Balia, J. - (1.) HEARD learned counsel for the parties.
(2.) THIS appeal by the Revenue against the order of the Income Tax Appellate Tribunal, Jodhpur Bench, Jodhpur, dated 19. 9. 2003 to the extent the order was against the Assessee. It was challenged by way of D. B. Income Tax Appeal No. 8/04 which has since been decided by a separate order dated 17th April 2006. Following two questions of law were framed while admitting the appeal on 14. 7. 04:- 1. Whether the learned Tribunal was justified in law as well as on facts in deleting the addition of Rs. 22,78,980/- on account on cessation/remission of liabilities when the same liabilities were written back and the creditor failed to lodge their claim before BIFR? The question No. 2 was not framed clearly and needs some modification. The modified question required to be considered in this appeal, reads as under:- 2. Whether the learned Tribunal was justified in law as well as on facts by deleting addition of Rs. 97,22,082/- on account of disallowance of bank interest when the same interest was waived by BIFR under the scheme approved by it vide order dated 27. 5. 93 but written off in the books of account of the assessee ending on 31. 3. 1993 relevant for the Assessment Year under consideration? We shall first examine the Question No. 2. The facts relating to question No. 2 are that for the accounting periods prior to Financial Year ending dated 31st March 1993 the interest on dues to various banks and expense deductable under Section 37 of the Income Tax Act while computing taxable income for the relevant Assessment Years. The Assessee is following the Merchantile Accounting i. e. accounts are maintainable on the basis of accrual of liabilities for accrual of income and not cash basis. Therefore, in ordinary circumstances the Trading liability incurred on account of interest that accrued on loans and deposits with the Assessee was liable to deduction while computing taxable income for the Assessment Year up to 1993-94. Interest accrued during earlier assessment years were duly accounted for and allowed as deduction in computation of total income of relevant Assessment Years. Apparently it was an undischarged liability. However, Assessee Company became a Sick Industrial Company and its case was pending before the Board of Industrial Financial Construction (BIFR) under the Sick Industrial Companies (Special Provision) Act, 1985. Under the Scheme for its rehabilitation framed by BIFR vide order passed on 27. 5. 93, interest liability in respect of certain debts of the Assessee due to banks and financial institutions was waived and as a result of which the total amount of Rs. 97,22 lacs stood waived. Simultaneously with the waiver of the interest liability of the assessee company under the scheme, it was also ordained that the assessee company shall be entitled to exemption from operation of Section 41 (1) of the Income Tax Act of 1961, in respect of waived liabilities.
(3.) SECTION 41 (1) states that where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year, the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made was in existence in that year or not. The following explanation was inserted with effect from 1. 4. 97 only and had no retrospective effect. Explanation 1 For the purpose of sub-section of the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under Clause (a) or the successor in business under clause (b) of that sub section by way of writing off such liability in his accounts. ;