M.M. AQUA TECHNOLOGIES LTD. versus COMMISSIONER OF INCOME TAX, DELHI-III on 11 August 2021

[2021] 8 S.C.R. 237

M.M. AQUA TECHNOLOGIES LTD.

v.

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.

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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HELD: 1.1 The object of Section 43B of the Income TaxAct, 1961, as originally enacted, is to allow certain deductionsonly on actual payment.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]

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.

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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.

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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

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.

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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 AB

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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

mode as has been prescribed in the Second Proviso, with referenceto clause (b) of the section which refers to the sum payable bythe assessee as contribution to provident fund, superannuationfund, gratuity fund etc.”

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

“11. … At page 197, the copy of the statement of taxable incomeof the assessee for the AY 2001-02 has been filed, which showsthat in the year in which the debentures were redeemed, theassessee did not claim any deduction for the interest. It has thusbeen proved in the present case that the payment of interest byconversion of the outstanding liability into convertible debentures,is a real substantial and effective payment, meeting the requirementof the word “actual” and is not a fictional or illusory payment.The parties have understood it as an effective discharge by theassessee of the interest liability. The treatment given in the accountsas well as in their income tax assessments is in accord with thefactual position.

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12. … In the present case, the parties have agreed betweenthemselves that the interest would be funded and convertibledebentures would be issued in an amount identical to the fundedinterest and that this arrangement would be accepted by both ofthem as actual discharge of the liability to pay interest. In ouropinion, nobody has the right to intervene and rewrite thearrangement for the parties and say that the parties cannot agreebetween themselves that this will be taken as actual discharge ofthe liability to pay interest. The apprehension expressed by thelegislature while introducing the provisions of section 43B wasthat the assessee were not discharging their income tax liabilitiesby paying them and in fact, some of them were even obtaining astay from the Courts and at the same time claiming such liabilityas deductions in their income tax assessments. This apprehension,which was the rationale behind Section 43B when it was introducedin 1984, appears to us to be misplaced in the present case. Asalready pointed out, herein we are not concerned with a statutoryliability. The assessee is not claiming a deduction in the incometax assessment without actually clearing the statutory liability as A

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Ahad happened in the case of CIT vs. Udaipur. Distillery Co. Ltd.(No. 1) (268 ITR 305) before the Rajasthan High Court in thatcase there was a statutory liability to pay the duty to the Govt.,and it was held that a bank guarantee would not meet therequirements of the section, and money has to actually flow intothe illegible. In the case before us, it is a contractual liability whereBboth the parties agree that the outstanding interest liability wouldbe discharged by the assessee in a particular mode and that modeis followed. The assessee has not claimed the interest as adeduction again in the year in which the debentures were redeemedand evidence to this effect has already been adverted to. TheCinterest which is now allowed as a deduction in the assessee’sassessment is reflected in the assessment of ICICI as its businessincome. Nobody is put to any loss. To invoke the provisions ofsection 43B, on the imaginary ground that there is no actualpayment of the interest, would be wholly misplaced and wouldamount to a strained interpretation of the section.”D7. Against the aforesaid judgment of the ITAT, the Revenue filedan appeal before the High Court, in which the question raised before theHigh Court for determination was set out as follows:

“Whether the funding of the interest amount by way of a termEloan amounts to actual payment as contemplated by Section 43Bof the Income-tax Act, 1961?”

