The question raised in these appeals is with particular reference to Section 43B Explanation 3C of the Income Tax Act, 1961 [the “Act”].
The brief facts necessary to appreciate the controversy raised in these appeals are as follows.
On 28th November, 1996, the Appellant filed a return of income declaring a loss of Rs.1,03,18,572/- for the assessment year 1996-1997. In the return filed by it, the Appellant claimed a deduction of Rs.2,84,71,384/- under Section 43B based on the issue of debentures in lieu of interest accrued and payable to financial institutions.
By an order dated 29th October, 1998, 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.
Claim of deduction against conversion of interest into a fresh loan is a case of misuse of the provisions of section 43B. A new Explanation 3C has, therefore, been inserted to clarify that if any sum payable by the assessee as interest on any loan or borrowing, referred to in clause (d) of section 43B, is converted into a loan or borrowing, the interest so converted, shall not be deemed to be actual payment. This amendment takes effect retrospectively from 1st April, 1989 i.e. the date from which clause (d) was inserted in section 43B and applies in relation to the assessment year 1989-90 and subsequent years.” The object of Section 43B, as originally enacted, is to allow certain deductions only on actual payment. This is made clear by the nonobstante 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), with which we are concerned, 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. The said Proviso reads as follows: "Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made otherwise than in cash, the sum has been realised within fifteen days from the due date." 15 20. This being the case, it is important to advert to the facts found in the present case. 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 learned 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 present case, it is clear that interest was “actually paid” by means of issuance of debentures, which extinguished the liability to pay interest. 21. 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 by us hereinabove, 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 found in the present case, 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 this 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.
whether interest can be said to have been actually paid by the mode of issuing debentures.
Ultimately, this Court concluded:
In the impugned judgment [CIT v. Gujarat Cypromet Ltd., 2006 SCC OnLine Guj 560], the Gujarat High Court has relied upon CIT v. Bhagwati Autocast Ltd., 2002 SCC OnLine Guj 381 which was not a case covered by Section 43-B(d) rather was a case of Section 43-B(a). The provision of Section 43- B covers a host of different situations. The statutory Explanation 3-C inserted by the Finance Act, 2006 is squarely applicable in the facts of the present case. It appears that the attention of the High Court was not invited to Explanation 3- C, we are, thus, of the view that the assessing officer has rightly disallowed the deduction as claimed by the assessee. The appellate authority, ITAT and the High Court erred in reversing the said disallowance. On the facts of that case, this Court found that Explanation 3C was squarely attracted in that outstanding interest had not actually been paid, but instead a new credit entry of loan now appeared, bringing the case within the express language of Explanation 3C. This is far removed from the facts of the present case, which were not adverted to at all in this judgment. Consequently, this judgment is also distinguishable and would not apply to govern the facts of the present case.
Consequently, the impugned judgments of the High Court are set aside and the judgment and order of the ITAT is restored. These appeals are allowed in the aforesaid terms.
1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS.4742-4743 OF 2021
(Arising out of SLP (Civil) Nos. 35883-35884 of 2016)
M.M. Aqua Technologies Ltd. … Appellant
Versus
Commissioner of Income Tax, Delhi-III … Respondent
J U D G M E N T
R.F. Nariman, J
1. Leave granted.
2. The question raised in these appeals is with particular reference to
Section 43B Explanation 3C of the Income Tax Act, 1961 [the “Act”].
The brief facts necessary to appreciate the controversy raised in these
appeals are as follows.
3. On 28th November, 1996, the Appellant filed a return of income
declaring a loss of Rs.1,03,18,572/- for the assessment year 1996-1997.
