2021 (0) AIJEL-SC 67581


Hon'ble Judges:Rohinton Fali Nariman and B.R.Gavai JJ.

M.M.Aqua Technologies Ltd. Versus Commissioner Of Income Tax, Delhi-iii

CIVIL APPEAL No. 4742 of 2021 ; 4743 of 2021 ; *J.Date :- AUGUST 11, 2021

Cases Referred To :
  1. Brandy Syndicate V. Inland Revenue Commissioner, 1921 1 KB 64
  2. Brij Mohan Das Laxman Das V. Cit, 1997 1 SCC 352 : 1997 AIR SC 1651 : 1996 (9) Scale 225 : JT 1997 (1) 155 : 1996 (Supp9) SCR 775
  3. Cit V. Bhagwati Autocast Ltd., 2002 0 SCCOnLineGuj 381
  4. Cit V. Gujarat Cypromet Ltd., 2006 0 SCCOnLineGuj 560
  5. Cit V. Gujarat Cypromet Ltd., 2020 15 SCC 460 : 2019 (412) ITR 397 : 2019 (308) CTR 309 : 2019 (262) Taxman 93 : 2019 JX(SC) 978
  6. Cit V. Peico Electronics & Electricals, 1987 166 ITR(Cal) 299
  7. Cit V. Podar Cement (P) Ltd., 1997 5 SCC 482 : 1997 AIR SC 2523 : 1997 (4) Scale 271 : JT 1997 (5) 529 : 1997 (Supp1) SCR 394
  8. K.P. Varghese V. Ito, 1981 4 SCC 173 : 1981 AIR SC 1922 : 1981 (3) Scale 1315 : 1982 (1) SCR 629 : 1981 (131) ITR 597
  9. Kesoram Industries And Cotton Mills Ltd. V. Cwt, AIR 1966 SC 1370 : 1966 (2) SCR 688 : 1966 (1) SCJ 312 : 1966 (59) ITR 767 : 1966 (2) SCA 52
  10. National Rayon Corpn. Ltd. V. Cit, 1997 7 SCC 56 : 1997 AIR SC 3487 : 1997 (5) Scale 415 : JT 1997 (7) 372 : 1997 (Supp3) SCR 140
  11. Reliance Jute And Industries Ltd. V. Cit, 1980 1 SCC 139 : 1980 AIR SC 251 : 1980 (1) SCR 906 : 1980 UJ 255 : 1980 (1) SCJ 362
  12. Sedco Forex International Drill. Inc. V. Cit, 2005 12 SCC 717 : 2006 AIR SC 428 : 2005 (9) Scale 388 : JT 2005 (9) 639 : 2005 (Supp5) SCR 302
  13. Shyam Sunder V. Ram Kumar, 2001 8 SCC 24 : 2001 AIR SC 2472 : 2001 (4) Scale 710 : JT 2001 (6) 94 : 2001 (Supp1) SCR 115
  14. Sonia Bhatia V. State Of U.P., 1981 2 SCC 585 : 1981 AIR SC 1274 : 1981 (1) Scale 58 : 1981 (1) Scale 491 : 1981 (3) SCR 239
  15. Vodafone International Holdings Bv V. Union Of India, 2012 6 SCC 613 : 2012 (1) Scale 530 : JT 2012 (1) 410 : 2012 (1) SCR 573 : 2012 (1) Supreme 394

Equivalent Citation(s):
2021 JX(SC) 429 : 2021 AIJEL_SC 67581



1 Leave granted.

2 The question raised in these appeals is with particular reference to Section 43B Explanation 3C of the Income Tax Act, 1961 [the Act ]. The brief facts necessary to appreciate the controversy raised in these appeals are as follows.

3 On 28th November, 1996, the Appellant filed a return of income declaring 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 of Rs.2,84,71,384/- under Section 43B based on the issue of debentures in lieu of interest accrued and payable to financial institutions. By an order dated 29th October, 1998, the Assessing Officer rejected the Appellant s contention by holding that the issuance of debentures was not as per the original terms and conditions on which the loans were granted, and that interest was payable, holding that a subsequent change in the terms of the agreement, as they then stood, would be contrary to Section 43B(d), and would render such amount ineligible for deduction. The Commissioner of Income Tax (Appeals) [ CIT ] allowed the appeal and held, on facts, as follows:

4 On these facts, the conclusion drawn by the learned CIT was:

5 This order was upheld in appeal by the Income Tax Appellate Tribunal [ ITAT ]. The ITAT held:

6 It then arrived at the important finding based on facts as follows:

7 Against the aforesaid judgment of the ITAT, the Revenue filed an appeal before the High Court, in which the question raised before the High Court for determination was set out as follows:

