MM Aqua Technologies Limited Vs CIT, Delhi
Forum-Supreme Court
Date-11th August 2021

Sub-Whether conversion of interest on loan due to financial institutions into debentures amounts to payment of interest and hence deductible u/s 43B notwithstanding the Explanation 3C of the said Section?

The Apex court in this case was deciding an important issue regarding deduction of Rs 2.84 crores u/s 43B towards conversion of interest on loan due to a financial institution into debentures in view of insertion of Explanation 3C retrospectively w.e.f 1/4/1989 by Finance Act, 2006 in Section 43B. The court dealing with the object of introduction of Section 43b in Para 19, observed that
“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), with which we are concerned, 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.”

Thereafter the court noted that at the heart of introduction of Explanation 3C was the misuse of provisions of Section 43B by converting interest unpaid into a fresh loan and where the issue of debentures was in connection with a rehabilitation plan, no misuse can be said to have been found.

Thereafter relying on the decisions in the case of KP Varghese Vs ITO(1981) 4 SCC 173(SC), Sedxo Forex Vs CIT(2005) 12 SCC 717(SC) and Vodafone International Holdings BV Vs UOI(2012) 6 SCC 613(SC) held that Explanation 3C is clarificatory and it explains Section 43B(d) as it originally stood and does not purport to add a new condition retrospectively, as has wrongly been held by the High Court.

Thus, the court reversed the judgement of high court by deciding that Explanation 3C was not attracted in this case and the interest was deductible.

This judgement will come to the rescue of lot of stressed companies who have taken benefit of rehabilitation plan by paying interest on loan by way of issuance of debentures . This was probably one of the last few judgements delivered by Justice Nariman before he bid adieu to the SC on 12/8/2021.

Ramesh Patodia
13-08-2021