In Brief
M.M. Aqua Technologies claimed a deduction under Income Tax Act Section 43B for interest paid to financial institutions by issuing convertible debentures. The debentures were issued under a mutually agreed rehabilitation plan. The Income Tax Officer rejected the deduction, but the CIT (Appeals) and ITAT allowed it. The Delhi High Court reversed, relying on Explanation 3C (added 2006, retrospective from 1989), which states interest converted into a loan is not "actually paid." The Supreme Court held that Explanation 3C applies only where interest remains unpaid and is converted into fresh borrowing, not where debentures genuinely discharge liability. Since facts found show actual discharge of interest through mutually agreed debenture issuance, Explanation 3C does not apply. The Court invoked interpretive canons: clarificatory retrospective provisions protect bona fide transactions, and tax ambiguities favour the assessee. Appeals allowed; High Court judgment set aside; ITAT judgment restored.
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