Commissioner of Income Tax Vs Lotus Roofings Pvt. Ltd.

Chitra Venkataraman, J.@mdashThis Tax Case Appeal is filed by the Revenue as against the order of the Tribunal relating to the assessment year 1995-96 raising the following substantial question of law:

Whether in the facts and in the circumstances of the case, the Tribunal was right in holding that conversion of overdue interest into funded interest by the financial institutions would constitute actual payment of interest u/s 43B?

2. The Assesses claimed deduction u/s 43B of the Income Tax Act as regards the payment of interest on the loans taken from ICICI Bank and PIPDIC. Admittedly, the Assesses, following the mercantile system of accounting, made only a provision in the profit and loss account as regards the payment of interest on the loan taken. However, the Assesses placed reliance on Board''s circular, which specifically exempted the requirement of payment of sales tax covered under the scheme framed by the State Government and submitted that having regard to the provision already made in the profit and loss account, the Assesses was entitled to the claim deduction u/s 43B of the Income Tax Act. The Assesses also produced letters from M/s. ICICI dated 21.12.1994 and from M/s. PIPDIC dated 22.8.1995 that the overdue interest payable by the Assesses was converted into loan amount. The Assessing Authority rejected the plea of the Assesses, since as per Section 43B of the Income Tax Act, the deduction could be granted only on the actual payment of interest. The Assesses filed an appeal before the Commissioner of Income Tax (Appeals), who confirmed the findings of the Assessing Authority. On a further appeal by the Assesses before the Income Tax Appellate Tribunal, the Assessee''s appeal was allowed. In so allowing the appeal, the Tribunal seems to have followed the earlier view of the Tribunal in another Assessee''s case. However, the Tribunal pointed out that there was no actual payment of interest and it only made a provision in the profit and loss account for the payment of interest. Aggrieved by the decision, the Revenue is on appeal before this Court.

3. In spite of service of notice on the Assesses, there is no representation for the Assesses. Hence, after perusing the records and after hearing the arguments of the learned standing counsel appearing for the Revenue, the present order is passed.

4. As rightly pointed out by the learned standing counsel appearing for the Revenue that in the decision reported in Kalpana Lamps and Components Ltd. Vs. Deputy Commissioner of Income Tax, , this Court had an occasion to consider the similar claim and pointed out that a mere postponement of liability to pay interest did not amount to discharge, whether actual or constructive. This Court further pointed out as follows:

Section 43B(a) deals with sums payable by the Assesses by way of tax, duty, cess or fees under any law for the time being in force. Explanation 2 sets out that for the purposes of that clause, "any sum payable" means a sum for which the Assesses has incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law. The year in which the liability was incurred is taken as the year in which the sum was paid. That provision is meant to aid the Assesses who have received the deferral benefit under the schemes framed by the State Governments with regard to sales tax.

5. Learned standing counsel appearing for the Revenue further pointed out to the decision of the Supreme Court reported in Commissioner of Income Tax, Udaipur Rajasthan Vs. Mcdowell and Co. Ltd., , wherein the Apex Court pointed out to the case of an Assesses furnishing bank guarantee in respect of an amount payable on bottling fee account. The Assesses claimed deduction u/s 43B. Referring to the statutory provisions u/s 43B of the Income Tax Act, the Supreme Court held as follows:

The requirement of Section 43B of the Act is actual payment and not deemed payment as condition precedent for making the claim for deduction in respect of any of the expenditure incurred by the Assesses during the relevant previous year specified in Section 43B. The furnishing of bank guarantee cannot be equated with actual payment which requires that money must flow from the Assesses to the public exchequer as required u/s 43B. By no stretch of imagination can it be said that furnishing of bank guarantee is actual payment of tax or duty in cash. The bank guarantee is nothing but a guarantee for payment on some happening and that cannot be actual payment as required u/s 43B of Act for allowance as deduction in the computation of profits. Section 43B, after amendment with effect from April 1, 1989, refers to any sum payable by the Assesses by way of tax, duty or fee by whatever name called under any law for the time being in force. The basic requirement, therefore, is that the amount payable must be by way of tax, duty and cess under any law for the time being in force.

6. In the decision reported in Mugat Dyeing and Printing Mills Vs. A.Commissioner of Income Tax, the Gujarat High Court pointed out that the expression employed in Section 43B of the Income Tax Act is "actually paid". The word "actual" hence, has to be understood as referable to something real in opposition to constructive or speculative. Thus, going by the said phrase "actually paid" has to be construed as the Assesses, in fact, making the payment. Importing any other meaning, hence, would amount to doing violence to the plain meaning of the statute.

7. In the light of the above said decision of the Supreme Court reported in Commissioner of Income Tax, Udaipur Rajasthan Vs. Mcdowell and Co. Ltd., on the scope of Section 43B of the Income Tax Act and this Court''s decision reported in Kalpana Lamps and Components Ltd. Vs. Deputy Commissioner of Income Tax, and on the admitted fact that all that the Assesses had made as regards the claim was only by way of a provision in the profit and loss account and no actual payment was made by the Assesses in respect of the interest payable, we have no hesitation to set aside the order of the Tribunal. Accordingly, the order of the Tribunal is set aside and the question is answered in favor of the Revenue. The Tax Case (Appeal) is allowed. No costs.