My lender took equity shares against the outstanding interest. The Assessing Officer says there was no actual payment under section 43B. Is he right?
No. Where the liability to pay interest ceases to exist because shares have been issued to the lender, that is actual payment within section 43B, and Explanations 3C and 3D have nothing to bite on. The test the High Court applied is whether the liability to pay the interest stands extinguished.
Decided by the High Court (Alok Aradhe CJ and J. Sreenivas Rao J) on 2024-12-23, reported as ITTA No. 239 of 2008 (High Court for the State of Telangana); Assessment Year 1999-2000. It bears on section 43B, section 43B(d), section 43B(e), section 43B(h), section 43B first proviso, section Explanation 3C to s.43B, section Explanation 3D to s.43B of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
This is the most recent High Court statement of the line that separates a deductible discharge from a deferred one, and it is useful for a second reason: it reproduces the text of section 43B, the two Explanations and the first proviso as they stand after the Finance Act 2023, so it is a judgment that can be cited for the statutory text rather than a commentary. Three things to take from the extract at paragraph 13. First, the first proviso now opens "nothing contained in this Section except the provisions of clause (h)" — the relaxation for payment before the return due date does not extend to clause (h), the micro and small enterprise clause, which means a sum payable to a micro or small enterprise beyond the section 15 MSMED Act time is deductible only in the year of actual payment and cannot be rescued by paying before the section 139(1) date. That carve-out is the single most missed feature of clause (h). Second, the Court dates the two Explanations: clause (d) was inserted by the Finance Act 1988 with effect from 1 April 1989, and Explanations 3C and 3D were inserted by the Finance Act 2006 with effect from 1 April 1989 and 1 April 1997 respectively. Third, Explanation 3C as reproduced here catches interest converted into "a loan or borrowing or debenture or any other instrument by which the liability to pay is deferred to a future date", with Explanation 3D in the same terms save that it reads 'a loan or advance' — wider than the version the Supreme Court set out in Gujarat Cypromet in 2019.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee's claim to deduction under section 43B for AY 1999-2000 was denied on the ground that no actual payment had been made. Equity shares had been issued in favour of APIDC against the outstanding interest liability. The Income Tax Appellate Tribunal, Hyderabad Bench-B, by order dated 20 April 2006, decided against the assessee. It was not the Revenue's case before the High Court that the assessee's liability to pay interest had not ceased to exist on the issuance of shares; the denial rested solely on the absence of actual payment.
The substantial question of law was answered in favour of the assessee, the appeal was allowed and the Tribunal's order dated 20 April 2006 was set aside, the assessee being held entitled to the deduction under section 43B. Since the liability to pay interest ceased to exist on the issue of shares in favour of APIDC, that amounted to actual payment within the meaning of section 43B. There was no order as to costs.
The Court set out section 43B with clauses (d) and (e), the first proviso and Explanations 3C and 3D, and recorded the legislative history: section 43B inserted by the Finance Act 1983 with effect from 1 April 1984, clause (d) by the Finance Act 1988 with effect from 1 April 1989, and Explanations 3C and 3D by the Finance Act 2006 with effect from 1 April 1989 and 1 April 1997 (para 13). It then extracted at length paragraphs 17 to 21, 23 and 24 of the Supreme Court's judgment in M.M. Aqua Technologies Ltd. v CIT, including the Board's Circular No. 372/1983 explaining the object of section 43B, Circular No. 14/2006 explaining that Explanation 3C was inserted because claims of deduction on conversion of interest into a fresh loan were a misuse of section 43B, and the holding that where debentures were accepted in discharge of the debt under a rehabilitation plan the interest was actually paid because the liability was extinguished, so that a loophole-plugging Explanation could not be brought to the Revenue's aid (para 14). From that the Court drew the governing test: in the facts of each case, whether the interest was actually paid must be decided with reference to whether the liability to pay the interest stands extinguished (end of para 14). It noted that a Division Bench of the Gujarat High Court in Core Emballage Limited had followed M.M. Aqua on facts of equity shares issued against outstanding interest liability (para 15), and applied the same conclusion here (para 16).
In view of the interpretation put forth by the Supreme Court on Section 43B of the Act, as the liability of the assessee to pay interest ceased to exist on issue of shares in favour of APIDC, the same would tantamount to actual payment within the meaning of Section 43B of the Act.
