Judgment:
1. Aggrieved by the order dt. 10th December, 1993, of the CIT(A)-I, Indore, pertaining to the asst. yr. 1989-90, the assessee is in a appeal before us on the following grounds : (1) That the learned CIT(A) erred in confirming the disallowance of Rs. 2,89,61,025 under s. 43B. (2) That the CIT(A) erred in concluding that the granting of rupee term loan by the financial institutions in lieu to the funded interest took place on 16th July, 1990, and not on 25th October, 1989.
(3) That the CIT(A) erred in holding that the granting of a rupee term loan by the financial institutions in lieu of funded interest does not, in any case, amount to actual payment under s. 43B of the Act.
2. The facts are these. The assessee is a public limited company engaged in the Manufacture and sale of light commercial vehicle. For the asst. yr. 1989-90, the previous year of the assessee consisted of 23 months i.e. from 1st May, 1987, to 31st March, 1989. The AO found that the assessee had claimed deduction of interest of Rs. 2,89,67,325 being interest accrued and due and payable to the financial institutions and LIC in the year of account. During the course of assessment proceedings, it was stated by the assessee that the interest payable to financial institutions was, in fact, agreed to be converted into loan by the financial institutions, which is evident from the letter dt. 25th October, 1989, of ICICI. It was also stated that in view of the said correspondence, the interest outstanding as on 31st March, 1989, was paid, though constructively.
2.1. It was argued before the AO that the assessee had paid interest outstanding and received back the same amount as additional loan from financial institutions. It was contended that since the constructive payment of the interest outstanding was made on 25th October, 1989, i.e., before the due date of filing the return, no disallowance under s. 43B can be made. It was further stated that interest outstanding as on 31st March, 1989, in respect of loan from LIC has also been agreed in principle to be converted into loan. The contentions of the assessee were not acceptable to the AO. According to him, the letter dt. 25th October, 1989, was only the proposal of the financial institution to grant an additional short-term loan. In fact, this was not grant of loan or funding of interest. Similarly, the LIC had only agreed in principle to grant further loan. In fact, none of these transactions actually materialised before the due date of filing the return. The AO further observed that in tax audit report, which is dt. 22nd December, 1989, the amount of interest was stated to be unpaid. It showed that till 22nd December, 1989, neither funding of interest was done nor the loan was paid. Adverting to cl. (d) of s. 43B the AO observed that what the Act provides is actual payment. It does not recognise constructive payment. He also rejected the assessee's contention about the conversion of interest payable into a loan till the date of filing the return in view of non-payment mentioned in the tax audit report. The AO further observed that, in fact, correspondence with ICICI reveals that the ICICI was agreeable in principle to provide rupee loan not exceeding Rs. 2,82 lacs. It was a letter of intent so the letter dt.
25th October, 1989, cannot be treated as conversion or grant of loan.
It was only a letter of intent to sanction a further short-term loan of Rs. 282 lacs. According to the AO, once a fresh loan is sanctioned, it cannot be treated as payment of interest because actual payment of interest will start when the amount of interest is actually paid as per the agreement. The assessee entered into agreement in the month of May/June, 1990, for the purpose of these loans, which were beyond the due date of filing of the return. He, therefore, rejected even the plea of constructive payment. He also observed that s. 43B talks of actual payment and not constructive payment. Even if it is considered that interest payable was converted into loans, then its actual payment is started much later in accordance with the fresh terms sanctioned by the ICICI. On query from ICICI, it was stated by them that the short-term loans/funded interest are being repaid in instalments commencing from May, 1990, and ending on February, 1992. Thus, actual payment of interest started from May, 1990 i.e. much after the due date of filing of return from asst. yr. 1989-90. Sec. 43B allows such interest only on actual payment. Accordingly, he made the impugned disallowance.
