Commissioner of Income Tax vs Anand Iron and Steel Industries

B.N. Kirpal, J.—This is a petition u/s 256(2) of the income tax Act, 1961 (''the Act'') with a prayer that the Tribunal should be directed to refer two questions of law to this Court. In respect of the assessment year 1982-83, the ITO assessed the respondent on a total income of Rs. 29,018. This order of the ITO was subsequently revised by the Commissioner u/s 263 of the Act. The Commissioner came to the conclusion that the ITO had erroneously given a remission of interest of Rs. 1,20,373 and that the same was taxable u/s 41(2) of the Act.

It appears that the respondent, along with two other concerns, namely, Chetan Swarup Vinod Swarup and Chetan Gupta & Co., had overdraft facilities with the Oriental Bank of Commerce. Approximately Rs. 15,40,000 were owed to the said bank and the respondent approached the said bank for full and final settlement by the respondent paying Rs. 12 lakhs. This offer was accepted. According to the department, the reduction of the amount from Rs. 15,40,000 to Rs. 12 lakhs included within it a remission of interest of Rs. 1,20,373 and this was taxable under the provisions of section 41(2) .

The assessee filed an appeal to the Tribunal. The Tribunal referred to the proposal given to the board and the resolution passed by the board of the bank and then came to the conclusion that the amount which was paid was first appropriated by the bank towards interest and only the balance amount against the principal. According to the Tribunal, the provisions of section 41(2) were not attracted to the present case. In coming to the conclusion, the Tribunal also sought to rely on the observations of the Supreme Court in the case of Khajamian Wakf Estates etc. Vs. State of Madras and Another, which was a case of payment of decretal amount by a mortgagor and came to the conclusion that the payment is first adjustable against interest and secondly against the principal.

Being aggrieved, the petitioner filed an application u/s 256(1)(ii) contending that the Tribunal should refer the following two questions of law to this Court:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that there is nothing in the resolution to suggest that a sum of Rs. 1,20,373 was given by way of rebate out of the interest of Rs. 1,28,501?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding as above in view of the bank''s letter dated June 4, 1984, indicating that relief was towards interest and not principal?

The Tribunal, by the impugned order, came to the conclusion that question No. 2 could not be referred because the letter of the bank dated 4-6-1984, on which reliance was sought to be placed, had not been produced before the Tribunal. With regard to the first question, the Tribunal came to the conclusion that it had followed the decision of the Supreme Court and that the conclusion of the Tribunal was a question of fact and not of law. After the dismissal of the application u/s 256(1) , the present petition u/s 256(2) has been filed.

As regards question No. 2, we find no infirmity in the order of the Tribunal. It is now settled law that a question of law cannot be raised basing it on a document which was not there before the income tax authorities including the Tribunal when the Tribunal decided the case. The letter of 4-6-1984, was never placed before the Tribunal and, therefore, that cannot be the basis for seeking reference to this Court.

With regard to the first question, however, we find that the Tribunal, after referring to the proposal of the respondent to the bank, scrupulously avoided referring to the most material part of the said proposal. In the proposal which was placed before the board of directors, it had, inter alia, been stated that the assessee had approached the bank with a request that "the bank may grant a concession in interest charged and accept payment of Rs. 12,00,000 in full and final settlement of outstandings of Rs. 15,40,000 which had piled up with the application of interest". The recommendation was that this offer of the assessee should be accepted and a resolution was passed stating that "keeping in view the facts enumerated above, the matter is being placed before the board of directors for its consideration and it is recommended that the borrowers'' offer of Rs. 12 lakhs in full and final settlement of the outstandings of Rs. 15.40 lakhs may please be accepted. The borrowers will be asked to make a payment of Rs. 6 lakhs immediately on signing the agreement. The balance amount of Rs. 6 lakhs will be paid within 15 days'' time.

In our view, a question of law does arise because the question involved relates to the interpretation of the offer which was made by the assessee, the recommendation put forth to the board and the resolution passed thereon. The Tribunal has not referred to that part of the recommendation which refers to the assessee approaching the bank for grant of concession in the interest charged. The case of the assessee appears to be that the outstanding amount of Rs. 15.40 lakhs had piled up with the application of interest. In our opinion, the Tribunal was wrong in coming to the conclusion that no question of law arose from its order.

For the aforesaid reasons, we direct the Tribunal to draw up the statement of case and refer to this Court the following question of law:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that there is nothing in the resolution to suggest that a sum of Rs. 1,20,373 was given by way of rebate out of the interest of Rs. 1,28,501?

The parties shall bear their own costs.