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Handle my notice → Ask a CA on WhatsAppNo. Where the liability to pay interest ceases to exist because shares have been issued to the lender, that is actual payment within section 43B, and Explanations 3C and 3D have nothing to bite on. The test the High Court applied is whether the liability to pay the interest stands extinguished. This was decided by the High Court (Alok Aradhe CJ and J. Sreenivas Rao J) and bears on section 43B, section 43B(d), section 43B(e), section 43B(h), section 43B first proviso, section Explanation 3C to s.43B, section Explanation 3D to s.43B of the Income Tax Act 1961. It is reported as ITTA No. 239 of 2008 (High Court for the State of Telangana); Assessment Year 1999-2000. This is the most recent High Court statement of the line that separates a deductible discharge from a deferred one, and it is useful for a second reason: it reproduces the text of section 43B, the two Explanations and the first proviso as they stand after the Finance Act 2023, so it is a judgment that can be cited for the statutory text rather than a commentary. Three things to take from the extract at paragraph 13. First, the first proviso now opens "nothing contained in this Section except the provisions of clause (h)" — the relaxation for payment before the return due date does not extend to clause (h), the micro and small enterprise clause, which means a sum payable to a micro or small enterprise beyond the section 15 MSMED Act time is deductible only in the year of actual payment and cannot be rescued by paying before the section 139(1) date. That carve-out is the single most missed feature of clause (h). Second, the Court dates the two Explanations: clause (d) was inserted by the Finance Act 1988 with effect from 1 April 1989, and Explanations 3C and 3D were inserted by the Finance Act 2006 with effect from 1 April 1989 and 1 April 1997 respectively. Third, Explanation 3C as reproduced here catches interest converted into "a loan or borrowing or debenture or any other instrument by which the liability to pay is deferred to a future date", with Explanation 3D in the same terms save that it reads 'a loan or advance' — wider than the version the Supreme Court set out in Gujarat Cypromet in 2019. If it applies to you, the first step is this: Frame the question as extinguishment, not as mode of payment: show that after the transaction the assessee owes the lender nothing on account of that interest.
The assessee's claim to deduction under section 43B for AY 1999-2000 was denied on the ground that no actual payment had been made. Equity shares had been issued in favour of APIDC against the outstanding interest liability. The Income Tax Appellate Tribunal, Hyderabad Bench-B, by order dated 20 April 2006, decided against the assessee. It was not the Revenue's case before the High Court that the assessee's liability to pay interest had not ceased to exist on the issuance of shares; the denial rested solely on the absence of actual payment. The matter was decided on 2024-12-23 by the High Court (Alok Aradhe CJ and J. Sreenivas Rao J). On those facts the High Court held as follows. The substantial question of law was answered in favour of the assessee, the appeal was allowed and the Tribunal's order dated 20 April 2006 was set aside, the assessee being held entitled to the deduction under section 43B. Since the liability to pay interest ceased to exist on the issue of shares in favour of APIDC, that amounted to actual payment within the meaning of section 43B. There was no order as to costs.
The Court set out section 43B with clauses (d) and (e), the first proviso and Explanations 3C and 3D, and recorded the legislative history: section 43B inserted by the Finance Act 1983 with effect from 1 April 1984, clause (d) by the Finance Act 1988 with effect from 1 April 1989, and Explanations 3C and 3D by the Finance Act 2006 with effect from 1 April 1989 and 1 April 1997 (para 13). It then extracted at length paragraphs 17 to 21, 23 and 24 of the Supreme Court's judgment in M.M. Aqua Technologies Ltd. v CIT, including the Board's Circular No. 372/1983 explaining the object of section 43B, Circular No. 14/2006 explaining that Explanation 3C was inserted because claims of deduction on conversion of interest into a fresh loan were a misuse of section 43B, and the holding that where debentures were accepted in discharge of the debt under a rehabilitation plan the interest was actually paid because the liability was extinguished, so that a loophole-plugging Explanation could not be brought to the Revenue's aid (para 14). From that the Court drew the governing test: in the facts of each case, whether the interest was actually paid must be decided with reference to whether the liability to pay the interest stands extinguished (end of para 14). It noted that a Division Bench of the Gujarat High Court in Core Emballage Limited had followed M.M. Aqua on facts of equity shares issued against outstanding interest liability (para 15), and applied the same conclusion here (para 16). In the words reproduced by the source cited on this page: "In view of the interpretation put forth by the Supreme Court on Section 43B of the Act, as the liability of the assessee to pay interest ceased to exist on issue of shares in favour of APIDC, the same would tantamount to actual payment within the meaning of Section 43B of the Act." The decision followed or applied M.M. Aqua Technologies Ltd. v CIT (SC, 11 August 2021) — followed; CIT-I v Core Emballage Limited (Guj., 21 January 2022) — followed.