3. On appeal, the fortune of the assessee did not fluctuate. According to the CIT(A), the correspondence about rescheduling of loan repayment dates back to 30th July, 1988, but the formality of rescheduling of the interest was completed on 16th July, 1990, i.e., much after the due date of filing the return i.e. 31st December, 1989. It cannot therefore, be said that, there was indirect or constructive payment of interest before 31st December, 1989. Further the Act does not recognise implied or constructive payment under s. 43B and wherever such benefits are to be given about the payment, the same has been notified by the Board by issue of suitable circulars and instructions as with regard to the sales-tax deferral scheme. The decision of Delhi Bench of the Tribunal in Nuchem Plastics vs. Dy. CIT (1992) 44 TTJ (Del) 261 and decision of Bombay Tribunal in Sunil Silk Mills Ltd. vs. Dy. CIT (1992) 46 ITD 4 (Bom) relied upon by the assessee do not apply to the facts of the assessee's case. He, accordingly, upheld the disallowance. This has brought the assessee before us.
4. Shri Ajay Vohra, the learned counsel for the assessee carried us through the documents contained in the paper book filed on behalf of the assessee. He submitted that the CIT(A) did not appreciate the facts of the assessee's case in the right perspective. As a result of funding of interest outstanding as on 31st March, 1989, the assessee's liability towards such interest stood discharged and in its place a new liability in the shape of a short-term loan came into being. This arrangement obviates the necessity of any inflow or outflow of funds.
He further submitted that the agreement dt. 16th July, 1990, was made effective from 25th October, 1989, and the assessee was paying interest on the term loan created by funding of the outstanding interest w.e.f.
25th October, 1989. According to him, agreement dt. 16th July, 1990, only formally recorded the terms of sanction letter dt. 25th October, 1989. The loan agreement relates back to 25th October, 1989. In its letter dt. 9th October, 1990, to the AO and dt. 21st December, 1990, to the assessee, the ICICI confirmed that the assessee-company is paying interest on term loan in lieu of funded interest w.e.f. 25th October, 1989. Shri Vohra vehemently argued that the interest due to the financial institutions as on 31st March, 1989 stood repaid on 25th October, 1989, and the assessee had received back on the same date the said amount in the shape of loan. The interest outstanding as on 31st March, 1989, ceased to exist since the same was converted into loan; in other words; corresponding loan was granted in lieu of funded interest.
In support of his arguments that even constructive payment was sufficient for allowing deduction under s. 43B. He placed reliance on the following decisions : Mula Sahkari Sakhar Karkhana Ltd. vs. ITO (1996) 55 TTJ (Pune) 375, and 5. Shri Brijesh Gupta, the learned Departmental Representative, submitted that actual payment is sine qua non for allowing deduction under s. 43B. The interest liability as on 31st March, 1989, remained unpaid till the due date of filing the return. Conversion of outstanding loan liability into loan does not amount to actual payment as envisaged under s. 43B. According to Shri Gupta, the agreement between the assessee-company and the financial institution was entered into on 16th July, 1990, and had taken effect from that date only. In other words, it was only on 16th July, 1990 that the outstanding interest liability had been converted into loan. He strongly refuted the arguments of Shri Vohra that the outstanding interest liability as on 31st March, 1989, was converted into loan on 25th October, 1989.
Since the conversion of interest liability into loan account had taken place on 16th July, 1990, which is much after 31st December, 1989, the due date of filing the return, deduction on the basis of conversion of interest liability into loan account cannot be allowed under s. 43B.Shri Gupta also submitted that the agreement between the assessee and the financial institution did not contain any deeming provision as in the case of sales-tax deferral scheme so as to construe the conversion of outstanding interest liability as constructive payment of liability as claimed by the assessee. Taking us through the decisions cited by Shri Vohra, it was pointed out by Shri Gupta that none of them were identical on facts with the case of the assessee. He, therefore, submitted that no assistance can be derived by the assessee from them.
6. We have considered the arguments advanced by the learned representatives of the parties. We have thoroughly scrutinised the orders of the authorities below as also the documents including the copies of decisions cited contained in the paper book filed on behalf of the assessee. It is not in dispute that the assessee claimed deduction of the impugned interest which remained outstanding as on the end of the previous year i.e. 31st March, 1989 relevant to the assessment year under consideration. The assessee's claim was passed, inter alia, upon the ICICI's letter dt. 25th October, 1989, conveying their approval to the assessee's proposal dt. 30th July, 1988, for rescheduling the loan repayments and converting the interest accrued upto 31st March, 1989, into loan. The question for consideration before us is that whether the said letter of approval to convert the outstanding interest liability as on 31st March, 1989, into loan carrying interest @ 14% p.a. meets the requirement of the provisions of s. 43B of the Act. Let us notice the provisions.
