M/s. Frontier Information Tech Ltd. V. The Deputy Commissioner of Income Tax

ITTA/239/2008

AI Insights

The case revolves around the interpretation of Section 43B of the Income Tax Act, 1961, concerning the deductibility of interest that was converted into equity shares. The appellant, M/s. Frontier Information Secunderabad Tech Ltd., had converted outstanding interest liabilities into equity shares with Andhra Pradesh Industrial Development Corporation Limited (APIDC) and faced disallowance of these claims under Section 43B by the tax authorities. The primary legal question was whether such a conversion constitutes 'actual payment' of interest under Section 43B, which mandates that deductions for certain payments are only allowable if the payments are actually made. The Supreme Court's interpretation in similar cases and the specific facts of the case led to the conclusion that the issuance of equity shares did extinguish the liability to pay interest, thus qualifying as actual payment.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 752677 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 23-12-2024
• Assessment Year: misc
• Other Referred Cases: M.M. Aqua Technologies Limited v. Commissioner of Income-tax, Delhi-III, Commissioner of Income-tax-V v. Rathi Graphics Technologies Limited, Commissioner of Income-tax v. Core Emballage Ltd
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: J V PRASAD
• Assessee Lawyers: A V A KARTIKEYA
• Keywords: Actual payment; Assessment year 1999-2000; Income Tax; Section 43B; Interest Conversion to Equity
• Section: 142(1); 143(2); 43B; 260A; 143(1)(a)

Judgement Text

"134181 IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD MONDAY, THE TWENTY THIRD DAY OF DECEMBER TWO THOUSAND AND TWENTY FOUR PRESENT THE HONOURABLE THE CHIEF JUSTICE ALOK ARADHE AND THE HONOURABLE SRI JUSTICE J SREENIVAS RAO INCOME TAX TRIBUNAL APPEAL NO: 239 OF 2008 Appeal under section 2604 of the lncome Tax Act., against the dated 20.04.2006 passed in l.T.A.No.532iHydl2004 for the Assessment year 1999-2000 on the file of the lncome Tax Appellate Tribunal, Hyderabad Bench 'B', Hyderabad preferred against the Order dated 05.03.2004 Passed in lTA. No.265/ClT(A)-ll/03-04 on the file of the Commissioner of lncome Tax (Appeals)-ll, Hyderabad Preferred against the Order dated: 29.08.2003 in PAN/GIR.No. AAACFSlBOB on the file of the Deputy Commissioner of lndia Tax Circlel (3), Hyderabad. Between: M/s. Frontier lnformation Secunderabad. Tech Ltd., D-l8, Vikrampuri, Meghana Plaza, ...APPELLANT AND The Deputy Commissioner of lncome Tax, Circle - 1 (3) Hyderabad. ...RESPONDENT Counsel for the Appellant: SRl. A.V.A SIVA KARTIKEYA Counsel for the Respondent: SRl. J V PRASAD, SC FOR INCOME TAX The Court delivered the following: JUDGMENT THE HON'BLE THE CHIEF JUSTICE ALOK ARADHE AND THE HON'BLE SRI JUSTICE J. SREENIVAS RAO ITTA No.239 of 2008 JTIDGMENT: rlper the Hon'ble the Chief Justice Alok Aradhe) Mr. A.V.A. Siva Kartikeya, learned counsel appears for the appellant/assessee. Mr. J.V.Prasad, learned Senior Standing Counsel fbr Income-tax Department appears for the respondent/Revenue 2. This appeal under Section 260A of the Income-tax Act, 196l (fbr short the 'Act'), has been filed against order dated 20.04.2007, passed by the Income Tax Appellate Tribunal, Hyderabad Bench 'B', Hyderabad (for short 'the Tribunal'), in I.T.A.No.532 ft yd12004. 3. The subject matter of the appeal pertains to the assessment year 1999-200Ct. 4. The appeal was admitted on the following substantial question of law: \"Whether on the facts=4g1i circumstances of the case, the Hon'ble l'ribunal is right in disallowing the claim of interest i I I li ll CJ & JSR, J ITTA.No.239 of 2006 converted to equity in a sum of Rs.75,75,000/- on a proper interpretation of Section 43B of the Income Tax Act, l96l?,, 5. Facts giving rise to filing of this appeal briefly stated are that the assessee is a company and is a developer of software. The assesse€ filed the return of income on 29.12.1999 declaring the loss of Rs. 1,00,64,340/-. The retum filed by the assessee was processed under Section 143(l)(a) ofthe Act. The assessee in the retum of income during the financial year 1998-99 had converted the interest due of Rs.75,75,000/- to Andhra pradesh Industrial Development Corporation Limit€d (for short .APIDC,) into equity shares by issuing 5,05,000 shares ofRs. 10/- each totaling to a sum of Rs.50,50,000/-. Interest of Rs.39,94,4291- had accrued to the assessee and was due to Andhra pradesh State Financial Corporation (for short 'APSFC'). The case of the assessee was selected for scrutiny and notices under Sections 1a3(2) and 142(l) of the Act were issued. The assessee was asked to file objections, if any, to disallowance of unpaid interest of Rs.75.75 lakhs and Rs.39.94 lakhs under Section 438 of the Act. 2 CJ & JSR, J ITTA.i,ro.239 ol2008 6. The assessee thereupon filed objections in which