Interest converted in to Loan & eligibility of deduction u/s 43B
Interest converted in to Loan & eligibility of deduction u/s 43B
A retrospective amendment was done in the Income Tax Act – 1961 to not allow deduction towards interest if the same is converted by the banks in to loan and not actually repaid. It may be noted that Section 43B was amended in 2006 by adding explanation 3C to Section 43B w.e.f. 01.04.1989, which reads as under:
“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.”
The explanatory memorandum explaining the logic behind incorporation of explanation 3C is contained in Circular No. 528 Dt 16/12/1988 which reads as under:
21.1 Under the existing provisions of section 43B of the Income-tax Act deduction for any amount payable by the assessee by way of tax or duty under any law or any sum payable as an employer by way of contribution to any provident fund or superannuation fund is allowed as a deduction in computing the income of that person in the year in which such sum is actually paid by him. An amendment was carried out by the Finance Act, 1987 whereby the time for making payment in respect of tax or duty under any law was extended to the due date applicable in the case of an assessee for furnishing the return of income under section 139(1) of the Income-tax Act in respect of the previous year in which the liability to pay such sum was incurred. The due date by which the payment on account of provident fund, gratuity fund, superannuation fund, etc., is to be made is the date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under the relevant Act, Rule or Notification.
21.2 The words “tax” and “duty” have been the subject-matter of judicial interpretation and there is controversy as to whether they cover statutory levies like cess, fees, etc. Some appellate authorities have held that such cess or fees cannot be covered by the expressions “tax” or “duty”. Such an interpretation is against the legislative intent and, therefore, by way of clari-fication, an amendment has been carried out to provide that cess or fees by whatever name called, which have been imposed by any statutory authority, including a local authority, will be allowed as a deduction only if these are actually paid.
21.3 A marked tendency has been noticed that on one pretext or the other some taxpayers postpone the payment of interest on loans provided by the various financial institutions and thus the money recoverable by these institutions is used for business purposes even though it has been claimed as a deduction from the income. With a view to improve the liquidity position of the public financial institutions and to prevent misuse of the limited resource of finance available to trade and industry, section 43B of the Act has been amended to provide that any sum payable as interest on any loan or borrowing from any public financial institutions in accordance with the terms and conditions of the agreement governing such loan or borrowing, shall not be allowed as a deduction if the same is not actually paid before the due date applicable in his case for furnishing the return of income. As per the new Explanation 3 to section 43B of the Income-tax Act, the term “public financial institution” shall have the same meaning as assigned to it in section 4A of the Companies Act, 1956.
21.4 These amendments will come into force with effect from 1st April, 1989 and will, accordingly, apply in relation to assessment year 1989-90 and subsequent years.
