One of the most common disallowances of business expenditure  AO resort while computing profits from business or profession is disallowance under section 43B of the Income Tax . So twisting and misreading of the clauses in favour of revenue is quite common. That is the reason controversial disallowances are often done by Revenue Authorities. Here is one such an issue of disallowance u/s 43B. It is common practice among banks, financial institutions (lenders debtors to restructure the loan repayment in order to save the loan from becoming Non-Performing Asset (NPA). The restructuring of loan provides relief to ailing business by reducing the interest burden and therefore gives a new life to business. But one of the often faced problem by the debtor ( an assessee who has business income ) is the disallowance of interest on the loan restructured under section 43B of the Income Tax Act. Now Explanation 3C under section 43B says that if the interest is converted to a loan, such interest shall not be considered as paid for the purpose of section 43B. Here is the extract of the said explanation 3C Explanation 3C.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid One of the issue in this regard, that was raised in the case of  JSW Steel Ltd.v.ACIT [2011] 9 ITR(T) 39 (Bangalore) before In the ITAT Banglore Bench A'  was : Whether conversion of outstanding interest into loans and Convertible Redeemable Preference Share (CRPS) can be treated as actual payment for the purpose of section 43B and thus allowable expenditure on payment basis ? The facts, in brief, was that during the relevant previous year, the assessee had entered into Revised Restructuring Package (RRP) with various financial institutions/ banks. Consequent to said package the outstanding interest liabilities due to financial institutions/banks amounting to Rs. 500 crores were converted into loans and Redeemable Preference Shares (CRPS). This conversion of outstanding interest into loans and CRPS were claimed by the assessee as a deduction of expenditure on interest under section 43B of the Income Tax Act  The Assessing Officer disallowed the aforesaid claim of the assessee. The ground for rejection of the claim of assessee was Explanation 3C under section 43B which provided that interest can be claimed under section 43B only when it is actually paid and conversion of interest amount into loans or borrowings would not be deemed as payment of interest. The Commissioner (Appeals) upheld the order of the Assessing Officer, however, he directed the A.O should allow the interest paid before filing the return of income and also proportionate interest allowable as per clarification issued by the CBDT Circular No. 7 of 2006 dated 7-7-2006. In respect of conversion of interest into preference shares, the Commissioner (Appeals) held that the said conversion could not be brought within the ambit of the Explanation 3C to section 43B as holder of such shares could not be treated as lender of the assessee and in fact, lender had become the owner with certain rights. Department appealed against the order of CIT(A), but the ITAT rejected the departmental appeal and confirmed the decision of CIT(A) by holding that if interest is converted to preference share, such conversion of interest to ownership in form of preference share shall not come within the ambit of Explanation #c and therefore can be considered as "actually paid". Here are the relevant extract from the ITAT orders The assessee had converted outstanding interest liability along with restructuring expenses into CRPS as per revised restructuring scheme entered into by it with various banks and financial institutions. Thus, the assessee had made a constructive payment and discharged its liability of interest by issuing CRPS to the said institutions. The said scheme was approved by 75 per cent of the creditors and it was not at the behest of the assessee. [Para 13.2] In view of the judicial stand on the issue, the Assessing Officer's portrayal that the interest payable which was converted into loan and, thus, it doesn't make a difference if the assessee changes the nomenclature whereby in view of above, the Commissioner (Appeals) rightly took a view that 'Though actual cash did not change hands and the transaction was completed through book adjustments and that the interest liability had been paid off through giving the creditor a share in the owner ship of the assessee company and, thus, the assessee was entitled to claim the amount so paid off under section 43B as a deduction and also in respect of applicability of restructuring expenses, even then if such expenditure were not to be termed 'interest', it would still be allowable as it had been incurred with the objective of squaring off a liability that was on revenue account and would thus 'acquire the character of a revenue expense.' [Para 13.8] The instant issue was, therefore, decided against the revenue, and the order of the Commissioner (Appeals) was affirmed. [Para 13.9] In other orders, as per the aforesaid order of ITAT, it is settled that when interest is converted to preference share or some kind of ownership in the business, such kind of conversion of interest are not covered within the Explanation 3C . Readers are advised to read the article on another controversial issue related to disallowance where even high courts are having a different opinion.Section 43B Covers Emplyoees Contribution to PF , ESI Too