In the return filed by it, the Appellant claimed a deduction of
Rs.2,84,71,384/- under Section 43B based on the issue of debentures
2
in lieu of interest accrued and payable to financial institutions. By an
order dated 29th October, 1998, 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. The Commissioner of Income Tax (Appeals) [“CIT”] allowed
the appeal and held, on facts, as follows:
“3.2. …. It was clarified by the Ld. Counsel that the original
agreements with the financial institutions provided for
conversion of 20% of the amount in default into equity capital
of the appellant at the option of the lenders. The agreements
also provided for the repayment of the principal and the
interest, in default as per the revised terms and conditions
stipulated by the lendor at the time of default. As the appellant
was not in position to pay the interest and liquidated
damages. It approached the lead Financial Institutions which
on behalf of all the institutions approved the Rehabilitation
Plan According to the Rehabilitation Plan, the appellant
issued 300149 convertible debentures of 100 each
amounting to Rs. 3,00,14,900/ in lieu of outstanding interest
and other charges. As a result of these debentures in favour
of the Financial institutions, interest of Rs. 2,84,71,384/- was
effectively paid. It was argued by the Ld. Counsel that
liquidation of the outstanding interest by issue of debentures
was tantamount to actual payment of interest as envisaged
u/s 43B of the I.T. Act. It was emphasized by the Ld. Counsel
that section 43B of the I.T. Act, cash or cheque is the
3
prescribed mode of payment of P.F. and ESI while there is no
prescribed mode of payment of interest. The mode of
payment of interest can therefore be other than cash or
cheque/draft. The issue of debentures in lieu of interest
therefore amounted to payment which had been
acknowledged by the lead institutions. Since the lendor had
admitted receipt of interest, there was no dispute about the
payment.
….
However, the original terms and conditions of the borrowings
not only provided for conversion of 20% of the amount in
default into appellant's equity but also revision of terms and
conditions of payment at the time of each default. The partial
conversion into equity was at the option of the lendor which
the lendor did not exercise. On the appellant's request, the
lead institution acting as trustee of all the lenders agreed to
the Rehabilitation Plan and accepted 300149 debentures of
Rs. 100 each aggregating to Rs. 3,00,14,900/- in discharge
of the outstanding interest. The discharge of the liability of
interest through issue of debentures as mutually agreed
between the appellant and the lenders was therefore in
accordance with the terms and conditions governing the
borrowings.”
4. On these facts, the conclusion drawn by the learned CIT was:
“3.6. It would not be correct to say that a debenture is a piece
of paper and the issue of debentures in lieu of interest merely
postponed the payment of liability. A debenture is a valuable
security which is freely negotiable and openly quoted in the
stock market. As the Financial institutions had accepted the
debentures in effective discharge of the liability for the
outstanding interest which was no longer payable by the
appellant, it was tantamount to actual payment for the intent
of section 43B of the I.T. Act. As interest had been actually
paid during the year and the payment was in accordance with
4
the terms and conditions of the borrowings, interest of Rs.
2,84,71,384/- is directed to be allowed u/s 43B of the I.T. Act.”
5. This order was upheld in appeal by the Income Tax Appellate Tribunal
[“ITAT”]. The ITAT held:
“9. … The Section was introduced to curb the mischief of
withholding tax payment by the assessee, while at the same
time claiming deduction thereof in the income-tax
assessments. But when both the parties creditor and debtor
agree that the conversion of the outstanding interest liability
into fully paid debentures would be accepted by them as
discharge of the liability then to hold that notwithstanding the
contract between the two, it is open to the income tax
authorities to say that the interest liability has not been
discharged would not only be opposed to the contextual
perspective of section 43B, but would also do violence to the
language used. In Subhra Motel Pvt. Ltd. (supra), the Delhi
Bench of the Tribunal referred to the fact that the expression
“actually paid" appearing in Section 43B is not qualified by
words to the effect that the payment should be by cash or by
cheque or draft or by any other mode as has been prescribed
in the Second Proviso, with reference to clause (b) of the
section which refers to the sum payable by the assessee as
contribution to provident fund, superannuation fund, gratuity
fund etc.”