It was decided by the High Court on 2024-12-23 and is reported as ITTA No. 239 of 2008 (High Court for the State of Telangana); Assessment Year 1999-2000. 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 43B(e), section 43B(h), section 43B first proviso, section Explanation 3C to s.43B, section Explanation 3D 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 taxpayer. The substantial question of law was answered in favour of the assessee, the appeal was allowed and the Tribunal's order dated 20 April 2006 was set aside, the assessee being held entitled to the deduction under section 43B. Since the liability to pay interest ceased to exist on the issue of shares in favour of APIDC, that amounted to actual payment within the meaning of section 43B. There was no order as to costs. It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 43B, section 43B(d), section 43B(e), section 43B(h), section 43B first proviso, section Explanation 3C to s.43B, section Explanation 3D to s.43B of the Income Tax Act 1961, and was decided by Alok Aradhe CJ and J. Sreenivas Rao 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. Put the lender's own tax treatment on record. In M.M. Aqua Technologies the fact that ICICI's accounts reflected the debentures as its business income was part of what carried the day, and this Court relied on the Revenue not disputing cessation of the liability. Distinguish a funded interest term loan or any instrument that merely defers the liability — Explanation 3C and 3D catch those, and Gujarat Cypromet is the Supreme Court authority against you. For a clause (h) MSME disallowance, do not argue that payment before the section 139(1) due date saves the deduction; read the first proviso as reproduced at paragraph 13 of this judgment, which excepts clause (h) in terms. Before conceding a clause (h) disallowance, check that the payee is a micro or small enterprise and not a medium one — clause (h) reaches 'a micro or small enterprise' only — and that the time limit in section 15 of the MSMED Act 2006 in fact applies to the payee, which turns on the definition of 'supplier' in section 2(n) of that Act. Whether an unregistered enterprise is a 'supplier' is litigated and should not be assumed either way. Where the conversion instrument is a debenture rather than shares, check the assessment year. 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 from AY 2023-24 the M.M. Aqua debenture result is displaced by statute. Equity shares are unaffected: they extinguish the liability rather than defer it, which is the whole basis of paragraph 16 of this judgment.
Searched for later treatment; none was found. That is not the same as a source affirming it. A citator search on citedby:178494555 returns nothing. A second search for "Frontier Information Tech" with "43B" returns 2 documents. The judgment, reported at (2025) 478 ITR 637, was taken up in DCIT v Corteva Agriscience Services India (Income Tax Appellate Tribunal, Hyderabad, 30 January 2026), but it was cited there by counsel and the Bench distinguished it on the facts at para 18, holding that it concerned conversion of an interest liability whereas the case before it concerned employee dues, and allowing the revenue's appeal. A distinction is not an application, and it is not adverse authority either; it simply confines the judgment to its facts. No Supreme Court matter was found. 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.
I read paragraphs 13 to 18 verbatim and re-fetched the sentence of the first proviso containing the clause (h) exception to confirm it. I did not read paragraphs 1 to 12, so the facts stated below are drawn from what paragraphs 15 to 18 record rather than from the narrative part of the judgment; in particular the judgment as retrieved does not spell out in the portion I read who APIDC is beyond the name, or the amount involved. Those 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, confirmed from the departmental section 43B page bearing the Year stamp 2022, which prints them in italics against the footnote 'Italicised words inserted by Act No. 6 of 2022, effective 1-4-2023'. The judgment at para 13 attributes the whole of Explanations 3C and 3D to the Finance Act 2006 while reproducing the post-2022 text; the 2006 attribution is right for the Explanations as originally inserted and wrong for the debenture words. The judgment concerns AY 1999-2000 but reproduces the section as it stands today, which is a help for the statutory text and a warning not to read the clause (h) proviso as having applied to the year in issue. 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 substantial question of law was answered in favour of the assessee, the appeal was allowed and the Tribunal's order dated 20 April 2006 was set aside, the assessee being held entitled to the deduction under section 43B. Since the liability to pay interest ceased to exist on the issue of shares in favour of APIDC, that amounted to actual payment within the meaning of section 43B. There was no order as to costs.
TaxSphere, “Frontier Information Tech Ltd v DCIT”, https://taxnotice.vittsphere.com/caselaw/case/frontier-information-tech-43b-interest-discharged-by-equity-shares/ (validity last checked 2026-09-08)
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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?
I cleared accrued interest by issuing debentures to the lender. Does that count as payment under s.43B?
Under a negotiated settlement the lender took equity shares against interest due. Does Explanation 3C to section 43B catch that?
I paid my MSME supplier late but before filing my return. Is the expense disallowed this year?
