Commissioner Of Income Tax-I v. Core Emballage Limited

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 1440 of 2008 =============================================COMMISSIONER OF INCOME TAX-I VersusCORE EMBALLAGE LIMITED ============================================= Appearance: M R BHATT & CO.(5953) for the Appellant(s) No. 1DARSHAN R PATEL(8486) for the Opponent(s) No. 1============================================= CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALAand HONOURABLE MS. JUSTICE NISHA M. THAKORE Date : 21/01/2022 ORAL ORDER (PER : HONOURABLE MS. JUSTICE NISHA M. THAKORE) 1.This is an appeal filed by the Revenue Department underSection 260A of the Income Tax Act, 1961 (for short, ‘the Act’)challenging the order dated 20.02.2008 passed by the IncomeTax Appellate Tribunal, Ahmedabad Bench “C”, Ahmedabad inITA No.2858/Ahd/2007 for the A.Y. 2001-02. 2.The substantial question of law which is raised by theRevenue department for our consideration, reads as under: “Whether the Appellate Tribunal is right in law and on facts indirecting to allow Rs.2.70 Crores being interest payable to ICICILtd. u/s. 43B of the Income Tax Act, 1961 (Act)?” 3.The facts which emerges from the record are brieflynarrated as under: 3.1The return of income came to be filed by the respondent/original assessee company on 30.10.2001 thereby declaring total loss of Rs.3,71,26,980/-. During the course of filing ofreturn, the assessee company had also furnished Profit & LossA/c Book and Balance sheet etc. The Assessing Officer hadprocessed and scrutiny assessment was made under Section143(3) read with Section 145(3) of the Act and had passedassessment order dated 30.03.2004 thereby determining totalincome of an amount of Rs.11,52,285/-. 3.2Thereafter, on verification of the record, the AssessingOfficer found that the assessee company had claimeddeduction of an amount of Rs.5,00,87,126/- under the head ofthe interest paid to ICICI Bank on Term Loan. The said amountalso included the value of Rs.27,00,000/- equity shares ofRs.10 each issued by the company in lieu of accumulatedinterest for an amount of Rs.2,70,00,000/-. This lead toreopening of the assessment of the year under considerationwhich was followed by a Notice dated 20.03.2006 underSection 148 of the Act. The said notice was served on theassessee on 24.03.2006. 3.3In response to the said Notice issued under Section 148of the Act, the respondent – assessee company had submittedreturn of income on 17.04.2006 thereby declaring enhancedloss of Rs.18,22,40,379/- which included an amount ofRs.3,71,26,977/- towards the business loss not beingconsidered and the unpaid municipal tax and land revenue ofRs.11,52,285/-. Once again Notices under Section 143(2) and142(1) of the Act were issued and served upon the respondent-assessee company. The same was responded by the assessee– company by submitting objections vide letter dated22.12.2006. Ultimately, the Assessing Officer found that the assessee was required to explain why the interest of anamount of Rs.2,70,00,000/- payable to the ICICI on Term Loanwas required to be disallowed in view of Section 43B of the Actmore particularly, when no actual payment by cash or chequewas made and in fact, it can only be treated as an adjustmentof payment by issuing shares to the company. Ultimately, theAssessing Officer rejected the objections raised by therespondent – assessee company by disallowing the aforesaidamount and adding it into the total income of the assessee fortaxation purpose. assessee was required to explain why the interest of anamount of Rs.2,70,00,000/- payable to the ICICI on Term Loanwas required to be disallowed in view of Section 43B of the Actmore particularly, when no actual payment by cash or chequewas made and in fact, it can only be treated as an adjustmentof payment by issuing shares to the company. Ultimately, theAssessing Officer rejected the objections raised by therespondent – assessee company by disallowing the aforesaidamount and adding it into the total income of the assessee fortaxation purpose. 3.4Being aggrieved and dissatisfied with the aforesaid orderof the Assessing Officer, the respondent – assessee companypreferred an appeal before the Commissioner of Income Tax(Appeals)- V, Ahmedabad, which was registered as AppealNo.CIT(A)-V/DCIT Cir.1/211/2006-07. The CIT(A) after carefullyexamining the issue and on perusal of the record arrived at afinding that this was a case where payment of interest hasbeen made by issue of fully paid up shares to ICICI Ltd.. Itfurther found that in case of issue shares, there can be nooccasion to pay the amount again in any other manner andthus, agreed with the contention of the respondent – assesseecompany regarding disallowance made by the AssessingOfficer under Section 43B of the Act as incorrect andaccordingly, partly allowed the appeal. 