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Judgment
D. Murugesan, J.—These Tax Case Appeals are directed at the instance of the Revenue, questioning the common order of the Income Tax
Appellate Tribunal, Chennai ''B'' Bench, dated 09.09.2003 made in I.T.A.Nos.1982 and 1985/Mds/2002 respectively.
Tax Case (Appeal) No.519 of 2005 relates to the assessment year 1990-91 and the Tax Case (Appeal) No.521 of 2005 relates to the
assessment year 1992-93.
The substantial question of law raised in both the tax case appeals is, Whether on the facts and circumstances of the case, the Tribunal was right
in holding that the BIFR''s recommendation to the department to consider granting exemption from the provisions of Section 43B should be treated
as a mandate ?
The respondent assessee had taken over M/s.Press Metal Corporation as per the scheme sanctioned by the Board for Industrial and Financial
Reconstruction (BIFR) in terms of section 18(4) of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as
''SICA''). The assessee claimed deduction u/s 43B of the Income Tax Act of interest payable by the sick unit to the bank. The deduction was not
allowed by the Assessing Officer and the assessment order was taken on appeals before the Commissioner of Income Tax (Appeals) and the
same were rejected. Challenging the orders of the Commissioner of Income Tax (Appeals), the assessee preferred further appeals before the
Income Tax Appellate Tribunal. The Tribunal, by placing reliance on two Circulars issued by the BIFR in No.523 dated 05.10.1988 and 576
dated 31.08.1990, allowed the appeals, giving rise to the cause for these two appeals at the instance of the revenue.
Based on the substantial question of law, two issues arise for consideration.
Firstly, whether the circulars of the Board in No.523 and 576 are applicable to the facts of the case?
Secondly, whether the provisions of section 32 of SICA would override the effect on the provisions of section 43B of the Income Tax Act?
As far as the said two circulars are concerned, having noticed that section 17(3) of SICA excluded the application of sections 41(1), 79 and
115J of the Income Tax Act, in respect of specified assessment years, in the said circulars No.523 dated 05.10.1988 and 576 dated 31.08.1990,
it was clarified that in view of the above provision, the assessing officer will not subject to tax the remission or cessation of interest liability u/s 41(1)
of the Income Tax Act. It was further clarified that section 32(1) of SICA refers only to the ""provisions of this Act, and of any rules or schemes
made there under and not to orders passed u/s 17(2). Hence, it was clarified that the orders passed by the BIFR u/s 17(2) will not have the effect
of overriding the provisions of the Income Tax Act. However, subsequently, by Circular No. 576 dated 31.08.1990, it was further clarified that
once the Scheme is sanctioned u/s 18 of SICA by the Board, it will have overriding effect over the provisions of the Income tax Act in regard to
the matters covered in Circular No. 523 dated 05.10.1988.
A reading of both the circulars would show that in the event a scheme has been sanctioned by the Board, the Scheme will have overriding effect
over the provisions of the Income Tax Act only in matters covered under the Circular No. 523 dated 05.10.1988. That circular relates to the
provisions of section 41(1) of the Income Tax Act and not section 43B of the Act. In that view of the matter, placing reliance on both the above
circulars by the Income Tax Appellate Tribunal, for consideration of the claim of the assessee for deduction u/s 43B in respect of interest payable
by the sick company, is unsustained.
The next question is, whether, by virtue of the provisions u/s 32 of SICA, the scheme will have overriding effect on the provisions of the section
43B of the Income Tax Act. For consideration of the said issue, it may be pointed out that in para 4.2.4 of the Rehabilitation Scheme formulated
by the Board in its order dated 14.11.1990, observed that the income tax authorities may consider allowing deduction u/s 43B of interest
''payable'' by M/s.Press Metal Corporation to banks and financial institutions even though they have not been paid during the year.
Though the assessing officer has referred to the above in the scheme, he was of the view that section 43B does not give any discretion to the
assessing officer to allow any deduction in respect of interest payment when such interest has not actually been paid during the relevant pervious
year and deduction u/s 43B is allowable only in the assessment year relevant to the previous year in which such payment is made. Accordingly we
allow the interest payable u/s 43B.
Section 43B starts with non-obstente clause and it reads that ""Notwithstanding anything contained in any other provision of this Act, a
deduction otherwise allowable under this Act in respect of any sum payable by the assessee as interest on any loan or borrowing from any public
financial institutions or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the
agreement governing such loan or borrowing. This provisions is applicable only in respect of notwithstanding anything contained under the Income
Tax Act and not any other Act. However, section 32 of SICA reads as under:
32: Effect of the Act on other laws:-
(1) The provisions of this Act and of any rules or schemes made there under shall have effect notwithstanding anything inconsistent therewith
contained in any other law except the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and the Urban Land (Ceiling and
Regulation) Act, 1976 (33 of 1976) for the time being in force or in the Memorandum or Articles of Association of an industrial company or in any
other instrument having effect by virtue of any law other than this Act.
(2) Where there has been under any scheme under this Act an amalgamation of a sick industrial company with another company, the provisions of
section 72-A of the income tax Act, 1961 (43 of 1961), shall, subject to the modifications that the power of the Central Government under that
section may be exercised by the Board without any recommendation by the specified authority referred to in that section, apply in relation to such
amalgamation as they apply in relation to the amalgamation of a company owning an industrial undertaking with another company.
A reading of sub-section (1) of Section 32 shows that the provisions of the SICA and or any rules or schemes made there under shall have
effect notwithstanding anything inconsistent therewith contained in any other law. In our opinion, by virtue of the provisions of section 32 of SICA,
the scheme framed u/s 18 shall have the effect of overriding the provisions of the Income Tax Act. Section 32 does not make any difference in any
provisions of the Income Tax Act, be it even the provisions of section 43B. Though u/s 43B of the Income Tax Act, the assessing officer may not
have any discretion to allow any deduction in respect of interest payable, it is the case of the revenue that by virtue of the provisions of section 32
of SICA, the assessee, who has taken over the sick industry, would have the benefit of the provisions of the scheme. In this regard, we may also
refer the judgment of the Calcutta High Court, taking a similar view, reported in Commissioner of Income Tax Vs. J.K. Corporation Ltd., .
It is also contended that even assuming that the Scheme had no overriding effect on the provisions of the Income Tax Act, a reading of the
scheme does not show that it directed the allowing of the deduction u/s 43B, except observing that the income tax authorities may consider
allowing such deduction. The scheme should be read keeping in kind the object of the provisions of the SICA for rehabilitation measure in respect
of sick industry. When a company is declared to be a sick and the assessee is taking over the management of such a sick company based on the
scheme for the purpose of rehabilitation, such assessee should also be entitled to the benefits and the scheme should be construed only keeping in
mind the rehabilitation measure. In these circumstances, the contention of the revenue that the scheme has not specifically directed the allowing of
deduction u/s 43B cannot be accepted as such benefit should be dealt with in the scheme itself. Therefore, the substantial question of law is
answered in the negative i.e. against the revenue.
For the reasons stated above, both the appeals are dismissed. No costs.