6. It then arrived at the important finding based on facts as follows:
“11. … At page 197, the copy of the statement of taxable
income of the assessee for the AY 2001-02 has been filed,
which shows that in the year in which the debentures were
redeemed, the assessee did not claim any deduction for the
interest. It has thus been proved in the present case that the
payment of interest by conversion of the outstanding liability
into convertible debentures, is a real substantial and effective
payment, meeting the requirement of the word “actual” and is
5
not a fictional or illusory payment. The parties have
understood it as an effective discharge by the assessee of
the interest liability. The treatment given in the accounts as
well as in their income tax assessments is in accord with the
factual position.
xxx xxx xxx
12. … In the present case, the parties have agreed between
themselves that the interest would be funded and convertible
debentures would be issued in an amount identical to the
funded interest and that this arrangement would be accepted
by both of them as actual discharge of the liability to pay
interest. In our opinion, nobody has the right to intervene and
rewrite the arrangement for the parties and say that the
parties cannot agree between themselves that this will be
taken as actual discharge of the liability to pay interest. The
apprehension expressed by the legislature while introducing
the provisions of section 43B was that the assessee were not
discharging their income tax liabilities by paying them and in
fact, some of them were even obtaining a stay from the
Courts and at the same time claiming such liability as
deductions in their income tax assessments. This
apprehension, which was the rationale behind Section 43B
when it was introduced in 1984, appears to us to be
misplaced in the present case. As already pointed out, herein
we are not concerned with a statutory liability. The assessee
is not claiming a deduction in the income tax assessment
without actually clearing the statutory liability as had
happened in the case of CIT vs: Udaipur. Distillery Co. Ltd.
(No. 1) (268 ITR 305) before the Rajasthan High Court in that
case there was a statutory liability to pay the duty to the Govt.,
and it was held that a bank guarantee would not meet the
requirements of the section, and money has to actually flow
into the illegible. In the case before us, it is a contractual
liability where both the parties agree that the outstanding
interest liability would be discharged by the assessee in a
particular mode and that mode is followed. The assessee has
6
not claimed the interest as a deduction again in the year in
which the debentures were redeemed and evidence to this
effect has already been adverted to. The interest which is
now allowed as a deduction in the assessee's assessment is
reflected in the assessment of ICICI as its business income.
Nobody is put to any loss. To invoke the provisions of section
43B, on the imaginary ground that there is no actual payment
of the interest, would be wholly misplaced and would amount
to a strained interpretation of the section.”
7. Against the aforesaid judgment of the ITAT, the Revenue filed an appeal
before the High Court, in which the question raised before the High Court
for determination was set out as follows:
“Whether the funding of the interest amount by way of a term
loan amounts to actual payment as contemplated by Section
43B of the Income-tax Act, 1961?”
8. After correctly recording the facts that “the assessee was unable to
discharge this interest liability due to its financial hardship. On
30/03/1994, the ICICI, by a letter waived a part of the compound interest
together with the commitment charges and agreed to accept 3,00,149
convertible debentures of ‘100 each, amounting to 3,00,14,900/- in lieu
of the outstanding amount”, the Delhi High Court set out the reasoning
of the ITAT in some detail and then the arguments of counsel for the
Appellant and Respondent. In para 8, the judgment then set out Section
43B with Explanation 3C, which was inserted by the Finance Act, 2006
7
retrospectively w.e.f. 1.4.1989. The High Court concluded, based on
Explanation 3C, as follows:
“10. Now, Explanation 3C, having retrospective effect with
effect from 01.04.1989, would be applicable to the present
case, as it relates to AY1996-97. Explanation 3C squarely
covers the issue raised in this appeal, as it negates the
assessee’s contention that interest which has been converted
into loan is deemed to be “actually paid”. In light of the
insertion of this explanation, which, as mentioned earlier, was
not present at the time the impugned order was passed, the
assessee cannot claim deduction under Section 43B of the
Act.”
9. It then concluded, after referring to the judgments of the High Court of
Madhya Pradesh and the High Court of Telangana and Andhra Pradesh,
as follows:
“12. In light of the introduction of Explanation 3C, this Court
does not consider it necessary to discuss the precedents
relied upon by the assesse delivered prior to the enactment
of Finance Act, 2006. As regards the decision in Shakti
Spring Industries [(2013) 219 Taxman 124], the interest due
in that case was offset against a subsidy which the assessee
was entitled to, and it did not involve an instance where was
"converted into a loan or borrowing” within the meaning
Explanation 3C. It is perhaps for this reason that Explanation
3 was not discussed.”
