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M.M. Aqua Technologies Ltd. Vs. Commissioner of Income Tax, Delhi-III - (Supreme Court) (11 Aug 2021)

Explanation 3C to Section 43B (d) of the IT Act is 'clarificatory' and does not add a new condition retrospectively


Direct Taxation

The question raised in present appeals is with particular reference to Section 43B Explanation 3C of the Income Tax Act, 1961 [IT Act]. 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 of IT Act 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) of IT Act, and would render such amount ineligible for deduction. The Commissioner of Income Tax (Appeals) ["CIT"] allowed the appeal. This order was upheld in appeal by the Income Tax Appellate Tribunal ["ITAT"].

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 was whether the funding of the interest amount by way of a term loan amounts to actual payment as contemplated by Section 43B of the IT Act. The High Court concluded that, Explanation 3C, having retrospective effect with effect from 1st April, 1989, would be applicable to the present case, as it relates to AY1996-97. The Assessee cannot claim deduction under Section 43B of the IT Act.

The object of Section 43B of IT Act, as originally enacted, is to allow certain deductions only on actual payment. This is made clear by the non-obstante 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.

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. 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 of IT Act 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.

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. Explanation 3C is clarificatory - it explains Section 43B(d) of IT Act as it originally stood and does not purport to add a new condition retrospectively, as has wrongly been held by the High Court.

The High Court judgment 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. Consequently, the impugned judgments of the High Court are set aside and the judgment and order of the ITAT is restored. Appeals allowed.

Relevant : Sedco Forex International Drill. Inc. v. CIT MANU/SC/2079/2005


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