3.5Being aggrieved and dissatisfied with the aforesaid orderdated 29.04.2007 passed by the CIT(A), Ahmedabad, theRevenue department preferred an appeal bearing ITA No.2858/Ahd/2007 before the Income Tax Appellate Tribunal,Ahmedabad Bench “C”, Ahmedabad. The limited dispute which was raised by the Revenue Department in appeal regardingdisallowance of Rs.2,70,00,000/-, towards the interest payableto ICICI Ltd. in terms of Section 43B of the Act, was examinedby the ITAT Appeals. Upon careful consideration of thesubmissions made by the respective parties, the ITAT agreedwith the view of the CIT(A) that the shares have been allowedin the year under consideration in lieu of the outstandingliability of the assessee is ultimately a payment of the amountand consequently such payment results into discharge of theliability in the year under consideration. Thus, the ITAT find noerror of law against the order of the CIT(A) in deleting theaforesaid addition made by the Assessing Officer and therebyrejected the aforesaid appeal of the Revenue. Hence, theRevenue department has approached this Court. 4.We have heard Mr. Manish Bhatt, the learned SeniorCounsel assisted by Mr. Munjaal Bhatt, the learned counselappearing for the appellant – Revenue department and Mr.Darshan Patel, the learned counsel appearing for therespondent – assessee company. We have also carefullyexamined the record and have also perused thejudgments/decisions relied upon by the learned counselappearing for the respective parties. The only short issuewhich falls for our consideration relates to the provisions ofallowance under Section 43B of the Act. 5.Mr. Manish Bhatt, the learned Senior Counsel for thedepartment has made a strenuous effort by referring toSection 43B of the Act and has submitted that the intention ofthe legislation is the ‘actual payment by way of cash orcheque’. The issuance of shares as against the outstanding 5.Mr. Manish Bhatt, the learned Senior Counsel for thedepartment has made a strenuous effort by referring toSection 43B of the Act and has submitted that the intention ofthe legislation is the ‘actual payment by way of cash orcheque’. The issuance of shares as against the outstanding liability of interest of the assessee company for the year underconsideration does not fall in the category of actual payment ofinterest and has therefore, submitted that such amount doesnot qualify for deduction under Section 43B of the Act. It wasfurther urged that this was not a case where the AssessingOfficer had examined an issue and recorded satisfaction in theoriginal assessment by referring to Explanation – 1 of Section147. The learned Senior Counsel for the department submittedthat the Assessing Officer has rightly assumed jurisdiction forreopening the assessment in terms of powers conferred underSection 148 of the Act. The learned Senior Counsel has furtherreferred to Explanation – 3C to Section 43B of the Act, whichdeclares that any deduction in respect of any amount beingthe interest payable which has been converted into loan orborrowing, then the same shall “not be deemed to have beenactually paid”. Accordingly, he submitted that the AssessingOfficer was justified in seeking reopening of the originalassessment of the respondent – assessee company. 6.On the other hand, Mr. Darshan Patel, the learnedcounsel appearing for the respondent – assessee company hasreferred to and relied upon the findings and reasons arrived atby the CIT(A) as well as the ITAT, Ahmedabad and hassubmitted that no error of fact or law is found, which calls forany interference of this Court in appeal under Section 260A ofthe Act. It is further submitted that there are concurrentfindings of facts as well as law and in absence of anysubstantial questions of law being framed by the Revenuedepartment, the present appeal is not required to beentertained and is required to be rejected summarily. 7.The learned Counsel for the respondent – assessee byreferring to Explanation – 3C to Section 43B of the Act, hassubmitted that the application of explanation 3C to section 43Bof the act is misconstrued in the facts of the case on hand asthe same deals with the situation of conversion of interest intothe loan or borrowings. It was further submitted thatExplanation – 3C to Section 43B of the Act was introducedretrospectively with effect from 01.04.1989. Thus, it issubmitted that there is nothing in the provision much less withthe retrospective effect, by which the conversion of interestinto shares has been described as not amounting to actualpayment for the purposes of Section 43B of the Act. Thelearned counsel appearing for the respondent – assessee hasplaced reliance upon the decision of the Supreme Court in thecase of M.M. Aqua Technologies Ltd. Vs. Commissioner ofIncome Tax, Delhi-III passed in the Civil Appeal Nos.4742-4743of 2021. 8.By referring to the aforesaid decision, the learnedCounsel appearing for the respondent – assessee has placedmuch reliance upon Para-20 by drawing analogy in the facts ofthe case where the Supreme Court has treated issuance ofdebentures as against the “actual payment” of interestacceptable more particularly, when ultimately it extinguishedthe liability to pay interest. 