M.M. AQUA TECHNOLOGIES LTD. versus COMMISSIONER OF INCOME TAX, DELHI-III

Citation: [2021] 8 S.C.R. 237 · Decided: 11-08-2021 · Supreme Court of India · Bench: R.F. NARIMAN · Disposal: Leave Granted & Allowed

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Judgment (excerpt)

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237
M.M. AQUA TECHNOLOGIES LTD.
v.
COMMISSIONER OF INCOME TAX, DELHI-III
(Civil Appeal Nos. 4742-4743 of 2021)
AUGUST 11, 2021
[ROHINTON FALI NARIMAN AND B.R. GAVAI, JJ.]
Income Tax Act, 1961: s. 43B explanation 3C – Certain
deductions to be only on actual payment – Funding of interest
amount by way of a term debenture, if amounts to actual payment –
Appellant-assessee company had obtained loan from financial
institutions for business operations on which is interest is payable
– Assessee unable to discharge interest liability due to its financial
hardship – It approached financial institution for a rehabilitation
plan – In terms of the Plan, assessee issued convertible debentures
in lieu of interest payment and then claimed a deduction u/s. 43B –
Rejection of the claim, by the Assessing Officer holding that the
issue of debenture does not tanamount to actual payment – However,
CIT allowed the claim and the tribunal upheld the same – In appeal,
the High Court held that interest had been converted into loan –
On appeal, held: The issue of debentures by the assessee was under
a rehabilitation plan, to extinguish the liability of interest altogether
– No misuse of the provision of s. 43B was found by either the CIT
or the ITAT – Explanation 3C, was meant to plug a loophole, cannot
therefore be brought to the aid of Revenue – In case of any ambiguity
in the retrospectively added explanation 3C, the three canons of
interpretation come to the rescue of the assessee, first, the 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,
thus, Explanation 3C is clarificatory-it explains s. 43B(d) as it
originally stood and does not purport to add a new condition
retrospectively; and third, any ambiguity in the language of
Explanation 3C shall be resolved in favour of the assesse – Thus,
the order passed by the High Court are set aside.
s. 43 – Object of – Explaination of.
[2021] 8 S.C.R. 237
237
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238
SUPREME COURT REPORTS
[2021] 8 S.C.R.
Allowing the appeals, the Court
HELD: 1.1 The object of Section 43B of the Income Tax
Act, 1961, as originally enacted, is to allow certain deductions
only on actual 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 incurring of a liability, can
allow for a deduction. Interestingly, the ‘sum payable’ referred
to in Section 43B(d), does not refer to the mode of payment,
unlike Proviso 2 to the said Section, which was omitted by the
Finance Act, 2003 w.e.f. 1st April, 2004. [Para 19][249-G-H; 250-
A-C]
1.2 Both the CIT and the ITAT found, as a matter of fact,
that as per a rehabilitation plan agreed to between the lender
and the borrower, debentures were accepted by the financial
institution in discharge of the debt on account of outstanding
interest. This is also clear from the expression “in lieu of” used
in the judgment of the CIT. That this is so is clear not only from
the accounts produced by the assessee, but equally clear from
the fact that in the assessment of ICICI 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 instant case, it is clear that interest was
“actually paid” by means of issuance of debentures, which
extinguished the liability to pay interest. [Para 20][250-D-F]
1.3 Explanation 3C, which was introduced for the “removal
of doubts”, only made it clear that interest that remained unpaid
and has been converted into a loan or borrowing shall not be
deemed to have been actually paid. As has been seen, particularly
with regard to the Circular explaining Explanation 3C, at the heart
of the introduction of Explanation 3C is misuse of the provisions
of Section 43B by not actually paying interest, but converting
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