8. After correctly recording the facts that “the assessee was unableto discharge this interest liability due to its financial hardship. On30/03/1994, the ICICI, by a letter waived a part of the compound interestFtogether with the commitment charges and agreed to accept Rs. 3,00,149convertible debentures of ‘100 each, amounting to Rs. 3,00,14,900/- inlieu of the outstanding amount”, the Delhi High Court set out the reasoningof the ITAT in some detail and then the arguments of counsel for theAppellant and Respondent. In para 8, the judgment then set out Section43B with Explanation 3C, which was inserted by the Finance Act, 2006Gretrospectively w.e.f. 1.4.1989. The High Court concluded, based onExplanation 3C, as follows:

“10. Now, Explanation 3C, having retrospective effect with effectfrom 01.04.1989, would be applicable to the present case, as itrelates to AY1996-97. Explanation 3C squarely covers the issueHraised in this appeal, as it negates the assessee’s contention that

interest which has been converted into loan is deemed to be “actuallypaid”. In light of the insertion of this explanation, which, asmentioned earlier, was not present at the time the impugned orderwas passed, the assessee cannot claim deduction under Section43B of the Act.”

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

“12. In light of the introduction of Explanation 3C, this Court doesnot consider it necessary to discuss the precedents relied upon bythe assesse delivered prior to the enactment of Finance Act, 2006.As regards the decision in Shakti Spring Industries [(2013) 219Taxman 124], the interest due in that case was offset against asubsidy which the assessee was entitled to, and it did not involvean instance where was “converted into a loan or borrowing” withinthe meaning Explanation 3C. It is perhaps for this reason thatExplanation 3 was not discussed.”

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

“8. … The clear purport of the statute i.e. Section 43-B (d) is thatany amount payable towards interest liability would qualify fordeduction; however Explanation 3C acts to insist on a rider:

“Explanation 3C for the removal of doubts, it is hereby declaredthat a deduction of any sum, being interest payable underclause(d) of this section, shall be allowed if such interest hasbeen actually paid and any interest referred to in that clausewhich has been converted into a loan or borrowing shall not bedeemed to have been actually paid.”

Quite possibly the assessee’s arguments would have beenconvincing and the court might have been persuaded that actualpayment of amounts is inessential and a composition of the kindinvolved in this case, would have sufficed - but for Explanation3C. Now, this provision was inserted with retrospective effectand clearly operated for the period in question. The assessee doesnot dispute that. Furthermore, this court’s judgment cited the rulingsof other courts- Andhra Pradesh & Telangana and the MadhyaPradesh High Courts- which held that actual payment is the sine A

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Aqua non for applicability of Section 43-B. In the circumstances,the decisions in Standard Chartered [2006 (6) SCC 94] and SunriseAssociates [2006 (5) SCC 603], which declared the nature andcharacter of debentures, are of little avail.”

11. Shri Biswajit Bhattacharya, learned Senior Advocate appearingBon behalf of the Appellant, first drew this Court’s attention to an orderdated 20th April, 2005 by which the question of law framed forconsideration in the appeal before the High Court was as follows:

“Whether the funding of the interest amount by way of a term‘debenture’ amounts to actual payment as contemplated by SectionC43B of the Income Tax Act, 1961?”

12. This question was then wrongly recorded as follows:

“Whether the funding of the interest amount by way of a termloan amounts to actual payment as contemplated by Section 43Bof the Income-tax Act, 1961?”

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13. Since the High Court asked itself the wrong question, it reachedthe wrong conclusion as the key word “debenture” was missing in thequestion framed in the impugned judgment dated 18th May, 2015. Hethen took us through the facts that were found by the CIT and the ITATand argued that, on facts, a finding was rendered in his favour that theEdebentures that were issued were not towards any future payment ofliability, but towards actual payment of interest that was due and owedto the financial institution in question. He was at pains to point out thatExplanation 3C, which was introduced with retrospective effect afterthese judgments, would have no application in the facts of this case asFinterest had not been converted into any loan or borrowing. Thus, bothHigh Court judgments based exclusively on Explanation 3C are erroneousas they have ignored the vital facts found by the authorities below, whichauthorities are final on facts. To buttress his arguments, he also reliedupon judgments showing that debentures are actionable claims and canbe sold in the market as such.

