A retrospective provision in a tax law that “serves to clear a doubt” cannot be considered retroactive, even if such wording is used in amending or amending the law in its previous version, the Supreme Court found and ruled , that Explanation 3C to Section 43B (d) of the Income Tax Act is “explanatory” and does not retrospectively add a new condition.
Judges’ bank RF Nariman and BR Gavai noted that Declaration 3C was introduced to curb abuse of the provisions of Section 43B by not actually paying interest but converting that interest into a new loan.
Section 43B (d) reads as follows: Without prejudice to any other provision of this Act, a deduction otherwise permitted under this Act in respect of – xxx xxx xxx (d) any amount that the agent is required to pay as interest on a loan or borrowing by a public financial institution or a state finance company or a state industrial investment company under the terms of the agreement governing such loan or loan, or xxx xxx xxx is permitted (regardless of the previous year in which the liability required payment of such amount to the agent after the regularly applied by him) only when calculating the income according to § 28 of the previous year in which this amount was actually paid by him: Section applies to every amount that the expert actually paid on or before the due date applicable in his case has, to the income according to minor z u provide. Section 139 (1) for the previous year in which the obligation to pay the amount arose in the above manner, and proof of payment must be provided together with the declaration by the authorized representative.
Finance Act, 2006 inserted Explanation 3C dated April 1, 1989, which reads as follows: “Provided that no deduction is permitted under subparagraph b unless such amount has actually been deposited in cash or by the issue of a check or bill of exchange or otherwise on or before the due date as defined in the explanation below section (va) of section (1) of section 36, and if such payment was made in any manner other than cash, the amount was paid within fifteen days of the due date realized. “”
In this case, the Valuer requested a Section 43B deduction for issuing bonds in lieu of accrued interest payable to financial institutions. The Expert dismissed the allegation that the issuance of bonds was inconsistent with the original terms on which the loans were granted and that interest was payable on the grounds that any subsequent amendment to the terms would be contrary to the Agreement as it was then section 43B (d) and would not make that amount deductible. The Income Tax Officer (Complaints) [“CIT”] the appeal was upheld, the decision of which was upheld by the Income Tax Court of Appeal. Revenue appealed to the High Court, asking, “Is the term loan financing the interest amount an actual payment within the meaning of Section 43B of the Income Tax Act 1961?” The High Court upheld the Revenue’s assertion that Statement 3C would apply to the present case with retroactive effect from 04/01/1989 as it relates to AY1996-97.
On appeal, the court first found that the purpose of Section 43B in its original version was to allow certain deductions only in the event of actual payment.
“This is made clear by the non-observative clause contained at the beginning of the provision, whereby the deduction is permissible regardless of the previous years in which the obligation to pay such an amount arose according to the accounting method by the Assesse. In short, a commercial one Accounting system may not be considered if a deduction is made under this section, which clarifies that incurring liability cannot provide for a deduction but only “actual payment”, as opposed to incurring a liability, may provide for an “actual payment” Allow deduction. “
noted that Explanation 3C, introduced to “remove doubts”, merely clarified that unpaid interest converted into a loan or bond is not considered to be actually paid.
As we have seen above, especially with regard to the circular on Explanation 3C, the focus of the introduction of Explanation 3C is on the abuse of the provisions of Section 43B by not actually paying interest but converting it into a new loan. According to the facts established in the present case, the issuance of bonds by the appraiser as part of a restructuring plan should extinguish the interest debt as a whole. In fact, neither the CIT nor the IAT found any abuse of the provision of Section 43B. Explanation 3C, which should close a loophole, can therefore not be used by the tax office on the facts of this case.
The court found that in the event of ambiguity in the subsequently added 3C declaration, three well-established canons of interpretation are available to rescue the expert in this case
- Since Explanation 3C was added in 2006 with the aim of closing a loophole, ie abusing Section 43B by not actually paying interest but converting the interest into a new loan, bona fide transactions of actual payments should not be affected .
- A retroactive provision in a tax law that “serves to dispel doubts” cannot be accepted as retroactive even if such a wording is used when it changes or changes the previous law.
- Any ambiguity in the language of Explanation 3C is in favor of the Assesees according to Cape Brandy Syndicate v. Inland Revenue Commissioner resolved.
Therefore, taking note of other facts in the case, the Bank overturned the High Court’s judgment and reinstated ITAT’s orders.
Case: MM Aqua Technologies Ltd vs. Commissioner of Income Tax, Delhi-III; CA 4742-4743 FROM 2021
Quote: LL 2021 SC 373
Coram: Judges RF Nariman and BR Gavai
Adviser: Sr. Adv Biswajit Bhattacharya, ASG Balbir Singh
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