M.M. AQUA TECHNOLOGIES LTD.versusCOMMISSIONER OF INCOME TAX, DELHI-III

                          [2021] 8 S.C.R. 237                               237


                   M.M. AQUA TECHNOLOGIES LTD.                              A
                                        v.
            COMMISSIONER OF INCOME TAX, DELHI-III
                   (Civil Appeal Nos. 4742-4743 of 2021)
                             AUGUST 11, 2021                                B
    [ROHINTON FALI NARIMAN AND B.R. GAVAI, JJ.]
       Income Tax Act, 1961: s. 43B explanation 3C – Certain
deductions to be only on actual payment – Funding of interest
amount by way of a term debenture, if amounts to actual payment –
                                                                            C
Appellant-assessee company had obtained loan from financial
institutions for business operations on which is interest is payable
– Assessee unable to discharge interest liability due to its financial
hardship – It approached financial institution for a rehabilitation
plan – In terms of the Plan, assessee issued convertible debentures
in lieu of interest payment and then claimed a deduction u/s. 43B –         D
Rejection of the claim, by the Assessing Officer holding that the
issue of debenture does not tanamount to actual payment – However,
CIT allowed the claim and the tribunal upheld the same – In appeal,
the High Court held that interest had been converted into loan –
On appeal, held: The issue of debentures by the assessee was under
                                                                            E
a rehabilitation plan, to extinguish the liability of interest altogether
– No misuse of the provision of s. 43B was found by either the CIT
or the ITAT – Explanation 3C, was meant to plug a loophole, cannot
therefore be brought to the aid of Revenue – In case of any ambiguity
in the retrospectively added explanation 3C, the three canons of
interpretation come to the rescue of the assessee, first, the bona fide     F
transactions of actual payments are not meant to be affected; second,
a retrospective provision in a tax act which is “for the removal of
doubts” cannot be presumed to be retrospective, even where such
language is used, if it alters or changes the law as it earlier stood,
thus, Explanation 3C is clarificatory-it explains s. 43B(d) as it
                                                                            G
originally stood and does not purport to add a new condition
retrospectively; and third, any ambiguity in the language of
Explanation 3C shall be resolved in favour of the assesse – Thus,
the order passed by the High Court are set aside.
      s. 43 – Object of – Explaination of.
                                                                            H
                                  237
238            SUPREME COURT REPORTS                      [2021] 8 S.C.R.


A           Allowing the appeals, the Court
            HELD: 1.1 The object of Section 43B of the Income Tax
      Act, 1961, as originally enacted, is to allow certain deductions
      only on actual payment. This is made clear by the non-obstante
      clause contained in the beginning of the provision, coupled with
B     the deduction being allowed irrespective of the previous years
      in which the liability to pay such sum was incurred by the assessee
      according to the method of accounting regularly employed by it.
      In short, a mercantile system of accounting cannot be looked at
      when a deduction is claimed under this Section, making it clear
      that incurring of liability cannot allow for a deduction, but only
C     “actual payment”, as contrasted with incurring of a liability, can
      allow for a deduction. Interestingly, the ‘sum payable’ referred
      to in Section 43B(d), does not refer to the mode of payment,
      unlike Proviso 2 to the said Section, which was omitted by the
      Finance Act, 2003 w.e.f. 1st April, 2004. [Para 19][249-G-H; 250-
D     A-C]
            1.2 Both the CIT and the ITAT found, as a matter of fact,
      that as per a rehabilitation plan agreed to between the lender
      and the borrower, debentures were accepted by the financial
      institution in discharge of the debt on account of outstanding
E     interest. This is also clear from the expression “in lieu of” used
      in the judgment of the CIT. That this is so is clear not only from
      the accounts produced by the assessee, but equally clear from
      the fact that in the assessment of ICICI Bank, for the assessment
      year in question, the accounts of the bank reflect the amount
      received by way of debentures as its business income. This being
F     the fact-situation in the instant case, it is clear that interest was
      “actually paid” by means of issuance of debentures, which
      extinguished the liability to pay interest. [Para 20][250-D-F]
            1.3 Explanation 3C, which was introduced for the “removal
      of doubts”, only made it clear that interest that remained unpaid
G     and has been converted into a loan or borrowing shall not be
      deemed to have been actually paid. As has been seen, particularly
      with regard to the Circular explaining Explanation 3C, at the heart
      of the introduction of Explanation 3C is misuse of the provisions
      of Section 43B by not actually paying interest, but converting
H
       M.M. AQUA TECHNOLOGIES LTD. v. COMMISSIONER                       239
               OF INCOME TAX, DELHI-III

