A ‘Clarificatory’ Provision In Tax Laws Cannot Impose A New Condition Retrospectively: Supreme Court

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A ‘Clarificatory’ Provision In Tax Laws Cannot Impose A New Condition Retrospectively

Case: M.M. Aqua Technologies Ltd vs. Commissioner of Income Tax, Delhi-III

Coram: Justices RF Nariman and BR Gavai

Case No: CA 4742-4743 OF 2021

Court Observation: “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 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.”

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 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 the facts of this case.

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Tax Laws, Supreme Court, Clarificatory provision in Tax Law.