M.m. Aqua Technologies Ltd v. Commissioner Of Income Tax, Delhi-Iii

[2021] 8 S.C.R. 237 M.M. AQUA TECHNOLOGIES LTD. COMMISSIONER OF INCOME TAX, DELHI-III(Civil Appeal Nos. 4742-4743 of 2021) AUGUST 11, 2021 [ROHINTON FALI NARIMAN AND B.R. GAVAI, JJ.] Income Tax Act, 1961: s. 43B explanation 3C – Certaindeductions to be only on actual payment – Funding of interestamount by way of a term debenture, if amounts to actual payment –Appellant-assessee company had obtained loan from financialinstitutions for business operations on which is interest is payable– Assessee unable to discharge interest liability due to its financialhardship – It approached financial institution for a rehabilitationplan – In terms of the Plan, assessee issued convertible debenturesin lieu of interest payment and then claimed a deduction u/s. 43B –Rejection of the claim, by the Assessing Officer holding that theissue of debenture does not tanamount to actual payment – However,CIT allowed the claim and the tribunal upheld the same – In appeal,the High Court held that interest had been converted into loan –On appeal, held: The issue of debentures by the assessee was undera rehabilitation plan, to extinguish the liability of interest altogether– No misuse of the provision of s. 43B was found by either the CITor the ITAT – Explanation 3C, was meant to plug a loophole, cannottherefore be brought to the aid of Revenue – In case of any ambiguityin the retrospectively added explanation 3C, the three canons ofinterpretation come to the rescue of the assessee, first, the bona fidetransactions of actual payments are not meant to be affected; second,a retrospective provision in a tax act which is “for the removal ofdoubts” cannot be presumed to be retrospective, even where suchlanguage is used, if it alters or changes the law as it earlier stood,thus, Explanation 3C is clarificatory-it explains s. 43B(d) as itoriginally stood and does not purport to add a new conditionretrospectively; and third, any ambiguity in the language ofExplanation 3C shall be resolved in favour of the assesse – Thus,the order passed by the High Court are set aside. s. 43 – Object of – Explaination of. 237 238SUPREME COURT REPORTS AAllowing the appeals, the Court HELD: 1.1 The object of Section 43B of the Income TaxAct, 1961, as originally enacted, is to allow certain deductionsonly on actual payment. This is made clear by the non-obstanteclause contained in the beginning of the provision, coupled withBthe deduction being allowed irrespective of the previous yearsin which the liability to pay such sum was incurred by the assesseeaccording to the method of accounting regularly employed by it.In short, a mercantile system of accounting cannot be looked atwhen a deduction is claimed under this Section, making it clearthat incurring of liability cannot allow for a deduction, but onlyC“actual payment”, as contrasted with incurring of a liability, canallow for a deduction. Interestingly, the ‘sum payable’ referredto in Section 43B(d), 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. [Para 19][249-G-H; 250-DA-C] 1.2 Both the CIT and the ITAT found, as a matter of fact,that as per a rehabilitation plan agreed to between the lenderand the borrower, debentures were accepted by the financialinstitution in discharge of the debt on account of outstandingEinterest. This is also clear from the expression “in lieu of” usedin the judgment of the CIT. That this is so is clear not only fromthe accounts produced by the assessee, but equally clear fromthe fact that in the assessment of ICICI Bank, for the assessmentyear in question, the accounts of the bank reflect the amountreceived by way of debentures as its business income. This beingFthe fact-situation in the instant case, it is clear that interest was“actually paid” by means of issuance of debentures, whichextinguished the liability to pay interest. [Para 20][250-D-F] 237 [2021] 8 [1982] 1 SCR 629 [2012] 1 SCR 573 1.3 Explanation 3C, which was introduced for the “removalof doubts”, only made it clear that interest that remained unpaidGand has been converted into a loan or borrowing shall not bedeemed to have been actually paid. As