Interpretation of Section 43B: Debentures vs. Interest Payment

The court’s analysis of Section 43B of the Income Tax Act sheds light on the pivotal distinction between debentures and interest payments. Through a detailed legal examination, the judgment explores the requirement for actual payment of liabilities, clarifying the application of Explanation 3C in cases where interest is converted into a loan. This summary delves into the essential legal considerations surrounding the deduction of interest payable, providing insight into the court’s interpretation of statutory provisions.


  • Appellant claimed a deduction of Rs.2,84,71,384 under Section 43B for issuing debentures in lieu of interest accrued to financial institutions.
  • Rehabilitation Plan involved issuing 300149 convertible debentures of Rs. 100 each totaling Rs. 3,00,14,900 in lieu of outstanding interest and other charges.
  • Appellant filed a return of income declaring a loss of Rs.1,03,18,572 for the assessment year 1996-1997.
  • Lead Financial Institutions approved the Rehabilitation Plan, effectively paying interest of Rs. 2,84,71,384 to the institutions.
  • The Assessing Officer rejected the Appellant’s contention regarding the issuance of debentures not being as per the original terms and conditions of the loans.
  • The Assessing Officer held that the interest was payable as per the revised terms at the time of default, making the amount ineligible for deduction under Section 43B(d).
  • The Commissioner of Income Tax (Appeals) allowed the appeal and noted that the original agreements with financial institutions included a provision for the conversion of 20% of the default amount into equity capital at the lenders’ option.


  • The Appellant argued that liquidation of outstanding interest by issuing debentures was equivalent to actual payment of interest as per Section 43B of the Income Tax Act.
  • The Appellant emphasized that debentures are actionable claims and can be sold in the market.
  • Reference was made to the Cape Brandy Syndicate case to highlight the strict construction of fiscal and tax statutes, where the term ‘debenture’ was not specified in Explanation 3C.
  • The Additional Solicitor General argued that Section 43B was introduced to prevent deductions based on a mercantile system of accounting, requiring actual payment to be made.
  • It was emphasized that a debenture is essentially a loan, and in this case, interest was converted into a loan, falling within the scope of Explanation 3C.
  • A judgment of the Supreme Court was referenced to explain the correct meaning of ‘debentures’ and how it relates to the interpretation of tax statutes.
  • The non-obstante clause in Section 43B was highlighted as indicating its departure from other sections in the Income Tax Act.


  • The interpretation of Section 43B of the Income Tax Act is crucial in determining the applicability of sub-section (2) regarding understatement of consideration received.
  • The provision aims to ensure actual payment of liabilities, not just their accrual or provision in accounts.
  • Explanation 3C was added in 2006 to prevent misuse of the provision by converting interest into a fresh loan.
  • Debentures issued in lieu of interest were considered as an actual payment under a rehabilitation plan.
  • The High Court judgment erred in concluding interest was converted into a loan, ignoring the factual agreement between the parties and the actual payment through debentures.
  • Section 43B mandates deduction only on actual payment, not on mere account accrual.
  • The insertion of Explanation 3C clarifies that interest converted into a loan is not deemed as actual payment.
  • Secured loans, including debentures, must be shown as liabilities in the balance sheet.
  • The interpretation of statutes must align with the factual arrangements agreed upon by the parties.
  • The Section does not prescribe a particular mode of payment for interest, unlike other statutory liabilities like P.F. and ESI contributions.
  • Explanation 3C is clarificatory and does not add a new condition retrospectively.
  • Any ambiguity in the language of Explanation 3C shall be resolved in favor of the assessee.
  • The High Court’s view on debentures being treated as a provision instead of a reserve was deemed erroneous.
  • The legal definitions of ‘provision’ and ‘reserve’ as per the Companies Act were emphasized.
  • Judicially defined ‘earned in India’ as income “arising or accruing in India.”
  • Actual payment is essential for the applicability of Section 43-B.
  • Interest due offset against a subsidy is not a conversion into a loan or borrowing as per Explanation 3C.
  • The obligation to repay a loan is considered a present obligation.
  • The law in force during the relevant assessment year applies unless otherwise provided expressly or by necessary implication.
  • Explanation 3C clarifies that interest payable must be actually paid for deduction.
  • The court’s decision is influenced by the presence of Explanation 3C which places conditions on deduction of interest payable.
  • Funds lent to repay interest do not qualify as actual payment under Section 43B.
  • Contractual agreements between parties should be considered in determining liability discharge for tax purposes.
  • Section 43B of the Income Tax Act states that certain deductions will only be allowed on actual payment.
  • This includes deductions for interest payable on loans from public financial institutions, State financial corporations, or State industrial investment corporations.
  • Explanation 3C clarifies that interest payable under Section 43B(d) must be actually paid to be allowed as a deduction.
  • The deduction for such interest shall be allowed in the year it is actually paid by the assessee.
  • However, if the interest payable has been converted into a loan or borrowing, it will not be deemed as actually paid.
  • The deduction is not allowed if the sum is paid after the due date for furnishing the income tax return for the relevant previous year.
  • The ASG did not rely on a particular part (PRE_NOT_RELIED) of the judgment.
  • This section of the judgment was not considered in the argument presented by the ASG.
  • The ASG focused on a different part of the judgment in their submission.
  • The High Court did not consider Explanation 3C in the case in question.
  • The assessing officer rightfully disallowed the deduction claimed by the assessee.
  • The ITAT and the High Court erred in reversing the disallowance.
  • Explanation 3C was applicable in the case referred to as outstanding interest had not been paid and a new credit entry of loan was made.
  • The present case is different as there was no mention of similar facts.
  • The judgement cited is not applicable to the present case.


  • The impugned judgments of the High Court are set aside
  • The judgment and order of the ITAT is restored
  • The appeals are allowed


Case Number: C.A. No.-004742-004743 / 2021

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