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Liability to repay arises the moment the money is borrowed

Judgment name-M.M. Aqua technologies limited versus commissioner of income tax, Delhi-3

Judgement date- August 11,2021

Citation– civil appeal no. – 4742-4743 of 2021


1.Aqua Technologies limited (appellant) find a return of income tax declaring a loss and claimed a deduction on the issue of debentures to financial institutions. The assessing officer rejected the contention by stating 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 and would render such amount ineligible for deduction. After correctly recording the facts that the assessee was unable to Discharge this interest liability due to its financial hardship.

2.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 Loan amounts to actual payment as contemplated by Section 43B of the Income-tax Act, 1961?

The High Court dismissed the Review Petition filed by the assessee stating as follows:

The clear purport of the statute i.e. Section 43-B (d) is that any amount payable towards interest liability would qualify for deduction.

It is hereby declared that a deduction of any sum, being interest payable, 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.

3.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 loan amounts to actual payment of the Income Tax Act, 1961?

While discussing this question, this court held : 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 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.

4.It is important to advert to the facts found in the present case. 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 clear from the expression “in lieu of” used in the judgment. That this is so is clear not only from the accounts produced by the assessee , but equally clear from the fact that 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 was “actually paid” by means of issuance of debentures, which extinguished the liability to pay interest.


Appeal allowed

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