The disallowance of interest under Section 43B should be subsumed into the offer of waiver of principal amount to avoid subjecting the assessee to double jeopardy.

1. This appeal relates to the assessment year 2007-2008.

2. The facts of the case are:

That the assessee, which is a Private Limited Company, is engaged in the business of manufacturing and trading of refined edible oil. The asseseee-Company had taken a loan from the Canara Bank which was to the tune of Rs.387.82 Lakhs as term loan and Rs.53.48 Lakhs as working capital loan, totaling to Rs.441.30 Lakhs. Since there was default in payment of the loan amount by the assessee, the Bank declared the account of the assessee as nonperforming asset (NPA). The total interest accrued in the said account of the assessee was Rs.193.96 Lakhs i.e., the total outstanding payable by the Bank was Rs.635.26 Lakhs which included the principal amount as well as the interest.

These figures are as per the accounts submitted by the assessee and accepted by the Department.

During the assessment year in question, the assessee arrived at a one time settlement with the Bank and against payment of Rs.635.26 Lakhs (as per the Books of Accounts of the assessee), as per the one time settlement an amount of Rs.378.72 Lakhs, was to be paid by the assessee to the Bank which was paid and the account was thereafter closed. In the returns filed by the assessee, towards the total amount of Rs.378.72 Lakhs paid to the Bank, the assessee provided for Rs.193.96 Lakhs as interest paid and claimed deduction under Section 43B of the Income Tax Act, 1961 (hereafter referred to as ‘the Act’). After deducting the said amount of interest of Rs.193.96 Lakhs from Rs.378.72 Lakhs the figure of Rs.184.76 Lakhs was taken as repayment towards principal amount. Thus from the total principal amount payable which was Rs.441.30 Lakhs, if Rs.184.76 Lakhs is deducted as the amount paid towards principal, balance of Rs.256.54 Lakhs would be the amount which was waived by the Bank. For the relevant assessment year, in its return the assessee provided for waived amount of Rs.257.08 Lakhs (i.e., Rs.256.54+Rs.0.54 Lakhs) as income and the said amount was offered to be subjected to tax.

The department did not accept the plea of the assessee of adjusting the amount of Rs.193.96 Lakhs towards interest and also its claim for benefit under Section 43B of the Act, and instead held that the entire amount of Rs.378.72 Lakhs paid by the assessee as one time settlement with the Bank to be adjusted towards the principal amount of Rs.441.30 Lakhs.

Ultimately in the appeal filed by the assessee before the Tribunal, although the erroneous claim of the assessee in adjusting the amount of Rs.193.96 Lakhs towards interest was disallowed and it was held that the total amount had to be first adjusted towards payment of principal amount, but considering the fact that the appellant had itself subjected the waived principal amount of Rs.257.08 Lakhs to tax in its returns, in the interest of justice and equity the Tribunal directed that the disallowance of the interest under Section 43B of the Act be subsumed into the offer of Rs.257.08 Lakhs on waiver of principal.

3. In the aforesaid facts, this appeal has been filed by the revenue raising the following substantial question of law:

“Whether on the facts and in the circumstances, the Tribunal was correct in holding that principal sum of Rs.2,57,08,826/waived, is offered to tax, and as such, the disallowance of Rs.1,93,96,881/is to be subsumed into offer of Rs.2,57,08,826/on waiver of Principal, which is against the sum and substance of the scheme of allowing deduction under Section 43B which is based on actual payment of interest and recorded perverse finding?”

4. We have heard Sri.K.V.Aravind, learned counsel for the appellant as well as Sri.K.K.Chythanya, learned counsel for the respondent-assessee and perused the records.

5. The submission of the learned counsel for the appellant is that once it has been held that principal sum of Rs.257.08 Lakhs (which was waived by the Bank) had been subjected and offered to tax, after the disallowance of interest