By TIOL News Service

NEW DELHI, FEB 26, 2019: THE ISSUE BEFORE THE APEX COURT IS - Whether once interest liability accrued during relevant assessment year was not actually paid back and rather adjusted into further bank loan, is not eligible for deduction u/s 43B. YES IS THE VERDICT.

Facts of the case:

The assessee company filed its return declaring total loss of Rs.3,76,70,656/-. The said return was processed and the assessment was passed, wherein the AO disallowed the deduction claimed by assessee with regard to payment of interest amounting to Rs.2,51,31,154/- to the IDBI Bank, referring to the CBDT Circular dated Dec 16, 1988. On appeal, the CIT(A) found that the fact that the entry pertaining to the interest element outstanding to financial institutions had been reversed after receipt of funds of Rs.8 crores from IDBI, substantiates the contention of assessee company that the entries relating to interest outstanding with reference the said institutions had been squared up and a new credit entry of loan of IDBI was appearing in the balance sheet. The counsel for assessee pleaded that since no interest payment was outstanding and the amount was paid off, the expenditure of interest was allowable u/s 43B. It was further added that in case the loan had been disbursed in two parts; one to meet the interest outstanding and the balance for financial assistance, still the entries in the books of account would remain the same and the outstanding interest would have been NIL. Hence, the CIT(A) held that the disallowance made by AO contrary to the substance of the transaction and the provisions of Section 43B.

Not satisfied, the Revenue approached the Tribunal, wherein the addition made by AO u/s 43B stood deleted, on conversion of upaid interest into a funded interest loan treating the same as interest payment. The matter ultimately reached High Court, which upheld the order of ITAT, relying on the judgment of Gujarat High Court in case of Commissioner of Income Tax v. Bhagwati Autocast Ltd. [261 ITR 481].

Apex Court held:

++ it is noted that Explanation 3C was inserted by the Finance Act, 2006 and it was declared that "a deduction of any sum, being interest payable under clause (d) of section 43B, 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." The interest liability which accrued during the relevant assessment year was not actually paid back by the assessee, rather was sought to be adjusted in the further loan of Rs.8 crores which was obtained by the IDBI Bank. The judgment of Delhi High Court relied upon by Revenue's counsel refers to Section 43B as well as Explanation 3C, and held that Explanation 3C having retrospective effect with effect from April 01, 1989 shall be applicable to the year in question. The statutory Explanation 3C inserted by the Finance Act, 2006 is thus squarely applicable in the facts of the present case. It appears that the attention of High Court was not invited to Explanation 3C. Hence, the AO has rightly disallowed the deduction claimed by assessee.

(See 2019-TIOL-81-SC-IT)