8 After correctly recording the facts that the assessee was unable to discharge this interest liability due to its financial hardship. On 30/03/1994, the ICICI, by a letter waived a part of the compound interest together with the commitment charges and agreed to accept 3,00,149 convertible debentures of 100 each, amounting to 3,00,14,900/- in lieu of the outstanding amount , the Delhi High Court set out the reasoning of the ITAT in some detail and then the arguments of counsel for the Appellant and Respondent. In para 8, the judgment then set out Section 43B with Explanation 3C, which was inserted by the Finance Act, 2006 retrospectively w.e.f. 1.4.1989. The High Court concluded, based on Explanation 3C, as follows:

9 It then concluded, after referring to the judgments of the High Court of Madhya Pradesh and the High Court of Telangana and Andhra Pradesh, as follows:

10 On 22nd July, 2016, the High Court dismissed the Review Petition filed by the assessee stating as follows:

Quite possibly the assessee's arguments would have been convincing and the court might have been persuaded that actual payment of amounts is inessential and a composition of the kind involved in this case, would have sufficed - but for Explanation 3C. Now, this provision was inserted with retrospective effect and clearly operated for the period in question. The assessee does not dispute that. Furthermore, this court's judgment cited the rulings of other courts- Andhra Pradesh & Telangana and the Madhya Pradesh High Courtswhich held that actual payment is the sine qua non for applicability of Section 43-B. In the circumstances, the decisions in Standard Chartered [2006 (6) SCC 94] and Sunrise Associates [2006 (5) SCC 603], which declared the nature and character of debentures, are of little avail.

11 Shri Biswajit Bhattacharya, learned Senior Advocate appearing on behalf of the Appellant, first drew this Court s attention to an order dated 20th April, 2005 by which the question of law framed for consideration in the appeal before the High Court was as follows:

12 This question was then wrongly recorded as follows:

13 Since the High Court asked itself the wrong question, it reached the wrong conclusion as the key word debenture was missing in the question framed in the impugned judgment dated 18th May, 2015. He then took us through the facts that were found by the CIT and the ITAT and argued that, on facts, a finding was rendered in his favour that the debentures that were issued were not towards any future payment of liability, but towards actual payment of interest that was due and owed to the financial institution in question. He was at pains to point out that Explanation 3C, which was introduced with retrospective effect after these judgments, would have no application in the facts of this case as interest had not been converted into any loan or borrowing. Thus, both High Court judgments based exclusively on Explanation 3C are erroneous as they have ignored the vital facts found by the authorities below, which authorities are final on facts. To buttress his arguments, he also relied upon judgments showing that debentures are actionable claims and can be sold in the market as such.

14 Shri Bhattacharya also relied upon Cape Brandy Syndicate v. Inland Revenue Commissioner [1921 (1) KB 64] to submit that fiscal and tax statutes have to be strictly construed and that since the word debenture is not specified in Explanation 3C, it cannot be read into it.

15 Shri Balbir Singh, learned Additional Solicitor General, argued that Section 43B makes a departure from other Sections in the Act, as indicated by its non-obstante clause. The Section was introduced so that no deductions could be claimed based on a mercantile system of accounting as actual payment would have to be made. He also relied upon a judgment of this Court as to the correct meaning of debentures and then referred to and relied upon CIT v. Gujarat Cypromet Ltd., (2020) 15 SCC 460, which referred to the impugned judgment in the present case with approval. He also argued that it being clear that a debenture is nothing but a loan, interest had, in fact, been converted into a loan on the facts of this case and squarely attracted the latter part of Explanation 3C.

16 At this juncture, it is important to set out Section 43B. The relevant provisions of the said Section read as follows:

17 Section 43B was originally inserted by the Finance Act, 1983 w.e.f. 1st April, 1984. The scope and effect of the newly inserted provision, at that point, was explained by the Central Board of Direct Taxes [ Board ] in Circular No.372/1983 dated 8th December, 1983 as follows:

18 As has been pointed out hereinabove, the Finance Act, 2006 inserted Explanation 3C w.e.f. 1st April, 1989. The scope and effect of this provision was explained by the Board in Circular No.14/2006 dated 23rd December, 2006, as follows:

19 The object of Section 43B, as originally enacted, is to allow certain deductions only on actual payment. This is made clear by the nonobstante clause contained in the beginning of the provision, coupled with the deduction being allowed irrespective of the previous years in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by it. In short, 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. The said Proviso reads as follows:

