Commissioner Of Income Tax Delhi Vs. Mm Aqua Technologies Ltd.
August, 22nd 2016
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 22.04.2016
Pronounced on: 22.07.2016
+ REV. PET.308/2015 IN ITA 110/2005
COMMISSIONER OF INCOME TAX DELHI ...... Petitioner
Through : Sh. Rahul Chaudhary, Sr. Standing
Counsel with Sh. Anup Kesari, Advocate.
M.M. AQUA TECHNOLOGIES LTD. ..... Respondent
Through : Sh. Bishwajit Bhattacharyya, Sr.
Advocate with Sh. Chandrachur Bhattacharyya,
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE R.K. GAUBA
MR. JUSTICE S. RAVINDRA BHAT
1. This review petition by the assessee seeks recall of the judgment and
order of this court, dated 18.05.2015, allowing the revenue's appeal under
Section 263-A of the Income Tax Act ("the Act").
2. The brief facts are that the assessee claimed deduction to the tune of `
2,84,71,384/-under Section 43B of the Act, in the computation of income.
The interest was paid to the financial institutions during the assessment year
in question by issuing non-convertible debentures to such institutions. The
Assessing Officer (AO) had rejected the assessee's claim for deduction,
holding that the issue of debentures for the interest payable does not amount
to actual payment of interest and conditions of Section 43 B of the Act were,
REV. PET.308/2015 IN ITA 110/2015 Page 1
therefore, not satisfied. The Commissioner of Income Tax (CIT), who
allowed the appeal, accepted the assessee's contentions. The Income Tax
Appellate Tribunal (ITAT) rejected the revenue's appeal- it, therefore,
approached this court, under Section 263-A. This court had admitted the
appeal and framed the following question of law, on 20-04-2005:
"Whether the funding of the interest amount by way of a term
'debenture' amounts to actual payment of as contemplated by
Section 43B of the Income Tax Act, 1961?"
3. In the judgment, the court upheld the contentions of the revenue that it
was only actual payment of amounts, which qualified for the benefit under
Section 43-B. The assessee had succeeded before the CIT and the ITAT in
saying that issuance of debenture amounted to payment, qualifying for the
claim under Section 43-B. In so holding, the said two authorities held that
the issue of debentures equivalent to the amount of outstanding interest
amounted to actual payment of the interest liability and, therefore, it has to
be allowed as a deduction. Reliance was placed on the judgment of the
Supreme Court in the case of J.B. Boda Co. (P.) Ltd v Central Board of
Direct Taxes 223 ITR 271; the assessee had successfully contended that in a
case involving receipt as well as payment, a single entry for the net effect
would suffice instead of a two way traffic of separate entries of receipt and
payment. The assessee had in addition, in the appeal before this court, relied
on Standard Chartered Bank v Andhra Bank, 2006 (6) SCC 94 which had
held that a debenture amounted to an actionable claim. The revenue had
relied on the decision reported in Kalpana Lamps and Components Ltd. v.
DCIT, (2001) 255 ITR 491,where it was held that mere postponement of the
liability to pay interest does not amount to discharge, whether actual or
REV. PET.308/2015 IN ITA 110/2015 Page 2
constructive and, therefore, the conversion of the outstanding interest into a
term loan liability, though with the consent of the lender, cannot be
considered as a constructive discharge of the interest liability.
4. This court- in the judgment under review- negatived the assessee's
contentions. It firstly noted that by virtue of Explanation 3C to Section 43-B
(d) there was no room left for doubt that actual payment of amounts
"payable" was essential, in view of the clear terms ("any interest referred to
in that clause which has been converted into a loan or borrowing shall not
be deemed to have been actually paid."). The court also noticed that the
explanation, as well as Explanation 3D were introduced by the Finance Act,
2006 "with retrospective effect, from 01.04.1989 and 01.04.1997
respectively. Thus, these two explanations were not present at the time the
impugned order was passed." The Court held that:
"Explanation 3C, having retrospective effect with effect from
01.04.1989,would be applicable to the present case, as it
relates to AY 1996-97. Explanation 3C squarely covers the
issue raised in this appeal, as it negates the assessees
contention that interest which has been converted into a loan is
deemed to be "actually paid". In light of the insertion of this
explanation, which, as mentioned earlier, was not present at the
time the impugned order was passed, the assessee cannot claim
deduction under Section 43-B of the Act."
