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Income Tax Appellate Tribunal, AHMEDABAD “A” BENCH
Before: SHRI N.K. BILLAIYA & SHRI MAHAVIR PRASAD
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:
With this appeal, the Revenue has challenged the correctness of the order of the Ld. CIT(A)-II, Baroda dated 06.03.2014 pertaining to A.Y. 2010-11.
ITA No. 2008/Ahd/2014 2 . A.Y. 2010-11 2. The sum and substance of the grievance of the revenue is that the ld. CIT(A) erred in deleting the disallowance of Rs. 4,30,47,863/- by ignoring the explanation 3C to section 43B of the Act.
Briefly stated the facts of the case are that the assessee is manufacturing of stainless steel products. The return for the year under consideration was electronically filed on 16.09.2010 declaring total loss of Rs. 9,68,63,129/-. The return was selected for scrutiny assessment and accordingly statutory notices were issued and served upon the assessee.
During the course of the scrutiny assessment proceedings, the A.O. noticed that the assessee has claimed deduction u/s. 43B of the Act at Rs. 5,23,53,680/- in the computation of total income. The assessee was asked to furnish the details and evidences for claiming deduction in the computation for interest on FCL of Rs. 5,23,53,680/-. Necessary details were filed and on perusal of the same, the A.O. found that the assessee has actually paid Rs. 93,05,817/- to ARCIL and for the balance amount of Rs. 4,30,47,863/-, the assessee has issued Fully Convertible Debentures. Since the interest amount of Rs. 4,30,47,863/- was not actually paid by the assessee, the A.O. was of the opinion that the same is not allowable u/s. 43B of the Act.
The assessee was asked to justify its claim. The assessee furnished the following reply:- In the computation of income for A.Y. 2010-11 we have claimed proportionate interest of Rs. 5,23,53,680/- u/s. 436 being interest on Foreign Currency Loan (FCL). As explained herein above, the outstanding interest on FCL was disallowed on accrual basis and same is claimed over the years on payment basis u/s. 43B of the Act. Said interest of Rs. 5,23,53,680/- has two portions, one Rs. 93,05,817/- being proportionate interest paid as part of installments to ARGIL and balance
ITA No. 2008/Ahd/2014 3 . A.Y. 2010-11 Rs. 4,30,47,863/- being proportionate interest paid as part of Fully Convertible Debentures (FCDs). During the course of assessment proceedings, you required us to provide explanation for allow ability of claim of outstanding interest of Rs. 4,30,47,863/- u/s. 43B of the Act. In that respect we wish to inform you that, at the time of issue of debentures against outstanding interest, the liability was not actually paid but on conversion of said FCDs into Equity shares of the company the liability got discharged and the outstanding interest got actually paid to the Financial Institution. Accordingly same was claimed u/s. 43B of the Act. As per explanation 3C to section 43B it has been clarified that, if any interest referred to in clause (d) of section 43B has been converted into a loan or borrowing shall not be deemed to have been actually paid whereas in the present case said interest has been later on converted into fully paid equity shares of the company before the end of the year. Conversion into fully paid equity shares is neither loan nor borrowing and accordingly it is not affected by explanation 3C.
We further wish to inform you all the relevant documents relating to issue of FCDs and subsequent conversion to Equity shares has been already furnished vide our reply letter dated 3.10.2012.
In view thereof, you are requested not to disallow any part of said interest claimed u/s 43 B of the Act
The reply of the assessee was considered by the A.O. but was not accepted because of the following reason:- Section 43B(d)- To get the deduction u/s. 43B, the assessee has to satisfy the provisions under this section which provides that: Any sum payable by the assessee as interest on any loan or borrowing from any public financial institution [or a 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 allowed (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
ITA No. 2008/Ahd/2014 4 . A.Y. 2010-11 computing the income referred to in section 28 of that previous year in which such sum is actually paid by him. Further, explanation 3C to the above section clarifies as under: For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and 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. From the above, it is crystal clear that a deduction for payment of interest on any loans or borrowings are to be allowed if it is actually paid by the assessee during the previous year relevant to the assessment year. In this case the assessee has actually not paid the said amount, rather it is converted in to FCD as per the scheme agreed by parties and approved by the Hon'ble High Court. It is a fact that the assessee has issued FCD to ARCIL on 30.06.2009 in lieu of interest payment of Rs. 4,30,47,863/- and the said FCD was converted into equity on 27th March 2010. On the event of conversion of the said amount in to FCD, there was no existence of liability against the said interest amount. Once the interest amount is converted into FCD it has become a fresh loan or borrowing, because debentures issued by a company is nothing but a secured loan or borrowings and has all the characteristic of a borrowing. Therefore the explanation 3C as stated above is directly applicable in this case and the claim of deduction U/s. 43B of the Act is not allowable. The assessee's contention that the said debentures were again converted into equity share of the company and hence the provision of explanation 3C to this provision is not attracted, is also not tenable in law. The assessee had already converted the said interest in to FCD and had issued the Debentures to ARCIL. Once debentures was issued there was no outstanding liability of interest in the books of the assessee- The outstanding amount payable to ARCIL was only a debenture, and the debenture holder had the option for
ITA No. 2008/Ahd/2014 5 . A.Y. 2010-11 conversion at their choice only which was exercised. Therefore, the assessee has converted the debentures amount into equity and not this interest amount into equity. Therefore the argument of the assessee is not acceptable and the claim of Rs. 4,30,47,863/- U/s. 43B is disallowed.
Assessee carried the matter before the ld. CIT(A) and reiterated its claim.