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14. Shri Bhattacharya also relied upon Cape Brandy Syndicatev. Inland Revenue Commissioner [1921 (1) KB 64] to submit thatfiscal and tax statutes have to be strictly construed and that since theword “debenture” is not specified in Explanation 3C, it cannot be readinto it.

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15. Shri Balbir Singh, learned Additional Solicitor General, arguedthat Section 43B makes a departure from other Sections in the Act, asindicated by its non-obstante clause. The Section was introduced so thatno deductions could be claimed based on a mercantile system ofaccounting as actual payment would have to be made. He also reliedupon 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 thepresent case with approval. He also argued that it being clear that adebenture is nothing but a loan, interest had, in fact, been converted intoa loan on the facts of this case and squarely attracted the latter part ofExplanation 3C.

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

43B. Certain deductions to be only on actual payment –

Notwithstanding anything contained in any other provision of thisAct, a deduction otherwise allowable under this Act in respectof—

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(d) any sum payable by the assessee as interest on any loan orborrowing from any public financial institution or a State financialcorporation or a State industrial investment corporation, inaccordance with the terms and conditions of the agreementgoverning such loan or borrowing, or xxx xxx xxx shall be allowed (irrespective of the previous year in which theliability to pay such sum was incurred by the assessee accordingto the method of accounting regularly employed by him) only incomputing the income referred to in section 28 of that previousyear in which such sum is actually paid by him:

Provided that nothing contained in this section shall apply in relationto any sum which is actually paid by the assessee on or before thedue date applicable in his case for furnishing the return of incomeunder sub-section (1) of section 139 in respect of the previousyear in which the liability to pay such sum was incurred as A

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aforesaid and the evidence of such payment is furnished by theassessee along with such return.

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Explanation 3C.—For the removal of doubts, it is hereby declaredthat a deduction of any sum, being interest payable under clauseB(d) of this section, shall be allowed if such interest has been actuallypaid and any interest referred to in that clause which has beenconverted into a loan or borrowing shall not be deemed to havebeen actually paid.

17. Section 43B was originally inserted by the Finance Act, 1983Cw.e.f. 1st April, 1984. The scope and effect of the newly insertedprovision, at that point, was explained by the Central Board of DirectTaxes [“Board”] in Circular No.372/1983 dated 8th December, 1983 asfollows:

“35.2 Several cases have come to notice where taxpayers do notDdischarge their statutory liability such as in respect of excise duty,employer’s contribution to provident fund, Employees StateInsurance Scheme, etc., for long periods of time, extendingsometimes to several years. For the purposes of their income-taxassessments, they claim the liability as deduction on the groundEthat they maintain accounts on mercantile or accrual basis. Onthe other hand, they dispute the liability and do not discharge thesame. For some reasons or the other, undisputed liabilities alsoare not paid.

35.3 To curb this practice, the Finance Act has inserted a newFsection 43B to provide that deduction for any sum payable by theassessee by way of tax or duty under any law for the time beingin force or any sum payable by the assessee as an employer byway of contribution to any provident fund or superannuation fundor gratuity fund or any other fund for the welfare of employeesshall irrespective of the previous year in which the liability to payGsuch sum was incurred, be allowed only in computing the incomeof that previous year in which such sum is actually paid by theassessee.

35.4 The section also contains an Explanation for the removalof doubts. The Explanation provides that where a deduction inHrespect of any sum aforesaid is allowed in computing the income

of any previous year, being a previous year relevant to theassessment year 1983-84, or any earlier assessment year, in whichthe liability to pay such sum was incurred by the assessee, theassessee shall not be entitled to any deduction under section 43Bin respect of such sum on the ground that the sum has been actuallypaid by him in that year. In other words, an assessee who hasalready been allowed deduction of a liability on account of the taxor duty or in respect of any sum payable as contribution to anyfund for the assessment year 1983-84, or any earlier year in whichthe liability to pay was incurred, cannot, in respect of that liability,be allowed a deduction in the assessment year 1984-85, or anysubsequent year on the ground that he has actually made apayment towards such liability in that year.”

