Conversion of interest liability into equity shares could be considered "actual payment" u/s 43B.

M/S. FRONTIER INFORMATION TECH LTD. VS. THE DEPUTY COMMISSIONER OF INCOME TAX (TELANGANA HIGH COURT-2024)

The primary issue in this case was whether the conversion of interest liability into equity shares could be considered "actual payment" u/s 43B. The assessee, a software development company, had converted unpaid interest of Rs. 75,75,000/- to Andhra Pradesh Industrial Development Corporation Limited (APIDC) into equity shares. The AO disallowed this conversion u/s 43B, which mandates actual payment for deduction eligibility. The assessee argued that constructive payment amounted to actual payment, citing precedents from the Supreme Court and High Courts. The court examined the provisions of Sec. 43B, which was introduced to curb practices where liabilities were claimed as deductions without actual payment. Explanation 3C, inserted by the Finance Act, 2006, clarifies that conversion of interest into a loan or other instruments does not constitute actual payment. The Supreme Court in M.M. Aqua Technologies Limited had previously ruled that the actual payment requirement is met if the liability to pay interest is extinguished, as was the case when debentures were issued to discharge the interest liability. The High Court noted that the Revenue did not dispute the cessation of the liability to pay interest upon the issuance of equity shares. Referring to the Supreme Court's interpretation, the court concluded that the liability's cessation due to share issuance equated to actual payment u/s 43B. Consequently, the assessee was entitled to the deduction benefit. Appeal allowed.

According to Rule 52(d) of the Central Goods and Services Tax Rules, 2017 (“the CGST Section 169(1)(f) of the CGST Act are pari materia. Rule 52 of the CGST Rules had been dealt with by a Division Bench of the Hon’ble Madras High Court as early as in the year 1972 and had held that Clauses (a), (b) & (c) are alternative and that if any of the aforesaid modes is not practicable then Clause (d) ought to have been followed.

section 169 of the CGST Act governs “Service of notice in certain circumstances”.

Section 169(1) of the CGST states that any decision, order, summons, notice or other communication under this Act or the rules made thereunder shall be served by any one of the following methods, namely: a. by giving or tendering it directly or by a messenger including a courier to the addressee or the taxable person or to his manager or authorised representative or an advocate or a tax practitioner holding authority to appear in the proceedings on behalf of the taxable person or to a person regularly employed by him in connection with the business, or to any adult member of family residing with the taxable person; or

b. by registered post or speed post or courier with acknowledgement due, to the person for whom it is intended or his authorised representative, if any, at his last known place of business or residence; or

c. by sending a communication to his e-mail address provided at the time of registration or as amended from time to time; or

d. by making it available on the common portal; or

e. by publication in a newspaper circulating in the locality in which the taxable person or the person to whom it is issued is last known to have resided, carried on business or personally worked for gain; or

f. if none of the modes aforesaid is practicable, by affixing it in some conspicuous place at his last known place of business or residence and if such mode is not practicable for any reason, then by affixing a copy thereof on the notice board of the office of the concerned officer or authority who or which passed such decision or order or issued such summons or notice