Debentures issued in lieu of interest liability allowable expenditure u/s 43B – Supreme Court

Debentures issued in lieu of interest liability allowable expenditure u/s 43B read with Explanation 3C – Supreme Court

ABCAUS Case Law Citation
ABCAUS 3541 (2021) (08) SC

The appellant had filed a SLP raising the question with reference to Section 43B Explanation 3C of the Income Tax Act, 1961 (the Act).

Important case law relied/referred:
CIT v. Gujarat Cypromet Ltd (2020) 15 SCC 460
Cape Brandy Syndicate v. Inland Revenue Commissioner [1921 (1) KB 64]
K. P. Varghese v. ITO, (1981) 4 SCC 173
Sedco Forex International Drill. Inc. v. CIT, (2005) 12 SCC 717
National Rayon Corpn. Ltd. vs. CIT (1997) 7 SCC 56

The appellant assessee was unable to discharge interest   liability due to bank on account of its financial hardship.  The bank waived a part of the compound interest and agreed to accept convertible debentures in lieu of the outstanding interest amount.

The appellant company claimed a deduction under Section 43B based on the issue of debentures in lieu of interest accrued and payable to the financial institutions (bank).

The Assessing Officer rejected the appellant’s contention by holding that the issuance of debentures was not  as  per the original terms and conditions on which the loans  were granted, and that interest was payable, holding that  a subsequent change in the terms of the agreement, as  they then stood, would be contrary to Section 43B(d), and would render such amount ineligible for deduction.

Both the CIT(A) and the Tribunal held in allowed the appeal of in the favour of the assessee of the appellant assessee. However, the Hon’ble High Court held in allowed the appeal of in the favour of the assessee of the Revenue.

The Hon’ble High Court relied upon the Explanation 3C to section 43B having retrospective effect.

The Hon’ble Supreme Court observed that Section 43B was originally inserted by the Finance Act, 1983 w.e.f. 1st April, 1984. The scope and effect of the provision, at that point, was explained by the CBDT in Circular No.372/1983 dated 8th December 1983.

Further, the scope and effect of provision of Explanation 3C to Section 43B was explained by the CBDT vide Circular No.14/2006 dated 23rd December, 2006.

The Hon’ble Supreme Court stated that the object of Section 43B was to allow certain deductions only on actual payment basis.

The Hon’ble Supreme Court noted that both the CIT and the ITAT had found that as per a rehabilitation plan  agreed to between the lender and the borrower,  debentures  were  accepted  by  the  bank in discharge of the debt on account of outstanding interest. 

This fact was also clear from the expression “in lieu of” used. This was so clear not only from the accounts of the assessee, but the fact that in the assessment of the bank the accounts of the bank reflected the amount received by way of debentures as its business income.

The Hon’ble Supreme Court stated that in the present case, the fact-situation is clear that interest was “actually paid” by means of issuance of debentures, which extinguished the liability to pay interest.

The Hon’ble Supreme Court said that 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.

The Hon’ble Supreme Court added that 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.

The Hon’ble Supreme Court set aside judgments of the High Court and judgment and order of the ITAT was restored. Accordingly,  appeals are allowed in allowed the appeal of in the favour of the assessee of the appellant assessee.

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