such interest into a fresh loan. On the facts, the issue of              A
debentures by the assessee was, under a rehabilitation plan, to
extinguish the liability of interest altogether. No misuse of the
provision of Section 43B was found as a matter of fact by either
the CIT or the ITAT. Explanation 3C, which was meant to plug a
loophole, cannot therefore be brought to the aid of Revenue on
                                                                         B
the facts of the instant case. Indeed, if there be any ambiguity in
the retrospectively added Explanation 3C, at least three well
established canons of interpretation come to the rescue of the
assessee in this case. First, since Explanation 3C was added in
2006 with the object of plugging a loophole-i.e. misusing Section
43B by not actually paying interest but converting interest into a       C
fresh loan, bona fide transactions of actual payments are not meant
to be affected. Second, a retrospective provision in a tax act which
is “for the removal of doubts” cannot be presumed to be
retrospective, even where such language is used, if it alters or
changes the law as it earlier stood. This being the case,
                                                                         D
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.
Third, any ambiguity in the language of Explanation 3C shall be
resolved in favour of the assesse. [Para 21-24][250-F-H; 251-A-
C; 252-G-H; 253-G-H; 254-A]                                              E
      1.4 The High Court judgment is clearly in error in
concluding that ‘interest’, on the facts of this case, has been
converted into a loan. There is no basis for this finding - as a
matter of fact, it is directly contrary to the finding on facts of the
authorities below. The impugned judgments of the High Court              F
are set aside and the judgment and order of ITAT is restored.
[Paras 25, 31][254-B-C; 257-D]
      Vodafone International Holdings BV v. Union of India
      (2012) 6 SCC 613 : [2012] 1 SCR 573 – relied on.
      K.P. Varghese v. ITO (1981) 4 SCC 173 : [1982] 1 SCR               G
      629; Sedco Forex International Drill. Inc. v. CIT (2005)
      12 SCC 717 : [2005] 5 Suppl. SCR 302; National
      Rayon Corpn. Ltd. v. CIT (1997) 7 SCC 56 : [1997] 3
      Suppl. SCR 140 – referred to.
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240            SUPREME COURT REPORTS                           [2021] 8 S.C.R.


A           National Rayon Corpn. Ltd. v. CIT (1997) 7 SCC 56 :
            [1997] 3 Suppl. SCR 140; CIT v. Gujarat Cypromet
            Ltd. (2020) 15 SCC 460 – distinguished.
            Cape Brandy Syndicate v. Inland Revenue
            Commissioner 1921 (1) KB 64 – referred to.
B                              Case Law Reference
      (2020) 15 SCC 460                 distinguished             Para 30
      [1982] 1 SCR 629                  referred to               Para 21
      [2005] 5 Suppl. SCR 302           referred to               Para 22
C
      [2012] 1 SCR 573                  relied on                 Para 24
      [1997] 3 Suppl. SCR 140           distinguished             Para 27
            CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 4742-
      4743 of 2021.
D           From the Judgment and Order dated 22.07.2016 of the High Court
      of Delhi at New Delhi in Review Petition No.308 of 2015.
            Bishwajit Bhattacharyya, Sr. Adv., Sahil Tagotra, Advs. for the
      Appellant.

E          Balbir Singh, ASG, Rupesh Kumar, Ms. Vimla Sinha, Apoorv
      Kurup, Udai Khanna, Raj Bahadur Yadav, Advs. for the Respondent.
            The Judgment of the Court was delivered by
            R. F. NARIMAN, J.
            1. Leave granted.
F
             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.
G            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
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       M.M. AQUA TECHNOLOGIES LTD. v. COMMISSIONER                            241
       OF INCOME TAX, DELHI-III [R. F. NARIMAN, J.]

contention by holding that the issuance of debentures was not as per the      A
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,
                                                                              B
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      C
      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           D
      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           E
      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             F
      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.
      ….                                                                      G
      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         H
242            SUPREME COURT REPORTS                            [2021] 8 S.C.R.


A           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
B
            therefore in accordance with the terms and conditions governing
            the borrowings.”
            4. On these facts, the conclusion drawn by the learned CIT was:
            “3.6. It would not be correct to say that a debenture is a piece of
C           paper and the issue of debentures in lieu of interest merely
            postponed the payment of liability. A debenture is a valuable
            security which is freely negotiable and openly quoted in the stock
            market. As the Financial institutions had accepted the debentures
            in effective discharge of the liability for the outstanding interest
            which was no longer payable by the appellant, it was tantamount
D           to actual payment for the intent of section 43B of the I.T. Act. As
            interest had been actually paid during the year and the payment
            was in accordance with the terms and conditions of the
            borrowings, interest of Rs. 2,84,71,384/- is directed to be allowed
            u/s 43B of the I.T. Act.”
E           5. This order was upheld in appeal by the Income Tax Appellate
      Tribunal [“ITAT”]. The ITAT held:
            “9. … The Section was introduced to curb the mischief of
            withholding tax payment by the assessee, while at the same time
            claiming deduction thereof in the income-tax assessments. But
F           when both the parties creditor and debtor agree that the conversion
            of the outstanding interest liability into fully paid debentures would
            be accepted by them as discharge of the liability then to hold that
            notwithstanding the contract between the two, it is open to the
            income tax authorities to say that the interest liability has not been
G           discharged would not only be opposed to the contextual perspective
            of section 43B, but would also do violence to the language used.
            In Subhra Motel Pvt. Ltd. (supra), the Delhi Bench of the Tribunal
            referred to the fact that the expression “actually paid” appearing
            in Section 43B is not qualified by words to the effect that the
            payment should be by cash or by cheque or draft or by any other
H
 M.M. AQUA TECHNOLOGIES LTD. v. COMMISSIONER                              243
 OF INCOME TAX, DELHI-III [R. F. NARIMAN, J.]