18. As has been pointed out hereinabove, the Finance Act, 2006inserted Explanation 3C w.e.f. 1st April, 1989. The scope and effect ofthis provision was explained by the Board in Circular No.14/2006 dated23rd December, 2006, as follows:

“16.2 It has come to notice that certain assessees were claimingdeduction under section 43B on account of conversion of interestpayable on an existing loan into a fresh loan on the ground thatsuch conversion was a constructive discharge of interest liabilityand, therefore, amounted to actual payment. Claim of deductionagainst conversion of interest into a fresh loan is a case of misuseof the provisions of section 43B. A new Explanation 3C has,therefore, been inserted to clarify that if any sum payable by theassessee as interest on any loan or borrowing, referred to in clause(d) of section 43B, is converted into a loan or borrowing, theinterest so converted, shall not be deemed to be actual payment.

16.3 This amendment takes effect retrospectively from 1st April,1989 i.e. the date from which clause (d) was inserted in section43B and applies in relation to the assessment year 1989-90 andsubsequent years.”

19. The object of Section 43B, as originally enacted, is to allowcertain deductions only on actual payment. This is made clear by thenon-obstante clause contained in the beginning of the provision, coupledwith the deduction being allowed irrespective of the previous years inwhich the liability to pay such sum was incurred by the assessee according AB

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Ato the method of accounting regularly employed by it. In short, a mercantilesystem of accounting cannot be looked at when a deduction is claimedunder this Section, making it clear that incurring of liability cannot allowfor a deduction, but only “actual payment”, as contrasted with incurringof a liability, can allow for a deduction. Interestingly, the ‘sum payable’referred to in Section 43B(d), with which we are concerned, does notBrefer to the mode of payment, unlike Proviso 2 to the said Section, whichwas omitted by the Finance Act, 2003 w.e.f. 1st April, 2004. The saidProviso reads as follows:

“Provided further that no deduction shall, in respect of any sumreferred to in clause (b), be allowed unless such sum has actuallyCbeen paid in cash or by issue of a cheque or draft or by any othermode on or before the due date as defined in the Explanationbelow clause (va) of sub-section (1) of section 36, and wheresuch payment has been made otherwise than in cash, the sum hasbeen realised within fifteen days from the due date.”D20. This being the case, it is important to advert to the facts foundin the present case. Both the CIT and the ITAT found, as a matter offact, that as per a rehabilitation plan agreed to between the lender andthe borrower, debentures were accepted by the financial institution indischarge of the debt on account of outstanding interest. This is alsoEclear from the expression “in lieu of” used in the judgment of the learnedCIT. That this is so is clear not only from the accounts produced by theassessee, but equally clear from the fact that in the assessment of ICICIBank, for the assessment year in question, the accounts of the bankreflect the amount received by way of debentures as its business income.This being the fact-situation in the present case, it is clear that interestFwas “actually paid” by means of issuance of debentures, whichextinguished the liability to pay interest.

21. Explanation 3C, which was introduced for the “removal ofdoubts”, only made it clear that interest that remained unpaid and hasbeen convertedinto a loan or borrowing shall not be deemed to haveGbeen actually paid. As has been seen by us hereinabove, particularlywith regard to the Circular explaining Explanation 3C, at the heart of theintroduction of Explanation 3C is misuse of the provisions of Section43B by not actually paying interest, but converting such interest into afresh loan. On the facts found in the present case, the issue of debenturesHby the assessee was, under a rehabilitation plan, to extinguish the liability of interest altogether. No misuse of the provision of Section 43B wasfound 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 theaid of Revenue on the facts of this case. Indeed, if there be any ambiguityin the retrospectively added Explanation 3C, at least three well establishedcanons of interpretation come to the rescue of the assessee in this case.First, since Explanation 3C was added in 2006 with the object of plugginga loophole – i.e. misusing Section 43B by not actually paying interest butconverting interest into a fresh loan, bona fide transactions of actualpayments are not meant to be affected. In similar circumstances, in K.P.Varghese v. ITO, (1981) 4 SCC 173, this Court construed Section 52of the Income Tax Act as applying only to cases where ‘understatement’is be found – an ‘understatement’ is not to be found in the literal languageof Section 52, but was introduced by this Court to streamline the provisionin the light of the object sought to be achieved by the said provision. ThisCourt, therefore, held:

