Facts of the Case

The assessee, M/s Eicher Ltd., had outstanding interest liabilities payable to financial institutions including IFCI, IDBI, and HDFC Bank. Instead of making direct payment of the interest amount, the liability was converted into a funded term loan arrangement.

The assessee claimed deduction under Section 43B of the Income Tax Act on the ground that such restructuring amounted to constructive payment.

The Assessing Officer disallowed the deduction amounting to ₹5,00,03,643/- on the ground that there was no actual payment.

The Commissioner of Income Tax (Appeals) reversed the disallowance, and the Income Tax Appellate Tribunal affirmed the appellate order by holding that constructive discharge of liability qualified for deduction under Section 43B.

The Revenue challenged the findings before the Delhi High Court.

Issues Involved

  1. Whether conversion of interest liability into a funded term loan constitutes “actual payment” under Section 43B of the Income Tax Act, 1961?
  2. Whether deduction under Section 43B can be allowed when interest liability is merely restructured and not physically discharged?
  3. What is the effect of Explanation 3C inserted retrospectively by the Finance Act, 2006 on such transactions?

Petitioner’s Arguments (Revenue)

  • The Revenue contended that Section 43B permits deduction only upon actual payment of statutory or financial liabilities.
  • Mere conversion of outstanding interest into a fresh loan does not amount to discharge of liability.
  • Explanation 3C expressly clarifies that conversion of interest into a loan or borrowing shall not be treated as actual payment.
  • Since the amendment is retrospective from 01.04.1989, it squarely governs the assessment year under consideration.

Respondent’s Arguments (Assessee)

  • The assessee argued that restructuring of interest liability through a funded term loan effectively settled the liability with the lender and should be treated as constructive payment.
  • The assessee relied upon the appellate findings and Tribunal’s view recognizing the substance of the transaction as equivalent to payment.
  • Alternatively, the assessee submitted that to the extent actual payments had been made during the relevant assessment year, deduction should be allowed under Section 43B.

Court Findings / Order

The Delhi High Court held that after insertion of Explanation 3C to Section 43B by the Finance Act, 2006 with retrospective effect from 01.04.1989, the legal position stands clarified that conversion of interest liability into a loan or borrowing does not amount to actual payment.

The Court observed that the statutory explanation removes all ambiguity and makes it clear that deduction is permissible only when actual payment is made.

Accordingly, the substantial question of law was answered in favour of the Revenue and against the assessee.

However, on the alternative plea of the assessee regarding actual payments made during the relevant assessment year, the Court remitted the matter back to the Assessing Officer for factual verification. To the extent such actual payments were proved, the assessee would be entitled to deduction under Section 43B.

Thus, the appeal was partly allowed.

Important Clarification

This judgment reinforces that:

  • Conversion of unpaid interest into funded interest term loan (FITL) is not equivalent to actual payment for Section 43B deduction.
  • Explanation 3C has retrospective application from 01.04.1989.
  • Only actual cash outflow or legally recognized discharge qualifies for deduction.

Partial actual payments, if established, may still qualify for deduction.
Sections Involved

  • Section 43B, Income Tax Act, 1961
  • Explanation 3C to Section 43B (Inserted by Finance Act, 2006 with retrospective effect from 01.04.1989)

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:3950-DB/RKG30042015ITA1912003.pdf

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