mode as has been prescribed in the Second Proviso, with reference         A
to clause (b) of the section which refers to the sum payable by
the assessee as contribution to provident fund, superannuation
fund, gratuity fund etc.”
6. It then arrived at the important finding based on facts as follows:
“11. … At page 197, the copy of the statement of taxable income           B
of the assessee for the AY 2001-02 has been filed, which shows
that in the year in which the debentures were redeemed, the
assessee did not claim any deduction for the interest. It has thus
been proved in the present case that the payment of interest by
conversion of the outstanding liability into convertible debentures,      C
is a real substantial and effective payment, meeting the requirement
of the word “actual” and is not a fictional or illusory payment.
The parties have understood it as an effective discharge by the
assessee of the interest liability. The treatment given in the accounts
as well as in their income tax assessments is in accord with the
factual position.                                                         D

xxx xxx xxx
12. … In the present case, the parties have agreed between
themselves that the interest would be funded and convertible
debentures would be issued in an amount identical to the funded           E
interest and that this arrangement would be accepted by both of
them as actual discharge of the liability to pay interest. In our
opinion, nobody has the right to intervene and rewrite the
arrangement for the parties and say that the parties cannot agree
between themselves that this will be taken as actual discharge of
the liability to pay interest. The apprehension expressed by the          F
legislature while introducing the provisions of section 43B was
that the assessee were not discharging their income tax liabilities
by paying them and in fact, some of them were even obtaining a
stay from the Courts and at the same time claiming such liability
as deductions in their income tax assessments. This apprehension,         G
which was the rationale behind Section 43B when it was introduced
in 1984, appears to us to be misplaced in the present case. As
already pointed out, herein we are not concerned with a statutory
liability. The assessee is not claiming a deduction in the income
tax assessment without actually clearing the statutory liability as
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244             SUPREME COURT REPORTS                             [2021] 8 S.C.R.


A           had happened in the case of CIT vs. Udaipur. Distillery Co. Ltd.
            (No. 1) (268 ITR 305) before the Rajasthan High Court in that
            case there was a statutory liability to pay the duty to the Govt.,
            and it was held that a bank guarantee would not meet the
            requirements of the section, and money has to actually flow into
            the illegible. In the case before us, it is a contractual liability where
B
            both the parties agree that the outstanding interest liability would
            be discharged by the assessee in a particular mode and that mode
            is followed. The assessee has not claimed the interest as a
            deduction again in the year in which the debentures were redeemed
            and evidence to this effect has already been adverted to. The
C           interest which is now allowed as a deduction in the assessee’s
            assessment is reflected in the assessment of ICICI as its business
            income. Nobody is put to any loss. To invoke the provisions of
            section 43B, on the imaginary ground that there is no actual
            payment of the interest, would be wholly misplaced and would
            amount to a strained interpretation of the section.”
D
            7. Against the aforesaid judgment of the ITAT, the Revenue filed
      an appeal before the High Court, in which the question raised before the
      High Court for determination was set out as follows:
            “Whether the funding of the interest amount by way of a term
E           loan amounts to actual payment as contemplated by Section 43B
            of the Income-tax Act, 1961?”
              8. After correctly recording the facts that “the assessee was unable
      to discharge this interest liability due to its financial hardship. On
      30/03/1994, the ICICI, by a letter waived a part of the compound interest
F     together with the commitment charges and agreed to accept Rs. 3,00,149
      convertible debentures of ‘100 each, amounting to Rs. 3,00,14,900/- in
      lieu of the outstanding amount”, the Delhi High Court set out the reasoning
      of the ITAT in some detail and then the arguments of counsel for the
      Appellant and Respondent. In para 8, the judgment then set out Section
      43B with Explanation 3C, which was inserted by the Finance Act, 2006
G     retrospectively w.e.f. 1.4.1989. The High Court concluded, based on
      Explanation 3C, as follows:
            “10. Now, Explanation 3C, having retrospective effect with effect
            from 01.04.1989, would be applicable to the present case, as it
            relates to AY1996-97. Explanation 3C squarely covers the issue
H           raised in this appeal, as it negates the assessee’s contention that
       M.M. AQUA TECHNOLOGIES LTD. v. COMMISSIONER                             245
       OF INCOME TAX, DELHI-III [R. F. NARIMAN, J.]

      interest which has been converted into loan is deemed to be “actually    A
      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
      43B of the Act.”
      9. It then concluded, after referring to the judgments of the High       B
Court of Madhya Pradesh and the High Court of Telangana and Andhra
Pradesh, as follows:
      “12. In light of the introduction of Explanation 3C, this Court does
      not consider it necessary to discuss the precedents relied upon by
      the assesse delivered prior to the enactment of Finance Act, 2006.       C
      As regards the decision in Shakti Spring Industries [(2013) 219
      Taxman 124], the interest due in that case was offset against a
      subsidy which the assessee was entitled to, and it did not involve
      an instance where was “converted into a loan or borrowing” within
      the meaning Explanation 3C. It is perhaps for this reason that
      Explanation 3 was not discussed.”                                        D

       10. On 22nd July, 2016, the High Court dismissed the Review
Petition filed by the assessee stating as follows:
      “8. … The clear purport of the statute i.e. Section 43-B (d) is that
      any amount payable towards interest liability would qualify for          E
      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        F
         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
                                                                               G
      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
      Pradesh High Courts- which held that actual payment is the sine          H
246             SUPREME COURT REPORTS                           [2021] 8 S.C.R.


