Payment of interest by way of conversion into loans: SC allows deduction u/s 43B


Payment of interest by way of conversion into loans: SC allows deduction u/s 43B


Commissioner of Income-tax, Delhiv. M.M. Aqua Technologies Ltd.[2016] 72 171 (Delhi)

Short Overview : 

  1. Assessee had claimed deduction of interest on loan taken from financial institutions U/S 43B. 
  1. The interest on loan was not actually paid due to financial difficulties but an arrangement was made with the institutions, whereby the existing interest liability would be converted into debentures. 
  1. As per Section 43B(d) of Income Tax Act, 1961, interest on loan or borrowing from any public financial institution or State Financial Corporation or State Industrial Investment Corporation shall be allowed as deduction while computing business income of that previous year in which such interest is actually paid.
  1. As per Explanation 3C to Section 43B of Income Tax Act, 1961, if the interest payable under clause (d) has been converted into a loan or borrowing then it shall not be deemed that such interest have been actually paid.
  1. Assessing Officer disallowed the appellant’s claim of deduction by holding that the issuance of debentures was not as per the original terms and conditions on which the loans were granted. He held that a subsequent change in the terms of the agreement would be contrary to Section 43B(d) and would render such amount ineligible for deduction.
  1. The assessee contended that the original terms and conditions of the borrowings provided for the revision of terms and conditions of payment at the time of each default. It was argued by the assessee that payment of the outstanding interest by issue of debentures tantamount to actual payment of interest as envisaged u/s 43B of the Income Tax Acr,1961.

The Hon SC held that:

  1. It was found that issue of debentures by assessee was, under a rehabilitation plan, to extinguish liability of interest altogether.No misuse of provision of section 43B was foundas a matter of fact by either Commissioner or Tribunal.
  1. The interest was actually paid by means of issuance of debentures, which extinguished the liability to pay interest. Issue of debentures was not merely converting interest into loans but actual payment of interest. 
  1. The Assessing Officer is directed to delete the disallowance of deduction of interest claimed by assessee u/s 43B.