Under a negotiated settlement the lender took equity shares against interest due. Does Explanation 3C to section 43B catch that?
No. Explanation 3C is directed at the conversion of interest into a loan or borrowing, where the liability continues in a different form. Where interest is converted into equity shares in the lender's name the liability is extinguished, there is no outstanding interest to that extent, and the conversion is actual payment for section 43B.
Decided by the High Court (S. Muralidhar J and Vibhu Bakhru J) on 2015-08-06, reported as ITA 780/2014 and ITA 785/2014 (High Court of Delhi at New Delhi); Assessment Year 2002-03. It bears on section 43B, section 43B(d), section Explanation 3C to s.43B, section 147 of the Income Tax Act 1961, in Deductions & Disallowances and Reassessment & Reopening matters.
This is the cleanest statement of the distinction and it pre-dates the Supreme Court in M.M. Aqua Technologies by six years. The reason it is worth carrying separately is that it states the ratio in a single sentence a reader can use: in the case of a loan or borrowing the liability continues although in a different form, whereas on conversion into shares the amount converted is no longer a liability at all. It also records the argument that no provision, retrospective or otherwise, has ever described conversion of interest into shares as not amounting to actual payment — Explanation 3C does not say so and Parliament has not said so elsewhere. There is a second, independent ground in the judgment worth noting for a reassessment file: the Court held that on the facts there was in any event no justification for reopening under section 147 on a mere change of opinion, the assessee having disclosed the settlement in a note appended to its computation of income. Note that the same High Court, in the same year, decided M.M. Aqua Technologies the other way on debenture facts, and that decision was set aside by the Supreme Court in 2021.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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IDBI approved a negotiated settlement under which, against outstanding interest due as at 31 March 2001, it accepted 14,30,000 equity shares of Rs 10 each valued at Rs 1,43,00,000, taken towards 30 per cent simple interest due at that date. The outstanding interest as at 31 March 2001 was reduced accordingly. The interest had been added back by the assessee in earlier years. In its computation of income for AY 2002-03, placed before the Assessing Officer, the assessee appended a note at paragraph 11 setting out the settlement, claiming the Rs 1,43,00,000 as interest paid in the relevant previous year and deductible under section 43B on the footing that "actual payment" is to be liberally construed and covers every discharge of liability, and recording that accrued interest for 1 April 2001 to 31 March 2002 had been added back. The Commissioner (Appeals) and the Tribunal accepted the claim. The Revenue appealed, senior counsel arguing that Explanation 3C, introduced retrospectively from 1 April 1989, dealt with the situation of conversion of interest into a loan or borrowing.
The appeals were dismissed. The assessee's plea, accepted by the Commissioner (Appeals) and the Tribunal, that the conversion of a portion of interest into shares is actual payment within section 43B, merited acceptance; and in any event on the facts there was no justification for reopening the assessment under section 147 on a mere change of opinion.
There is no provision, much less a retrospective one, describing conversion of interest into shares as not amounting to actual payment for section 43B; Explanation 3C addresses the conversion of interest into a loan or borrowing (para 13). Where a creditor agrees under a settlement to convert a portion of interest into shares, that must be treated as an extinguishment of the liability to pay interest to that extent, so that in essence there is no further outstanding interest to that extent. That situation differs from the one Explanation 3C envisages, because on conversion into a loan or borrowing the liability continues although in a different form, whereas on conversion into equity shares the interest amount converted is no longer a liability (para 16).
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 said interest amount for which the conversion is taking place is no longer a liability.
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Handle my notice → Ask a CA on WhatsAppNo. Explanation 3C is directed at the conversion of interest into a loan or borrowing, where the liability continues in a different form. Where interest is converted into equity shares in the lender's name the liability is extinguished, there is no outstanding interest to that extent, and the conversion is actual payment for section 43B. This was decided by the High Court (S. Muralidhar J and Vibhu Bakhru J) and bears on section 43B, section 43B(d), section Explanation 3C to s.43B, section 147 of the Income Tax Act 1961. It is reported as ITA 780/2014 and ITA 785/2014 (High Court of Delhi at New Delhi); Assessment Year 2002-03. This is the cleanest statement of the distinction and it pre-dates the Supreme Court in M.M. Aqua Technologies by six years. The reason it is worth carrying separately is that it states the ratio in a single sentence a reader can use: in the case of a loan or borrowing the liability continues although in a different form, whereas on conversion into shares the amount converted is no longer a liability at all. It also records the argument that no provision, retrospective or otherwise, has ever described conversion of interest into shares as not amounting to actual payment — Explanation 3C does not say so and Parliament has not said so elsewhere. There is a second, independent ground in the judgment worth noting for a reassessment file: the Court held that on the facts there was in any event no justification for reopening under section 147 on a mere change of opinion, the assessee having disclosed the settlement in a note appended to its computation of income. Note that the same High Court, in the same year, decided M.M. Aqua Technologies the other way on debenture facts, and that decision was set aside by the Supreme Court in 2021. If it applies to you, the first step is this: Ask what instrument the lender received. Shares extinguish; a loan, borrowing or instrument deferring payment does not.
