R.F.NARIMAN,J. - (1.) Leave granted.
(2.) The question raised in these appeals is with particular reference to Section 43B Explanation 3C of the Income Tax Act, 1961 [the "Act"]. The brief facts necessary to appreciate the controversy raised in these appeals are as follows.
(3.) On 28th November, 1996, the Appellant filed a return of income declaring a loss of Rs.1,03,18,572/- for the assessment year 1996-1997. In the return filed by it, the Appellant claimed a deduction of Rs.2,84,71,384/- under Section 43B based on the issue of debentures in lieu of interest accrued and payable to financial institutions. By an order dated 29th October, 1998, the Assessing Officer rejected the Appellant 's contention by holding that the issuance of debentures was not as per the original terms and conditions on which the loans were granted, and that interest was payable, holding that a subsequent change in the terms of the agreement, as they then stood, would be contrary to Section 43B(d), and would render such amount ineligible for deduction. The Commissioner of Income Tax (Appeals) ["CIT"] allowed the appeal and held, on facts, as follows: "3.2. .... It was clarified by the Ld. Counsel that the original agreements with the financial institutions provided for conversion of 20% of the amount in default into equity capital of the appellant at the option of the lenders. The agreements also provided for the repayment of the principal and the interest, in default as per the revised terms and conditions stipulated by the lendor at the time of default. As the appellant was not in position to pay the interest and liquidated damages. It approached the lead Financial Institutions which on behalf of all the institutions approved the Rehabilitation Plan According to the Rehabilitation Plan, the appellant issued 300149 convertible debentures of 100 each amounting to Rs. 3,00,14,900/ in lieu of outstanding interest and other charges. As a result of these debentures in favour of the Financial institutions, interest of Rs. 2,84,71,384/- was effectively paid. It was argued by the Ld. Counsel that liquidation of the outstanding interest by issue of debentures was tantamount to actual payment of interest as envisaged u/s 43B of the I.T. Act. It was emphasized by the Ld. Counsel that section 43B of the I.T. Act, cash or cheque is the prescribed mode of payment of P.F. and ESI while there is no prescribed mode of payment of interest. The mode of payment of interest can therefore be other than cash or cheque/draft. The issue of debentures in lieu of interest therefore amounted to payment which had been acknowledged by the lead institutions. Since the lendor had admitted receipt of interest, there was no dispute about the payment. .... However, the original terms and conditions of the borrowings not only provided for conversion of 20% of the amount in default into appellant's equity but also revision of terms and conditions of payment at the time of each default. The partial conversion into equity was at the option of the lendor which the lendor did not exercise. On the appellant's request, the lead institution acting as trustee of all the lenders agreed to the Rehabilitation Plan and accepted 300149 debentures of Rs. 100 each aggregating to Rs. 3,00,14,900/- in discharge of the outstanding interest. The discharge of the liability of interest through issue of debentures as mutually agreed between the appellant and the lenders was therefore in accordance with the terms and conditions governing the borrowings." ;