Whether, on the facts and in the circumstances of the case, the funded interest could be said to be non-payment of interest in the relevant year to invoke the proviso to Section 43B of the Act to disallow the deduction of interest as claimed by the appellant?= As a matter of fact, from reading of Explanation 3C, in our opinion, the question as raised in the present appeals stands answered without further discussion. This provision was inserted for removal of doubts and it was declared that deduction of any sum, being interest payable under clause (d) of Section 43B of the Act, 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. Thus, the doubt stands removed in view of Explanation 3C.

THE HONBLE SRI JUSTICE DILIP B.BHOSALE AND THE HONBLE SRI JUSTICE A.RAMALINGESWARA RAO            

I.T.T.A.Nos.289 of 2003

11-02-2015

Commissioner of Income Tax-II, Hyderabad. .... APPELLANT  
       
Pennar Profiles Limited, 1-8-303/69/3, S.P. Road,  Secunderabad....RESPONDENT  
       
COUNSEL FOR THE APPELLANT   :- Mr.S.Vivek Chandra Sekhar      

COUNSEL FOR RESPONDENT     :- Mr. Challa Gunaranjan      

<Gist:

>Head Note:

?Cases Referred:

1.(1998) 233 ITR 0493
2.(2010) 231 CTR (Karnataka) 90

THE HONBLE SRI JUSTICE DILIP B.BHOSALE      

AND

THE HONBLE SRI JUSTICE A.RAMALINGESWARA RAO            
       

I.T.T.A.Nos. 289 of 2003 and 6 of 2004


ORAL JUDGMENT: (per the Honble Sri Justice Dilip B.Bhosale)

        These appeals by the Revenue under Section 260A of the
Income Tax Act, 1961 (for short the Act), are preferred against the
common order, dated 24.01.2003, of the Income Tax Appellate
Tribunal, Hyderabad Bench A, passed in I.T.A.Nos.566/Hyd/98 and
439/Hyd/98.  By this order, the Tribunal disposed of two appeals,
one  filed by the assessee and other by the Revenue, against the
order, dated 14.05.1998, passed by the Commissioner of Income
Tax (Appeals) (for short CIT(A)).  The CIT (A) by that order, partly
allowed the appeal filed by the assessee.  The appeal before the CIT
(A) was against the assessment order, dated 26.03.1997, passed by
the Assessing Officer for the assessment year 1994-95 disallowing
the claim of the assessee, seeking deduction of interest liability, that
was converted/merged, by the financial institution, into a term loan
under Section 43B of the Act.

2.      The factual matrix to the extent it is relevant is that the
assessee is engaged in the business of manufacturing Alluminium
Extrusions.  They had filed returns of income, showing loss of
Rs.3,25,34,484/-, on 29.11.1994.  A notice under Section 143(2) of
the Act was issued to the assessee by the Assessing Officer on
06.11.1995. After granting an opportunity of being heard to the
assessees representative, the Assessing Officer completed the
assessment vide order, dated 26.03.1997.  It has come on record
that the assessee had debited the funded interest of Rs.85,42,788/-
in its profit and loss account. In addition thereto, in the statement of
computation of income, funded interest of Rs.1,18,16,471/-,
pertaining to the assessment years 1992-93 and 1993-94 was also
claimed as deduction.  Thus, the assessee had debited the funded
interest of Rs.2,03,59,250/- being the interest due to the financial
institutions relating to the assessment years 1992-93 and 1993-94
on account of availing of  loans from them. The said return was
processed under Section 143(1)(a) of the Act.  Ultimately, the
Assessing Officer disallowed the deduction by applying the proviso
to Section 43B of the Act. The assessee claimed that the interest
amount payable was converted into a principal amount/term loan
and, therefore, it deemed to have paid the interest as contemplated
by Section 43B of the Act and therefore, entitled for deduction.

3.      The only question raised and addressed, in these appeals, by
learned counsel for the parties is whether on the facts and in the
circumstances of the case, the Tribunal was justified in holding that
conversion of interest into a term loan can be taken as a deemed
payment for the purpose of Section 43B of the Act?

4.      Mr.S.Vivek Chandra Sekhar, learned counsel appearing for
the Revenue, at the outset, invited our attention to the provisions of
Section 43B of the Act and contended that under any circumstances,
in view of the  insertion of Explanation 3C to Section 43B, inserted
by the Finance Act, 2006 with retrospective effect from 01.04.1989,
unless the amount of interest has been actually paid, cannot be
allowed to be deducted as claimed by the assessee.  In other words,
he submitted that any sum payable as interest, referred to in
Clause(d) of Section 43B of the Act, which has been converted into
a loan or borrowing, cannot be allowed to be deducted or deemed to
have been actually paid.
5.        It would be relevant to reproduce the relevant portion of
Section 43B of the Act, which reads thus:

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-
(a) .
(b)..
(c)..
(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;
(e).
(f).
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.
Explanation (1).  
Explanation (2).  
Explanation 3:  For the removal of doubts it is hereby declared that
where a deduction in respect of any sum referred to in clause (c)
or clause (d ) of this section is allowed in computing the income
referred to in Section 28 of the previous year (being a previous
year relevant to the assessment year commencing on the 1st day
of April, 1988, 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 deduction under this section in respect
of such sum in computing the income of the previous year in which
the sum is actually paid by him.
Explanation 3A  
Explanation 3B  
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.
Explanation 3D  
Explanation 4.  
       
