Conversion of interest into shares should be considered 'actual payment' under Section 43B of the Income Tax Act.

1. These appeals under Section 260A of the Income Tax Act, 1961 (‘Act’) by the Revenue is directed against an order dated 17th January 2014 passed by the Income Tax Appellate Tribunal (‘ITAT’) in ITA No. 2894/Del/2011 and Cross Objection No. 60/Del/2013 relevant to the Assessment Year (‘AY’) 2002-03.

2. In respect of the Respondent/Assessee, a rehabilitation scheme was sanctioned by the Board for Industrial and Financial Reconstruction (‘BIFR’) on 1st November 2002. The scheme that was sanctioned was in fact prepared by the Industrial Development Bank of India (‘IDBI’), one of the major lenders of the Respondent. On the loans borrowed by the Assessee from IDBI, there was outstanding interest as on 31st March 2001. It was decided in a series of meetings that the IDBI could be allotted 14,30,000 equity shares of Rs. 10 each valued at Rs. 1.43 crores and the interest to the extent would be taken as having been paid as on 31st March 2002.

3. For the previous year ended on 31st March 2002, relevant to AY 2002-03, the Assessee filed a return on 31st October 2002 declaring a loss of Rs. 2,04,58,365. In computing the returned loss, the unpaid interest to the IDBI of Rs. 3,45,09,854 was added back to the net loss as per the Profit & Loss Account. Thereafter, deduction of interest paid to IDBI to the extent of Rs. 1.43 crores was claimed. The basis for this claim was the allotment of shares in the above manner to the IDBI. In the audited accounts for the year ended 31st March 2002, the following note was appended under the notes on accounts:

“IDBI has approved a negotiated settlement for the company. As per the terms of the rehabilitation based on the settlement, the company has issued 14,30,000 equity shares of Rs. 10/- each to IDBI towards 30% simple interest due as on 31/03/2001. The interest outstanding as at 31/03/2002 has been reduced to that extent. The other relief of the negotiated settlement would be accounted-for on the approval of rehabilitation scheme by the BIFR.”

4. Further in the computation of income for AY 2002-03, which was placed before the Assessing Officer (‘AO’), the Assessee appended the following note in para 11:

“During the year, IDBI approved a negotiated settlement, where-under IDBI against the outstanding interest due on 31.03.2001 accepted 14,30,000 equity shares of Rs. 10/- each valued at 1,43,00,000/-. The above shares were accepted towards 30% simple interest due as on 31.03.2001. Pursuant to above, outstanding interest as at 31.03.2001 has been reduced to the interest of Rs. 1,43,00,000/-. The above payment of interest in kind had been added back by the Assessee in earlier years. Since interest to the extent of Rs. 1,43,00,000/- has been paid in the relevant previous years, therefore, the same has been claimed deduction within the meaning of Section 43B of the Act. Various Tribunals have held the words actual payment in Section 43B are to be liberally construed and would cover every discharge of liability. The accrued interest for the 01.04.2001 to 31.03.2002 has been added back in the computation of income [see note 2 (iii) (a)].”

5. It may be added here that the actual date of allotment of 14,30,000 shares by the Respondent Assessee to the IDBI was 30th March 2002. The issued, subscribed, called up and paid up capital was increased correspondingly.

6. During the course of the original assessment proceedings, the AO by an order dated 4th November 2004 raised a specific query regarding the shares issued to the IDBI. By a letter dated 22nd November 2004, the Assessee explained, inter alia, that pursuant to the settlement reached with the IDBI which was confirmed by IDBI by letter dated 22nd January 2002, the shares as aforementioned were allotted. It was urged that the said allotment of shares should be taken to be against the interest amount ‘actually paid’ within the meaning of Section 43B of the Act. It was explained that by order dated 1st November 2002 the BIFR was only approving the scheme