10. On 22nd July, 2016, the High Court dismissed the Review Petition filed
by the assessee stating as follows:
“8. … The clear purport of the statute i.e. Section 43-B (d) is
that any amount payable towards interest liability would
8
qualify for deduction; however Explanation 3C acts to insist
on a rider:
“Explanation 3C for the removal of doubts, it is hereby
declared that a deduction of any sum, being interest
payable under clause(d) of this section, shall be allowed
if such interest has been actually paid and any interest
referred to in that clause which has been converted into
a loan or borrowing shall not be deemed to have been
actually paid.”
Quite possibly the assessee's arguments would have been
convincing and the court might have been persuaded that
actual payment of amounts is inessential and a composition
of the kind involved in this case, would have sufficed - but for
Explanation 3C. Now, this provision was inserted with
retrospective effect and clearly operated for the period in
question. The assessee does not dispute that. Furthermore,
this court's judgment cited the rulings of other courts- Andhra
Pradesh & Telangana and the Madhya Pradesh High Courtswhich held that actual payment is the sine qua non for
applicability of Section 43-B. In the circumstances, the
decisions in Standard Chartered [2006 (6) SCC 94] and
Sunrise Associates [2006 (5) SCC 603], which declared the
nature and character of debentures, are of little avail.”
11. Shri Biswajit Bhattacharya, learned Senior Advocate appearing on
behalf of the Appellant, first drew this Court’s attention to an order dated
20th April, 2005 by which the question of law framed for consideration
in the appeal before the High Court was as follows:
"Whether the funding of the interest amount by way of a term
'debenture' amounts to actual payment as contemplated by
Section 43B of the Income Tax Act, 1961?"
9
12. This question was then wrongly recorded as follows:
“Whether the funding of the interest amount by way of a term
loan amounts to actual payment as contemplated by Section
43B of the Income-tax Act, 1961?”
13. Since the High Court asked itself the wrong question, it reached the
wrong conclusion as the key word “debenture” was missing in the
question framed in the impugned judgment dated 18th May, 2015. He
then took us through the facts that were found by the CIT and the ITAT
and argued that, on facts, a finding was rendered in his favour that the
debentures that were issued were not towards any future payment of
liability, but towards actual payment of interest that was due and owed
to the financial institution in question. He was at pains to point out that
Explanation 3C, which was introduced with retrospective effect after
these judgments, would have no application in the facts of this case as
interest had not been converted into any loan or borrowing. Thus, both
High Court judgments based exclusively on Explanation 3C are
erroneous as they have ignored the vital facts found by the authorities
below, which authorities are final on facts. To buttress his arguments,
he also relied upon judgments showing that debentures are actionable
claims and can be sold in the market as such.
10
14. Shri Bhattacharya also relied upon Cape Brandy Syndicate v. Inland
Revenue Commissioner [1921 (1) KB 64] to submit that fiscal and tax
statutes have to be strictly construed and that since the word
“debenture” is not specified in Explanation 3C, it cannot be read into it.
15. Shri Balbir Singh, learned Additional Solicitor General, argued that
Section 43B makes a departure from other Sections in the Act, as
indicated by its non-obstante clause. The Section was introduced so that
no deductions could be claimed based on a mercantile system of
accounting as actual payment would have to be made. He also relied
upon a judgment of this Court as to the correct meaning of “debentures”
and then referred to and relied upon CIT v. Gujarat Cypromet Ltd.,
(2020) 15 SCC 460, which referred to the impugned judgment in the
present case with approval. He also argued that it being clear that a
debenture is nothing but a loan, interest had, in fact, been converted into
a loan on the facts of this case and squarely attracted the latter part of
Explanation 3C.
16. At this juncture, it is important to set out Section 43B. The relevant
provisions of the said Section read as follows:
11
43B. Certain deductions to be only on actual payment –
Notwithstanding anything contained in any other provision of
this Act, a deduction otherwise allowable under this Act in
respect of—
xxx xxx xxx
(d) any sum payable by the assessee as interest on any loan
or borrowing from any public financial institution or a State
financial corporation or a State industrial investment
corporation, in accordance with the terms and conditions of
the agreement governing such loan or borrowing, or
xxx xxx xxx
shall be allowed (irrespective of the previous year in which
the liability to pay such sum was incurred by the assessee
according to the method of accounting regularly employed by
him) only in computing the income referred to in section 28 of
that previous year in which such sum is actually paid by him:
Provided that nothing contained in this section shall apply in
relation to any sum which is actually paid by the assessee on
or before the due date applicable in his case for furnishing the
return of income under sub-section (1) of section 139 in
respect of the previous year in which the liability to pay such
sum was incurred as aforesaid and the evidence of such
payment is furnished by the assessee along with such return.