A           qua non for applicability of Section 43-B. In the circumstances,
            the decisions in Standard Chartered [2006 (6) SCC 94] and Sunrise
            Associates [2006 (5) SCC 603], which declared the nature and
            character of debentures, are of little avail.”
            11. Shri Biswajit Bhattacharya, learned Senior Advocate appearing
B     on behalf of the Appellant, first drew this Court’s attention to an order
      dated 20th April, 2005 by which the question of law framed for
      consideration in the appeal before the High Court was as follows:
            “Whether the funding of the interest amount by way of a term
            ‘debenture’ amounts to actual payment as contemplated by Section
C           43B of the Income Tax Act, 1961?”
            12. This question was then wrongly recorded as follows:
            “Whether the funding of the interest amount by way of a term
            loan amounts to actual payment as contemplated by Section 43B
            of the Income-tax Act, 1961?”
D
              13. Since the High Court asked itself the wrong question, it reached
      the wrong conclusion as the key word “debenture” was missing in the
      question framed in the impugned judgment dated 18th May, 2015. He
      then took us through the facts that were found by the CIT and the ITAT
      and argued that, on facts, a finding was rendered in his favour that the
E     debentures that were issued were not towards any future payment of
      liability, but towards actual payment of interest that was due and owed
      to the financial institution in question. He was at pains to point out that
      Explanation 3C, which was introduced with retrospective effect after
      these judgments, would have no application in the facts of this case as
F     interest had not been converted into any loan or borrowing. Thus, both
      High Court judgments based exclusively on Explanation 3C are erroneous
      as they have ignored the vital facts found by the authorities below, which
      authorities are final on facts. To buttress his arguments, he also relied
      upon judgments showing that debentures are actionable claims and can
      be sold in the market as such.
G
               14. Shri Bhattacharya also relied upon Cape Brandy Syndicate
      v. Inland Revenue Commissioner [1921 (1) KB 64] to submit that
      fiscal and tax statutes have to be strictly construed and that since the
      word “debenture” is not specified in Explanation 3C, it cannot be read
      into it.
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       M.M. AQUA TECHNOLOGIES LTD. v. COMMISSIONER                              247
       OF INCOME TAX, DELHI-III [R. F. NARIMAN, J.]

       15. Shri Balbir Singh, learned Additional Solicitor General, argued      A
that Section 43B makes a departure from other Sections in the Act, as
indicated by its non-obstante clause. The Section was introduced so that
no deductions could be claimed based on a mercantile system of
accounting as actual payment would have to be made. He also relied
upon a judgment of this Court as to the correct meaning of “debentures”
                                                                                B
and then referred to and relied upon CIT v. Gujarat Cypromet Ltd.,
(2020) 15 SCC 460, which referred to the impugned judgment in the
present case with approval. He also argued that it being clear that a
debenture is nothing but a loan, interest had, in fact, been converted into
a loan on the facts of this case and squarely attracted the latter part of
Explanation 3C.                                                                 C
      16. At this juncture, it is important to set out Section 43B. The
relevant provisions of the said Section read as follows:
      43B. Certain deductions to be only on actual payment –
      Notwithstanding anything contained in any other provision of this         D
      Act, a deduction otherwise allowable under this Act in respect
      of—
                               xxx xxx xxx
      (d) any sum payable by the assessee as interest on any loan or
      borrowing from any public financial institution or a State financial      E
      corporation or a State industrial investment corporation, in
      accordance with the terms and conditions of the agreement
      governing such loan or borrowing, or
                               xxx xxx xxx
                                                                                F
      shall be allowed (irrespective of the previous year in which the
      liability to pay such sum was incurred by the assessee according
      to the method of accounting regularly employed by him) only in
      computing the income referred to in section 28 of that previous
      year in which such sum is actually paid by him:
      Provided that nothing contained in this section shall apply in relation   G
      to any sum which is actually paid by the assessee on or before the
      due date applicable in his case for furnishing the return of income
      under sub-section (1) of section 139 in respect of the previous
      year in which the liability to pay such sum was incurred as
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248            SUPREME COURT REPORTS                             [2021] 8 S.C.R.