After considering the facts and the submissions, the ld. CIT(A) agreed with the assessee and held as under:- 3.3.6. I agree with the contention of the appellant that, though, actual cash did not change hands and the transaction was completed through book adjustments yet the interest liability had been paid off through giving the creditor a share in the ownership of the appellant-company and, therefore, the appellant is entitled to claim the deduction under section 43B of the Act. The same view has been taken by Hon'ble ITAT, Bangalore 'A' Bench in case of JSW Steel Ltd. Vs ACIT [2011] 9 taxmann.com 77 (Bang.). Respectfully, following the decision of ITAT, Bangalore, the claim of the appellant of deduction of Rs. 4,30,47,876/- under section 43B is allowed. This ground of appeal is allowed.
Aggrieved by this, the revenue is before us. The ld. D.R. strongly supported the findings of the A.O. It is the say of the ld. D.R. that the eligibility for the claim of deduction u/s. 43B of the Act has to be considered at the first instance when the interest due was converted into Fully Convertible Debentures. The ld. D.R. continued by stating that what has subsequently done by the assessee is that the FCD has been converted into equity shares and not the interest due has been converted into equity shares. Therefore, the A.O. has rightly applied explanation 3C. The ld. counsel for the assessee vehemently stated that there is no error in the findings of the ld. CIT(A) and the ld. CIT(A) has very rightly
ITA No. 2008/Ahd/2014 6 . A.Y. 2010-11 followed the order of the Tribunal Bangalore Bench in the case of JSW Steel Ltd. In support of his contention, the ld. counsel further relied upon the decision of the Hon’ble High Court of Delhi in the case of Rathi Graphics Technologies Ltd. 378 ITR 107 and ITAT Mumbai Bench in the case of Garware Chemicals Ltd. In ITA No. 7819/Mum/2010.
We have given a thoughtful consideration to the orders of the authorities below. There is no dispute that the interest of Rs. 4,30,47,863/- being proportionate interest paid as part of FCD was converted into equity shares of the company and by such conversion the liability got discharged and the outstanding interest was actually paid to the financial institution. In our considered opinion, conversion into fully paid equity shares is neither loan nor borrowing and, therefore, it is outside the ambit of explanation 3C to Section 43B of the Act.
There is also no dispute that all the relevant documents relating to issue of FCD and subsequent conversion to equity shares were furnished before the lower authorities. We find that the facts in issue are identical to the facts considered by the Hon’ble High Court of Delhi in the case of Rathi Graphics Technologies Ltd. (supra) and further supported by the decision of the Co- ordinate Bench Mumbai in the case of Garware Chemicals Ltd. (supra).
The facts and the findings of the Hon’ble High Court of Delhi in the case of Rathi Graphics Technologies Ltd. (supra) read as under:- When pursuant to a settlement the creditor agrees to convert a portion of interest into shares, it must be treated as an extinguishment of liability to pay interest to that extent. In essence there will be no further outstanding interest to that extent. Consequently, the situation where interest payable on a loan is
ITA No. 2008/Ahd/2014 7 . A.Y. 2010-11 converted into shares in the name of the creditor is different from the situation envisaged in Explanation 3C to section 43B of the Income-tax Act, 1961, viz., conversion of interest into "a loan or borrowing". In the latter instance, the liability continues, although in a different form. However, where the interest or a part thereof is converted into equity shares, the interest amount for which the conversion takes place is no longer a liability.
The assessee, for the assessment year 2002-03, claimed a deduction of Rs.1.43 crores under section 43B on share capital issued to the Industrial Development Bank of India. On a query when the money was with the assessee, how and on what basis the deduction had been claimed, the assessee in its reply explained that the allotment of shares was pursuant to the settlement arrived at with the Industrial Development Bank of India and the Industrial Development Bank of India had agreed to the conversion of a portion of the interest into shares by its letter dated January 22, 2002. It was also explained to the Assessing Officer that the allotment of shares took place in fact on March 30, 2002. The mere fact that the return of allotment was filed with the Registrar of Companies only on April 29, 2002, or that the Board for Industrial and Financial Reconstruction had sanctioned the scheme only on November 1, 2002, would not change the actual date on which the shares stood allotted, i.e., March 30, 2002. After the assessment was completed under section 143(3) , the assessment of the assessee was reopened under section 147 within four years thereafter on the ground that the assessee had claimed and was allowed a deduction of Rs. 1.43 crores towards the allotment of shares to the Industrial Development Bank of India on conversion of 30 per cent, of the simple interest in equity share capital. Since the rehabilitation scheme was sanctioned by the Board for Industrial and Financial Reconstruction on November 1, 2002, the deduction was not allowable during the assessment year 2002-03. The deduction of Rs. 1.43 crores was disallowed and added back to the income of the assessee. The Commissioner (Appeals) and the Tribunal accepted the plea of the assessee that the conversion of a portion of interest into shares should be taken to be "actual payment" within the meaning of section 43B. On appeals:
Held, dismissing the appeals, that the conversion of a portion of interest into shares should be taken to be "actual payment" within the meaning of section 43B of the Act. This was a case of mere change of opinion by the Assessing Officer as a specific query was raised by the Assessing Officer in the original assessment proceedings itself as regards the conversion of a portion of the interest into
ITA No. 2008/Ahd/2014 8 . A.Y. 2010-11 shares. There was no justification in seeking to reopen the assessment under section 147 on a mere change of opinion.
Respectfully following the same, we decline to interfere. Appeal filed by the Revenue is dismissed.
Order pronounced in Open Court on 27 - 10- 2017
Sd/- Sd/- (MAHAVIR PRASAD) (N. K. BILLAIYA) JUDICIAL MEMBER True Copy ACCOUNTANT MEMBER Ahmedabad: Dated 27 /10/2017 Rajesh Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) – 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. By ORDER
Deputy/Asstt.Registrar ITAT,Ahmedabad