INCOME TAX ACT, 1961

Section 43B, Expln. 3C

Business disallowance under section 43B - Deduction on actual payment - Funding of interest amount by way of a term 'debenture' - Applicability of Expln. 3C to section 43B

Assessee claimed a deduction under section 43B on account of issuance of debentures in lieu of interest accrued and payable to financial institutions. Revenue disallowed deduction in view of Expln. 3C to section 43B. High Court upheld this. Held: Explanation 3C to section 43B which was introduced for 'removal of doubts', only made it clear that interest that remained unpaid and has been converted into a loan or borrowing would not be deemed to have been actually paid. The purpose of introduction of Explanation 3C was to curb misuse of provisions of section 43B by not actually paying interest, but converting such interest into a fresh loan. On the facts found in assessee's case, issuance of debentures by assessee was, under a rehabilitation plan, to extinguish liability of interest altogether. No misuse of provision of section 43B was found as a matter of fact by either the CIT(A) or ITAT. Explanation 3C, which was meant to plug a loophole, could not, therefore, be brought to the aid of Revenue on the facts of assessee's case. Indeed, if there is any ambiguity in the retrospectively added Expln. 3C to section 43B, at least three well established canons of interpretation come to the rescue of assessee. 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. Second, 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 being the case, Expln. 3C is clarificatory since it explains section 43B(d) as it originally stood and does not purport to add a new condition retrospectively, as has wrongly been held by the High Court. Third, any ambiguity in the language of Expln. 3C would be resolved in favour of assessee. In view of all this, disallowance was deleted.

Supported by:Cape Brandy Syndicate v. Inland Revenue CIT and See Vodafone International Holdings BV v. UOI (2012) 6 SCC 613 (SC) : 2012 TaxPub(DT) 370 (SC), and Sedco Forex International Drill. Inc. v. CIT (2005) 12 SCC 717 (SC) : 2005 TaxPub(DT) 1870 (SC) and K.P. Varghese v. ITO (1981) 4 SCC 173 : 1981 TaxPub(DT) 972 (SC). Distinguished:CIT v. Gujarat Cypromet Ltd. (2020) 15 SCC 460 : 2019 TaxPub(DT) 2490 (SC) and National Rayon Corpn. Ltd. v. CIT (1997) 7 SCC 56.