it was stated that the assessee had paid outstanding interest and had received back the same amount as additional loan from 1inancial institutions. The assessee also stated that since constructive payment of interest outstanding was made on or before the due date, no disallou.ance under Section 43B of the Act is called for. The Assessing Officer by an order dated 29 .08.2003 inter alia held, that actual payment of the amount is sine qua non for allowing deduction under Section 43B of the Act. It was further held that conversion of outstanding interest liability into loan i.e., funding interest or into equity does not amount to actual payment. Accordingly, a sum of Rs.75,75,000/- and Rs.39,94,429,/_ was disallowed under Section 43B of the Act on the ground that the same was not actually paid. 7. The assessee thereupon filed an appeal before the Commissioner of lncome-tax (Appeals). The Commissioner of Income-tax (Appeals) by an order dated 05.03.2004 inter arictherd that the interest was not actually paid by the assessee to ApIDC and APSFC and therefore, the Assessing officer is justified in not J i. CJ & JSR, J ITTA No.239 of 2008 allowing the amount in question under Section 43B of the Act. Accordingly, the appeal was dismissed. 8. The assessee thereupon filed an appeal before the Tribunal. The Tribunal by an order dated 20.04.2007 partly allowed the appeal preferred by the assessee. In the aforesaid factual background, this appeal has been filed by the assessee. 9. Learned counsel for the assessee has submitted that constructive payment amounts to actual payment within the meaning of Section 43B of the Act. In support of aforesaid submission, reliance has been placed on the decisions of the Supreme Court, Delhi and Gujarat High Courts in M.M. Aqua Technologies Limited v. Commissioner of [ncome-tax, Delhi-IIIr; Commissioner of Income-tax-V v. Rathi Graphics Technologies Limited2 and Commissioner of lncome-tax v. Core Emballage Ltdr respectively. 10. On the other hand, learned Senior Standing Counsel for the Revenue has submitted that admittedly, the amount in question has 4 I (2021) 436 rrR 582 (sc) ' (20 t5) 328 rrR ro7 (Delhi) ' (2022) 443 ITR 157 (Gujarat) CJ & JSR, J I'ITA No.239 ot 2008 not actually been paid and therefore, the authorities under the Act are justified in denying the benefit under Section 43B of the Act to the assessee. It is submitted that from a plain and liberal interpretation of Section 43B of the Act, it is evident that in order to attract the applicability of the aforesaid provision, actual payment should be made which admittedly has not been paid in the instant case. It is therefore contended that with regard to disallowance of claim, the Tribunal has properly interpreted Section 43B of the Act and the orders passed by the authorities under the Act, do not call for any interference. ll. We have considered the rival submissions made by the learned counsel for the parties and perused the record. 12. In the instant case, the assessee had converted the liabilify to pay interest by issuing equity shares in favour of ApIDC. The issue which arises for consideration in this appeal is whether the same would amount to \"actual payment,' within the meaning of Section 43B of the Act. The authorities under the Act inter alia found that the interest payable by the assessee was converted into equity shares. However, the same was constructive payment and 5 6 CJ & JSR, J I'ITA.No-239 ot 2OOa not an actual payment and therefore, the claim of the assessee for deduction under Section 43B of the Act was negatived. 13. Section 43B ofthe Act has been inserted by the Finance Act, 1983 with effect from 01.04.1984. Clause (d) to Section 43B was inserted by the Finance Ac! 1988 with effect from 01.04.1989. Explanation 3C and Explanation 3D were inserted by the Finance Act,2006 with effect from 01.04.1989 and 01.04.1997 respectively. The relevant extract ofSection 43B reads as under: \"438. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of (d) any sum payable by the assessee as interest on any loan or borrowing from any public fltnancial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement goveming such loan or borrowing, or (e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank or a co- operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank in accordarrce with the terms and 7 CJ & JSR. J I'ITA.No.239 of 20Oa conditions of the agreement goveming such loan or advances. or Providcd that nothing contained in this Section except the provisions ol clause (h) 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 retum of income under sub-section (l) of Section 139 in respect of the previor.rs year in which the tiability to pay such sum was incurred as aforcsaid and the evidence of such payment is furnished by the assessee along with such retum. Explanation 3C. For the removal of doubts, it is hereLry 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 clausr: which has been converted into a loan or borrowing or debenture or any other instrument by which the liabilitl, to pay is deferred to a luture date shall not be deemed to have been actually paid. Explanation 3D. For the removal of doubts, it is hereby declared that a deduction ofany sum, being interest payable under clause (e) 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 advance or debenture or any other instrument by which the liability to pay is deferred to a future date shall not be deemed to have been actually paid.