A           aforesaid and the evidence of such payment is furnished by the
            assessee along with such return.
                                     xxx xxx xxx
            Explanation 3C.—For the removal of doubts, it is hereby declared
            that a deduction of any sum, being interest payable under clause
B           (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.
             17. Section 43B was originally inserted by the Finance Act, 1983
C     w.e.f. 1st April, 1984. The scope and effect of the newly inserted
      provision, at that point, was explained by the Central Board of Direct
      Taxes [“Board”] in Circular No.372/1983 dated 8th December, 1983 as
      follows:
            “35.2 Several cases have come to notice where taxpayers do not
D           discharge their statutory liability such as in respect of excise duty,
            employer’s contribution to provident fund, Employees State
            Insurance Scheme, etc., for long periods of time, extending
            sometimes to several years. For the purposes of their income-tax
            assessments, they claim the liability as deduction on the ground
E           that they maintain accounts on mercantile or accrual basis. On
            the other hand, they dispute the liability and do not discharge the
            same. For some reasons or the other, undisputed liabilities also
            are not paid.
            35.3 To curb this practice, the Finance Act has inserted a new
F           section 43B to provide that deduction for any sum payable by the
            assessee by way of tax or duty under any law for the time being
            in force or any sum payable by the assessee as an employer by
            way of contribution to any provident fund or superannuation fund
            or gratuity fund or any other fund for the welfare of employees
            shall irrespective of the previous year in which the liability to pay
G           such sum was incurred, be allowed only in computing the income
            of that previous year in which such sum is actually paid by the
            assessee.
            35.4 The section also contains an Explanation for the removal
            of doubts. The Explanation provides that where a deduction in
H           respect of any sum aforesaid is allowed in computing the income
       M.M. AQUA TECHNOLOGIES LTD. v. COMMISSIONER                               249
       OF INCOME TAX, DELHI-III [R. F. NARIMAN, J.]

      of any previous year, being a previous year relevant to the                A
      assessment year 1983-84, or any earlier assessment year, in which
      the liability to pay such sum was incurred by the assessee, the
      assessee shall not be entitled to any deduction under section 43B
      in respect of such sum on the ground that the sum has been actually
      paid by him in that year. In other words, an assessee who has
                                                                                 B
      already been allowed deduction of a liability on account of the tax
      or duty or in respect of any sum payable as contribution to any
      fund for the assessment year 1983-84, or any earlier year in which
      the liability to pay was incurred, cannot, in respect of that liability,
      be allowed a deduction in the assessment year 1984-85, or any
      subsequent year on the ground that he has actually made a                  C
      payment towards such liability in that year.”
       18. As has been pointed out hereinabove, the Finance Act, 2006
inserted Explanation 3C w.e.f. 1st April, 1989. The scope and effect of
this provision was explained by the Board in Circular No.14/2006 dated
23rd December, 2006, as follows:                                                 D
      “16.2 It has come to notice that certain assessees were claiming
      deduction under section 43B on account of conversion of interest
      payable on an existing loan into a fresh loan on the ground that
      such conversion was a constructive discharge of interest liability
      and, therefore, amounted to actual payment. Claim of deduction             E
      against conversion of interest into a fresh loan is a case of misuse
      of the provisions of section 43B. A new Explanation 3C has,
      therefore, been inserted to clarify that if any sum payable by the
      assessee as interest on any loan or borrowing, referred to in clause
      (d) of section 43B, is converted into a loan or borrowing, the
      interest so converted, shall not be deemed to be actual payment.           F

      16.3 This amendment takes effect retrospectively from 1st April,
      1989 i.e. the date from which clause (d) was inserted in section
      43B and applies in relation to the assessment year 1989-90 and
      subsequent years.”
                                                                                 G
       19. The object of Section 43B, as originally enacted, is to allow
certain deductions only on actual payment. This is made clear by the
non-obstante clause contained in the beginning of the provision, coupled
with the deduction being allowed irrespective of the previous years in
which the liability to pay such sum was incurred by the assessee according
                                                                                 H
250             SUPREME COURT REPORTS                            [2021] 8 S.C.R.


A     to the method of accounting regularly employed by it. In short, a mercantile
      system of accounting cannot be looked at when a deduction is claimed
      under this Section, making it clear that incurring of liability cannot allow
      for a deduction, but only “actual payment”, as contrasted with incurring
      of a liability, can allow for a deduction. Interestingly, the ‘sum payable’
      referred to in Section 43B(d), with which we are concerned, does not
B
      refer to the mode of payment, unlike Proviso 2 to the said Section, which
      was omitted by the Finance Act, 2003 w.e.f. 1st April, 2004. The said
      Proviso reads as follows:
            “Provided further that no deduction shall, in respect of any sum
            referred to in clause (b), be allowed unless such sum has actually
C           been paid in cash or by issue of a cheque or draft or by any other
            mode on or before the due date as defined in the Explanation
            below clause (va) of sub-section (1) of section 36, and where
            such payment has been made otherwise than in cash, the sum has
            been realised within fifteen days from the due date.”
D             20. This being the case, it is important to advert to the facts found
      in the present case. Both the CIT and the ITAT found, as a matter of
      fact, that as per a rehabilitation plan agreed to between the lender and
      the borrower, debentures were accepted by the financial institution in
      discharge of the debt on account of outstanding interest. This is also
E     clear from the expression “in lieu of” used in the judgment of the learned
      CIT. That this is so is clear not only from the accounts produced by the
      assessee, but equally clear from the fact that in the assessment of ICICI
      Bank, for the assessment year in question, the accounts of the bank
      reflect the amount received by way of debentures as its business income.
      This being the fact-situation in the present case, it is clear that interest
F     was “actually paid” by means of issuance of debentures, which
      extinguished the liability to pay interest.
             21. Explanation 3C, which was introduced for the “removal of
      doubts”, only made it clear that interest that remained unpaid and has
      been converted into a loan or borrowing shall not be deemed to have
G     been actually paid. As has been seen by us hereinabove, particularly
      with regard to the Circular explaining Explanation 3C, at the heart of the
      introduction of Explanation 3C is misuse of the provisions of Section
      43B by not actually paying interest, but converting such interest into a
      fresh loan. On the facts found in the present case, the issue of debentures
H     by the assessee was, under a rehabilitation plan, to extinguish the liability
       M.M. AQUA TECHNOLOGIES LTD. v. COMMISSIONER                             251
       OF INCOME TAX, DELHI-III [R. F. NARIMAN, J.]