13. Thus it is not enough to attract the applicability of sub-section(2) that the fair market value of the capital asset transferred bythe assessee as on the date of the transfer exceeds the full valueof the consideration declared in respect of the transfer by not lessthan 15 per cent of the value so declared, but it is furthermorenecessary that the full value of the consideration in respect of thetransfer is understated or in other words, shown at a lesser figurethan that actually received by the assessee. Sub-section (2) hasno application in case of an honest and bona fide transaction wherethe consideration in respect of the transfer has been correctlydeclared or disclosed by the assessee, even if the condition of 15per cent difference between the fair market value of the capitalasset as on the date of the transfer and the full value of theconsideration declared by the assessee is satisfied. ….

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15. It is therefore clear that sub-section (2) cannot be invoked bythe Revenue unless there is understatement of the considerationin respect of the transfer and the burden of showing that there issuch understatement is on the Revenue. Once it is established bythe Revenue that the consideration for the transfer has beenunderstated or, to put it differently, the consideration actuallyreceived by the assessee is more than what is declared or AB

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Adisclosed by him, sub-section (2) is immediately attracted, subjectof course to the fulfilment of the condition of 15 per cent or moredifference, and the Revenue is then not required to show what isthe precise extent of the understatement or in other words, whatis the consideration actually received by the assessee. That wouldin most cases be difficult, if not impossible, to show and henceBsub-section (2) relieves the Revenue of all burden of proof regardingthe extent of understatement or concealment and provides astatutory measure of the consideration received in respect of thetransfer. It does not create any fictional receipt. It does not deemas receipt something which is not in fact received. It merelyCprovides a statutory best judgment assessment of the considerationactually received by the assessee and brings to tax capital gainson the footing that the fair market value of the capital assetrepresents the actual consideration received by the assessee asagainst the consideration untruly declared or disclosed by him.This approach in construction of sub-section (2) falls in line withDthe scheme of the provisions relating to tax on capital gains. Itmay be noted that Section 52 is not a charging section but is acomputation section. It has to be read along with Section 48 whichprovides the mode of computation and under which the startingpoint of computation is “the full value of the consideration receivedEor accruing”. What in fact never accrued or was never receivedcannot be computed as capital gains under Section 48. Thereforesub-section (2) cannot be construed as bringing within thecomputation of capital gains an amount which, by no stretch ofimagination, can be said to have accrued to the assessee or beenreceived by him and it must be confined to cases where the actualFconsideration received for the transfer is understated and since insuch cases it is very difficult, if not impossible, to determine andprove the exact quantum of the suppressed consideration, sub-section (2) provides the statutory measure for determining theconsideration actually received by the assessee and permits theGRevenue to take the fair market value of the capital asset as thefull value of the consideration received in respect of the transfer.

22. Second, a retrospective provision in a tax act which is “for theremoval of doubts” cannot be presumed to be retrospective, even wheresuch language is used, if it alters or changes the law as it earlier stood.

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This was stated in Sedco Forex International Drill. Inc. v. CIT, (2005)12 SCC 717 as follows:

17. As was affirmed by this Court in Goslino Mario [(2000) 10SCC 165] a cardinal principle of the tax law is that the law to beapplied is that which is in force in the relevant assessment yearunless otherwise provided expressly or by necessary implication.(See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC139] .) An Explanation to a statutory provision may fulfil thepurpose of clearing up an ambiguity in the main provision or anExplanation can add to and widen the scope of the main section[See Sonia Bhatia v. State of U.P., (1981) 2 SCC 585, 598] . If itis in its nature clarificatory then the Explanation must be read intothe main provision with effect from the time that the main provisioncame into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC352, 354; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482, 506].But if it changes the law it is not presumed to be retrospective,irrespective of the fact that the phrases used are “it is declared”or “for the removal of doubts”.

