The Supreme Court docket permits curiosity to be deducted by issuing bonds

The Supreme Court (SC) has allowed MM Aqua Technologies to deduct the interest paid on the issue of bonds from its income for the purposes of income tax calculation. The ruling passed this week could provide relief to a number of companies looking to restructure their interest payable into securities payments.

The court found that the interest was “actually paid” by the issuance of bonds, thereby eliminating its obligation to pay interest. In order to reach this conclusion, the court relied on the fact that the bank’s accounts show the amount that the bank received as its operating income from bonds for the tax year in question.

Yashesh Ashar, partner at Bhuta Shah & Co, said: “The ruling could pave the way for companies under stress in the current environment to restructure their interest payments into bonds or other instruments and deduct them for income tax purposes. This provided that the lender recognizes this interest payment in his books and pays tax on it. “

The court relied on Note 3C to Section 43B (d) of the Government Income Tax Act for this purpose.

It states that the declaration has a “clarifying” character and does not add any new condition retrospectively.

“A retroactive provision in a tax law which is used to ‘remove doubts’ cannot be accepted as retroactive, even if such wording is used, if it amends or changes the law in its previous version”, the judges panel RF Nariman ( now retired) and BR Gavai watched.

Section 43B contains a list of deductible expenses under the heading “Income from trade and work”. It states that some expenses can only be deducted from operating income in the year in which they are actually paid and not in the year in which the obligation to pay these expenses arises.

According to Ashar, the ruling makes it clear that Statement 3C is merely a clarification and should not affect any real deal to accept a bond in lieu of the interest due in the event of default.

But the practice of making retroactive tax law changes under the guise of clarifications was also criticized by the court. “Tax certainty is non-negotiable, and the court confirmed that principle in its judgment,” said Abhay Sharma, Partner, Shardul Amarchand Mangadas & Co.

MM Aqua Technologies was in default of principal and interest on loans from ICICI Bank. Therefore, the two parties agreed that the interest would be paid to the lender through the issuance of “bonds” by the Assesse. After converting the interest into bonds, the Assesse asserted the interest as paid in accordance with Section 43B of the IT Act.

Ashar said: “The ruling confirms the ‘substance over form’ doctrine and affirms that the income tax authorities cannot rewrite the transaction completed by the two parties”.

Previously, the deduction claimed by the company was rejected by the assessor. However, it has been approved by the Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Tribunal.

The matter went to the Delhi High Court, which relied on Explanation 3C to Section 43B (d) of the IT Act to refuse the withdrawal.

Important observations from the SC

  • At the heart of the introduction of Note 3C is the abuse of the provisions of Section 43B by not actually paying interest but converting it into a new loan.
  • Explanation 3C is used for clarification; it explains Section 43B (d) in its original form and does not purport to add a new condition retrospectively.
  • A retroactive provision in a tax law that serves to “eliminate doubt” cannot be accepted as retroactive if it changes or changes the previous law.
  • According to a restructuring plan agreed between the lender and the borrower, bonds were accepted by the bank to settle the debts due to outstanding interest.

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