Explanation 3C to Section 43B(d) of Income Tax Act is clarificatory and does not purport to add a new condition retrospectively: Supreme Court

By - Divisha Srivastava*

The Supreme Court recently held that Explanation 3C to Section 43B(d) of the Income Tax Act is “clarificatory” and does not add a new condition with retrospective effect. The bench also noted that a retrospective provision in a tax statute that is for the purpose of removal of doubts, cannot be presumed to be retrospective if it alters or changes the law as it previously stood, even if such language is used.

M.M. Aqua Technologies Ltd. (Appellant) for the assessment year 1996-1997, submitted a report of income showing a loss of Rs.1,03,18,572/-. The Appellant claimed a deduction of Rs.2,84,71,384/- under Section 43B for debentures issued in lieu of interest accrued and payable to financial institutions in its return. The Assessing Officer dismissed the Appellant's claim in order, holding that the issuance of debentures was not in accordance with the original terms and conditions on which the loans were granted, that interest was due, and that a subsequent change in the terms of the agreement, as they stood at the time, would be contrary to Section 43B(d), rendering the amount ineligible for the deduction.

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The Commissioner of Income Tax (Appeals) (“CIT") allowed the appeal, and the Income Tax Appellate Tribunal (“ITAT”) upheld the decision. Revenue filed an appeal before the Delhi High Court and the issue to be decided by the High Court was, “whether financing of the interest amount through a term loan amounts to real payment as required by Section 43B of the Income-tax Act, 1961?”

The High Court agreed with the revenue department and set aside the order of ITAT, stating that Explanation 3C, which became effective, would apply to the current case because it relates to AY 1996-97.

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Explanation 3C, which was included to “remove ambiguities”, simply clarified that interest that had remained unpaid and had been transformed into a loan or borrowing was not regarded to have been paid in full. "This being the case, Explanation 3C is clarificatory – it explains Section 43B(d) as it originally stood and does not purport to add a new condition retrospectively, as has wrongly been held by the High Court", the bench observed.

According to the bench of Justices RF Nariman and BR Gavai, explanation 3C was added to Section 43B to prevent anyone from abusing the rules by not paying interest but instead turning it into a new loan. The bench accordingly set aside the judgment of the High Court and restored the judgment of ITAT.

CLICK HERE TO READ JUDGMENT.

*Divisha Srivastava is a 1st year student pursuing B.B.A.LL.B from S.N.D.T School of Law, Mumbai, Maharashtra.