20 This being the case, it is important to advert to the facts found in the present case. Both the CIT and the ITAT found, as a matter of fact, that as per a rehabilitation plan agreed to between the lender and the borrower, debentures were accepted by the financial institution in discharge of the debt on account of outstanding interest. This is also clear from the expression in lieu of used in the judgment of the learned CIT. That this is so is clear not only from the accounts produced by the assessee, but equally clear from the fact that in the assessment of ICICI Bank, for the assessment year in question, the accounts of the bank reflect the amount received by way of debentures as its business income. This being the fact-situation in the present case, it is clear that interest 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 of doubts , only made it clear that interest that remained unpaid and has been converted into a loan or borrowing shall not be deemed to have been actually paid. As has been seen by us hereinabove, particularly with regard to the Circular explaining Explanation 3C, at the heart of the introduction of Explanation 3C is misuse of the provisions of Section 43B by not actually paying interest, but converting such interest into a fresh loan. On the facts found in the present case, the issue of debentures by the assessee was, under a rehabilitation plan, to extinguish the liability of interest altogether. No misuse of the provision of Section 43B was found as a matter of fact by either the CIT or the ITAT. Explanation 3C, which was meant to plug a loophole, cannot therefore be brought to the aid of Revenue on the facts of this case. Indeed, if there be any ambiguity in the retrospectively added Explanation 3C, at least three well established canons of interpretation come to the rescue of the assessee in this case. First, since Explanation 3C was added in 2006 with the object of plugging a loophole i.e. misusing Section 43B by not actually paying interest but converting interest into a fresh loan, bona fide transactions of actual payments are not meant to be affected. In similar circumstances, in K.P. Varghese v. ITO, (1981) 4 SCC 173, this Court construed Section 52 of the Income Tax Act as applying only to cases where understatement is be found an understatement is not to be found in the literal language of Section 52, but was introduced by this Court to streamline the provision in the light of the object sought to be achieved by the said provision. This Court, therefore, held:

22 Second, a retrospective provision in a tax act which is for the removal of doubts cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This was stated in Sedco Forex International Drill. Inc. v. CIT, (2005) 12 SCC 717 as follows:

23 This being the case, Explanation 3C is clarificatory 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.

24 Third, any ambiguity in the language of Explanation 3C shall be resolved in favour of the assessee as per Cape Brandy Syndicate v. Inland Revenue Commissioner (supra) as followed by judgments of this Court See Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 at paras 60 to 70 per Kapadia, C.J. and para 333, 334 per Radhakrishnan, J.

25 The High Court judgment dated 18th May, 2015, is clearly in error in concluding that interest , on the facts of this case, has been converted into a loan. There is no basis for this finding - as a matter of fact, it is directly contrary to the finding on facts of the authorities below.

26 The learned ASG s reliance on National Rayon Corpn. Ltd. v. CIT, (1997) 7 SCC 56 is disingenuous. That was a decision which turned on whether a sum of Rs.79 lakhs represents Debenture Redemption Reserve and was includible in computing the capital of the assessee company for the purpose of the Companies (Profits) Surtax Act, 1964. The High Court took the view that the amount set apart to redeem debentures had to be treated as a provision and not as a reserve . While discussing this question, this Court held :

27 The question decided in this case is far removed from the question to be decided in the facts of the present case and has no application to these facts whatsoever. The question in the present case does not depend upon what can, in law, be stated to be a debenture and/or whether it is convertible or non-convertible or payable immediately or in the future. The question in the present case is only whether interest can be said to have been actually paid by the mode of issuing debentures. To answer this question, this judgment has no relevance.

28 The learned ASG then relied upon a recent judgment of this Court in CIT v. Gujarat Cypromet Ltd. (supra). In the said case, a Division Bench of this Court, while dealing with Section 43B Explanation 3C, noted the facts as found by the CIT as follows (para 5):

29 It is on these facts that Explanation 3C was pressed into service in favour of Revenue and paras 11 and 12 of the impugned judgment in the present case were referred to, in passing, in para 13. Ultimately, this Court concluded:

30 On the facts of that case, this Court found that Explanation 3C was squarely attracted in that outstanding interest had not actually been paid, but instead a new credit entry of loan now appeared, bringing the case within the express language of Explanation 3C. This is far removed from the facts of the present case, which were not adverted to at all in this judgment. Consequently, this judgment is also distinguishable and would not apply to govern the facts of the present case.

31 Consequently, the impugned judgments of the High Court are set aside and the judgment and order of the ITAT is restored. These appeals are allowed in the aforesaid terms.