The bank sanctioned a fresh loan and the outstanding interest was squared off against it. My books show no interest outstanding. Is that actual payment under section 43B?
No. Where the accrued interest is not paid back but is adjusted against a further loan from the same institution, Explanation 3C to section 43B applies and there is no actual payment. The Supreme Court allowed the Revenue's appeal and restored the Assessing Officer's disallowance.
Decided by the Supreme Court (Ashok Bhushan J and K.M. Joseph J) on 2019-02-21, reported as Civil Appeal No. 5347 of 2010; Assessment Year 2001-02; on appeal from the Gujarat High Court judgment dated 31 August 2006 in Tax Appeal No. 231 of 2006. It bears on section 43B, section 43B(d), section 43B(a), section Explanation 3C to s.43B of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
This is the Supreme Court authority that defeats the ordinary one-time-settlement and funded-interest-term-loan claim, and it is the case the department should be citing. The trap it exposes is precisely the argument the Commissioner (Appeals) accepted below: that the entries were squared up, that nothing was outstanding at the year end, and that the result would have been identical had the lender disbursed the loan in two tranches. The Court held that reasoning irrelevant — the liability continues in a different form and is deferred, which is what Explanation 3C strikes at. Two boundaries matter. First, Explanation 3C is retrospective from 1 April 1989, so it reaches assessment years long closed in the assessee's favour, and the Court noted that the High Court had gone wrong precisely because the Explanation was never put to it. Second, the Court rejected the attempt to carry across authority on deferred sales tax under section 43B(a) — Bhagwati Autocast — to a clause (d) case, saying section 43B covers a host of different situations. The distinction that saves an assessee is extinguishment: where the interest liability is discharged by the issue of shares or debentures so that it ceases to exist, the later decisions treat that as actual payment.
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The assessee filed a return for AY 2001-02 showing a loss of Rs 3,76,70,656 on 31 October 2001; the assessment order was passed on 17 March 2004. The Assessing Officer disallowed a deduction of Rs 2,51,31,154 claimed as interest payable to IDBI, relying on a circular dated 16 December 1988 and on the Madhya Pradesh High Court in Eicher Motors Ltd. v CIT [(2009) 315 ITR 312]. The Commissioner (Appeals) deleted the disallowance. He had perused the IDBI sanction letter, the auditor's note and Schedule 3 of the balance sheet as at 31 March 2001, and found that the entry for interest outstanding to financial institutions had been reversed on receipt of Rs 8 crores from IDBI, so that the interest entries were squared up and a new credit entry of an IDBI loan appeared instead, forming part of total secured loans of Rs 75,26,10,769. He accepted the assessee's argument that had the loan been disbursed in two parts, one to meet the outstanding interest and the balance as financial assistance, the entries would have been the same and the outstanding interest nil. The Tribunal dismissed the Revenue's appeal and the Gujarat High Court dismissed the tax appeal, relying on CIT v Bhagwati Autocast Ltd. [261 ITR 481], a case on deferment of sales tax under section 43B(a). The Revenue appealed. No one appeared for the assessee despite service.
The appeal was allowed and the question of law was answered in favour of the Revenue. The interest liability accruing in the relevant year was not actually paid but was sought to be adjusted in the further loan of Rs 8 crores, a case squarely within Explanation 3C to section 43B, which was inserted by the Finance Act 2006 with retrospective effect from 1 April 1989 and applies to the year in question. The Assessing Officer had rightly disallowed the deduction, and the Commissioner (Appeals), the Tribunal and the High Court all erred in reversing that disallowance.
The Court set out section 43B as it stood, including clause (d), and then Explanation 3C, and accepted the Additional Solicitor General's submission that the Explanation was inserted to take care of claims of payment of interest which is not in fact paid but is camouflaged as a loan or other financial advance. It found on the facts recorded by the Commissioner (Appeals) that the accrued interest had been adjusted against the further Rs 8 crore loan rather than repaid. It adopted the reasoning of the Delhi High Court in CIT v M.M. Aqua Technologies Ltd. [(2015) 376 ITR 498], including its paragraphs 11 and 12, which had in turn followed the Madhya Pradesh High Court in Eicher Motors and the Andhra Pradesh High Court in CIT v Pennar Profiles Limited: Explanation 3C, being for removal of doubts and retrospective from 1 April 1989, answers the question without further discussion, and decisions delivered before the Finance Act 2006 need not be considered. The Court held that the Gujarat High Court had gone wrong in relying on Bhagwati Autocast, which was a section 43B(a) case on deferment of sales tax and not a case under section 43B(d), observing that section 43B covers a host of different situations, and that it appeared the High Court's attention had not been invited to Explanation 3C at all.
The interest liability which accrued during the relevant assessment year was not actually paid back by the assessee rather was sought to be adjusted in the further loan of Rs.8 crores which was obtained by the IDBI Bank.
