Satish Chandra, A.M. - (1.) AGGRIEVED by the order dt. 10th December, 1993, of the CIT(A)-I, Indore, pertaining to the asst. yr. 1989-90, the assessee is in a appeal before us on the following grounds : (1) That the learned CIT(A) erred in confirming the disallowance of Rs. 2,89,61,025 under s. 43B. (2) That the CIT(A) erred in concluding that the granting of rupee term loan by the financial institutions in lieu to the funded interest took place on 16th July, 1990, and not on 25th October, 1989. (3) That the CIT(A) erred in holding that the granting of a rupee term loan by the financial institutions in lieu of funded interest does not, in any case, amount to actual payment under s. 43B of the Act.
(2.) The facts are these. The assessee is a public limited company engaged in the Manufacture and sale of light commercial vehicle. For the asst. yr. 1989-90, the previous year of the assessee consisted of 23 months i.e. from 1st May, 1987, to 31st March, 1989. The AO found that the assessee had claimed deduction of interest of Rs. 2,89,67,325 being interest accrued and due and payable to the financial institutions and LIC in the year of account. During the course of assessment proceedings, it was stated by the assessee that the interest payable to financial institutions was, in fact, agreed to be converted into loan by the financial institutions, which is evident from the letter dt. 25th October, 1989, of ICICI. It was also stated that in view of the said correspondence, the interest outstanding as on 31st March, 1989, was paid, though constructively. 2.1. It was argued before the AO that the assessee had paid interest outstanding and received back the same amount as additional loan from financial institutions. It was contended that since the constructive payment of the interest outstanding was made on 25th October, 1989, i.e., before the due date of filing the return, no disallowance under s. 43B can be made. It was further stated that interest outstanding as on 31st March, 1989, in respect of loan from LIC has also been agreed in principle to be converted into loan. The contentions of the assessee were not acceptable to the AO. According to him, the letter dt. 25th October, 1989, was only the proposal of the financial institution to grant an additional short-term loan. In fact, this was not grant of loan or funding of interest. Similarly, the LIC had only agreed in principle to grant further loan. In fact, none of these transactions actually materialised before the due date of filing the return. The AO further observed that in tax audit report, which is dt. 22nd December, 1989, the amount of interest was stated to be unpaid. It showed that till 22nd December, 1989, neither funding of interest was done nor the loan was paid. Adverting to cl. (d) of s. 43B the AO observed that what the Act provides is actual payment. It does not recognise constructive payment. He also rejected the assessee's contention about the conversion of interest payable into a loan till the date of filing the return in view of non-payment mentioned in the tax audit report. The AO further observed that, in fact, correspondence with ICICI reveals that the ICICI was agreeable in principle to provide rupee loan not exceeding Rs. 2,82 lacs. It was a letter of intent so the letter dt. 25th October, 1989, cannot be treated as conversion or grant of loan. It was only a letter of intent to sanction a further short-term loan of Rs. 282 lacs. According to the AO, once a fresh loan is sanctioned, it cannot be treated as payment of interest because actual payment of interest will start when the amount of interest is actually paid as per the agreement. The assessee entered into agreement in the month of May/June, 1990, for the purpose of these loans, which were beyond the due date of filing of the return. He, therefore, rejected even the plea of constructive payment. He also observed that s. 43B talks of actual payment and not constructive payment. Even if it is considered that interest payable was converted into loans, then its actual payment is started much later in accordance with the fresh terms sanctioned by the ICICI. On query from ICICI, it was stated by them that the short-term loans/funded interest are being repaid in instalments commencing from May, 1990, and ending on February, 1992. Thus, actual payment of interest started from May, 1990 i.e. much after the due date of filing of return from asst. yr. 1989-90. Sec. 43B allows such interest only on actual payment. Accordingly, he made the impugned disallowance. On appeal, the fortune of the assessee did not fluctuate. According to the CIT(A), the correspondence about rescheduling of loan repayment dates back to 30th July, 1988, but the formality of rescheduling of the interest was completed on 16th July, 1990, i.e., much after the due date of filing the return i.e. 31st December, 1989. It cannot therefore, be said that, there was indirect or constructive payment of interest before 31st December, 1989. Further the Act does not recognise implied or constructive payment under s. 43B and wherever such benefits are to be given about the payment, the same has been notified by the Board by issue of suitable circulars and instructions as with regard to the sales-tax deferral scheme. The decision of Delhi Bench of the Tribunal in Nuchem Plastics vs. Dy. CIT (1992) 44 TTJ (Del) 261 and decision of Bombay Tribunal in Sunil Silk Mills Ltd. vs. Dy. CIT (1992) 46 ITD 4 (Bom) relied upon by the assessee do not apply to the facts of the assessee's case. He, accordingly, upheld the disallowance. This has brought the assessee before us.
(3.) SHRI Ajay Vohra, the learned counsel for the assessee carried us through the documents contained in the paper book filed on behalf of the assessee. He submitted that the CIT(A) did not appreciate the facts of the assessee's case in the right perspective. As a result of funding of interest outstanding as on 31st March, 1989, the assessee's liability towards such interest stood discharged and in its place a new liability in the shape of a short-term loan came into being. This arrangement obviates the necessity of any inflow or outflow of funds. He further submitted that the agreement dt. 16th July, 1990, was made effective from 25th October, 1989, and the assessee was paying interest on the term loan created by funding of the outstanding interest w.e.f. 25th October, 1989. According to him, agreement dt. 16th July, 1990, only formally recorded the terms of sanction letter dt. 25th October, 1989. The loan agreement relates back to 25th October, 1989. In its letter dt. 9th October, 1990, to the AO and dt. 21st December, 1990, to the assessee, the ICICI confirmed that the assessee-company is paying interest on term loan in lieu of funded interest w.e.f. 25th October, 1989. SHRI Vohra vehemently argued that the interest due to the financial institutions as on 31st March, 1989 stood repaid on 25th October, 1989, and the assessee had received back on the same date the said amount in the shape of loan. The interest outstanding as on 31st March, 1989, ceased to exist since the same was converted into loan; in other words; corresponding loan was granted in lieu of funded interest. In support of his arguments that even constructive payment was sufficient for allowing deduction under s. 43B. He placed reliance on the following decisions : Nuchem Plastics vs. Dy. CIT (supra); Sunil Silk Mills vs. Dy. CIT (supra); Mula Sahkari Sakhar Karkhana Ltd. vs. ITO (1996) 55 TTJ (Pune) 375, and Subhra Motel (P) Ltd. vs. CIT (1998) 64 ITD 134 (Del).;