“LIC Mutual Fund” not ‘Public Financial Institution’ under section 43B

“LIC Mutual Fund” not ‘Public Financial Institution’, interest payable can not be disallowed u/s 43B

In a recent judgment, Hon’ble Calcutta High Court has held that “LIC Mutual Fund” is not “Public Financial Institution” u/s 43B therefore interest payable can not be disallowed on the ground of non-compliance of conditions of Section 43B.

ABCAUS Case Law Citation:
ABCAUS 4144 (2024) (07) HC

In the instant case, the appellant assessee had challenged the order passed by the ITAT in confirming disallowance u/s 43B in respect of interest on debentures payable to “LIC Mutual Fund”.

The appeal was admitted on the on the substantial questions of law as to whether LIC Mutual Fund can be regarded as Public Financial Institutions as specified in Clause (a) of Explanation 4 to Section 43B of the Income Tax Act, 1961 (the Act)?

The appellant/assessee was a company registered under the Companies Act. Its certain debentures were purchased by ‘LIC Mutual Fund’. For the Assessment Year in question, interest on these debentures was payable which the appellant/assessee had claimed as deductible expenditure in its profit and loss account.

The Assessing Officer (AO) while passing the assessment order disallowed u/s 43B the aforesaid interest on unsecured debentures on the ground that it had not been paid within the stipulated period.

The CIT(A) allowed the appeal on the point of interest on debentures. The CIT(A) held that Section 43B of the Act covers only financial institution and not mutual fund and since the ‘LIC Mutual Fund’ was not a financial institution under Section 43B of the Act, read with Section 4A of the Companies Act, 1956, therefore, the interest claimed as deduction by the appellant/assessee was allowable.

However, the ITAT reversed the order of CIT(A). ITAT held that the interest expenses claimed by the assessee to the LIC Mutual Fund were covered under the provisions of section 43B of the Act. Accordingly, the assessee was required to make the payment of the interest before the due date of filing income tax returns as specified under section 139(1) of the Act.

The Hon’ble High Court observed that as per SEBI Mutual Funds Regulations, 1996, ‘Mutual Fund shall be constituted in the form of a trust’ and the instrument of trust shall be in the form of a deed which shall be duly registered under the Indian Registration Act, 1908.

The Hon’ble High Court opined that ‘LIC Mutual Fund’ is a trust and the trust deed has been duly registered under the Indian Registration Act, 1908. The aforesaid “LIC Mutual Fund” is a trust of movable property, which has been created in terms of Section 6 of the Indian Trust Act, 1882 (‘the Trust Act’). The Life Insurance Corporation of India can, at best, be said to be an author of the trust or settlor of the trust, but the said trust and the Life Insurance Corporation of India both are separate legal entities. While the “LIC Mutual Fund” Trust is governed by the provisions of the Indian Trust Act, 1882 read with SEBI Mutual Fund Regulations, 1996, the Life Insurance Corporation of India is governed by the provisions of the Life Insurance Corporation Act, 1956.

The Hon’ble High Court noted the provisions of section 43B and Section 4A of the Companies Act, 1956 and opined that under Companies Act, 1956, list of ‘public financial institutions’ given in it is exhaustive. Clause (iv) of Sub-section (1) of Section 4A of the Companies Act, 1956 specifically mentions “Life Insurance Corporation of India”, established under Section 3 of the Life Insurance Corporation Act, 1956. It does not mention “LIC Mutual Fund” which is a Trust established under the Indian Trust Act.

Further the Hon’ble High Court observed that neither “LIC Mutual Fund” Trust is mentioned in the list given under Sub-section (1) of Section 4A nor the “LIC Mutual Fund” Trust has been established or constituted by or under any Central Act. Therefore, the “LIC Mutual Fund” Trust is not a public financial institution under Section 4A of the Companies Act, 1956. Consequently, Clause (d) of Section 43B of the Act, 1961 is not attracted under the facts and circumstances of the present case.

The Hon’ble High Court stated that Since “LIC Mutual Fund” is not “Public Financial Institution” under Section 43B of the Act read with Section 4A of the Companies Act, therefore, the interest on unsecured debentures payable by the appellant-assessee to the “LIC Mutual Fund” is not covered by Section 43B of the Act. Consequently, it could not be disallowed in the hands of the appellant-assessee on the ground of non-compliance of conditions of Section 43B.

The Hon’ble High Court held that the Income Tax Appellate Tribunal had committed a manifest error of law to hold that “LIC Mutual Fund” is a ‘public financial institution’ under Section 43B of the Act, 1961. Therefore, the disallowance made invoking the provisions of Section 43B of the Act cannot be sustained and consequently, the impugned order to that extent was set aside.

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