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Handle my notice → Ask a CA on WhatsAppNo. Where the accrued interest is not paid back but is adjusted against a further loan from the same institution, Explanation 3C to section 43B applies and there is no actual payment. The Supreme Court allowed the Revenue's appeal and restored the Assessing Officer's disallowance. This was decided by the Supreme Court (Ashok Bhushan J and K.M. Joseph J) and bears on section 43B, section 43B(d), section 43B(a), section Explanation 3C to s.43B of the Income Tax Act 1961. It is reported as Civil Appeal No. 5347 of 2010; Assessment Year 2001-02; on appeal from the Gujarat High Court judgment dated 31 August 2006 in Tax Appeal No. 231 of 2006. This is the Supreme Court authority that defeats the ordinary one-time-settlement and funded-interest-term-loan claim, and it is the case the department should be citing. The trap it exposes is precisely the argument the Commissioner (Appeals) accepted below: that the entries were squared up, that nothing was outstanding at the year end, and that the result would have been identical had the lender disbursed the loan in two tranches. The Court held that reasoning irrelevant — the liability continues in a different form and is deferred, which is what Explanation 3C strikes at. Two boundaries matter. First, Explanation 3C is retrospective from 1 April 1989, so it reaches assessment years long closed in the assessee's favour, and the Court noted that the High Court had gone wrong precisely because the Explanation was never put to it. Second, the Court rejected the attempt to carry across authority on deferred sales tax under section 43B(a) — Bhagwati Autocast — to a clause (d) case, saying section 43B covers a host of different situations. The distinction that saves an assessee is extinguishment: where the interest liability is discharged by the issue of shares or debentures so that it ceases to exist, the later decisions treat that as actual payment. If it applies to you, the first step is this: Read the sanction letter and the lender's own accounting entries before advising. What matters is whether the interest liability was extinguished or merely re-cast as principal repayable later.
The assessee filed a return for AY 2001-02 showing a loss of Rs 3,76,70,656 on 31 October 2001; the assessment order was passed on 17 March 2004. The Assessing Officer disallowed a deduction of Rs 2,51,31,154 claimed as interest payable to IDBI, relying on a circular dated 16 December 1988 and on the Madhya Pradesh High Court in Eicher Motors Ltd. v CIT [(2009) 315 ITR 312]. The Commissioner (Appeals) deleted the disallowance. He had perused the IDBI sanction letter, the auditor's note and Schedule 3 of the balance sheet as at 31 March 2001, and found that the entry for interest outstanding to financial institutions had been reversed on receipt of Rs 8 crores from IDBI, so that the interest entries were squared up and a new credit entry of an IDBI loan appeared instead, forming part of total secured loans of Rs 75,26,10,769. He accepted the assessee's argument that had the loan been disbursed in two parts, one to meet the outstanding interest and the balance as financial assistance, the entries would have been the same and the outstanding interest nil. The Tribunal dismissed the Revenue's appeal and the Gujarat High Court dismissed the tax appeal, relying on CIT v Bhagwati Autocast Ltd. [261 ITR 481], a case on deferment of sales tax under section 43B(a). The Revenue appealed. No one appeared for the assessee despite service. The matter was decided on 2019-02-21 by the Supreme Court (Ashok Bhushan J and K.M. Joseph J). On those facts the Supreme Court held as follows. The appeal was allowed and the question of law was answered in favour of the Revenue. The interest liability accruing in the relevant year was not actually paid but was sought to be adjusted in the further loan of Rs 8 crores, a case squarely within Explanation 3C to section 43B, which was inserted by the Finance Act 2006 with retrospective effect from 1 April 1989 and applies to the year in question. The Assessing Officer had rightly disallowed the deduction, and the Commissioner (Appeals), the Tribunal and the High Court all erred in reversing that disallowance.
The Court set out section 43B as it stood, including clause (d), and then Explanation 3C, and accepted the Additional Solicitor General's submission that the Explanation was inserted to take care of claims of payment of interest which is not in fact paid but is camouflaged as a loan or other financial advance. It found on the facts recorded by the Commissioner (Appeals) that the accrued interest had been adjusted against the further Rs 8 crore loan rather than repaid. It adopted the reasoning of the Delhi High Court in CIT v M.M. Aqua Technologies Ltd. [(2015) 376 ITR 498], including its paragraphs 11 and 12, which had in turn followed the Madhya Pradesh High Court in Eicher Motors and the Andhra Pradesh High Court in CIT v Pennar Profiles Limited: Explanation 3C, being for removal of doubts and retrospective from 1 April 1989, answers the question without further discussion, and decisions delivered before the Finance Act 2006 need not be considered. The Court held that the Gujarat High Court had gone wrong in relying on Bhagwati Autocast, which was a section 43B(a) case on deferment of sales tax and not a case under section 43B(d), observing that section 43B covers a host of different situations, and that it appeared the High Court's attention had not been invited to Explanation 3C at all. In the words reproduced by the source cited on this page: "The interest liability which accrued during the relevant assessment year was not actually paid back by the assessee rather was sought to be adjusted in the further loan of Rs.8 crores which was obtained by the IDBI Bank." The decision followed or applied Eicher Motors Ltd. v CIT [(2009) 315 ITR 312] (MP) — approved; CIT v Pennar Profiles Limited (ITA No. 289 of 2003, decided 11.02.2015) — approved; CIT, Delhi v M.M. Aqua Technologies Ltd. [(2015) 376 ITR 498] (Del.) — relied upon; CIT v Bhagwati Autocast Ltd. [261 ITR 481] (Guj.) — held inapplicable, being a section 43B(a) case.
