CIT vs. M. M. Aqua Technologies Ltd (Delhi High Court)

DATE: July 22, 2016 (Date of pronouncement)
DATE: August 3, 2016 (Date of publication)
AY: 1996-97
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S. 43B: Issue of debentures to fund the interest liability does not amount to “actual payment” of the interest so as to qualify for deduction under Explanation 3C to Section 43-B

(i) The question which has to be decided is whether the decision of this court in CIT vs. M. M. Aqua Technologies Ltd, which held that because of Explanation 3C to Section 43-B, any adjustment other than actual payment does not qualify for deduction under Section 43-B. As is evident from the discussion, the assessee’s review is premised on two major arguments, i.e. that the judgments of the Supreme Court in Standard Chartered Bank v Andhra Bank, 2006 (6) SCC 94 and Sunrise Associates vs Govt. of NCT of Delhi & Ors. 2006 (5) SCC 603, have categorically held that debentures (issued in favour of the bank, in this case to discharge interest liability) amounted to payment and that such debentures, being actionable claims and securities, were to be deemed paid once issued.

(ii) As to the main submission of the assessee’s argument that issuance of debentures amounted to payment, it is noteworthy that the Supreme Court ruled as to what is the true nature and character of a debenture. In R.D. Goyal v. Reliance Industries Ltd 2003(1) SCC 81 it was held that: “ ‘Share’ has been defined in Section 2(46) of the Companies Act to mean a share in the share capital of a company which in turn would mean that it would represent contribution of the shareholder towards the share capital of the company. On the other hand, a debenture is an instrument of debt executed by the company acknowledging its receipt to repay the same at a specified rate and also carrying an interest. It is in sum and substance a certificate of loan or a bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company„s capital structure yet it does not become a share capital. In any event, a debenture would not come within the purview of the definition of goods, inasmuch as, although the shares and stocks are included in the definition of goods but debentures are not.”

(iii) Thus, though debentures are securities and are actionable claim the essential fact is that they are instruments of debt, by the company acknowledging its indebtedness to pay the amount specified. Does this amount to “payment” under Section 43-B. This court is of opinion that there is no question of any error in the judgment under review. The clear purport of the statute- i.e. Section 43-B (d) is that any amount payable towards interest liability would qualify for deduction; however Explanation 3C acts to insist on a rider:
“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.”

(iv) Quite possibly the assessee’s arguments would have been convincing and the court might have been persuaded that actual payment of amounts is inessential and a composition of the kind involved in this case, would have sufficed- but for Explanation 3C. Now, this provision was inserted with retrospective effect and clearly operated for the period in question. The assessee does not dispute that. Furthermore, this court’s judgment cited the rulings of other courts- Andhra Pradesh & Telangana and the Madhya Pradesh High Courts- which held that actual payment is the sine qua non for applicability of Section 43-B. In the circumstances, the decisions in Standard Chartered (supra) and Sunrise Associates (supra), which declared the nature and character of debentures, are of little avail.

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