S. 43B — The assessee issued Deep Discount Bonds in 2000 — During the relevant assessment year, it claimed deduction of interest accrued on above bonds — AO was of the view that since no interest was paid in the period and eventually, the interest will be

The assessee, an infrastructure company, issued Deep Discount
Bonds worth Rs.30 crore in 2000 to Mutual Funds, Public Financial Institutions
and Scheduled Banks. The assessee claimed deduction of Rs.6,08,03,230 in the A.Y.
2003-04 on account of interest paid. However, the AO was of the view that since
the total interest will be paid at the maturity of the Deep Discount Bonds,
deduction was to be allowed only on actual payment. On appeal, the Commissioner
(Appeals) affirmed the view of the AO on a different ground, i.e., since
interest was to be paid on maturity, there was no question of accrual of
interest for the period.

As per the mercantile system of accounting employed by the
assessee, though the payment was to be made only at the maturity, it was not
wrong to provide for interest in a pro rata manner as the liability has accrued.
This view was seconded by the Circular No. 2 of 2002, dated 16-2-2002 of the
CBDT.

Thus, the interest which had accrued during the period,
though not paid was still allowable to the assessee. Moreover, it was affirmed
that S. 43B(e) was not applicable to payment of interest to Mutual Funds. Also,
in case of Public Financial Institutions, S. 43B(d) is attracted only on payment
of interest to its loans/borrower. In the given case, interest was paid on Deep
Discount Bonds which are like deposits. So, provisions regarding payment of
interest on loans/by a borrower as per S. 43B(d) and S. 43B(e) were not
applicable. Therefore, the disallowance made for interest in respect of Deep
Discount Bonds was to be deleted.