xxx xxx xxx
Explanation 3C.—For the removal of doubts, it is hereby
declared that a deduction of any sum, being interest payable
under clause (d) of this section, shall be allowed if such
interest has been actually paid and any interest referred to in
that clause which has been converted into a loan or
borrowing shall not be deemed to have been actually paid.
12
17. Section 43B was originally inserted by the Finance Act, 1983 w.e.f. 1st
April, 1984. The scope and effect of the newly inserted provision, at that
point, was explained by the Central Board of Direct Taxes [“Board”] in
Circular No.372/1983 dated 8th December, 1983 as follows:
“35.2 Several cases have come to notice where taxpayers do
not discharge their statutory liability such as in respect of
excise duty, employer's contribution to provident fund,
Employees State Insurance Scheme, etc., for long periods of
time, extending sometimes to several years. For the
purposes of their income-tax assessments, they claim the
liability as deduction on the ground that they maintain
accounts on mercantile or accrual basis. On the other hand,
they dispute the liability and do not discharge the same. For
some reasons or the other, undisputed liabilities also are not
paid.
35.3 To curb this practice, the Finance Act has inserted a new
section 43B to provide that deduction for any sum payable by
the assessee by way of tax or duty under any law for the time
being in force or any sum payable by the assessee as an
employer by way of contribution to any provident fund or
superannuation fund or gratuity fund or any other fund for the
welfare of employees shall irrespective of the previous year
in which the liability to pay such sum was incurred, be allowed
only in computing the income of that previous year in which
such sum is actually paid by the assessee.
35.4 The section also contains an Explanation for the removal
of doubts. The Explanation provides that where a deduction
in respect of any sum aforesaid is allowed in computing the
income of any previous year, being a previous year relevant
to the assessment year 1983-84, or any earlier assessment
year, in which the liability to pay such sum was incurred by
the assessee, the assessee shall not be entitled to any
13
deduction under section 43B in respect of such sum on the
ground that the sum has been actually paid by him in that
year. In other words, an assessee who has already been
allowed deduction of a liability on account of the tax or duty
or in respect of any sum payable as contribution to any fund
for the assessment year 1983-84, or any earlier year in which
the liability to pay was incurred, cannot, in respect of that
liability, be allowed a deduction in the assessment year 1984-
85, or any subsequent year on the ground that he has actually
made a payment towards such liability in that year.”
18. As has been pointed out hereinabove, the Finance Act, 2006 inserted
Explanation 3C w.e.f. 1st April, 1989. The scope and effect of this
provision was explained by the Board in Circular No.14/2006 dated 23rd
December, 2006, as follows:
“16.2 It has come to notice that certain assessees were
claiming deduction under section 43B on account of
conversion of interest payable on an existing loan into a fresh
loan on the ground that such conversion was a constructive
discharge of interest liability and, therefore, amounted to
actual payment. Claim of deduction against conversion of
interest into a fresh loan is a case of misuse of the provisions
of section 43B. A new Explanation 3C has, therefore, been
inserted to clarify that if any sum payable by the assessee as
interest on any loan or borrowing, referred to in clause (d) of
section 43B, is converted into a loan or borrowing, the interest
so converted, shall not be deemed to be actual payment.
16.3 This amendment takes effect retrospectively from 1st
April, 1989 i.e. the date from which clause (d) was inserted in
section 43B and applies in relation to the assessment year
1989-90 and subsequent years.”
14
19. The object of Section 43B, as originally enacted, is to allow certain
deductions only on actual payment. This is made clear by the nonobstante 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), with which we are concerned, 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. The said
Proviso reads as follows:
"Provided further that no deduction shall, in respect of any
sum referred to in clause (b), be allowed unless such sum
has actually been paid in cash or by issue of a cheque or draft
or by any other mode on or before the due date as defined in
the Explanation below clause (va) of sub-section (1) of
section 36, and where such payment has been made
otherwise than in cash, the sum has been realised within
fifteen days from the due date."