of interest altogether. No misuse of the provision of Section 43B was          A
found as a matter of fact by either the CIT or the ITAT. Explanation 3C,
which was meant to plug a loophole, cannot therefore be brought to the
aid of Revenue on the facts of this case. Indeed, if there be any ambiguity
in the retrospectively added Explanation 3C, at least three well established
canons of interpretation come to the rescue of the assessee in this case.
                                                                               B
First, since Explanation 3C was added in 2006 with the object of plugging
a loophole – i.e. misusing Section 43B by not actually paying interest but
converting interest into a fresh loan, bona fide transactions of actual
payments are not meant to be affected. In similar circumstances, in K.P.
Varghese v. ITO, (1981) 4 SCC 173, this Court construed Section 52
of the Income Tax Act as applying only to cases where ‘understatement’         C
is be found – an ‘understatement’ is not to be found in the literal language
of Section 52, but was introduced by this Court to streamline the provision
in the light of the object sought to be achieved by the said provision. This
Court, therefore, held:
      13. Thus it is not enough to attract the applicability of sub-section    D
      (2) that the fair market value of the capital asset transferred by
      the assessee as on the date of the transfer exceeds the full value
      of the consideration declared in respect of the transfer by not less
      than 15 per cent of the value so declared, but it is furthermore
      necessary that the full value of the consideration in respect of the
      transfer is understated or in other words, shown at a lesser figure      E
      than that actually received by the assessee. Sub-section (2) has
      no application in case of an honest and bona fide transaction where
      the consideration in respect of the transfer has been correctly
      declared or disclosed by the assessee, even if the condition of 15
      per cent difference between the fair market value of the capital         F
      asset as on the date of the transfer and the full value of the
      consideration declared by the assessee is satisfied. ….
                               xxx xxx xxx
      15. It is therefore clear that sub-section (2) cannot be invoked by
      the Revenue unless there is understatement of the consideration          G
      in respect of the transfer and the burden of showing that there is
      such understatement is on the Revenue. Once it is established by
      the Revenue that the consideration for the transfer has been
      understated or, to put it differently, the consideration actually
      received by the assessee is more than what is declared or                H
252            SUPREME COURT REPORTS                           [2021] 8 S.C.R.


A           disclosed by him, sub-section (2) is immediately attracted, subject
            of course to the fulfilment of the condition of 15 per cent or more
            difference, and the Revenue is then not required to show what is
            the precise extent of the understatement or in other words, what
            is the consideration actually received by the assessee. That would
            in most cases be difficult, if not impossible, to show and hence
B
            sub-section (2) relieves the Revenue of all burden of proof regarding
            the extent of understatement or concealment and provides a
            statutory measure of the consideration received in respect of the
            transfer. It does not create any fictional receipt. It does not deem
            as receipt something which is not in fact received. It merely
C           provides a statutory best judgment assessment of the consideration
            actually received by the assessee and brings to tax capital gains
            on the footing that the fair market value of the capital asset
            represents the actual consideration received by the assessee as
            against the consideration untruly declared or disclosed by him.
            This approach in construction of sub-section (2) falls in line with
D
            the scheme of the provisions relating to tax on capital gains. It
            may be noted that Section 52 is not a charging section but is a
            computation section. It has to be read along with Section 48 which
            provides the mode of computation and under which the starting
            point of computation is “the full value of the consideration received
E           or accruing”. What in fact never accrued or was never received
            cannot be computed as capital gains under Section 48. Therefore
            sub-section (2) cannot be construed as bringing within the
            computation of capital gains an amount which, by no stretch of
            imagination, can be said to have accrued to the assessee or been
            received by him and it must be confined to cases where the actual
F
            consideration received for the transfer is understated and since in
            such cases it is very difficult, if not impossible, to determine and
            prove the exact quantum of the suppressed consideration, sub-
            section (2) provides the statutory measure for determining the
            consideration actually received by the assessee and permits the
G           Revenue to take the fair market value of the capital asset as the
            full value of the consideration received in respect of the transfer.
            22. Second, a retrospective provision in a tax act which is “for the
      removal of doubts” cannot be presumed to be retrospective, even where
      such language is used, if it alters or changes the law as it earlier stood.
H
       M.M. AQUA TECHNOLOGIES LTD. v. COMMISSIONER                             253
       OF INCOME TAX, DELHI-III [R. F. NARIMAN, J.]

