Commissioner Of Income Tax-Ii, Hyderabad v. $ Pennar Profiles Limited, 1-8

THE HON’BLE SRI JUSTICE DILIP B.BHOSALE AND THE HON’BLE SRI JUSTICE A.RAMALINGESWARA RAO I.T.T.A.Nos.289 of 2003 and 6 of 2004 % 11.02.2015 Between: Commissioner of Income Tax-II, Hyderabad. Versus .... APPELLANT $ Pennar Profiles Limited, 1-8-303/69/3, S.P. Road, Secunderabad. ...RESPONDENT < Gist: > Head Note: ! COUNSEL FOR THE APPELLANT :- Mr.S.Vivek Chandra Sekhar ^ COUNSEL FOR RESPONDENT :- Mr. Challa Gunaranjan ? Cases Referred: 1. (1998) 233 ITR 04932. (2010) 231 CTR (Karnataka) 90 THE HON’BLE SRI JUSTICE DILIP B.BHOSALEAND THE HON’BLE SRI JUSTICE A.RAMALINGESWARA RAO I.T.T.A.Nos. 289 of 2003 and 6 of 2004 ORAL JUDGMENT:(per the Hon’ble Sri Justice Dilip B.Bhosale) These appeals by the Revenue under Section 260A of theIncome Tax Act, 1961 (for short ‘the Act’), are preferred againstthe common order, dated 24.01.2003, of the Income Tax AppellateTribunal, Hyderabad Bench ‘A’, passed in I.T.A.Nos.566/Hyd/98and 439/Hyd/98. By this order, the Tribunal disposed of twoappeals, one filed by the assessee and other by the Revenue,against the order, dated 14.05.1998, passed by the Commissionerof Income Tax (Appeals) (for short “CIT(A)”). The CIT (A) by thatorder, partly allowed the appeal filed by the assessee. The appealbefore the CIT (A) was against the assessment order, dated26.03.1997, passed by the Assessing Officer for the assessmentyear 1994-95 disallowing the claim of the assessee, seekingdeduction of interest liability, that was converted/merged, by thefinancial institution, into a term loan under Section 43B of the Act. 2. The factual matrix to the extent it is relevant is that theassessee is engaged in the business of manufacturing Alluminium Extrusions. They had filed returns of income, showing loss ofRs.3,25,34,484/-, on 29.11.1994. A notice under Section 143(2) ofthe Act was issued to the assessee by the Assessing Officer on06.11.1995. After granting an opportunity of being heard to theassessee’s representative, the Assessing Officer completed theassessment vide order, dated 26.03.1997. It has come on recordthat the assessee had debited the funded interest ofRs.85,42,788/- in its profit and loss account. In addition thereto, inthe statement of computation of income, funded interest ofRs.1,18,16,471/-, pertaining to the assessment years 1992-93 and1993-94 was also claimed as deduction. Thus, the assessee haddebited the funded interest of Rs.2,03,59,250/- being the interestdue to the financial institutions relating to the assessment years1992-93 and 1993-94 on account of availing of loans from them.The said return was processed under Section 143(1)(a) of theAct. Ultimately, the Assessing Officer disallowed the deduction byapplying the proviso to Section 43B of the Act. The assesseeclaimed that the interest amount payable was converted into aprincipal amount/term loan and, therefore, it deemed to have paidthe interest as contemplated by Section 43B of the Act andtherefore, entitled for deduction. 3. The only question raised and addressed, in these appeals,by learned counsel for the parties is “whether on the facts and inthe circumstances of the case, the Tribunal was justified in holdingthat conversion of interest into a term loan can be taken as adeemed payment for the purpose of Section 43B of the Act?” 4. Mr.S.Vivek Chandra Sekhar, learned counsel appearing forthe Revenue, at the outset, invited our attention to the provisionsof Section 43B of the Act and contended that under any circumstances, in view of the insertion of Explanation 3C toSection 43B, inserted by the Finance Act, 2006 with retrospectiveeffect from 01.04.1989, unless the amount of interest has beenactually paid, cannot be allowed to be deducted as claimed by theassessee. In other words, he submitted that any sum payable asinterest, referred to in Clause(d) of Section 43B of the Act, whichhas been converted into a loan or borrowing, cannot be allowed tobe deducted or deemed to have been actually paid. 4. Mr.S.Vivek Chandra Sekhar, learned counsel appearing forthe Revenue, at the outset, invited our attention to the provisionsof Section 43B of the Act and contended that under any circumstances, in view of the insertion of Explanation 3C toSection 43B, inserted by the Finance Act, 2006 with retrospectiveeffect from 01.04.1989, unless the amount of interest has beenactually paid, cannot be allowed to be deducted as claimed by theassessee. In other words, he submitted that any sum payable asinterest, referred to in Clause(d) of Section 43B of the Act, whichhas been converted into a loan or borrowing, cannot be allowed tobe deducted or deemed to have been actually paid. 5. It would be relevant to reproduce the relevant portion ofSection 43B of the Act, which reads thus: 43B.Certain deductions to be only on actual payment.