A retrospective provision in a tax act which is “for the removal of doubts” cannot be presumed to be retrospective, if it alters or changes the law as it earlier stood: Supreme Court

The SC on August 11, 2021 {M.M. Aqua Technologies Ltd. vs. Commissioner of Income Tax, Delhi-III} held that in case of retrospective amendment, three well established canons of interpretation come to the rescue of the assessee in this case, firstly bona fide transactions of actual payments are not meant to be affected, secondly a retrospective provision in a tax act which is “for the removal of doubts” cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood, thirdly any ambiguity in the language of retrospective amendment shall be resolved in favour of the assessee.

It was also held by the Bench, comprising of Justice R. F. Nariman and Justice B.R. Gavai that the High Court judgment dated 18th May, 2015, is clearly in error in concluding that ‘interest’, on the facts of this case, has been converted into a loan. It was held that there is no basis for this finding - as a matter of fact, it is directly contrary to the finding on facts of the authorities below.

The question raised in these appeals before the SC was with particular reference to Section 43B Explanation 3C of the Income Tax Act, 1961.

The SC held that in the present case both the CIT and the ITAT found, 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. It was held that this is also clear from the expression “in lieu of” used in the judgment of the learned CIT. It was also held that that this is so is clear not only from the accounts produced by the assessee, but equally clear from the fact that in the assessment of ICICI Bank, for the assessment year in question, the accounts of the bank reflect the amount received by way of debentures as its business income. It was held that 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.

Consequently, the impugned judgments of the High Court were set aside and the judgment and order of the ITAT was restored by the SC. The appeals were allowed by the SC.