Deduction for interest payable converted into debenture not allowed under section 43B- Finance Bill 2022
According to Section 43B of the Income Tax Act, 1961, the deduction for certain expenditures is allowed only if they are actually paid by the taxpayers. As per the existing provisions, deduction of any sum, being interest payable on loan or borrowing from public financial institutions, NBFC, scheduled banks or co-operative banks, etc. is allowed only if such sum is actually paid and any interest referred to in clause (d), (da) and (e) of section 43B which has been converted into a loan or borrowing or advance shall not be deemed to have been actually paid.
However, certain taxpayers are claiming the deduction of interest payable under section 43B on account of the conversion of interest payable on an existing loan into a debenture on the ground that such conversion is a constructive discharge of interest liability and, therefore, amounted to actual payment. This view has been upheld by several courts which defeat the intention of the section as the section was introduced to curb the mischief of claiming deduction towards interest by the assessee, without paying the same to financial institutions/ NBFC/ scheduled banks or co-operative banks.
In view of the above, the Finance Bill 2022 proposes to amend Explanation 3, 3CA, and 3D of section 43B by inserting the following words after “loan or borrowing” or “loan or advance”:
“Or debenture or any other instrument by which the liability to pay is deferred to a future date”
The effect of the proposed amendment is that if the liability towards interest payable is deferred by any assessee by converting it into debentures or any other instrument, the same shall not be deemed to have been “actually paid” and as such, no deduction shall be allowed towards such interest amount under section 43B of the Act.
The proposed amendment shall take effect from 01-04-2023 and therefore will apply for A.Y. 2023-24 and onwards.
About Author: The author of this article is CA Naveen Goyal. He is having an experience of more than 15 years in the field of Direct Taxation as well as Indirect Taxation. For further queries, you can Whatsapp or contact on 09660930417
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