The question raised in these appeals is with particular reference to Section 43B Explanation 3C of the Income Tax Act, 1961. 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 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), and would render such amount ineligible for deduction.
Cape Brandy Syndicate v. Inland Revenue Commissioner [1921 (1) KB 64] to submit that fiscal and tax statutes have to be strictly construed and that since the word “debenture” is not specified in Explanation 3C, it cannot be read into it.
Shri Balbir Singh, learned Additional Solicitor General, argued that Section 43B makes a departure from other Sections in the Act, as indicated by its non-obstante clause. The Section was introduced so that no deductions could be claimed based on a mercantile system of accounting as actual payment would have to be made.
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—
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(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, or
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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.
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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.
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The object of Section 43B, 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. In short, a mercantile system of accounting cannot be looked at when a deduction is claimed under this Section, making it clear that incurring of liability cannot allow for a deduction, but only “actual payment”, as contrasted with incurring of a liability, can allow for a deduction.
CIT v. Gujarat Cypromet Ltd. in the said case, a Division Bench of this Court, while dealing with Section 43B Explanation 3C, noted the facts as found by the CIT as follows (para 5):
“2.2. I have perused the case laws cited and also the above sanction letter from IDBI and also the auditor’s note referred by the assessing officer. I have perused Schedule 3 of the balance sheet as on 31-3-2001 and find that the above loan appears as on 31-3-2001 and is part of the total secured loans of Rs 75,26,10,769. The fact that the entry pertaining to the interest element outstanding to financial institutions referred at page 2 of the order by the assessing officer has been reversed after receipt of funds of Rs 8 crores from IDBI substantiates the contention of the appellant company that the entries relating to interest outstanding with reference the above institutions have been squared up and its place a new credit entry of loan of IDBI is now appearing in the balance sheet as on 31-3-2001. The plea of the appellant’s counsel Shri Tanna that since no interest payment is outstanding now and the amount is paid off, the expenditure of interest is allowable under Section 43-B. It is further added that in case the loan had been disbursed in 2 parts — one to meet the interest outstanding and the balance for financial assistance still the entries in the books of account would have remain the same and the outstanding interest would have been NIL. Having regard to the above facts and also the case laws cited by the appellant’s representative, I am inclined to hold that the disallowance made by the assessing officer is contrary to the substance of the transaction and the provisions of Section 43-B of the Income Tax Act and the same cannot be sustained and therefore directed to be deleted.”CIT v. Gujarat Cypromet Ltd.
On the facts of that case, this Court found that Explanation 3C was squarely attracted in that outstanding interest had not actually been paid, but instead a new credit entry of loan now appeared, bringing the case within the express language of Explanation 3C. This is far removed from the facts of the present case, which were not adverted to at all in this judgment. Consequently, this judgment is also distinguishable and would not apply to govern the facts of the present case.