15
20. This being the case, it is important to advert to the facts found in the
present case. 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 learned
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 present case, it is clear that
interest was “actually paid” by means of issuance of debentures, which
extinguished the liability to pay interest.
21. 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 by us hereinabove, 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
16
paying interest, but converting such interest into a fresh loan. On the
facts found in the present case, 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 this 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. In similar
circumstances, in K.P. Varghese v. ITO, (1981) 4 SCC 173, this Court
construed Section 52 of the Income Tax Act as applying only to cases
where ‘understatement’ is be found – an ‘understatement’ is not to be
found in the literal language of Section 52, but was introduced by this
Court to streamline the provision in the light of the object sought to be
achieved by the said provision. This Court, therefore, held:
17
13. Thus it is not enough to attract the applicability of subsection (2) that the fair market value of the capital asset
transferred by the assessee as on the date of the transfer
exceeds the full value of the consideration declared in respect
of the transfer by not less than 15 per cent of the value so
declared, but it is furthermore necessary that the full value of
the consideration in respect of the transfer is understated or
in other words, shown at a lesser figure than that actually
received by the assessee. Sub-section (2) has no application
in case of an honest and bona fide transaction where the
consideration in respect of the transfer has been correctly
declared or disclosed by the assessee, even if the condition
of 15 per cent difference between the fair market value of the
capital asset as on the date of the transfer and the full value
of the consideration declared by the assessee is satisfied. ….
xxx xxx xxx
15. It is therefore clear that sub-section (2) cannot be invoked
by the Revenue unless there is understatement of the
consideration in respect of the transfer and the burden of
showing that there is such understatement is on the
Revenue. Once it is established by the Revenue that the
consideration for the transfer has been understated or, to put
it differently, the consideration actually received by the
assessee is more than what is declared or disclosed by him,
sub-section (2) is immediately attracted, subject of course to
the fulfilment of the condition of 15 per cent or more
difference, and the Revenue is then not required to show
what is the precise extent of the understatement or in other
words, what is the consideration actually received by the
assessee. That would in most cases be difficult, if not
impossible, to show and hence sub-section (2) relieves the
Revenue of all burden of proof regarding the extent of
understatement or concealment and provides a statutory
measure of the consideration received in respect of the
transfer. It does not create any fictional receipt. It does not
deem as receipt something which is not in fact received. It
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merely provides a statutory best judgment assessment of the
consideration actually received by the assessee and brings
to tax capital gains on the footing that the fair market value of
the capital asset represents the actual consideration received
by the assessee as against the consideration untruly
declared or disclosed by him. This approach in construction
of sub-section (2) falls in line with the scheme of the
provisions relating to tax on capital gains. It may be noted that
Section 52 is not a charging section but is a computation
section. It has to be read along with Section 48 which
provides the mode of computation and under which the
starting point of computation is “the full value of the
consideration received or accruing”. What in fact never
accrued or was never received cannot be computed as
capital gains under Section 48. Therefore sub-section (2)
cannot be construed as bringing within the computation of
capital gains an amount which, by no stretch of imagination,
can be said to have accrued to the assessee or been received
by him and it must be confined to cases where the actual
consideration received for the transfer is understated and
since in such cases it is very difficult, if not impossible, to
determine and prove the exact quantum of the suppressed
consideration, sub-section (2) provides the statutory measure
for determining the consideration actually received by the
assessee and permits the Revenue to take the fair market
value of the capital asset as the full value of the consideration
received in respect of the transfer.
22. 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
was stated in Sedco Forex International Drill. Inc. v. CIT, (2005) 12
SCC 717 as follows:
19
17. As was affirmed by this Court in Goslino Mario [(2000) 10
SCC 165] a cardinal principle of the tax law is that the law to
be applied is that which is in force in the relevant assessment
year unless otherwise provided expressly or by necessary
implication. (See also Reliance Jute and Industries
Ltd. v. CIT [(1980) 1 SCC 139] .) An Explanation to a statutory
provision may fulfil the purpose of clearing up an ambiguity in
the main provision or an Explanation can add to and widen
the scope of the main section [See Sonia Bhatia v. State of
U.P., (1981) 2 SCC 585, 598] . If it is in its nature clarificatory
then the Explanation must be read into the main provision
with effect from the time that the main provision came into
force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24
(para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC
352, 354; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482,
506]. But if it changes the law it is not presumed to be
retrospective, irrespective of the fact that the phrases used
are “it is declared” or “for the removal of doubts”.