9.We have extensively heard the learned counselappearing for the respective parties and have also perused therecord, relevant provisions of law and the decisions relied. Theonly short issue involved in this appeal is that whether theissuance of equity shares as against the payment of outstanding interest can be considered for deduction underSection 43B of the Act. 10.At this stage, it would be appropriate to reproducerelevant provision of law: 9.We have extensively heard the learned counselappearing for the respective parties and have also perused therecord, relevant provisions of law and the decisions relied. Theonly short issue involved in this appeal is that whether theissuance of equity shares as against the payment of outstanding interest can be considered for deduction underSection 43B of the Act. 10.At this stage, it would be appropriate to reproducerelevant provision of law: “43B. Certain deductions to be only on actual payment –Notwithstanding anything contained in any other provision of thisAct, a deduction otherwise allowable under this Act in respect of— xxx xxx xxx (d) any sum payable by the assessee as interest on any loan orborrowing from any public financial institution or a State financialcorporation or a State industrial investment corporation, inaccordance with the terms and conditions of the agreementgoverning such loan or borrowing, or xxx xxx xxx shall be allowed (irrespective of the previous year in which theliability to pay such sum was incurred by the assessee accordingto the method of accounting regularly employed by him) only incomputing the income referred to in section 28 of that previousyear in which such sum is actually paid by him: Provided that nothing contained in this section shall apply inrelation to any sum which is actually paid by the assessee on orbefore the due date applicable in his case for furnishing thereturn of income under sub-section (1) of section 139 in respectof the previous year in which the liability to pay such sum wasincurred as aforesaid and the evidence of such payment isfurnished by the assessee along with such return.” 11.The Supreme Court in the case of M.M. Aqua Technologies Ltd. (Supra) had an occasion to deal with Section43B more particularly, Explanation – 3C of the Act. Therelevant paragraphs are reproduced as under: “17. Section 43B was originally inserted by the Finance Act, 1983w.e.f. 1st April, 1984. The scope and effect of the newly insertedprovision, at that point, was explained by the Central Board ofDirect Taxes [“Board”] in Circular No.372/1983 dated 8thDecember, 1983 as follows: “35.2 Several cases have come to notice where taxpayers donot discharge their statutory liability such as in respect ofexcise duty, employer's contribution to provident fund, Employees State Insurance Scheme, etc., for long periods oftime, extending sometimes to several years. For the purposesof their income-tax assessments, they claim the liability asdeduction on the ground that they maintain accounts onmercantile or accrual basis. On the other hand, they disputethe liability and do not discharge the same. For some reasonsor the other, undisputed liabilities also are not paid. 35.3 To curb this practice, the Finance Act has inserted a newsection 43B to provide that deduction for any sum payable bythe assessee by way of tax or duty under any law for the timebeing in force or any sum payable by the assessee as anemployer by way of contribution to any provident fund orsuperannuation fund or gratuity fund or any other fund for thewelfare of employees shall irrespective of the previous year inwhich the liability to pay such sum was incurred, be allowedonly in computing the income of that previous year in whichsuch sum is actually paid by the assessee. 35.3 To curb this practice, the Finance Act has inserted a newsection 43B to provide that deduction for any sum payable bythe assessee by way of tax or duty under any law for the timebeing in force or any sum payable by the assessee as anemployer by way of contribution to any provident fund orsuperannuation fund or gratuity fund or any other fund for thewelfare of employees shall irrespective of the previous year inwhich the liability to pay such sum was incurred, be allowedonly in computing the income of that previous year in whichsuch sum is actually paid by the assessee. 35.4 The section also contains an Explanation for the removalof doubts. The Explanation provides that where a deduction inrespect of any sum aforesaid is allowed in computing theincome of any previous year, being a previous year relevantto the assessment year 1983-84, or any earlier assessmentyear, in which the liability to pay such sum was incurred bythe assessee, the assessee shall not be entitled to anydeduction under section 43B in respect of such sum on theground that the sum has been actually paid by him in thatyear. In other words, an assessee who has already beenallowed deduction of a liability on account of the tax or dutyor in respect of any sum payable as contribution to any fundfor the assessment year 1983-84, or any earlier year in whichthe liability to pay was incurred, cannot, in respect of thatliability, be allowed a deduction in the assessment year 1984-85, or any subsequent year on the ground that he hasactually made a payment towards such liability in that year.” 18. As has been pointed out hereinabove, the Finance Act, 2006inserted Explanation 3C w.e.f. 1st April, 1989. The scope andeffect of this provision was explained by the Board in CircularNo.14/2006 dated 23rd December, 2006, as follows: “16.2 It has come to notice that certain assessees wereclaiming deduction under section 43B on account ofconversion of interest payable on an existing loan into a freshloan on the ground that such conversion was a constructivedischarge of interest liability and, therefore, amounted toactual payment. Claim of deduction against conversion ofinterest into a fresh loan is a case of misuse of the provisionsof section 43B. A new Explanation 3C has, therefore, beeninserted to clarify that if any sum payable by the assessee asinterest on any loan or borrowing, referred to in clause (d) ofsection 43B, is converted into a loan or borrowing, theinterest so converted, shall not be deemed to be actualpayment. 