18. There was and is no ambiguity in the main provision of Section9(1)(ii). It includes salaries in the total income of an assessee ifthe assessee has earned it in India. The word “earned” had beenjudicially defined in S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] bythe High Court of Gujarat, in our view, correctly, to mean as income“arising or accruing in India”. The amendment to the section byway of an Explanation in 1983 effected a change in the scope ofthat judicial definition so as to include with effect from 1979,“income payable for service rendered in India”.

19. When the Explanation seeks to give an artificial meaning to“earned in India” and brings about a change effectively in theexisting law and in addition is stated to come into force with effectfrom a future date, there is no principle of interpretation whichwould justify reading the Explanation as operating retrospectively.

23. This being the case, Explanation 3C is clarificatory – it explainsSection 43B(d) as it originally stood and does not purport to add a newcondition retrospectively, as has wrongly been held by the High Court.

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A24. Third, any ambiguity in the language of Explanation 3C shallbe resolved in favour of the assessee as per Cape Brandy Syndicate v.Inland Revenue Commissioner (supra) as followed by judgments ofthis Court – See Vodafone International Holdings BV v. Union ofIndia, (2012) 6 SCC 613 at paras 60 to 70 per Kapadia, C.J. and para333, 334 per Radhakrishnan, J.B

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

C26. The learned ASG’s reliance on National Rayon Corpn. Ltd.v. CIT, (1997) 7 SCC 56 is disingenuous. That was a decision whichturned on whether a sum of Rs.79 lakhs represents ‘DebentureRedemption Reserve’ and was includible in computing the capital of theassessee company for the purpose of the Companies (Profits) SurtaxAct, 1964. The High Court took the view that the amount set apart toDredeem debentures had to be treated as a “provision” and not as a“reserve”. While discussing this question, this Court held :

8. Mr Ramachandran advanced another argument that there wasno present liability to pay any amount to the debenture-holders.That liability will arise only when the amount falls due for payment.Therefore, there was no existing liability for redeeming thedebentures in the relevant year of account.

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9. We are unable to uphold this argument. The liability to repayarises the moment the money is borrowed. The amount borrowedmay be repayable immediately or in future. The date of repaymentof loan may be deferred by agreement but the obligation or theliability to repay will not cease on that account. The obligation is apresent obligation; debitum in praesenti, solvendum in futuro.This aspect of the matter was explained in the judgment of thisCourt in Kesoram Industries and Cotton Mills Ltd. v. CWT [AIR1966 SC 1370 : (1966) 59 ITR 767] .

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10. By issuing the debentures, the Company had taken a loanagainst the security of its assets. This loan may not be repayablein the year of account. But the obligation to pay the loan is apresent obligation. Any money set apart in the accounts of theCompany to redeem the debentures must be treated as moneys H

set apart to meet a known liability. The debentures will have to beshown in the Company’s balance sheet of the year as “liability”.

11. In the case of CIT v. Peico Electronics & Electricals [(1987)166 ITR 299 (Cal)] the Calcutta High Court held that theDebenture Redemption Reserve will have to be treated as a“reserve” and not “provision” because, none of the debenturesbecame redeemable during the accounting period. The liability toredeem the debenture was a future liability. The debentures hadbeen separately shown in the balance sheet as a liability. Thereserve had been created by appropriation of profits and not byway of a charge on revenue.

