Allotment of shares in lieu of interest liability as per BIFR scheme held as actual payment under sec. 43B

Facts:

a)  The assessee had borrowed loan from IDBI and there was outstanding interest on such loan. A rehabilitation scheme was sanctioned by the BIFR, wherein it was decided that the IDBI would be allotted equity shares by the assessee and the interest to the extent of shares would be taken as having been paid.

b)  The assessee allotted certain shares to the IDBI and claimed that the said allotment of shares should be taken to be against the interest amount 'actually paid' within the meaning of section 43B.

c)  The assessment was completed accordingly. Thereafter, the Assessing Officer reopened the case of assessee on the ground that mere allotment of equity shares in lieu of interest liability could not be construed as 'actually paid' as required under section 43B.

d)  On appeal, the Commissioner (Appeals) held that the reopening of the case was valid. However on merit, he deleted the addition. On second appeal, the Tribunal held that in the original assessment proceeding itself the Assessing Officer had raised a query on this issue which had been explained satisfactorily by the assessee and accepted by the Assessing Officer and, therefore, the instant case was a case of change of opinion. The Tribunal however upheld the decision of the Commissioner (Appeals) on merits.

The High Court held as under:

1)  This was indeed a case of mere change of opinion by the Assessing Officer. A specific query was raised by the Assessing Officer in the original assessment proceedings itself as regards the conversion of a portion of the interest into shares. 

2)  When pursuant to a settlement the creditor agrees to convert a portion of interest into shares, it must be treated as an extinguishment of liability to pay interest to that extent. In essence, there will be no further outstanding interest to that extent. Consequently, the situation where an interest payable on a loan is converted into shares in the name of the lender/creditor is different from the situation envisaged in Explanation 3C to section 43B, viz., conversion of interest into 'a loan or borrowing'. In the latter instance, the liability continues, although in a different form. However, where the interest or a part thereof is converted into equity shares, the said interest amount for which the conversion is taking place is no longer a liability. 

3)  The plea of the assessee, which was accepted by the Commissioner (Appeals) and the Tribunal that the said conversion of a portion of interest into shares should be taken to be 'actual payment' within the meaning of section 43B, merits acceptance. In that view of the matter, there is no legal infirmity in the impugned order of the Tribunal. - CIT v. Rathi Graphics Technologies Ltd [2015] 64 taxmann.com 65 (Delhi)