It has recently been held by the Delhi High Court at New Delhi in the case of Commissioner of Income Tax, Delhi vs. M.M. Aqua Technologies Ltd., Appeal No. ITA 110 of 2005, that repayment of interest on loan by conversion is not actual payment under section 43B of the Income Tax Act, 1961.
Delhi High Court declares repayment of interest on loan by conversion.
Date of Order:
The order was reserved on 30.04.2015 and was passed by the Delhi High Court on 18.05.2015.
Pleaders engaged in the case:
The Respondent was represented through Shri Bishwajit Bhattacharyya, Sr. Advocate with Shri Chandrachur Bhattacharyya, Advocate. The Appellant was represented through Shri Rohit Madan, Sr. Standing Counsel.
Brief facts of the case:
The Assessee was in in debts borrowed from institutional creditors amongst which ICICI was the lead manager. The interest which had accumulated on the principal amounted to Rs. 3, 00, 14,900/- and the assessee failed to repay the interest liability due to its financial crisis.
ICICI through a letter waived a part of the interest along with the commitment charges and offered to accept Rs. 3,00,14,900/- against the outstanding interest.
On 15.3.1996 the assessee issued debentures in favour of ICICI. In its return the assessee claimed that interest of Rs. 2, 84, 71,384/- was deductible as it was actually paid in the relevant financial year. The debentures issued amounted to Rs.3, 00, 14,900/- However, the interest claimed as deduction was a little less.
The difference was explained to be due to the fact that a part of the interest was treated in the books of accounts of the assessee as pre-production expenses. The assessee’s contention was rejected by the Assessing Officer with the view that the debenture issued resulted in postponement of the payment of interest and that it could not be considered as payment as per Section 43B to qualify for the relief. The Assessing Officer disallowed the claim.
The assessee preferred an appeal before the CIT (A). In the appeal the assessee relied upon the judgment delivered by the Andhra Pradesh High Court in the case of CIT v. Mahindra Nissan Allywin Ltd., 233 ITR 493 and that of the ITAT, Delhi in Subhra Motel (P.) Ltd., 64 ITD 134. It was contended that the issue of debentures equivalent to the amount of due interest should be treated as actual payment of the interest it should be allowed as a deduction.
The CIT (A) accepted the contentions of the assessee and directed the Assessing Officer to allow the deduction. The Revenue filed an appeal before the ITAT.
The ITAT relied on the judgment of Mahindra Nissan (supra) and that of the Patna High Court in Salendra Narain Bhanj Dev v. Asst. Agricultural Income Tax, Orissa, 30 ITR 801 which dealt with the term “actually paid”. In that case, maintenance allowance “actually paid” was allowed as a deduction but the High Court disallowed the same.
Arguments of the Department:
The Learned counsel for the Revenue contended that the impugned order was contrary to the decision of the Madras High Court in the case of Kalpana Lamps and Components Ltd. v. DCIT, (2001) 255 ITR 491. In that case, it was held that a mere postponement of the liability to pay interest is not actual discharge. The conversion of the due interest into a loan liability cannot be treated as a discharge of the interest liability.
It was further stated that the ITAT relied on Circular No. 674 dated 20.12.1993 issued by the CBDT which had been misplaced and was untenable. It was also argued that the application of the Circular was limited. It was further stated that Section 43B mandates actual payment to qualify for deduction.
Arguments of the assessee:
The Learned senior counsel for the assessee, Mr. Biswajit Bhattacharya argued that debentures were securities as per Section 2 (ac) and (h) of the Securities Contract Regulation Act, 1956 and are were free for trade. As soon as the debentures were issued to ICICI, it realized the monetary value. It was submitted that the AO failed to understand the nature of debentures for which it was held by the AO that that payment through debentures cannot amount to actual payment.
The Learned Senior Counsel relied on the order of the Hon’ble Supreme Court in Standard Chartered Bank v Andhra Bank, 2006 (6) SCC 94 where it was held that a debenture is an actionable claim though there is no prescribed method of transfer of debentures in the Transfer of Property Act.
The Learned senior Counsel also relied on the judgment of Vinir Engineering (P) Ltd. vs. Deputy Commissioner of Income Tax, 313 ITR 154, and that of the Jharkhand High Court in Commissioner of Income Tax vs. Shakti Spring Industries (P) Ltd, (2013) 219 Taxman 124, which stated that all payments do not require to be in cash and that debenture payments are sufficient payments under Section 43B of the Act.
The judgment of the Hon’ble High Court:
The Hon’ble Delhi High Court held that the loan was taken is from ICICI, IDBI and IFCI which are included in the definition of “public financial institution” provided in Section 4A of the Companies Act, 1956.
The Explanation 3C, having retrospective effect which would be applicable to the instant case, covers the issue that appeared in the appeal, as it goes against the contention of the assessee that interest that is converted into a loan is considered as actually paid.
The Hon’ble Delhi High Court in this regard relied upon the decision of the Madhya Pradesh High Court in Eicher Motors Ltd. v. Commissioner of Income Tax, 315 ITR 312.
In view of the above, the appeal of the department was allowed.