\" I C.' & JSR. J t-r'IA-No.239 ot 2OOA 14. The scope and ambit of Section 43B of the Act was considered by the Supreme Court in M.M.Aqua Technologies Limited (supra). The assessee in the aforesaid decision claimed deduction under Section 43B ofthe Act on the issue ofdebentures in lieu ofinterest accrued and payable to financial institutions. The Supreme Court in paragraphs 11 to 2l and 23 and 24 held as under: \"17. Section 43-B was originally inserted by the Finance Act, 1983 w.e.f. 1-4-1984. The scope and effect of the newly inserted provision, at that point, was explained by the Central Board ol Direct Taxes (\"the Board\") in Circular No. 372/1983 dated 8-12-1983 as follows: \"35.2. Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to provident fund, Employees State lnsurbnce Scheme, etc., for long periods of time, extending sometimes to several years. For the purposes ol their irrcome tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand, they dispute the liability and do not discharge the same. For some reasons or the other, Lurdisputed liabilities also are not paid. 35.3. To curb this practice, the Finance Act has inserted a new Section 43-B to provide that deduction for any sum payable by the Sqsessee by way of tax or duty 9 CJ & JSR, J ITTA ',1o.239 oi 2O0a under any law for the time being in force or any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees shall irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in ,arhich such sum is actually paid by the assessee. 35.4. Thc section also contains an Explanation for the removal of doubts. The Explanation provides that where a. deduction in respect of any sum aforesaid is allowed in computing the income of any previous year, being a previous year relevant to Assessment year 1983- 84, or any earlier assessment year, in which the liabilily to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under Section 43-B in respect of such sum on the ground that the surn has been actually paid by him in that year. In other words, an assessee who has already been allowed deduction of a tiability on account of the tax or duty or in respect of any sum payable as contribution to any fund for Assessment Year 1983-84, or any earlier year in which the liability to pay was incurred, cannot, in respect of that liability, be allowed a deduction in Assessment Year 1984-85. or any subsequent year on the ground that he has actually made a payment towards such tiability in that year. \" 18. As has been pointed out hereinabove, the Finance Act, 2006 inserted Explanation 3-C w.r.e.f. I-4-1989. 1-he scope and effect of this provision was .tri:iEr{,r.. I I 10 CJ & JSR, J ITTA.No 239 of 2OO8 explained by the Board in Circular No. 1412006 datet 23- 12-2006. as follows: \"L6.2.It has come to notice that certain assessees were claiming deduction under Section 43-B on account of conversion of interest payable on an existing loan into a fresh loan on the ground that such conversion was a constructive discharge of interest liability and, therefore, amounted to actual payment. Claim of deduction against conversion of interest into a fresh loan is a case of misuse of the provisions of Section 43-8. A new Explanation 3_ C has, therefore, been inserted to clarify that if any sum payable by the assessee as interest on any loan or borowing, referred to in clause (d) of Section 43-B, is converted into a loan or borrowing, the interest so converted, shall not be deemed to be actual payment. 16.3. This amendment takes effect retrospectively from l-4-1989 i.e. the date from which clause (d) was inserted in Section 43-B and applies in relation to Assessment Year 1989-90 and subsequent years.,, 19. The object of Section 43-B, as originally enacted, is to allow certain deductions only on acturl 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 11 CJ & JSR, J IT-I1,.No.239 of20Oa incuning of a liability, can allow for a deductirrn. Interestingly, the \"sum payable\" referred to in Section 43- B(d), with which we are concerned, does not refer to lhe mode of payment, unlike proviso 2 to the said section, which was omitted by the Finance Act, 2003 w.e.L l-4-2004. The said proviso reads as follows: \"Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (v-a) of sub-section (l) of Section 36, and where such payment has been made otherwise than in cash, the surn has been realised within fifteen days from the due date.