5. It is urged in the review, and contended by learned senior counsel Mr.
Bishwajit Bhattacharyya, that there are glaring errors in the judgment of
which review is sought. It is urged that this Court failed to attach due
importance to the binding dicta in Standard Chartered (supra). It was
submitted that the Court held that since there is no prescribed mode of
transfer of debenture under the Transfer of Property Act and given that it is
REV. PET.308/2015 IN ITA 110/2015 Page 3
an actionable claim, the issuance of debentures by the assessee amounted to
discharge of its interest liability which qualified its claim under Section 43-
B. Learned counsel placed great reliance on Sunrise Associates vs Govt. of
NCT of Delhi & Ors. 2006 (5) SCC 603, where it was observed as follows:
"Consequently an actionable claim is movable property and
'goods' in the wider sense of the term but a sale of an
actionable claim would not be subject to the sales tax laws.
Distinct elements are deducible from the definition of
'actionable claim' in Section 3 of the Transfer of Property Act.
An actionable claim is of course as its nomenclature suggests,
only a claim. A claim might connote a demand, but in the
context of the definition it is a right, albeit an incorporeal one.
Every claim is not an actionable claim. It must be a claim either
to a debt or to a beneficial interest in movable property. The
beneficial interest is not the movable property itself, and may
be existent, accruing, conditional or contingent. The movable
property in which such beneficial interest is claimed, must not
be in the possession of the claimant. An actionable claim is
therefore an incorporeal right. That goods for the purposes of
Sales Tax may be intangible and incorporeal has been held in
Tata Consultancy Services Vs. State of Andhra Pradesh (2005)
1 SCC 308.
What then is the distinction between actionable claims and
other goods on the sale of which sales tax may be levied? The
Court in Vikas Sales (supra) said "when these licenses/scrips
are being bought and sold freely in the market as goods and
when they have a value of their own unrelated to the goods
which can be imported thereunder, it is idle to contend that they
are in the nature of actionable claims". It was assumed that
actionable claims are not transferable for value and that that
was the difference between 'actionable claims' and those other
goods which are covered by the definition of 'goods' in the Sale
of Goods Act, 1930 and the Sales Tax Laws. The assumption
was fallacious and the conclusion in so far as it was based on
REV. PET.308/2015 IN ITA 110/2015 Page 4
this erroneous perception, equally wrong. The Transfer of
Property Act, 1882, deals with transfer of actionable claims in
Chapter VIII of that Act. Section 130 of the Transfer of
Property Act provides that an actionable claim may be assigned
for value. A right on the fulfillment of certain conditions to call
for delivery of goods mentioned in a contract is an actionable
claim and assignable under Section 130. (See Jaffer Meher Ali
Vs. Budge-Budge Jute Mills Co.(1906) 33 Cal.702). There may
also be assignments of an actionable claim dehors Section 130
(See Bharat Nidhi Ltd. Vs. Takhatmat (1969) 1 SCR 595).
Negotiable Instruments, another species of actionable claim,
are transferable under the Negotiable Instruments Act 1881.
Transferability is therefore not the point of distinction between
actionable claims and other goods which can be sold. The
distinction lies in the definition of actionable claim. Therefore if
a claim to the beneficial interest in movable property not in the
vendee's possession is transferred, it is not a sale of goods for
the purposes of the sales tax laws.
An actionable claim would include a right to recover insurance
money or a partner's right to sue for an account of a dissolved
partnership or the right to claim the benefit of a contract not
coupled with any liability (see Union of India v Sarada Mills
(1972) 2 SCC 877, 880). A claim for arrears of rent has also
been held to be an actionable claim (State of Bihar v
Maharajadhiraja Sir Kameshwar
Singhhttps://indiankanoon.org/doc/49043/ 1952 SCR 889, 910).
A right to the credit in a provident fund account has also been
held to an actionable claim (Official Trustee, Bengal v L.