12. We are of the view that this approach is erroneous andoverlooks the definitions of “provision” and “reserve” given in theCompanies Act. The debentures were nothing but secured loans.Merely because the debentures were not redeemable during theaccounting period, the liability to redeem the debentures did notcease to exist. It was redeemable or repayable at a future date.But it was a known liability. In the form of balance sheet prescribedby the Act in Schedule VI, the secured loans have to be shownunder the heading “liabilities”. Secured loans include (1)debentures, (2) loans and advances from banks, (3) loans andadvances from subsidiaries and (4) other loans and advances.The secured loans might not be immediately repayable, but theliability to repay these loans was an existing liability and has to beshown in the Company’s balance sheet for the relevant year ofaccount as a liability. Amounts set apart to pay these loans cannotbe “reserve”. The interpretation clause of the balance sheet inSchedule VI of the Companies Act specifically lays down thatreserves shall not include any amount written off or retained byway of providing for a known liability.

27. The question decided in this case is far removed from thequestion to be decided in the facts of the present case and has noapplication to these facts whatsoever. The question in the present casedoes 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 orin the future. The question in the present case is only whether interestcan be said to have been actually paid by the mode of issuing debentures.To answer this question, this judgment has no relevance.

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A28. The learned ASG then relied upon a recent judgment of thisCourt in CIT v. Gujarat Cypromet Ltd. (supra). In the said case, aDivision Bench of this Court, while dealing with Section 43B Explanation3C, noted the facts as found by the CIT as follows (para 5):

“2.2. I have perused the case laws cited and also the aboveBsanction letter from IDBI and also the auditor’s note referred bythe assessing officer. I have perused Schedule 3 of the balancesheet as on 31-3-2001 and find that the above loan appears as on31-3-2001 and is part of the total secured loans of Rs 75,26,10,769.The fact that the entry pertaining to the interest element outstandingto financial institutions referred at page 2 of the order by theCassessing officer has been reversed after receipt of funds of Rs 8crores from IDBI substantiates the contention of the appellantcompany that the entries relating to interest outstanding withreference the above institutions have been squared up and itsplace a new credit entry of loan of IDBI is now appearing in theDbalance sheet as on 31-3-2001. The plea of the appellant’s counselShri Tanna that since no interest payment is outstanding now andthe amount is paid off, the expenditure of interest is allowableunder Section 43-B. It is further added that in case the loan hadbeen disbursed in 2 parts — one to meet the interest outstandingand the balance for financial assistance still the entries in the books E

of account would have remain the same and the outstandinginterest would have been NIL. Having regard to the above factsand also the case laws cited by the appellant’s representative, Iam inclined to hold that the disallowance made by the assessingofficer is contrary to the substance of the transaction and theFprovisions of Section 43-B of the Income Tax Act and the samecannot be sustained and therefore directed to be deleted.”

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

16. In the impugned judgment [CIT v. Gujarat Cypromet Ltd.,2006 SCC OnLine Guj 560], the Gujarat High Court has reliedupon CIT v. Bhagwati Autocast Ltd., 2002 SCC OnLine Guj 381which was not a case covered by Section 43-B(d) rather was aHcase of Section 43-B(a). The provision of Section 43-B covers a host of different situations. The statutory Explanation 3-C insertedby the Finance Act, 2006 is squarely applicable in the facts of thepresent case. It appears that the attention of the High Court wasnot invited to Explanation 3-C, we are, thus, of the view that theassessing officer has rightly disallowed the deduction as claimedby the assessee. The appellate authority, ITAT and the High Courterred in reversing the said disallowance.

30. On the facts of that case, this Court found that Explanation3C was squarely attracted in that outstanding interest had not actuallybeen paid, but instead a new credit entry of loan now appeared, bringingthe case within the express language of Explanation 3C. This is farremoved from the facts of the present case, which were not adverted toat all in this judgment. Consequently, this judgment is also distinguishableand would not apply to govern the facts of the present case.

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

Nidhi Jain

Appeals allowed.

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