-Notwithstanding anything contained in any other provision ofthis Act, a deduction otherwise allowable under this Act inrespect of- (a) ……. (b)…….. (c)…….. (d) any sum payable by the assessee as interest on any loanor borrowing from any public financial institution or a StateFinancial Corporation or a State Industrial InvestmentCorporation, in accordance with the terms and conditions ofthe agreement governing such loan or borrowing; (e)……. (f)……. shall be allowed (irrespective of the previous year in which theliability to pay such sum was incurred by the assesseeaccording to the method of accounting regularly employed byhim) only in computing the income referred to in section 28 ofthat previous year 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 onor before the due date applicable in his case for furnishing thereturn of income under sub-section (1) of section 139 inrespect of the previous year in which the liability to pay suchsum was incurred as aforesaid and the evidence of suchpayment is furnished by the assessee along with such return.Explanation (1)………. Explanation (2)………. Explanation 3: For the removal of doubts it is hereby declaredthat where a deduction in respect of any sum referred to in clause (c) or clause (d ) of this section is allowed incomputing the income referred to in Section 28 of the previousyear (being a previous year relevant to the assessment yearcommencing on the 1[st] day of April, 1988, or any earlierassessment year) in which the liability to pay such sum wasincurred by the assessee, the assessee shall not be entitledto any deduction under this section in respect of such sum incomputing the income of the previous year in which the sumis actually paid by him. Explanation 3A…… Explanation 3B…… Explanation 3C: For the removal of doubts, it is herebydeclared that a deduction of any sum, being interest payableunder clause (d) of this section, shall be allowed if suchinterest has been actually paid and any interest referred to inthat clause which has been converted into a loan or borrowingshall not be deemed to have been actually paid.Explanation 3D……Explanation 4………. 6. We have perused the orders passed by the authoritiesbelow and we find that the Tribunal, for dismissing the appealsfiled by the assessee and the Revenue, placed reliance upon thejudgment of this Court in Commissioner of Income Tax Vs.Mahindra Nissan Allywin Limited[[1]],in short, holding that theassessee is entitled to claim deduction of the interest liability tothe financial institution which had been converted into a term loan. 7. Learned counsel appearing for the assessee placed relianceupon the judgment of the Karnataka High Court in VinirEngineering Private Limited Vs. Deputy Commissioner of IncomeTax[[2]]and submitted that similar view, as taken by this Court inMahindra Nissan’s case, was taken in this judgment. TheKarnataka High Court having regard to the facts that fell forconsideration framed the following question for consideration: “Whether, on the facts and in the circumstances of the 7. Learned counsel appearing for the assessee placed relianceupon the judgment of the Karnataka High Court in VinirEngineering Private Limited Vs. Deputy Commissioner of IncomeTax[[2]]and submitted that similar view, as taken by this Court inMahindra Nissan’s case, was taken in this judgment. TheKarnataka High Court having regard to the facts that fell forconsideration framed the following question for consideration: “Whether, on the facts and in the circumstances of the case, the funded interest could be said to be non-payment ofinterest in the relevant year to invoke the proviso to Section 43B ofthe Act to disallow the deduction of interest as claimed by theappellant? 