\" 20. This being the case, it is important to advert to the facts found in the present case. Both CIT and ITAT found, as a mattel' of fact, that as per a rehabilitation plan agreed to between the lender and the borrower, debentures were accepted by the financial institutions in discharge o/the del)t on account of outstanding interest. This is also clear frorr the expression \"in lieu of' used in the judgment of the leamed CIT. That this is so is clear not only lrom the accounts produced by the assessee, but equally clear from the fact that in the assessment oflcrct Bank, for the assessment year in question, the accounts of the bank reflect the amount received by way of debentures as its business income. This being the fact situation in the present case, it is clear that interest was \"actually paid\" by means of issuance of debenttres, which extinguished the liability to pay lnterest I I I I I 72 CJ & JSR, J ITTA.No.239 of 2OO8 21. Explanation 3-C, which was introduced for the \"removal of doubts\", only made it clear that interest that remained UlPaid and has been converted into a loan or borrowing shall not be deemed to have been actually paid' As has been seen by us hereinabove, particularly with regard to the Circular exptaining Explanation 3-C, at the heart of the introduction of Explanation 3-C is tnisuse of the provisions of Section 43-B by not actually paying interest' but converting such interest into a fresh loan' On the facts found in the present case, the issue ol debentures by the assessee was, under a rehabilitation plan, to extinguish the liability of intcrest altogether. No misuse of the provision of Section 43-B was found as a matt€r of fact by either CIT or ITAT. Explanation 3-C, which was meant to plug a loophote, cannot therefore be brought to the aid of the Revenue on the facts of this case' Indeed, if there be any ambiguity in the retrospectivety added Explanation 3-C' at least three well-established canons of interpretation come to the rescue of the assessee in this case' First' since Explanation 3-C was added in 2006 with the object of plugging a loophole - i.e' misusing Section 43-B by not actually paying interest but converting interest into a fresh loan, bona fide transactions ol actual payments are not meant to be affected. In simitar circumstances' in K'P' Varghese v. ITO lK. P. Varghese v' ITO, (1981) 4 SCC I 73 : 1981 SCC (Tax) 293!, this Court construed Section 52 of the Income Tax Act as applying only to cases where \"understatement\" is to be found - an \"understatement\" is not to be found in the literal language of Section 52' but was introduced by this Court to streamline the provision in the 13 CJ & JSR, J 1TTA No.239 o12008 light of the object sought to be achieved by the said provision. This Court, therefore, held : (SCC pp. 189 & l9l - 92,paras 13 & l5) \"1.1. Thus it is not enough to aftract the applicability of sub-section (2) that the fair market value of the capital asset transferred by the assessee as on the date of the transfr:r exceeds the full value of the consideration declared in respect of the transfer by not less than l5%o of the value so declared, but it is furthermore necessary that the full value of the consideration in respect of the transfer is understated or in other words, shown at a lesser hgure than that actually received by the assessee. Sub-section (2) has no application in case ot an honest and bona fide transaction where the consideration in respecl of the transfer has been correctly declared or disclosed by the assessee, even if the condition of 15% difference between the fair market value of the capital asset as on the date of the transfer and the full value of the consideration declared by the assessee is satisfied. ... 1i. It is therefore clear that sub-section (2) ciruiot be invoked by the Revenue unless there is understatemerit of the consideration in respect of the transfer and the burden of shorving that there is such understatement is on the Revenue. Once it is established by the Revenue that the consideration for the transfer has been understated or, to put it differently, the consideration actually received by the assessee is more than what is declared or disclosed by him, sub-section (2) is immediately attracted, subject ol course to the fulfilment of the condition of l5o% or more difference, and the Revenue is then not required to show what is the precise extent of the understatement or in l4 other words, what is the consideration actually received by the assessee. That would in most cases be difficult, if not impossible, to show and hence sub-section (2) relieves the Revenue of all burden of proof regarding the extent of understatement or concealment and provides a statutory measure ofthe consideration received in respect of the transfer. It does not create any fictional receipt. It does not deem as receipt something which is not in fact received. It merely provides a statutory