"43B. Notwithstanding anything contained in any other provisions of this Act, a deduction otherwise allowable under this Act in respect of - (d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or State financial corporation or a State industrial investment corporation in accordance with the terms and conditions of the agreement governing such loan or borrowing.
shall be allowable (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in s. 28 of that previous year in which such sum is actually paid by him : Provided that nothing contained in this section shall apply in relation to any sum referred to in cl. (a) or cl. (c) or cl. (d), which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-s. (1) of s. 139 in respect of the previous year in which the liability to pay sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.
7. Sec. 43B has been inserted by the Finance Act, 1983, w.e.f. 1st April, 1984, and cl. (d) thereof with which we are presently concerned has been inserted by Act 26 of 1988 w.e.f. 1st April, 1989. Clause (d) provides that interest on any loan or borrowings from any public financial institution, etc. shall be allowed as deduction in computing the income of the previous year in which it is actually paid. Under the first proviso any sum payable as interest, liability for which was incurred in the previous year will be allowed as deduction if it is actually paid by the due date of furnishing the return under s. 139(1) of the Act in respect of the assessment year to which the aforesaid previous year relates.
8. From the above, it is crystal clear that deduction of interest under cl. (d) r/w first proviso of s. 43B is allowable if it is actually paid in the relevant previous year itself or if it is actually paid by the due date of furnishing the return under s. 139(1) relatable to the said previous year.
9. The intention of the legislature in inserting the provision of cl.
(d) of s. 43B is explained in circular No. 528 dt. 16th December, 1988, as under : "A marked tendency has been noticed that on one pretext or the other some taxpayers postpone the payment of interest on loans provided by the various financial institutions and thus the money recoverable by these institutions is used for business purposes even though it has been claimed as a deduction from the income. With a view to improve the liquidity position of the public financial institutions and to prevent misuse of the limited resource of finance available to trade and industry, s. 43B of the IT Act has been amended to provide that any sum payable as interest on any loan on borrowings from any public financial institutions in accordance with the terms and conditions of the agreement governing such loan or borrowing, shall not be allowed as a deduction if the same is not actually paid before the due date applicable in his case for furnishing the return of income." 10. The expression 'actually paid' has not been defined in the Act.
However, the word 'paid' has been defined in sub-s. (2) of s. 43 as under : 'paid' means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head 'profits and gains of business or profession.
11. We are conscious that the definitions in s. 43 are for the purpose of ss. 28 to 41. Therefore, definition of 'paid' in s. 43(2) cannot control the operation of s. 43B, which begins with a non obstante clause - 'Notwithstanding anything contained in any other provisions of the Act.' The word 'paid' has been given a different meaning in s. 43B where certain deductions, inter alia, of interest are allowed only on the basis of actual payment.
12. As per Blacks Law Dictionary (6th Edn.), the word 'actual' is used as a legal term in contradistinction to virtual or constructive.
Actually means really, truly. In fact, actually is opposed to seemingly, pretendedly or feignedly.
13. Thus, what is envisaged in cl. (d) r/w first proviso of s. 43B is physical transfer of the amount of interest from the payer assessee-company to the payee financial institutions, etc. either within the previous year itself or by the due date of filing the return under s. 139(1) relatable to that previous year. There is nothing in the above provisions, which is akin to the deeming provision as envisaged in the sales-tax deferral scheme as explained in Board's Circular No. 674 dt. 29th December, 1993, whereby the amount of sales-tax liability converted into loans is allowable as deduction in the assessment for the previous year in which such conversion has been permitted by or under the Government orders. No such circular about the deductibility of interest liability converted into loans has been issued by the Board so far.
