Hon'ble Judges/Coram:
Rohinton Fali Nariman and B.R. Gavai

JUDGMENT

Rohinton Fali Nariman, J.

1. Leave granted.

2. The question raised in these appeals is with particular reference to Section 43B Explanation 3C of the Income Tax Act, 1961 [the "Act"]. The brief facts necessary to appreciate the controversy raised in these appeals are as follows.

3. On 28th November, 1996, the Appellant filed a return of income declaring a loss of Rs. 1,03,18,572/- for the assessment year 1996-1997. In the return filed by it, the Appellant claimed a deduction of Rs. 2,84,71,384/- Under Section 43B based on the issue of debentures in lieu of interest accrued and payable to financial institutions. By an order dated 29th October, 1998, the Assessing Officer rejected the Appellant's contention by holding that the issuance of debentures was not as per the original terms and conditions on which the loans were granted, and that interest was payable, holding that a subsequent change in the terms of the agreement, as they then stood, would be contrary to Section 43B(d), and would render such amount ineligible for deduction. The Commissioner of Income Tax (Appeals) ["CIT"] allowed the appeal and held, on facts, as follows:

3.2. .... It was clarified by the Ld. Counsel that the original agreements with the financial institutions provided for conversion of 20% of the amount in default into equity capital of the Appellant at the option of the lenders. The agreements also provided for the repayment of the principal and the interest, in default as per the revised terms and conditions stipulated by the lender at the time of default. As the Appellant was not in position to pay the interest and liquidated damages. It approached the lead Financial Institutions which on behalf of all the institutions approved the Rehabilitation Plan According to the Rehabilitation Plan, the Appellant issued 300149 convertible debentures of 100 each amounting to Rs. 3,00,14,900/- in lieu of outstanding interest and other charges. As a result of these debentures in favour of the Financial institutions, interest of Rs. 2,84,71,384/- was effectively paid. It was argued by the Ld. Counsel that liquidation of the outstanding interest by issue of debentures was tantamount to actual payment of interest as envisaged Under Section 43B of the I.T. Act. It was emphasized by the Ld. Counsel that Section 43B of the I.T. Act, cash or chequ........