7.1 In that case, deduction sought, as claimed in the presentcase, by the assessee, was disallowed by the Assessing Officer,applying the proviso to Section 43B of the Act. The assessee,thereafter, had filed an application under Section 154 of the Actexplaining the reasons for claiming deduction. The applicationwas, however, rejected holding that re-schedule of interestpayment by means of a fresh loan cannot be treated as interestpayment deductible under Section 43B of the specific repaymentschedule. The Commissioner upheld the order of the AssessingOfficer. The Tribunal held that disallowance was proper andpermissible under Section 143(1)(a) of the Act and dismissed theappeal. Against that order, the assessee had filed appeal underSection 260A of the Act before the Karnataka High Court, wherein,the High Court while allowing the appeal filed by the assessee inparagraph ‘13’ observed thus: “In view of what is stated above, we answer thesubstantial questions of law raised in this appeal by holdingthat the Tribunal was not justified in law in concluding that thefunded interest could be said to be non-payment of interest inthe relevant year to invoke the proviso to Section 43B of theAct to disallow the deduction of interest as claimed by theappellant. The Assessing Officer was not justified in law tomake a prima facie adjustment in a proceeding under Section143 (1)(a) of the Act by holding that there was no deemedpayment of interest in the relevant year without appreciating-the interest outstanding for the earlier years 199495 and-199596 had been funded by K.S.F.C. during the relevant yearby a fresh loan and that the proviso to Section 43B of the Actwas not applicable.” (emphasis supplied) 8. In this backdrop, we have perused the provisions containedin Section 43B of the Act, in particular, Explanation 3C thereof,which was inserted by the Finance Act, 2006 with retrospectiveeffect from 01.04.1989. This provision was inserted in 2006 andhence, this Court in Mahindra Nissan’scase, had no occasion todeal with the case in the light of this provision. Insofar as theKarnataka High Court is concerned, though this provision wasexisting on the date of judgment, it appears that it was not broughtto the notice of learned Judges and hence, the Division Benchproceeded to consider and decide the appeal of the assesseewithout referring to Explanation 3C appended to Section 43B of theAct. 9. As a matter of fact, from reading of Explanation 3C, in ouropinion, the question as raised in the present appeals standsanswered without further discussion. This provision was insertedfor removal of doubts and it was declared that deduction of anysum, being interest payable under clause (d) of Section 43B of theAct, shall be allowed if such interest has been “actually paid” andany interest referred to in that clause, which has been convertedinto a loan or borrowing, shall not be deemed to have been“actually paid”. Thus, the doubt stands removed in view ofExplanation 3C. This provision was considered by the MadhyaPradesh High Court in Eicher Motors Limited Vs. Commissioner of Income Tax[[3]]to hold that in view of the Explanation 3C appendedto Section 43B with retrospective effect from 01.04.1989,conversion of interest amount into loan would not be deemed to beregarded as “actually paid” amount within the meaning of Section43B of the Act. Income Tax[[3]]to hold that in view of the Explanation 3C appendedto Section 43B with retrospective effect from 01.04.1989,conversion of interest amount into loan would not be deemed to beregarded as “actually paid” amount within the meaning of Section43B of the Act. 10. It is not in dispute that the assessment years with which we are concerned in the present appeals are covered by Explanation3C, which was inserted by the Finance Act, 2006 withretrospective effect from 01.04.1989. In this view of the matter,the appeals filed by the Revenue deserve to be allowed.Accordingly, we answer the substantial question of law framed byus in favour of the Revenue and against the assessee. However,there shall be no order as to costs. Pending miscellaneous petitions, if any, also standdisposed of. _____________________ DILIP B.BHOSALE,J _________________________ A.RAMALINGESWARA RAO,J Dt:11.02.2015 Note: L.R. copy to be marked: Yes/No.kdl [1](1998) 233 ITR 0493(1998) 233 ITR 0493 [2](2010) 231 CTR (Karnataka), 90 [3](2009) 315 ITR 0312(2009) 315 ITR 0312