has been seen, particularlywith regard to the Circular explaining Explanation 3C, at the heartof the introduction of Explanation 3C is misuse of the provisionsof Section 43B by not actually paying interest, but convertingH such interest into a fresh loan. On the facts, the issue ofdebentures by the assessee was, under a rehabilitation plan, toextinguish the liability of interest altogether. No misuse of theprovision of Section 43B was found as a matter of fact by eitherthe CIT or the ITAT. Explanation 3C, which was meant to plug aloophole, cannot therefore be brought to the aid of Revenue onthe facts of the instant case. Indeed, if there be any ambiguity inthe retrospectively added Explanation 3C, at least three wellestablished canons of interpretation come to the rescue of theassessee in this case. First, since Explanation 3C was added in2006 with the object of plugging a loophole-i.e. misusing Section43B by not actually paying interest but converting interest into afresh loan, bona fide transactions of actual payments are not meantto be affected. Second, a retrospective provision in a tax act whichis “for the removal of doubts” cannot be presumed to beretrospective, even where such language is used, if it alters orchanges the law as it earlier stood. This being the case,Explanation 3C is clarificatory-it explains Section 43B(d) as itoriginally stood and does not purport to add a new conditionretrospectively, as has wrongly been held by the High Court.Third, any ambiguity in the language of Explanation 3C shall beresolved in favour of the assesse. [Para 21-24][250-F-H; 251-A-C; 252-G-H; 253-G-H; 254-A] 1.4 The High Court judgment is clearly in error inconcluding that ‘interest’, on the facts of this case, has beenconverted into a loan. There is no basis for this finding - as amatter of fact, it is directly contrary to the finding on facts of theauthorities below. The impugned judgments of the High Courtare set aside and the judgment and order of ITAT is restored.[Paras 25, 31][254-B-C; 257-D] Vodafone International Holdings BV v. Union of India(2012) 6 SCC 613 : [2012] 1 SCR 573 – relied on. K.P. Varghese v. ITO (1981) 4 SCC 173 : [1982] 1 SCR 629; Sedco Forex International Drill. Inc. v. CIT (2005)12 SCC 717 : [2005] 5 Suppl. SCR 302; NationalRayon Corpn. Ltd. v. CIT (1997) 7 SCC 56 : [1997] 3Suppl. SCR 140 – referred to. ANational Rayon Corpn. Ltd. v. CIT (1997) 7 SCC 56 :[1997] 3 Suppl. SCR 140; CIT v. Gujarat CyprometLtd. (2020) 15 SCC 460 – distinguished. Cape Brandy Syndicate v. Inland RevenueCommissioner 1921 (1) KB 64 – referred to. CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 4742-4743 of 2021.D From the Judgment and Order dated 22.07.2016 of the High Courtof Delhi at New Delhi in Review Petition No.308 of 2015. Bishwajit Bhattacharyya, Sr. Adv., Sahil Tagotra, Advs. for theAppellant. EBalbir Singh, ASG, Rupesh Kumar, Ms. Vimla Sinha, ApoorvKurup, Udai Khanna, Raj Bahadur Yadav, Advs. for the Respondent. The Judgment of the Court was delivered by R. F. NARIMAN, J. 1. Leave granted. F 2. The question raised in these appeals is with particular referenceto Section 43B Explanation 3C of the Income Tax Act, 1961 [the “Act”].The brief facts necessary to appreciate the controversy raised in theseappeals are as follows. G3. On 28th November, 1996, the Appellant filed a return of incomedeclaring a loss of Rs.1,03,18,572/- for the assessment year 1996-1997.In the return filed by it, the Appellant claimed a deduction ofRs.2,84,71,384/- under Section 43B based on the issue of debentures inlieu of interest accrued and payable to financial institutions. By an orderdated 29th October, 1998, the Assessing Officer rejected the Appellant’sH रा21 Section: ARGUMENTS contention by holding that the issuance of debentures was not as per theoriginal terms and conditions on which the loans were granted, and thatinterest was payable, holding that a subsequent change in the terms ofthe agreement, as they then stood, would be contrary to Section 43B(d),and would render such amount ineligible for deduction. The Commissionerof Income Tax (Appeals) [“CIT”] allowed the appeal and held, on facts,as follows: “3.2. …. It was clarified by the Ld. Counsel that the originalagreements with the financial institutions provided for conversionof 20% of the amount in default into equity capital of the appellantat the option of the lenders. The agreements also provided for therepayment of the principal and the interest, in default as per therevised terms and conditions stipulated by the lendor at the timeof default. As the appellant was not in position to pay the interestand liquidated damages. It approached the lead FinancialInstitutions which on behalf of all the institutions approved theRehabilitation Plan According to the Rehabilitation Plan, theappellant issued 300149 convertible debentures of 100 eachamounting to Rs. 3,00,14,900/ in lieu of outstanding interest andother charges. As a result of these debentures in favour of theFinancial institutions, interest of Rs. 2,84,71,384/- was effectivelypaid. It was argued by the Ld. Counsel that liquidation of theoutstanding interest by issue of debentures was tantamount toactual payment of interest as envisaged u/s 43B of the I.T. Act. Itwas emphasized by the Ld. Counsel that section 43B of the I.T.Act, cash or cheque is the prescribed mode of payment of P.F.and ESI while there is no prescribed mode of payment of interest.The mode of payment of interest can therefore be other thancash or cheque/draft. The issue of debentures in lieu of interesttherefore amounted to payment which had been acknowledgedby the lead institutions. Since the lendor had admitted receipt ofinterest, there was no dispute about the payment. However, the original terms and conditions of the borrowings notonly provided for conversion of 20% of the amount in default intoappellant’s equity but also revision of terms and conditions ofpayment at the time of each default. The partial conversion intoequity was at the option of the lendor which the lendor did not exercise. On the appellant’s request, the lead institution acting astrustee of all the lenders agreed to the Rehabilitation Plan andaccepted 300149 debentures of Rs. 100 each aggregating toRs. 3,00,14,900/- in discharge of the outstanding interest. Thedischarge of the liability of interest through issue of debentures asmutually agreed between the appellant and the lenders wastherefore in accordance with the terms and conditions governingthe borrowings.” 4. On these facts, the conclusion drawn by the learned CIT was: “3.6. It would not be correct to say that a debenture is a piece ofpaper and the issue of debentures in lieu of interest merelypostponed the payment of liability. A debenture is a valuablesecurity which is freely negotiable and openly quoted in the stockmarket. As the Financial institutions had accepted the debenturesin effective discharge of the liability for the outstanding interestwhich was no longer payable by the appellant, it was tantamountto actual payment for the intent of section 43B of the I.T. Act. Asinterest had been actually paid during the year and the paymentwas in accordance with the terms and conditions of theborrowings, interest of Rs. 2,84,71,384/- is directed to be allowedu/s 43B of the I.T. Act.” 5. This order was upheld in appeal by the Income Tax AppellateTribunal [“ITAT”]. The ITAT held: “9. … The Section was introduced to curb the mischief ofwithholding tax payment by the assessee, while at the same timeclaiming deduction thereof in the income-tax assessments. Butwhen both the parties creditor and debtor agree that the conversionof the outstanding interest liability into fully paid debentures wouldbe accepted by them as discharge of the liability then to hold thatnotwithstanding the contract between the two, it is open to theincome tax authorities to say that the interest liability has not beendischarged would not only be opposed to the contextual perspectiveof section 43B, but would also do violence to the language used.In Subhra Motel Pvt. Ltd. (supra), the Delhi Bench of the Tribunalreferred to the fact that the expression “actually paid” appearingin Section 43B is not qualified by words to the effect that thepayment should be by cash or by cheque or draft or by any other M.M. AQUA TECHNOLOGIES LTD. v. CO