Income Tax Act, 1961: s. 43B explanation 3C – Certain deductions to be only on actual payment – Funding of interest amount by way of a term debenture, if amounts to actual payment – Appellant-assessee company had obtained loan from financial institutions for business operations on which is interest is payable – Assessee unable to discharge interest liability due to its financial hardship – It approached financial institution for a rehabilitation plan – In terms of the Plan, assessee issued convertible debentures in lieu of interest payment and then claimed a deduction u/s. 43B – Rejection of the claim, by the Assessing Officer holding that the issue of debenture does not tanamount to actual payment – However, CIT allowed the claim and the tribunal upheld the same – In appeal, the High Court held that interest had been converted into loan – On appeal, held: The issue of debentures by the assessee was under a rehabilitation plan, to extinguish the liability of interest altogether – No misuse of the provision of s. 43B was found by either the CIT or the ITAT – Explanation 3C, was meant to plug a loophole, cannot therefore be brought to the aid of Revenue – In case of any ambiguity in the retrospectively added explanation 3C, the three canons of interpretation come to the rescue of the assessee, first, the bona fide transactions of actual payments are not meant to be affected; second, a retrospective provision in a tax act which is “for the removal of doubts” cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood, thus, Explanation 3C is clarificatory-it explains s. 43B(d) as it originally stood and does not purport to add a new condition retrospectively; and third, any ambiguity in the language of Explanation 3C shall be resolved in favour of the assesse – Thus, the order passed by the High Court are set aside. s. 43 – Object of – Explaination of.
Allowing the appeals, the Court
HELD: 1.1 The object of Section 43B of the Income Tax Act, 1961, as originally enacted, is to allow certain deductions only on actual payment. This is made clear by the non-obstante clause contained in the beginning of the provision, coupled with the deduction being allowed irrespective of the previous years in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by it. In short, a mercantile system of accounting cannot be looked at when a deduction is claimed under this Section, making it clear that incurring of liability cannot allow for a deduction, but only “actual payment”, as contrasted with incurring of a liability, can allow for a deduction. Interestingly, the ‘sum payable’ referred to in Section 43B(d), does not refer to the mode of payment, unlike Proviso 2 to the said Section, which was omitted by the Finance Act, 2003 w.e.f. 1st April, 2004. [Para 19][249-G-H; 250A-C]
1.2 Both the CIT and the ITAT found, as a matter of fact, that as per a rehabilitation plan agreed to between the lender and the borrower, debentures were accepted by the financial institution in discharge of the debt on account of outstanding interest. This is also clear from the expression “in lieu of” used in the judgment of the CIT. That this is so is clear not only from the accounts produced by the assessee, but equally clear from the fact that in the assessment of ICICI Bank, for the assessment year in question, the accounts of the bank reflect the amount received by way of debentures as its business income. This being the fact-situation in the instant case, it is clear that interest was “actually paid” by means of issuance of debentures, which extinguished the liability to pay interest. [Para 20][250-D-F]
1.3 Explanation 3C, which was introduced for the “removal of doubts”, only made it clear that interest that remained unpaid and has been converted into a loan or borrowing shall not be deemed to have been actually paid. As has been seen, particularly with regard to the Circular explaining Explanation 3C, at the heart of the introduction of Explanation 3C is misuse of the provisions of Section 43B by not actually paying interest, but converting such interest into a fresh loan. On the facts, the issue of debentures by the assessee was, under a rehabilitation plan, to extinguish the liability of interest altogether. No misuse of the provision of Section 43B was found as a matter of fact by either the CIT or the ITAT. Explanation 3C, which was meant to plug a loophole, cannot therefore be brought to the aid of Revenue on the facts of the instant case. Indeed, if there be any ambiguity in the retrospectively added Explanation 3C, at least three well established canons of interpretation come to the rescue of the assessee in this case. First, since Explanation 3C was added in 2006 with the object of plugging a loophole-i.e. misusing Section 43B by not actually paying interest but converting interest into a fresh loan, bona fide transactions of actual payments are not meant to be affected. Second, a retrospective provision in a tax act which is “for the removal of doubts” cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This being the case, Explanation 3C is clarificatory-it explains Section 43B(d) as it originally stood and does not purport to add a new condition retrospectively, as has wrongly been held by the High Court. Third, any ambiguity in the language of Explanation 3C shall be resolved in favour of the assesse. [Para 21-24][250-F-H; 251-AC; 252-G-H; 253-G-H; 254-A]
1.4 The High Court judgment is clearly in error in concluding that ‘interest’, on the facts of this case, has been converted into a loan. There is no basis for this finding - as a matter of fact, it is directly contrary to the finding on facts of the authorities below. The impugned judgments of the High Court are set aside and the judgment and order of ITAT is restored. [Paras 25, 31][254-B-C; 257-D]
Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613 : [2012] 1 SCR 573 – relied on. K.P. Varghese v. ITO (1981) 4 SCC 173 : [1982] 1 SCR 629; Sedco Forex International Drill. Inc. v. CIT (2005)
12 SCC 717 : [2005] 5 Suppl. SCR 302; National Rayon Corpn. Ltd. v. CIT (1997) 7 SCC 56 : [1997] 3 Suppl. SCR 140 – referred to.
National Rayon Corpn. Ltd. v. CIT (1997) 7 SCC 56 : [1997] 3 Suppl. SCR 140; CIT v. Gujarat Cypromet Ltd. (2020) 15 SCC 460 – distinguished.
Cape Brandy Syndicate v. Inland Revenue
Commissioner 1921 (1) KB 64 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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