It was decided by the Supreme Court on 2019-02-21 and is reported as Civil Appeal No. 5347 of 2010; Assessment Year 2001-02; on appeal from the Gujarat High Court judgment dated 31 August 2006 in Tax Appeal No. 231 of 2006. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 43B, section 43B(d), section 43B(a), section Explanation 3C to s.43B, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was allowed and the question of law was answered in favour of the Revenue. The interest liability accruing in the relevant year was not actually paid but was sought to be adjusted in the further loan of Rs 8 crores, a case squarely within Explanation 3C to section 43B, which was inserted by the Finance Act 2006 with retrospective effect from 1 April 1989 and applies to the year in question. The Assessing Officer had rightly disallowed the deduction, and the Commissioner (Appeals), the Tribunal and the High Court all erred in reversing that disallowance. It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 43B, section 43B(d), section 43B(a), section Explanation 3C to s.43B of the Income Tax Act 1961, and was decided by Ashok Bhushan J and K.M. Joseph J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the settlement funded the interest into a fresh loan, a funded interest term loan or any instrument deferring payment, concede the disallowance for that year and claim the deduction in the year the funded loan is actually repaid. Do not argue from the fact that the balance sheet shows no interest outstanding, or that the transaction is in substance the same as two separate disbursements. Both arguments were accepted below and both were rejected here. Do not rely on authority about deferred sales tax under section 43B(a) or on any decision predating the Finance Act 2006 — the Court refused both routes. Where the interest was discharged by the issue of equity shares, run M.M. Aqua Technologies, Rathi Graphics and Frontier Information Tech instead, and put the lender's own treatment of the receipt on record. Where it was discharged by debentures, check the assessment year first: the Finance Act 2022 added 'or debenture or any other instrument by which the liability to pay is deferred to a future date' to Explanations 3C, 3CA and 3D with effect from 1 April 2023, so the M.M. Aqua debenture route is closed from AY 2023-24 onwards.
Still good law. The order is indexed as a Supreme Court daily order, so a citedby search on its document id returns nothing; a search pairing the case name with Explanation 3C returns the decisions that engage with it. It has been applied after, and notwithstanding, M.M. Aqua Technologies: the Madras High Court decided CIT v M/s Tamil Nadu Water Investment Co Ltd (15 February 2022) on the footing that the interest 'is hit by explanation 3C to Section 43B (d)', and the Chennai Tribunal in Tamil Nadu Water Investment Company v ACIT (6 May 2022) recorded that Explanation 3C was 'elaborately dealt with by the supreme court in the decision in Gujarat Cypromet Ltd case'. Nothing overruling or doubting it was found. It must nevertheless be read with M.M. Aqua Technologies Ltd v CIT (Supreme Court, 11 August 2021), which set aside the Delhi High Court decision this order had relied on and construed Explanation 3C as a provision to plug a loophole, holding the issue of debentures in discharge of an interest liability to be actual payment. The Cypromet result therefore turns on its own facts — interest adjusted against a fresh loan from the same institution — and should not be extended beyond them. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order carries three oddities. It records that the appeal against the Commissioner (Appeals) order "was dismissed by the ITAT on 24.06.1985", which cannot be right for an assessment order passed on 17 March 2004 for AY 2001-02. It describes the further loan of Rs 8 crores as "obtained by the IDBI Bank", evidently for "from". And the text of Explanation 3C reproduced in the order stops at "converted into a loan or borrowing shall not be deemed to have been actually paid", whereas the version reproduced by the Telangana High Court in Frontier Information Tech Ltd (23 December 2024) reads "converted into a loan or borrowing or debenture or any other instrument by which the liability to pay is deferred to a future date". Those further words were inserted into Explanations 3C, 3CA and 3D by the Finance Act 2022 (Act No. 6 of 2022) with effect from 1 April 2023, that is from AY 2023-24; the departmental section 43B page bearing the Year stamp 2022 prints them in italics with the footnote 'Italicised words inserted by Act No. 6 of 2022, effective 1-4-2023'. The version this order reproduces is therefore the correct text for AY 2001-02, and the wider version applies only from AY 2023-24. The order is a short judgment without numbered paragraphs. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed and the question of law was answered in favour of the Revenue. The interest liability accruing in the relevant year was not actually paid but was sought to be adjusted in the further loan of Rs 8 crores, a case squarely within Explanation 3C to section 43B, which was inserted by the Finance Act 2006 with retrospective effect from 1 April 1989 and applies to the year in question. The Assessing Officer had rightly disallowed the deduction, and the Commissioner (Appeals), the Tribunal and the High Court all erred in reversing that disallowance.
TaxSphere, “CIT v Gujarat Cypromet Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-gujarat-cypromet-43b-explanation-3c-funded-interest-loan/ (validity last checked 2026-09-08)
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