Allotment of equity shares in lieu of interest liability is a mode of payment allowable u/s 43B – Mum ITAT


Garware Chemicals Ltd. v DCIT (IT APPEAL NO. 7819 (MUM.) OF 2010 dated 21.01.2015) Mumbai ITAT

Background:

The assessee is engaged in the business of manufacturing of various Petro Chemical products. During the assessment proceedings, the Assessing Officer noted that the assessee has claimed the deduction of Rs. 14 crore u/s 43B of Income Tax Act. The AO found that the claim of the assessee u/s 43B was in connection with the discharge of interest amount payable to IDBI amounting to Rs. 14 crore by way of conversion of the same into equity shares of the assessee company. The AO held that in view of the Explanation 3C of section 43B, the claim of the assessee is not allowable and accordingly rejected. The CIT(A) also did not accept the contention of the assessee and confirmed the disallowance made by Assessing Officer by following the decision of this Tribunal in the case of SRF Ltd. v. DCIT (34 SOT 1).

Assessee’s contentions:

  • As a result of restructuring of loan taken from IDBI bank, the interest of Rs. 14 crore was converted into Equity at par which would be subject to buy back by M/s Garware Polysters Ltd, a group concern of the assessee with the return of 10.02% per annum to IDBI.
  • The legislature has intentionally excluded the interest payable which has been converted into loan or borrowing from the term ‘actually paid‘ under Explanation 3C. The deeming fiction under Explanation 3C cannot be expanded beyond the specific instance given in the Explanation. Thus the conversion of interest payable into equity would not be covered under the Explanation 3C to section 43B.
  • The CIT(A) relied upon the decision of this Tribunal in the case of SRF v. DCIT (supra), however, the said case is based on the premises of the expenditure actually incurred and not on the Explanation 3C to section 43B.
Revenue’s arguments:
  • Explanation 3C of section 43B has been included with the object to correct the mischief of claim of deduction without payment. Therefore, to understand the intention of the legislature mischief rule of interpretation has to be applied in this case. 
  • CBDT Circular no. 7/2006 dated 17.07.2006 states that converted interest by whatever name will be eligible for deduction only in the year when the converted interest is actually paid. 
HELD:
  • Section 43B defers the deduction otherwise allowable to the year in which the payment is made. Clause (d) of this section is regarding the sum payable as interest on any loan or borrowing to be allowed only in the year of actual payment
  • Explanation 3C further clarifies the term actual payment and stipulates that the deduction of interest payable is allowable only on actual payment and not on deferment of liability of converting the same into loan or borrowings.
  • From the reading of section 43B(1)(d) and Explanation 3C as well as CBDT Circular No. 7/2006, it is discernible that the deduction is allowed only when the liability is discharged and not merely on deferring the same by conversion
  • The conversion of interest payable into loan or borrowing is otherwise not the payment of interest and discharge of interest liability but it is only a measure of deferment of liability
  • Therefore, in case of discharge of liability by any mode would not fall under the ambit of Explanation 3C as the liability is no more in existence once it is discharged and the allowability of deduction of the interest payable cannot be claimed in any subsequent year as there will be no further payment.
  • There are series of decisions of this Tribunal on the point that the interest liability stand discharged by allotting equity shares and accordingly the same is eligible for deduction u/s 43B.
  • We concur with the view of the Tribunal in the case of Suryalakshmi Cotton Mills Ltd. v. ACIT (supra), JSW Steel Ltd. v. ACIT (supra) and Cable Corporation of India Ltd. v. DCIT (supra) and by following the decision of Special Bench in the case of Biocon Ltd. v. DCIT (supra), in our view, the Explanation 3C cannot be applied in case of interest payable, converted into share capital as the interest liability stand ceased to exist and not deferred as in case of conversion of interest loan or borrowing.

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