IDBI approved a negotiated settlement under which, against outstanding interest due as at 31 March 2001, it accepted 14,30,000 equity shares of Rs 10 each valued at Rs 1,43,00,000, taken towards 30 per cent simple interest due at that date. The outstanding interest as at 31 March 2001 was reduced accordingly. The interest had been added back by the assessee in earlier years. In its computation of income for AY 2002-03, placed before the Assessing Officer, the assessee appended a note at paragraph 11 setting out the settlement, claiming the Rs 1,43,00,000 as interest paid in the relevant previous year and deductible under section 43B on the footing that "actual payment" is to be liberally construed and covers every discharge of liability, and recording that accrued interest for 1 April 2001 to 31 March 2002 had been added back. The Commissioner (Appeals) and the Tribunal accepted the claim. The Revenue appealed, senior counsel arguing that Explanation 3C, introduced retrospectively from 1 April 1989, dealt with the situation of conversion of interest into a loan or borrowing. The matter was decided on 2015-08-06 by the High Court (S. Muralidhar J and Vibhu Bakhru J). On those facts the High Court held as follows. The appeals were dismissed. The assessee's plea, accepted by the Commissioner (Appeals) and the Tribunal, that the conversion of a portion of interest into shares is actual payment within section 43B, merited acceptance; and in any event on the facts there was no justification for reopening the assessment under section 147 on a mere change of opinion.
There is no provision, much less a retrospective one, describing conversion of interest into shares as not amounting to actual payment for section 43B; Explanation 3C addresses the conversion of interest into a loan or borrowing (para 13). Where a creditor agrees under a settlement to convert a portion of interest into shares, that must be treated as an extinguishment of the liability to pay interest to that extent, so that in essence there is no further outstanding interest to that extent. That situation differs from the one Explanation 3C envisages, because on conversion into a loan or borrowing the liability continues although in a different form, whereas on conversion into equity shares the interest amount converted is no longer a liability (para 16). In the words reproduced by the source cited on this page: "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 said interest amount for which the conversion is taking place is no longer a liability."
It was decided by the High Court on 2015-08-06 and is reported as ITA 780/2014 and ITA 785/2014 (High Court of Delhi at New Delhi); Assessment Year 2002-03. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 43B, section 43B(d), section Explanation 3C to s.43B, section 147, 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 taxpayer. The appeals were dismissed. The assessee's plea, accepted by the Commissioner (Appeals) and the Tribunal, that the conversion of a portion of interest into shares is actual payment within section 43B, merited acceptance; and in any event on the facts there was no justification for reopening the assessment under section 147 on a mere change of opinion. It arises in Deductions & Disallowances and Reassessment & Reopening matters, on section 43B, section 43B(d), section Explanation 3C to s.43B, section 147 of the Income Tax Act 1961, and was decided by S. Muralidhar J and Vibhu Bakhru 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. Reproduce the note appended to the computation of income, if there is one, when resisting a reopening — here the disclosure in the note defeated the change-of-opinion reopening. Read this judgment together with M.M. Aqua Technologies (SC, 2021) and Frontier Information Tech (Telangana HC, 2024); the three run in one line and the Telangana decision is the most recent. Where the Revenue relies on Gujarat Cypromet, meet it by showing extinguishment rather than adjustment against a fresh advance. The current wording of Explanation 3C extends beyond a loan or borrowing to 'a debenture or any other instrument by which the liability to pay is deferred to a future date'; those words were added by the Finance Act 2022 with effect from 1 April 2023. They do not touch this judgment's reasoning, because equity shares extinguish the liability rather than defer it, but they do close the debenture route from AY 2023-24.
Validity check could not be completed. Validity check could not be completed. The reasoning is consistent with, and was in substance vindicated by, the Supreme Court in M.M. Aqua Technologies Ltd. v CIT (11 August 2021), which set aside the same High Court's contrary decision on debenture facts, and with the Telangana High Court in Frontier Information Tech (23 December 2024). I did not search for any appeal against this judgment. The current wording of Explanation 3C extends beyond a loan or borrowing to a debenture or any other instrument by which the liability to pay is deferred to a future date; those words were inserted by the Finance Act 2022 (Act No. 6 of 2022) with effect from 1 April 2023, and on this judgment's own reasoning they do not reach a conversion into equity shares, which extinguishes rather than defers the liability. 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 retrieval gave me paragraphs 4, 13, 16, 17 and 19 verbatim and did not carry the intervening paragraphs, so I have not read the whole judgment. The judgment concerns two appeals, ITA 780/2014 and ITA 785/2014, and the retrieved text does not tell me how the two differ; I have taken AY 2002-03 from the extract at paragraph 4. I have not reproduced any part of the judgment dealing with a waiver of interest, if there is one, because I did not see it. 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 appeals were dismissed. The assessee's plea, accepted by the Commissioner (Appeals) and the Tribunal, that the conversion of a portion of interest into shares is actual payment within section 43B, merited acceptance; and in any event on the facts there was no justification for reopening the assessment under section 147 on a mere change of opinion.
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