best-judgment assessment of the consideration actually received by the assessee and brings to tax capital gains on the footing that the fair market value of the capital asset represents the actual consideration received by the assessee as against the consideration untruly declared or disclosed by him. This approach in construction of sub-section (2) falls in line with the scheme of the provisions relating to tax on capital gains. It may be noted that Section 52 is not a charging section but is a computation section. It has to be read along with Section 48 which provides the mode of computation and under which the starting point of computation is 'the futt value of the consideration received or accruing'. What in fact never accrued or was never received cannot be computed as capital gains under Section 48. Therefore sub-section (2) cannot be construed as bringing within the computation of capital gains an amount which, by no stretch of imagination, can be said to have accrued to the assessee or been received by him and it must be confined to cases where the actual consideration received for the transfer is uflderstated and since in such cases it is very difficult, if not impossible, to determine and prove the exact quantum of the suppressed consideration, sub-section (2) provides the statutory measure for determining the consideration CJ & JSR- J I'ITA No 239 of 2008 15 C.I & JSR, J rT-Ir.No 239 0t 200a actually received by the assessee and permits the Revenue to take the fair market value of the capital asset as the full value of the consideration received in respect of the transfer.\" 23. This being the case, Explanation 3_C is clarificatory - it explains Section 43-B(/) as it originally stood and does not purpoft to add a new condition retrospectively, as has wrongly been held by the High Court. 24. Third, any ambiguity in the language of Explanation 3C shall be resolved in favour of the assessee as per Cape Brandy Syndicate v. lnland Revenue Commissioner ([192 l] (l) KB 64) as followed by judgments of this Court _ See Vodafonc intemational Holdings BV vs. Union ol lndra [[20121 7 Laxrrann.com 202/204 Taxman 40gl34t ITR I ar paras 60 to 70 per Kapadia, C.J. and paras 333, 334 p<:r Radhakrish nan, Jl.\" Thus, from the aforesaid decision of the Supreme Court, it is evident that in the facts ofeach case, the issue whether the interest was actually paid has to be decided with reference to the fact whether the liability to pay the interest stands extinguished. 15. A Division Bench of the Gujarat High Court in Core Emballage Limited (supra) dealt with the claim of the assessee for deduction of the amoun, gr*. Secrion 43B of rhe Act. The 16 CJ & JSR, J I'rTA.No 239 oi 2OO8 assessee had issued equity shares against the outstanding interest liability. The Division Bench of the Gujarat High Court in the aforesaid decision followed the decision of the Supreme Court in M.M.Aqua Technologies Limited (supra) and held that the liability of the assessee to pay interest had ceased on account of issue of equity shares. The assessee was held entitled to benefit of Section 43B of the Act. 16. It is noteworthy that in the instant case, it is not the case of the Revenue that liability of the assessee to pay interest has not ceased to exist on issuance of equity shares. The claim of the assessee for deduction under Section 43B of the Act has been denied on the ground that the actual payment has not been made. In view of the interpretation put forth by the Supreme Court on Section 43B of the Act, as the liability of the assessee to pay interest ceased to exist on issue of shares in favour of APIDC, the same would tantamount to actual payment within the meaning of Section 43B of the Act. The assessee, therefore, is entitled to benefit ofSection 43B ofthe Act. t7 CJ & JSR, J IT'I'A No.239 of20O8 t7. For the aforesaid mentions, the substantial question of law is answered in favour of the assessee. 18. In the resulr, the appeal is allowed. The order dated 20.04.2006 passed by the Income Tax Appellate T.ribunal, Hyderabad Bench-B, Hyderabad is set aside and the assessee is held entitled to claim the benefit of deduction under Section 43B ofthe Act. There shall be no order as to costs. Miscellaneous applications, if any pending, shall stand closed. There shall be no order as to costs. t l I //TRUE COPY// Sd/. K. SRINIVASA RAO JOTNT RFGTSTR^R // ---- / ) SECTTOIV OFFICER To 1 2 .2 4. 5. 6. gh I* ll::1_Ill llq:l!\"]\" rribunat,. Hyderabad Bench,8,, Hyderabad I ne uommtsstoner ot lncome Tax (Appeals)_ll, Hvderabad lhe Qepytv _Cpmmissioner 91p991nb iii, ct?\"6 _ i (5i Hyderabad one CC to SRt A V KR|SHNA-Ko_UNDNYA Aovoijirj fcjpudi-- One CC to SRt J V pRASAD, SC FOR trlCOrr,rE'iniidpUCi, Two CD Copies R/ P W HIGH COURT DATED: 23t1ZtZO24 JUDGMENT ITTA.No.239 of 2008 ALLOWING THE ITTA g*d4 /-:: ' {' ,..= R f +.( l:,- S D{ Y+- l l i I t ] I i I J I {ffi, 0 g .tlfl ?m f, t' 2 .; !\"'\"t,-, ,. ,. ' "