This was stated in Sedco Forex International Drill. Inc. v. CIT, (2005)        A
12 SCC 717 as follows:
      17. As was affirmed by this Court in Goslino Mario [(2000) 10
      SCC 165] a cardinal principle of the tax law is that the law to be
      applied is that which is in force in the relevant assessment year
      unless otherwise provided expressly or by necessary implication.         B
      (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC
      139] .) An Explanation to a statutory provision may fulfil the
      purpose of clearing up an ambiguity in the main provision or an
      Explanation can add to and widen the scope of the main section
      [See Sonia Bhatia v. State of U.P., (1981) 2 SCC 585, 598] . If it
      is in its nature clarificatory then the Explanation must be read into    C
      the main provision with effect from the time that the main provision
      came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC
      24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC
      352, 354; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482, 506].
      But if it changes the law it is not presumed to be retrospective,        D
      irrespective of the fact that the phrases used are “it is declared”
      or “for the removal of doubts”.
      18. There was and is no ambiguity in the main provision of Section
      9(1)(ii). It includes salaries in the total income of an assessee if
      the assessee has earned it in India. The word “earned” had been          E
      judicially defined in S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] by
      the High Court of Gujarat, in our view, correctly, to mean as income
      “arising or accruing in India”. The amendment to the section by
      way of an Explanation in 1983 effected a change in the scope of
      that judicial definition so as to include with effect from 1979,
      “income payable for service rendered in India”.                          F

      19. When the Explanation seeks to give an artificial meaning to
      “earned in India” and brings about a change effectively in the
      existing law and in addition is stated to come into force with effect
      from a future date, there is no principle of interpretation which
      would justify reading the Explanation as operating retrospectively.      G
      23. 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.

                                                                               H
254             SUPREME COURT REPORTS                             [2021] 8 S.C.R.


A           24. Third, any ambiguity in the language of Explanation 3C shall
      be resolved in favour of the assessee as per Cape Brandy Syndicate v.
      Inland Revenue Commissioner (supra) as followed by judgments of
      this Court – See Vodafone International Holdings BV v. Union of
      India, (2012) 6 SCC 613 at paras 60 to 70 per Kapadia, C.J. and para
      333, 334 per Radhakrishnan, J.
B
               25. The High Court judgment dated 18th May, 2015, is clearly in
      error in concluding that ‘interest’, on the facts of this case, has been
      converted into a loan. There is no basis for this finding - as a matter of
      fact, it is directly contrary to the finding on facts of the authorities below.
C           26. The learned ASG’s reliance on National Rayon Corpn. Ltd.
      v. CIT, (1997) 7 SCC 56 is disingenuous. That was a decision which
      turned on whether a sum of Rs.79 lakhs represents ‘Debenture
      Redemption Reserve’ and was includible in computing the capital of the
      assessee company for the purpose of the Companies (Profits) Surtax
      Act, 1964. The High Court took the view that the amount set apart to
D     redeem debentures had to be treated as a “provision” and not as a
      “reserve”. While discussing this question, this Court held :
             8. Mr Ramachandran advanced another argument that there was
             no present liability to pay any amount to the debenture-holders.
             That liability will arise only when the amount falls due for payment.
E            Therefore, there was no existing liability for redeeming the
             debentures in the relevant year of account.
             9. We are unable to uphold this argument. The liability to repay
             arises the moment the money is borrowed. The amount borrowed
             may be repayable immediately or in future. The date of repayment
F            of loan may be deferred by agreement but the obligation or the
             liability to repay will not cease on that account. The obligation is a
             present obligation; debitum in praesenti, solvendum in futuro.
             This aspect of the matter was explained in the judgment of this
             Court in Kesoram Industries and Cotton Mills Ltd. v. CWT [AIR
G            1966 SC 1370 : (1966) 59 ITR 767] .
             10. By issuing the debentures, the Company had taken a loan
             against the security of its assets. This loan may not be repayable
             in the year of account. But the obligation to pay the loan is a
             present obligation. Any money set apart in the accounts of the
             Company to redeem the debentures must be treated as moneys
H
       M.M. AQUA TECHNOLOGIES LTD. v. COMMISSIONER                             255
       OF INCOME TAX, DELHI-III [R. F. NARIMAN, J.]