18. There was and is no ambiguity in the main provision of
Section 9(1)(ii). It includes salaries in the total income of an
assessee if the assessee has earned it in India. The word
“earned” had been judicially defined in S.G. Pgnatale [(1980)
124 ITR 391 (Guj)] by the High Court of Gujarat, in our view,
correctly, to mean as income “arising or accruing in India”.
The amendment to the section by way of an Explanation in
1983 effected a change in the scope of that judicial definition
so as to include with effect from 1979, “income payable for
service rendered in India”.
19. When the Explanation seeks to give an artificial meaning
to “earned in India” and brings about a change effectively in
the existing law and in addition is stated to come into force
with effect from a future date, there is no principle of
interpretation which would justify reading the Explanation as
operating retrospectively.
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23. 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.
24. Third, any ambiguity in the language of Explanation 3C shall be
resolved in favour of the assessee as per Cape Brandy Syndicate v.
Inland Revenue Commissioner (supra) as followed by judgments of
this Court – See Vodafone International Holdings BV v. Union of
India, (2012) 6 SCC 613 at paras 60 to 70 per Kapadia, C.J. and para
333, 334 per Radhakrishnan, J.
25. The High Court judgment dated 18th May, 2015, 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.
26. The learned ASG’s reliance on National Rayon Corpn. Ltd. v. CIT,
(1997) 7 SCC 56 is disingenuous. That was a decision which turned on
whether a sum of Rs.79 lakhs represents ‘Debenture Redemption
Reserve’ and was includible in computing the capital of the assessee
company for the purpose of the Companies (Profits) Surtax Act, 1964.
The High Court took the view that the amount set apart to redeem
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debentures had to be treated as a “provision” and not as a
“reserve”. While discussing this question, this Court held :
8. Mr Ramachandran advanced another argument that there
was no present liability to pay any amount to the debentureholders. That liability will arise only when the amount falls due
for payment. Therefore, there was no existing liability for
redeeming the debentures in the relevant year of account.
9. We are unable to uphold this argument. The liability to
repay arises the moment the money is borrowed. The amount
borrowed may be repayable immediately or in future. The
date of repayment of loan may be deferred by agreement but
the obligation or the liability to repay will not cease on that
account. The obligation is a present obligation; debitum in
praesenti, solvendum in futuro. This aspect of the matter was
explained in the judgment of this Court in Kesoram Industries
and Cotton Mills Ltd. v. CWT [AIR 1966 SC 1370 : (1966) 59
ITR 767] .
10. By issuing the debentures, the Company had taken a loan
against the security of its assets. This loan may not be
repayable in the year of account. But the obligation to pay the
loan is a present obligation. Any money set apart in the
accounts of the Company to redeem the debentures must be
treated as moneys set apart to meet a known liability. The
debentures will have to be shown in the Company's balance
sheet of the year as “liability”.
11. In the case of CIT v. Peico Electronics & Electricals
[(1987) 166 ITR 299 (Cal)] the Calcutta High Court held that
the Debenture Redemption Reserve will have to be treated
as a “reserve” and not “provision” because, none of the
debentures became redeemable during the accounting
period. The liability to redeem the debenture was a future
liability. The debentures had been separately shown in the
balance sheet as a liability. The reserve had been created by
22
appropriation of profits and not by way of a charge on
revenue.
