LIC Mutual Fund Isn’t Public Financial Institution | Interest Payable to It Isn’t Covered by Section 43B | HC

Case Details: V2 Retail Ltd. vs. Deputy Commissioner of Income-tax - [2024] 165 taxmann.com 676 (Calcutta)

Judiciary and Counsel Details

• Surya Prakash Kesarwani & Ajay Kumar Gupta, JJ.
• J.P. Khaitan, Sr. Adv., Saurabh Bagaria & Pranav Sharma Advs. for the Appellant.
• Smt. Smita Das De, Adv. for the Respondent.

Facts of the Case

During the relevant assessment year, LIC Mutual Fund purchased certain unsecured debentures of the assessee company. The assessee extended the interest on unsecured debentures payable during the year to LIC Mutual Fund for another two years. It claimed deduction of the interest payable to LIC Mutual Fund. The Assessing Officer (AO) invoking the provisions of section 43B disallowed the interest on the ground that it had not been paid within the stipulated period.

On appeal, CIT(A) allowed the assessee’s appeal. Subsequently, the order was reversed by the Tribunal, disallowing the deduction claimed by the assessee. Aggrieved by the order, an appeal was filed to the Calcutta High Court.

High Court Held

The High Court held that as per clause 2(q) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (SEBI Mutual Funds Regulations), mutual fund means the fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities, money markets, gold or gold related instruments, silver or silver related instruments, real estate assets and other assets and instruments as may be specified by the Board from time to time.

Clause 14 mandatorily requires that a mutual fund be constituted as a trust, and the instrument of a trust shall be a deed duly registered under the provisions of the Indian Registration Act, 1908, executed by the sponsorer in favour of the trustees named in such an instrument. Thus, LIC Mutual Fund is a trust, and the trust deed has been duly registered under the Indian Registration Act.

LIC Mutual Fund is a trust of movable property, which has been created in terms of section 6 of the Indian Trust Act, 1882. The Life Insurance Corporation of India can be said to be an author of the trust or settlor of the trust, but the said trust and the Life Insurance Corporation of India are both separate legal entities. While the LIC Mutual Fund Trust is governed by the provisions of the Indian Trust Act read with SEBI Mutual Fund Regulations, the Life Insurance Corporation of India is governed by the provisions of the Life Insurance Corporation Act, 1956.

Clause (d) of section 43B refers to any sum payable by the assessee as interest on any loan or borrowing from any public financial institution. Explanation 4(a) to section 43B provides that public financial institutions shall have the meaning assigned to them under section 4A of the Companies Act, 1956.

Section 4A specifically mentions the Life Insurance Corporation of India, established under section 3 of the Life Insurance Corporation Act, 1956. It does not mention LIC Mutual Fund which is a trust established under the Indian Trust Act. Further, section 4A(2) empowers the Central Government to specify, by notification in the official gazette, such other institutions as it may think fit to be a public financial institution, provided that no institution shall be so specified unless – (i) it has been established or constituted by or under any Central Act, or (ii) not less than 51 per cent of the paid-up share capital of such institution is held or controlled by the Central Government.

Neither LIC Mutual Fund Trust is mentioned in the list under sub-section (1) of section 4A of the Companies Act, 1956, nor has the LIC Mutual Fund Trust been established or constituted by or under any Central Act. Therefore, the LIC Mutual Fund Trust is not a public financial institution under section 4A. Consequently clause (d) of section 43B is not attracted under the facts and circumstances of the case.

Accordingly, it could not be disallowed in the hands of the assessee on the grounds of non-compliance with conditions of section 43B, and the disallowance of interest invoking the provisions of section 43B cannot be sustained.

List of Cases Reviewed

• Dy. CIT v. Vishal Retail Ltd. [IT Appeal No. 2627 (Kol.) of 2013, dated 15-3-2017] set aside.