14. From the facts of the assessee's case, it would be abundantly clear that neither the outstanding liability as on 31st March, 1989, has actually been discharged within the previous year itself nor actual payment thereof took place before 31st December, 1989, the due date for filing the return for the related asst. yr. 1989-90. What has been done by the assessee is this. By application dt. 30th July, 1988, the assessee made, inter alia, the following proposal to ICICI (the lead institution) for financial assistance : (i) Repayment of loans should start from November/December, 1991 (and not from November/December, 1989).
(ii) Due interest upto November/December, 1991 be funded and the payment of interest should start from November/December, 1991.
(iii) Concessional rate of interest should be applicable for the entire term loan; and, (iv) The foreign exchange loan of Rs. 282 lacs be converted into rupee loan.
15. By letter of intent dt. 25th October, 1989, the ICICI conveyed their acceptance in principle to the assessee's proposal to provide rupee loan not exceeding Rs. 282 lacs under the probable finance participation scheme in participation with other financial institutions e.g. IDBI and IFCI to the assessee-company. This was subject to : (ii) Conditions in "standard loan agreement and the general conditions No. GC-1-86.
(iv) Draft of rupee loan agreement was to be forwarded only after acceptance of the terms and conditions that the above were only tentative terms and conditions. If those were acceptable, then; (a) assessee has to furnish two certified copies of Board's resolution within 30 days of receipt of letter of intent; and, (b) statement of anticipated drawal of loans indicating probable dates and amounts of drawal.
16. As per para 9 of the letter of intent, the same is not to be construed as giving rise to any binding obligation unless : (i) Within 30 days of receipt of this communication, the assessee conveys acceptance of terms and conditions.
(ii) Rupee loan agreement and other documents are executed within four months.
17. The above letter of intent dt. 25th October, 1989, was received by the assessee on 7th November, 1989. The meeting of the board of directors was held on 24th February, 1990, in which the company passed resolution to accept the offer of financial assistance of rupee term loan not exceeding Rs. 282 lacs by way of conversion of overdue interest upto 31st March, 1989, and authorised certain directors to convey the acceptance on behalf of the company of the said financial assistance to the financial institutions as also to execute deeds/documents, etc. relatable thereto.
18. Nothing has been brought on record as to what happened between 7th November, 1989, (the date of receipt of letter of intent dt. 25th October, 1989) and 24th February, 1990 (the date of Board's resolution), when did the company convey their acceptance to the financial assistance to ICICI is also not known. Obviously the acceptance must have been conveyed after 24th February, 1990, and before 16th July, 1990. On 16th July, 1990, the loan agreement was executed and as per art. VI thereof, the effective date of agreement is 16th July, 1990, on which date the agreement became binding on the parties.
19. The argument advanced on behalf of the assessee that the loan agreement dt. 16th July, 1990, related back to 25th October, 1989, has no force in view of the stipulation in the loan agreement itself that the agreement between the parties became effective and binding with effect from the date of execution of the loan agreement i.e. 16th July, 1990. An agreement between the parties becomes effective on the date of execution of the deed of agreement and if the parties agree that the agreement be effective from retrospective date, it is so stipulated in the agreement itself. There is also no merit in the assessee's argument that on 25th October, 1989, the assessee had paid outstanding interest constructively. As stated earlier, constructive payment of interest is not within the ambit of cl. (d) of s. 43B. Even the conversion of outstanding interest upon to 31st March, 1989, into rupee term loan had taken place on 16th July, 1990, the date on which the loan agreement between the parties was executed. As stated earlier, the acceptance by the company of the offer of impugned financial assistance was also conveyed any day after 24th February, 1990. Thus, the significant events, namely, acceptance of the offer of the financial assistance and execution of the loan agreement had taken place after the due date of filing of return under s. 139(1) i.e. 31st December, 1989, for asst.
yr. 1989-90.
20. From the facts of the assessee's case narrated already and the legal position set out earlier, we hold that the Revenue authorities were perfectly justified in negating the assessee's claim of deduction of the impugned amount of interest under s. 43B. Before parting we may observe that the decisions cited on behalf of the assessee do not render any assistance to it. The said decisions were rendered on the facts of those cases and are not applicable to the case of the assessee before us in view of the factual and legal position enumerated above.