Chippendale AIR 1944 (Cal.) 335; Bhupati Mohan Das v
Phanindra Chandra Chakravarthy & Anr AIR 1935 (Cal.) 756).
In our opinion a sale of a lottery ticket also amounts to the
transfer of an actionable claim."
6. Mr. Bhattacharyya, learned senior counsel submitted that debentures
are securities, by virtue of their definition and they are freely tradable. If the
holder of a debenture so desires, it can secure the underlying amount; in fact
REV. PET.308/2015 IN ITA 110/2015 Page 5
they are marketable securities. Therefore, this court fell into error in
answering the question of law against the assessee and in favour of the
revenue. He lastly faulted the judgment inasmuch as it proceeded to answer a
question different from what was originally framed. It was highlighted that
instead of deciding whether funding of interest liability through debenture
qualified for benefit under Section 43-B, this court erroneously answered the
"Whether the funding of the interest amount by way of a term
loan amounts to actual payment as contemplated by Section 43-
B of the Income-tax Act, 1961?"
7. The question which has to be decided is whether the decision of this
court, which held that because of Explanation 3C to Section 43-B, any
adjustment other than actual payment does not qualify for deduction under
Section 43-B. As is evident from the discussion, the assessee's review is
premised on two major arguments, i.e. that the judgments of the Supreme
Court have categorically held that debentures (issued in favour of the bank,
in this case to discharge interest liability) amounted to payment and that such
debentures, being actionable claims and securities, were to be deemed paid
8. As to the main submission of the assessee's argument that issuance of
debentures amounted to payment, it is noteworthy that the Supreme Court
ruled as to what is the true nature and character of a debenture. In R.D.
Goyal v. Reliance Industries Ltd 2003(1) SCC 81 it was held that:
"'Share' has been defined in Section 2(46) of the Companies
Act to mean a share in the share capital of a company which in
turn would mean that it would represent contribution of the
shareholder towards the share capital of the company. On the
other hand, a debenture is an instrument of debt executed by
REV. PET.308/2015 IN ITA 110/2015 Page 6
the company acknowledging its receipt to repay the same at a
specified rate and also carrying an interest. It is in sum and
substance a certificate of loan or a bond evidencing the fact
that the company is liable to pay a specified amount with
interest and although the money raised by the debentures
becomes a part of the company,,s capital structure yet it does
not become a share capital. In any event, a debenture would not
come within the purview of the definition of goods, inasmuch
as, although the shares and stocks are included in the definition
of goods but debentures are not."
Thus, though debentures are securities and are actionable claim the essential
fact is that they are instruments of debt, by the company acknowledging its
indebtedness to pay the amount specified. Does this amount to "payment"
under Section 43-B. This court is of opinion that there is no question of any
error in the judgment under review. The clear purport of the statute- i.e.
Section 43-B (d) is that any amount payable towards interest liability would
qualify for deduction; however Explanation 3C acts to insist on a rider:
"Explanation 3C.- For the removal of doubts, it is hereby
declared that a deduction of any sum, being interest payable
under clause(d) of this section, shall be allowed if such interest
has been actually paid and any interest referred to in that
clause which has been converted into a loan or borrowing shall
not be deemed to have been actually paid."
Quite possibly the assessee's arguments would have been convincing and the
court might have been persuaded that actual payment of amounts is
inessential and a composition of the kind involved in this case, would have
sufficed- but for Explanation 3C. Now, this provision was inserted with
retrospective effect and clearly operated for the period in question. The
assessee does not dispute that. Furthermore, this court's judgment cited the
rulings of other courts- Andhra Pradesh & Telangana and the Madhya
REV. PET.308/2015 IN ITA 110/2015 Page 7
Pradesh High Courts- which held that actual payment is the sine qua non for
applicability of Section 43-B. In the circumstances, the decisions in Standard
Chartered (supra) and Sunrise Associates (supra), which declared the nature
and character of debentures, are of little avail.
9. In view of the foregoing discussion, this court is satisfied that there is
no error apparent on the face of the record, nor is there any sufficient cause,
for reviewing its judgment. The review petition has to fail and is
S. RAVINDRA BHAT
JULY 22, 2016
REV. PET.308/2015 IN ITA 110/2015 Page 8