16.3 This amendment takes effect retrospectively from 1stApril, 1989 i.e. the date from which clause (d) was inserted insection 43B and applies in relation to the assessment year1989-90 and subsequent years.” 19. The object of Section 43B, as originally enacted, is to allowcertain deductions only on actual payment. This is made clear bythe non- obstante clause contained in the beginning of theprovision, coupled with the deduction being allowed irrespectiveof the previous years in which the liability to pay such sum wasincurred by the assessee according to the method of accountingregularly employed by it. In short, a mercantile system ofaccounting cannot be looked at when a deduction is claimedunder this Section, making it clear that incurring of liability cannotallow for a deduction, but only “actual payment”, as contrastedwith incurring of a liability, can allow for a deduction.Interestingly, the ‘sum payable’ referred to in Section 43B(d), withwhich we are concerned, does not refer to the mode of payment,unlike Proviso 2 to the said Section, which was omitted by theFinance Act, 2003 w.e.f. 1st April, 2004. The said Proviso reads asfollows: "Provided further that no deduction shall, in respect of anysum referred to in clause (b), be allowed unless such sum hasactually been paid in cash or by issue of a cheque or draft orby any other mode on or before the due date as defined inthe Explanation below clause (va) of sub-section (1) of section36, and where such payment has been made otherwise thanin cash, the sum has been realised within fifteen days fromthe due date." 20. This being the case, it is important to advert to the facts foundin the present case. Both the CIT and the ITAT found, as a matterof fact, that as per a rehabilitation plan agreed to between thelender and the borrower, debentures were accepted by thefinancial institution in discharge of the debt on account ofoutstanding interest. This is also clear from the expression “in lieuof” used in the judgment of the learned CIT. That this is so is clearnot only from the accounts produced by the assessee, but equallyclear from the fact that in the assessment of ICICI Bank, for theassessment year in question, the accounts of the bank reflect theamount received by way of debentures as its business income.This being the fact-situation in the present case, it is clear thatinterest was “actually paid” by means of issuance of debentures,which extinguished the liability to pay interest. 21. Explanation 3C, which was introduced for the “removal ofdoubts”, only made it clear that interest that remained unpaidand has been converted into a loan or borrowing shall not bedeemed to have been actually paid. As has been seen by ushereinabove, particularly with regard to the Circular explainingExplanation 3C, at the heart of the introduction of Explanation 3Cis misuse of the provisions of Section 43B by not actually payinginterest, but converting such interest into a fresh loan. On thefacts found in the present case, the issue of debentures by theassessee was, under a rehabilitation plan, to extinguish the liability of interest altogether. No misuse of the provision ofSection 43B was found as a matter of fact by either the CIT or theITAT. Explanation 3C, which was meant to plug a loophole, cannottherefore be brought to the aid of Revenue on the facts of thiscase. Indeed, if there be any ambiguity in the retrospectivelyadded Explanation 3C, at least three well established canons ofinterpretation come to the rescue of the assessee in this case.First, since Explanation 3C was added in 2006 with the object ofplugging a loophole – i.e. misusing Section 43B by not actuallypaying interest but converting interest into a fresh loan, bona fidetransactions of actual payments are not meant to be affected. Insimilar circumstances, in K.P. Varghese v. ITO, (1981) 4 SCC 173,this Court construed Section 52 of the Income Tax Act as applyingonly to cases where ‘understatement’ is be found – an‘understatement’ is not to be found in the literal language ofSection 52, but was introduced by this Court to streamline theprovision in the light of the object sought to be achieved by thesaid provision. This Court, therefore, held: 13. Thus it is not enough to attract the applicability of sub-section (2) that the fair market value of the capital assettransferred by the assessee as on the date of the transferexceeds the full value of the consideration declared in respectof the transfer by not less than 15 per cent of the value sodeclared, but it is furthermore necessary that the full value ofthe consideration in respect of the transfer is understated orin other words, shown at a lesser figure than that actuallyreceived by the assessee. Sub-section (2) has no applicationin