      set apart to meet a known liability. The debentures will have to be      A
      shown in the Company’s balance sheet of the year as “liability”.
      11. In the case of CIT v. Peico Electronics & Electricals [(1987)
      166 ITR 299 (Cal)] the Calcutta High Court held that the
      Debenture Redemption Reserve will have to be treated as a
      “reserve” and not “provision” because, none of the debentures            B
      became redeemable during the accounting period. The liability to
      redeem the debenture was a future liability. The debentures had
      been separately shown in the balance sheet as a liability. The
      reserve had been created by appropriation of profits and not by
      way of a charge on revenue.
                                                                               C
      12. We are of the view that this approach is erroneous and
      overlooks the definitions of “provision” and “reserve” given in the
      Companies Act. The debentures were nothing but secured loans.
      Merely because the debentures were not redeemable during the
      accounting period, the liability to redeem the debentures did not
      cease to exist. It was redeemable or repayable at a future date.         D
      But it was a known liability. In the form of balance sheet prescribed
      by the Act in Schedule VI, the secured loans have to be shown
      under the heading “liabilities”. Secured loans include (1)
      debentures, (2) loans and advances from banks, (3) loans and
      advances from subsidiaries and (4) other loans and advances.             E
      The secured loans might not be immediately repayable, but the
      liability to repay these loans was an existing liability and has to be
      shown in the Company’s balance sheet for the relevant year of
      account as a liability. Amounts set apart to pay these loans cannot
      be “reserve”. The interpretation clause of the balance sheet in
      Schedule VI of the Companies Act specifically lays down that             F
      reserves shall not include any amount written off or retained by
      way of providing for a known liability.
       27. The question decided in this case is far removed from the
question to be decided in the facts of the present case and has no
application to these facts whatsoever. The question in the present case        G
does not depend upon what can, in law, be stated to be a debenture and/
or whether it is convertible or non-convertible or payable immediately or
in the future. The question in the present case is only whether interest
can be said to have been actually paid by the mode of issuing debentures.
To answer this question, this judgment has no relevance.                       H
256             SUPREME COURT REPORTS                           [2021] 8 S.C.R.


A           28. The learned ASG then relied upon a recent judgment of this
      Court in CIT v. Gujarat Cypromet Ltd. (supra). In the said case, a
      Division Bench of this Court, while dealing with Section 43B Explanation
      3C, noted the facts as found by the CIT as follows (para 5):
            “2.2. I have perused the case laws cited and also the above
B           sanction letter from IDBI and also the auditor’s note referred by
            the assessing officer. I have perused Schedule 3 of the balance
            sheet as on 31-3-2001 and find that the above loan appears as on
            31-3-2001 and is part of the total secured loans of Rs 75,26,10,769.
            The fact that the entry pertaining to the interest element outstanding
            to financial institutions referred at page 2 of the order by the
C           assessing officer has been reversed after receipt of funds of Rs 8
            crores from IDBI substantiates the contention of the appellant
            company that the entries relating to interest outstanding with
            reference the above institutions have been squared up and its
            place a new credit entry of loan of IDBI is now appearing in the
D           balance sheet as on 31-3-2001. The plea of the appellant’s counsel
            Shri Tanna that since no interest payment is outstanding now and
            the amount is paid off, the expenditure of interest is allowable
            under Section 43-B. It is further added that in case the loan had
            been disbursed in 2 parts — one to meet the interest outstanding
            and the balance for financial assistance still the entries in the books
E           of account would have remain the same and the outstanding
            interest would have been NIL. Having regard to the above facts
            and also the case laws cited by the appellant’s representative, I
            am inclined to hold that the disallowance made by the assessing
            officer is contrary to the substance of the transaction and the
F           provisions of Section 43-B of the Income Tax Act and the same
            cannot be sustained and therefore directed to be deleted.”
             29. It is on these facts that Explanation 3C was pressed into service
      in favour of Revenue and paras 11 and 12 of the impugned judgment in
      the present case were referred to, in passing, in para 13. Ultimately, this
G     Court concluded:
            16. In the impugned judgment [CIT v. Gujarat Cypromet Ltd.,
            2006 SCC OnLine Guj 560], the Gujarat High Court has relied
            upon CIT v. Bhagwati Autocast Ltd., 2002 SCC OnLine Guj 381
            which was not a case covered by Section 43-B(d) rather was a
H           case of Section 43-B(a). The provision of Section 43-B covers a
         M.M. AQUA TECHNOLOGIES LTD. v. COMMISSIONER                             257
         OF INCOME TAX, DELHI-III [R. F. NARIMAN, J.]

        host of different situations. The statutory Explanation 3-C inserted     A
        by the Finance Act, 2006 is squarely applicable in the facts of the
        present case. It appears that the attention of the High Court was
        not invited to Explanation 3-C, we are, thus, of the view that the
        assessing officer has rightly disallowed the deduction as claimed
        by the assessee. The appellate authority, ITAT and the High Court
                                                                                 B
        erred in reversing the said disallowance.
         30. On the facts of that case, this Court found that Explanation
3C was squarely attracted in that outstanding interest had not actually
been paid, but instead a new credit entry of loan now appeared, bringing
the case within the express language of Explanation 3C. This is far
removed from the facts of the present case, which were not adverted to           C
at all in this judgment. Consequently, this judgment is also distinguishable
and would not apply to govern the facts of the present case.
       31. Consequently, the impugned judgments of the High Court are
set aside and the judgment and order of the ITAT is restored. These
appeals are allowed in the aforesaid terms.                                      D


Nidhi Jain                                                    Appeals allowed.



                                                                                 E




                                                                                 F




                                                                                 G




                                                                                 H