6.      We have perused the orders passed by the authorities below
and we find that the Tribunal, for dismissing the appeals filed by the
assessee and the Revenue, placed reliance upon the judgment of
this Court in Commissioner of Income Tax Vs. Mahindra Nissan
Allywin Limited , in short, holding that the assessee is entitled to
claim deduction of the interest liability to the financial institution
which had been converted into a term loan.

7.      Learned counsel appearing for the assessee placed reliance
upon the judgment of the Karnataka High Court in Vinir Engineering
Private Limited Vs. Deputy Commissioner of Income Tax  and
submitted that similar view, as taken by this Court in Mahindra
Nissans case, was taken in this judgment.  The Karnataka High
Court having regard to the facts that fell for consideration framed the
following question for consideration:
       Whether, on the facts and in the circumstances of the case,
the funded interest could be said to be non-payment of interest in the
relevant year to invoke the proviso to Section 43B of the Act to
disallow the deduction of interest as claimed by the appellant?

7.1     In that case, deduction sought, as claimed in the present case,
by the assessee, was disallowed by the Assessing Officer, applying
the proviso to Section 43B of the Act. The assessee, thereafter, had
filed an application under Section 154 of the Act explaining the
reasons for claiming deduction.  The application was, however,
rejected holding that re-schedule of interest payment by means of a
fresh loan cannot be treated as interest payment deductible under
Section 43B of the specific repayment schedule.  The Commissioner
upheld the order of the Assessing Officer.  The Tribunal held that
disallowance was proper and permissible under Section 143(1)(a) of
the Act and dismissed the appeal. Against that order, the assessee
had filed appeal under Section 260A of the Act before the Karnataka
High Court, wherein, the High Court while allowing the appeal filed
by the assessee in paragraph 13 observed thus:

        In view of what is stated above, we answer the substantial
questions of law raised in this appeal by holding that the Tribunal
was not justified in law in concluding that the funded interest could
be said to be non-payment of interest in the relevant year to
invoke the proviso to Section 43B of the Act to disallow the
deduction of interest as claimed by the appellant.  The Assessing
Officer was not justified in law to make a prima facie adjustment in
a proceeding under Section 143 (1)(a) of the Act by holding that
there was no deemed payment of interest in the relevant year
without appreciating the interest outstanding for the earlier years
1994-95 and 1995-96 had been funded by K.S.F.C. during the
relevant year by a fresh loan and that the proviso to Section 43B
of the Act was not applicable.               (emphasis supplied)

8.      In this backdrop, we have perused the provisions contained in
Section 43B of the Act, in particular, Explanation 3C thereof, which
was inserted by the Finance Act, 2006 with retrospective effect from
01.04.1989.  This provision was inserted in 2006 and hence, this
Court in Mahindra Nissans case, had no occasion to deal with the
case in the light of this provision.  Insofar as the Karnataka High
Court is concerned, though this provision was existing on the date of
judgment, it appears that it was not brought to the notice of learned
Judges and hence, the Division Bench proceeded to consider and
decide the appeal of the assessee without referring to Explanation
3C appended to Section 43B of the Act.

9.      As a matter of fact, from reading of Explanation 3C, in our
opinion, the question as raised in the present appeals stands
answered without further discussion. This provision was inserted for
removal of doubts and it was declared that deduction of any sum,
being interest payable under clause (d) of Section 43B of the Act,
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.
Thus, the doubt stands removed in view of Explanation 3C.  This
provision was considered by the Madhya Pradesh High Court in
Eicher Motors Limited Vs. Commissioner of Income Tax  to hold that
in view of the Explanation 3C appended to Section 43B with
retrospective effect from 01.04.1989, conversion of interest amount
into loan would not be deemed to be regarded as actually paid
amount within the meaning of Section 43B of the Act.
10.     It is not in dispute that the assessment years with which we
are concerned in the present appeals are covered by Explanation
3C, which was inserted by the Finance Act, 2006 with retrospective
effect from 01.04.1989.  In this view of the matter, the appeals filed
by the Revenue deserve to be allowed. Accordingly, we answer the
substantial question of law framed by us in favour of the Revenue
and against the assessee. However, there shall be no order as to
costs.

        Pending miscellaneous petitions, if any, also stand disposed
of.

____________________  
DILIP B.BHOSALE,J  
_________________________  
A.RAMALINGESWARA RAO,J      
Dt:11.02.2015