case of an honest and bona fide transaction where theconsideration in respect of the transfer has been correctlydeclared or disclosed by the assessee, even if the condition of15 per cent difference between the fair market value of thecapital asset as on the date of the transfer and the full valueof the consideration declared by the assessee is satisfied. …. xxx xxx xxx xxx xxx xxx 15. It is therefore clear that sub-section (2) cannot be invokedby the Revenue unless there is understatement of theconsideration in respect of the transfer and the burden ofshowing that there is such understatement is on the Revenue.Once it is established by the Revenue that the considerationfor the transfer has been understated or, to put it differently,the consideration actually received by the assessee is morethan what is declared or disclosed by him, sub-section (2) isimmediately attracted, subject of course to the fulfilment ofthe condition of 15 per cent or more difference, and theRevenue is then not required to show what is the preciseextent of the understatement or in other words, what is theconsideration actually received by the assessee. That wouldin most cases be difficult, if not impossible, to show andhence sub-section (2) relieves the Revenue of all burden ofproof regarding the extent of understatement or concealmentand provides a statutory measure of the considerationreceived in respect of the transfer. It does not create anyfictional receipt. It does not deem as receipt something which is not in fact received. It merely provides a statutory bestjudgment assessment of the consideration actually receivedby the assessee and brings to tax capital gains on the footingthat the fair market value of the capital asset represents theactual consideration received by the assessee as against theconsideration untruly declared or disclosed by him. Thisapproach in construction of sub-section (2) falls in line withthe scheme of the provisions relating to tax on capital gains.It may be noted that Section 52 is not a charging section butis a computation section. It has to be read along with Section48 which provides the mode of computation and under whichthe starting point of computation is “the full value of theconsideration received or accruing”. What in fact neveraccrued or was never received cannot be computed as capitalgains under Section 48. Therefore sub-section (2) cannot beconstrued as bringing within the computation of capital gainsan amount which, by no stretch of imagination, can be said tohave accrued to the assessee or been received by him and itmust be confined to cases where the actual considerationreceived for the transfer is understated and since in suchcases it is very difficult, if not impossible, to determine andprove the exact quantum of the suppressed consideration,sub-section (2) provides the statutory measure fordetermining the consideration actually received by theassessee and permits the Revenue to take the fair marketvalue of the capital asset as the full value of the considerationreceived in respect of the transfer.” 12.Thus, the Supreme Court found that Explanation – 3C wassquarely attracted against the outstanding interest had notactually being paid, but instead a new credit entry of loanappeared, bringing the case within the express language ofExplanation – 3C. The Court further held that what is requiredto be considered is the extinguishment of liability to pay theinterest in the facts of each case. It is not the case of thedepartment that by virtue of equity shares being offered asagainst the outstanding interest has infact not extinguishedthe liability to pay the interest to that extent. As against that,the finding of fact as recorded by the Tribunal below, theoutstanding amount of interest to the tune of Rs.2,70,00,000/-payable to the ICICI Ltd. was extinguished by offering shares towhich a receipt was also issued by the ICICI Ltd. vide letterdated 03.09.2001. Thus, this is a case where the payment of interest has been made by issue of fully paid up shares to ICICILtd. interest has been made by issue of fully paid up shares to ICICILtd. 13.We agree with the view taken by the CIT(A) as confirmedby the ITAT that it is not a case of conversion of outstandinginterest into the loan so that the same could be allowed onlyon the actual payment, more particularly, when asacknowledge by ICICI Ltd. the defaulted interest standsextinguished having realized the fully paid up shares.Consequently, there is no further outstanding interest to bepaid by the assessee company in future as it standsextinguished in the year under consideration Section 43B ishereby held to be attracted in the facts of the case. 14.In view of the above, concurrent findings recorded by theCIT(Appeals) and by the ITAT, the question of law raised by thedepartment does not deserve any further consideration. Thesaid question also being no more res-integra, it could not besaid that the present appeal involves any question much lesssubstantial question of law. It may be noted that the Appealunder section 260A of the Act, could be admitted only on theHigh Court being satisfied that the case involves a substantialquestion of law. 15. In the result, this appeal fails and is hereby dismissed. (J. B. PARDIWALA, J) (NISHA M. THAKORE,J)