The court determined that forgiven interest prior to amalgamation constituted income assessable under S.41(1) and should be factored into loss computations under S.72A.

1. This appeal is preferred against judgment dated 05.04.2005 of the High Court of Karnataka whereby the appeal of Commissioner of Income Tax (Revenue) was allowed setting aside the order to the Income Tax Appellate Tribunal(ITAT) which had granted the benefit of provisions of S.72A of the Income Tax Act, 1961 (hereinafter referred to as 'Act' ) to the appellant - assessee and, at the same time, held that waiver of interest by financial institutions would not be treated as income of the appellant - assessee under S.41(1) of the Act.

2. Brief summary of the facts which have led to the present appeal may be taken note of at this stage.

3. There was a company known as M/s. Hindustan Polymers Limited (HPL) which had become a sick industrial company. Proceedings in respect of the said company were pending before the Board for Industrial and Financial Reconstruction (BIFR) under Sick Industrial Companies Act (SICA). At that stage, petitions under S.391 and S.392 of the Companies Act, 1956, were filed in the High Court of Bombay and Madras for amalgamation of HPL with the assessee - appellant herein i.e., M/s. McDowell and Company Limited. Both the High Courts approved the scheme of amalgamation as a result of which, w.e.f. 01.04.1977, HPL stood amalgamated with the assessee / appellant - company.

4. As mentioned above, HPL, which was an industrial undertaking, had become a sick company and it owed a lot of money to banks and financial institutions. In its books of accounts, the interest which had accrued on the loans given by such financial companies were shown as the money payable on account of interest to the said banking companies and was reflected as expenditure on that count. As the interest payable was treated as expenditure, benefit thereof was taken in the assessment orders made. The assessee had approached the Central Government, before moving the High Court, with the scheme of amalgamation for getting benefits of S.72A of the Act. This section makes provisions relating to carry forward and set off accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation or demerger etc. Under certain circumstances and on fulfillment of conditions laid down therein, the company which takes over the sick company is allowed to set off losses of the amalgamated company as its own loses. The Central Government had made a declaration to this effect under S.72A of the Act granting the benefit of the said provision to the assessee.

5. Under the scheme of amalgamation that was approved by the High Court, after following the procedure in terms of S.391 and S.392 of the Companies Act, which includes the consent of the secured creditors as well, the banks which had advanced loans to HPL agreed to waive off the interest which had accrued prior to 01.04.1977. As already stated above, this interest was claimed as expenditure by HPL in its returns. On the waiver of this interest, it became income in terms of S.41(1) of the Act. In the return filed by the assessee for the Assessment Year 1983-1984, the assessee claimed set off of the accumulated loses which it had taken over from HPL by virtue of the provisions contained in S.72A of the Act. This was allowed. However, later on, it came to the notice of the Assessing Officer that while allowing the aforesaid benefit to the assessee, the income which had accrued under S.41(1) of the Act had not been set off against the accumulated loses. It so happened that on certain grounds, the assessment was reopened by the Assessing Officer and while undertaking the exercise of reassessme