12. We are of the view that this approach is erroneous and
overlooks the definitions of “provision” and “reserve” given in
the Companies Act. The debentures were nothing but
secured loans. Merely because the debentures were not
redeemable during the accounting period, the liability to
redeem the debentures did not cease to exist. It was
redeemable or repayable at a future date. But it was a known
liability. In the form of balance sheet prescribed by the Act in
Schedule VI, the secured loans have to be shown under the
heading “liabilities”. Secured loans include (1) debentures, (2)
loans and advances from banks, (3) loans and advances from
subsidiaries and (4) other loans and advances. The secured
loans might not be immediately repayable, but the liability to
repay these loans was an existing liability and has to be
shown in the Company's balance sheet for the relevant year
of account as a liability. Amounts set apart to pay these loans
cannot be “reserve”. The interpretation clause of the balance
sheet in Schedule VI of the Companies Act specifically lays
down that reserves shall not include any amount written off
or retained by way of providing for a known liability.
27. The question decided in this case is far removed from the question to
be decided in the facts of the present case and has no application to
these facts whatsoever. The question in the present case does not
depend upon what can, in law, be stated to be a debenture and/or
whether it is convertible or non-convertible or payable immediately or in
the future. The question in the present case is only whether interest can
be said to have been actually paid by the mode of issuing debentures.
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To answer this question, this judgment has no relevance.
28. The learned ASG then relied upon a recent judgment of this Court in
CIT v. Gujarat Cypromet Ltd. (supra). In the said case, a Division
Bench of this Court, while dealing with Section 43B Explanation 3C,
noted the facts as found by the CIT as follows (para 5):
“2.2. I have perused the case laws cited and also the above
sanction letter from IDBI and also the auditor's note referred
by the assessing officer. I have perused Schedule 3 of the
balance sheet as on 31-3-2001 and find that the above loan
appears as on 31-3-2001 and is part of the total secured
loans of Rs 75,26,10,769. The fact that the entry pertaining
to the interest element outstanding to financial institutions
referred at page 2 of the order by the assessing officer has
been reversed after receipt of funds of Rs 8 crores from IDBI
substantiates the contention of the appellant company that
the entries relating to interest outstanding with reference the
above institutions have been squared up and its place a new
credit entry of loan of IDBI is now appearing in the balance
sheet as on 31-3-2001. The plea of the appellant's counsel
Shri Tanna that since no interest payment is outstanding now
and the amount is paid off, the expenditure of interest is
allowable under Section 43-B. It is further added that in case
the loan had been disbursed in 2 parts — one to meet the
interest outstanding and the balance for financial assistance
still the entries in the books of account would have remain the
same and the outstanding interest would have been NIL.
Having regard to the above facts and also the case laws cited
by the appellant's representative, I am inclined to hold that
the disallowance made by the assessing officer is contrary to
the substance of the transaction and the provisions of Section
43-B of the Income Tax Act and the same cannot be
sustained and therefore directed to be deleted.”
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29. It is on these facts that Explanation 3C was pressed into service in favour
of Revenue and paras 11 and 12 of the impugned judgment in the present
case were referred to, in passing, in para 13. Ultimately, this Court
concluded:
16. In the impugned judgment [CIT v. Gujarat Cypromet Ltd.,
2006 SCC OnLine Guj 560], the Gujarat High Court has relied
upon CIT v. Bhagwati Autocast Ltd., 2002 SCC OnLine Guj
381 which was not a case covered by Section 43-B(d) rather
was a case of Section 43-B(a). The provision of Section 43-
B covers a host of different situations. The statutory
Explanation 3-C inserted by the Finance Act, 2006 is squarely
applicable in the facts of the present case. It appears that the
attention of the High Court was not invited to Explanation 3-
C, we are, thus, of the view that the assessing officer has
rightly disallowed the deduction as claimed by the assessee.
The appellate authority, ITAT and the High Court erred in
reversing the said disallowance.
30. On the facts of that case, this Court found that Explanation 3C was
squarely attracted in that outstanding interest had not actually been paid,
but instead a new credit entry of loan now appeared, bringing the case
within the express language of Explanation 3C. This is far removed from
the facts of the present case, which were not adverted to at all in this
judgment. Consequently, this judgment is also distinguishable and would
not apply to govern the facts of the present case.
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31. Consequently, the impugned judgments of the High Court are set aside
and the judgment and order of the ITAT is restored. These appeals are
allowed in the aforesaid terms.
………………….......................J.
[ ROHINTON FALI NARIMAN ]
………………….......................J.
[ B.R. GAVAI ]
New Delhi;
August 11, 2021.
