By TIOL News Service

NEW DELHI, JULY 29, 2016: THE issue is - Whether payment of interest to FIs by way of debentures amounts to 'actual payment' for purpose of deduction u/s 43B. NO is the verdict.

Facts of the case

The assessee, a manufacturer and supplier of Film Fill and Splash Fill for Cooling Tower, Drift Eliminator, Distribution Nozzle, Mist Eliminator, BIOdek, TUBEdek, MBBR-MEDIA, Airmax Diffuser, etc, while filing its return, had claimed deduction to the tune of Rs. 2,84,71,384/- u/s 43B in the computation of income. The interest was paid to the financial institutions during the assessment year in question by issuing non-convertible debentures to such institutions. The AO however rejected the assessee’s claim for deduction, holding that the issue of debentures for the interest payable did not amount to actual payment of interest and conditions of Section 43B were, therefore, not satisfied. On appeal, the CIT(A) as well as the ITAT accepted the assessee’s contentions. On further appeal, this High Court upheld the contentions of the Revenue that it was only actual payment of amounts, which qualified for the benefit u/s 43B. This court, in the judgment under review, negatived the assessee’s contentions by noting that by virtue of Explanation 3C to Section 43-B (d) there was no room left for doubt that actual payment of amounts "payable" was essential, in view of the clear terms of section 43B. This court also noticed that the explanation, as well as Explanation 3D were introduced by the Finance Act, 2006 "with retrospective effect, from 01.04.1989 and 01.04.1997 respectively. Thus, Explanation 3C, having retrospective effect with effect from 01.04.1989, would be applicable to the present case, as it related to AY 1996-97. Explanation 3C squarely covers the issue raised in this appeal, as it negates the assessee's contention that interest which has been converted into a loan is deemed to be "actually paid". In light of the insertion of this explanation, which was not present at the time the impugned order was passed, the assessee could not claim deduction u/s 43-B.

Having heard the parties, the High Court held that,

++ the question which has to be decided is whether the decision of this court, which held that because of Explanation 3C to Section 43-B, any adjustment other than actual payment does not qualify for deduction u/s 43-B. As is evident from the discussion, the assessee’s review is premised on two major arguments, i.e. that the judgments of the Supreme Court have categorically held that debentures amounted to payment and that such debentures, being actionable claims and securities, were to be deemed paid once issued. As to the main submission of the assessee’s argument that issuance of debentures amounted to payment, it is noteworthy that the Supreme Court ruled as to what is the true nature and character of a debenture. In R.D. Goyal v. Reliance Industries Ltd, it was held that: "'Share' has been defined in Section 2(46) of the Companies Act to mean a share in the share capital of a company which in turn would mean that it would represent contribution of the shareholder towards the share capital of the company. On the other hand, a debenture is an instrument of debt executed by the company acknowledging its receipt to repay the same at a specified rate and also carrying an interest. It is in sum and substance a certificate of loan or a bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure yet it does not become a share capital. In any event, a debenture would not come within the purview of the definition of goods, inasmuch as, although the shares and stocks are included in the definition of goods but debentures are not." Thus, though debentures are securities and are actionable claim the essential fact is that they are instruments of debt, by the company acknowledging its indebtedness to pay the amount specified. Does this amount to "payment" u/s 43-B. This court is of opinion that there is no question of any error in the judgment under review;

++ 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 Courts, which held that actual payment is the sine qua non for applicability of Section 43-B. In view of the foregoing discussion, this court is satisfied that there is no error apparent on the face of the record, nor is there any sufficient cause, for reviewing its judgment.

(See 2016-TIOL-1556-HC-DEL-IT)