Summary
For assessment year 1996–97, debentures accepted by financial institutions under a rehabilitation plan in full discharge of outstanding interest constituted actual payment under Section 43B(d), as then applicable. The concurrent factual findings established extinguishment of the interest liability, rather than conversion of unpaid interest into a fresh loan. Explanation 3C targeted the latter practice and did not defeat this bona fide payment. The Court set aside the High Court judgments and restored the Tribunal’s allowance of the deduction.
Issues
- Whether issuing debentures accepted in discharge of interest amounted to actual payment under the provision applicable to assessment year 1996–97.
- Whether Explanation 3C barred the deduction on the concurrent factual findings.
Provisions considered
- Section 43B(d) and Explanation 3C, as applicable to assessment year 1996–97, Income-tax Act, 1961Actual discharge by debentures was distinguished from conversion of unpaid interest into a fresh loan; the Explanation did not disallow the deduction on these facts. (¶¶ 16, 19, 20, 21, 22, 23, 24, 25, 27, 30, 31)
Held
- Section 43B required actual payment rather than mere incurring of a liability under mercantile accounting. The relevant interest provision did not prescribe payment exclusively by cash or cheque. (¶¶ 16, 17, 19)
- The fact-finding authorities established that the lenders accepted debentures under the rehabilitation plan in effective discharge of the interest liability. The accounts corroborated payment, the lender treated the receipt as business income, and the assessee claimed no second deduction on redemption. (¶¶ 3, 4, 5, 6, 20, 25)
- Explanation 3C addressed unpaid interest converted into a fresh loan. It was clarificatory and did not retrospectively add a new condition defeating this bona fide transaction that extinguished the interest liability. Any ambiguity in the Explanation was to be resolved in the assessee’s favour. (¶¶ 18, 21, 22, 23, 24)
- The High Court wrongly treated the transaction as conversion into a loan despite the concurrent factual findings. National Rayon concerned a different question; Gujarat Cypromet involved a fresh loan entry and was distinguishable. The Tribunal’s order was restored. (¶¶ 25, 26, 27, 28, 29, 30, 31)
Result
Appeals allowed; High Court judgments set aside and Tribunal order allowing the interest deduction restored.