The main legal point established in the judgment is that actual payment of interest is essential for claiming deduction under Section 43B of the Income Tax Act.

S. RAVINDRA BHAT, J.

1. This review petition by the assessee seeks recall of the judgment and order of this court, dated 18.05.2015, allowing the revenue’s appeal under Section 263-A of the Income Tax Act (“the Act”).

2. The brief facts are that the assessee claimed deduction to the tune of Rs. 2,84,71,384/-under Section 43B of the Act, in the computation of income. The interest was paid to the financial institutions during the assessment year in question by issuing non-convertible debentures to such institutions. The Assessing Officer (AO) had rejected the assessee’s claim for deduction, holding that the issue of debentures for the interest payable does not amount to actual payment of interest and conditions of Section 43 B of the Act were, therefore, not satisfied. The Commissioner of Income Tax (CIT), who allowed the appeal, accepted the assessee’s contentions. The Income Tax Appellate Tribunal (ITAT) rejected the revenue’s appeal it, therefore, approached this court, under Section 263-A. This court had admitted the appeal and framed the following question of law, on 20-04-2005:

"Whether the funding of the interest amount by way of a term 'debenture' amounts to actual payment of as contemplated by Section 43B of the Income Tax Act, 1961?"

3. In the judgment, the court upheld the contentions of the revenue that it was only actual payment of amounts, which qualified for the benefit under Section 43-B. The assessee had succeeded before the CIT and the ITAT in saying that issuance of debenture amounted to payment, qualifying for the claim under Section 43-B. In so holding, the said two authorities held that the issue of debentures equivalent to the amount of outstanding interest amounted to actual payment of the interest liability and, therefore, it has to be allowed as a deduction. Reliance was placed on the judgment of the Supreme Court in the case of J.B. Boda Co. (P.) Ltd v Central Board of Direct Taxes 223 ITR 271; the assessee had successfully contended that in a case involving receipt as well as payment, a single entry for the net effect would suffice instead of a two way traffic of separate entries of receipt and payment. The assessee had in addition, in the appeal before this court, relied on Standard Chartered Bank v Andhra Bank, 2006 (6) SCC 94 which had held that a debenture amounted to an actionable claim. The revenue had relied on the decision reported in Kalpana Lamps and Components Ltd. v. DCIT, (2001) 255 ITR 491, where it was held that mere postponement of the liability to pay interest does not amount to discharge, whether actual or constructive and, therefore, the conversion of the outstanding interest into a term loan liability, though with the consent of the lender, cannot be considered as a constructive discharge of the interest liability.

4. This court in the judgment under review negatived the assessee’s contentions. It firstly noted that by virtue of Explanation 3C to Section 43-B (d) there was no room left for doubt that actual payment of amounts “payable” was essential, in view of the clear terms (“any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid.”). The court also noticed that the explanation, as well as Explanation 3D were introduced by the Finance Act, 2006 “with retrospective effect, from 01.04.1989 and 01.04.1997 respectively. Thus, these two explanations were not present at the time the impugned order was passed.” The Court held that:

“Explanation 3C, having retrospective effect with effect from 01.04.1989, would be applicable to the present case, as it relates to AY 1996-97. Explanation 3C squarely covers the issue raised in this appeal, as it negates the assessee’s contention that interest which has been converted into a loan is deemed to be “actually paid”. In light of the insertion of this explanation, which, as mentioned earlier, was not present at the time the impugned order was passed, the assessee