1. Having regard to the commonality in the legal question which arises for consideration in these two appeals, they were heard on the same, one after the other. At the same time, after stating the legal principle which is involved, we will take up the appeals separately applying principles to the situation appearing in each of the case.

2. The issue in this case relates to the treatment which is to be given to the extent of amount of loan and interest waived by the financing institutions from where the loan was taken. The appellant is the assessee company, which is engaged in the business of manufacturing of electronic products. It was enjoying loan facility from State Bank of India (SBI). As the appellant could not discharge its liability for specific time, keeping in view the guidelines/directions of the SBI, the SBI categorized this loan as Non-Performing Asset (NPA). As on 31.03.1998, principal amount of loan due to the bank was `4,76,92,213 and outstanding interest was `1,90,42,295. Issue of recovery of loan was referred to Debt Recovery Tribunal in the year 2000. During the pendency of these proceedings, the assessee had settled the matter with the SBI. Pursuant to one time settlement with the bank, on payment of `1,85,00,000 against loan of `4,76,92,213 (principal amount), the remaining sum of `1,90,42,295 was waived. In the tax return filed by the assessee, it showed interest waived as income but not the amount of loan waived by SBI, though amount of interest written off i.e., `1,90,42,295 was credited to profit & loss account and was offered for taxation. However, relying upon the decision of this Court in the case of Commissioner of Income Tax Vs. Tosha International Ltd. [176 Taxman 187], principal amount written off i.e. `2,91,42,213 that was directly taken to balance sheet under the head capital reserve, was not offered for taxation.

3. The AO framed assessment order dated 16.12.2006. For the following reasons, the Assessing Officer held that even waiver of principal amount of loan was also taxable:

(a) When an assessee ceases to be liable to pay something that he was legally bound to pay, then in effect, he gains the amount that he was bound to pay. Therefore, principal amount of loan written off was nothing but gain/income in the hands of the appellant.

(b) Income pursuant to waiver accrued on settlement because prior thereto claim of the bank was alive and that income must be recognized in the period during which settlement took place.

(c) Judgment of this Court in Tosha International Ltd. (supra) was distinguishable because all that was decided was that the principal amount written off was not taxable under Section 41(1) of the Income Tax Act, 1961 (hereinafter referred to as „the Act?) and it was not held that such income was exempt.

(d) Income was taxable under the head profit and gains of business and profession because loan was taken for the purpose of business and one time settlement was an integral part of the business.

4. A perusal of the definition of Section 2(24) of the Act, which defines "income" would include the value of any benefit or perquisite, whether convertible into money or not, that would arise from the business. In order to appreciate the issue involved, it is relevant to extract the necessary provisions of the Act.

“2(24)"income" includes-

(i)profits and gains; (vd)the value of any benefit or perquisite taxable under Clause (iv) of Section 28;”

5. Section 28(iv) of the Act, comes under the heading "Profit and Gains of business or profession" and the same is extracted herein:

“28(iv)the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.”

6. Similarly, Section 41(1) of the Act deals with "profits chargeable to tax" and the same is extracted herein:

“41(1). Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by t