IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE P.S.GOPINATHAN MONDAY, THE 22ND MARCH 2010 / 1ST CHAITHRA 1932 ITA.No. 1774 of 2009() ---------------------- ITA.971/COCH/2008 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT: -------------------- THE COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/APPELLANT: --------------- M/S.ACCELERATED FREEZE DRYING CO. LTD., ALLEPPEY. ADV. SRI.P.BALAKRISHNAN (E) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22/03/2010, THE COURT ON 22/03/2010 DELIVERED THE FOLLOWING: C.R. C.N.RAMACHANDRAN NAIR & P.S.GOPINATHAN, JJ. .................................................................... I.T. Appeal No.1774 of 2009 .................................................................... Dated this the 22nd day of March, 2010. JUDGMENT Ramachandran Nair, J. The only question raised in the departmental appeal is whether the waiver of part of the loan by the Banks granted to the assessee is assessable as income either under Section 28(iv) or under Section 41(1) of the Income Tax Act. We have heard Senior Standing Counsel Sri.P.K.R.Menon appearing for the Revenue and Adv. Sri.P.Balakrishnan appearing for the respondent-assessee. 2. As on the last day of the previous year, assessee had an accumulated liability due to the Banks amounting to Rs.3486.03lakhs which was settled on payment of Rs.2450 lakhs. In the process assessee saved an amount of Rs.1036.03 lakhs. The Assessing Officer assessed this as deemed income assessable under the Act, but without any specific reference to either Sections 41(1) or 28(iv) of the Act. Even though Standing Counsel has relied on judgment of the Supreme Court in COMMISSIONER OF INCOME-TAX VS. 2 T.V.SUNDARAM IYENGAR AND SONS LTD. reported in 222 ITR 344, we do not find any application for the said decision to the facts of this case. However, we find that interest, if any, written off by the Bank may be assessable under Section 41(1), if it was allowed as a deduction in any of the preceding assessments of the assessee. This is because interest paid on funds borrowed for business purpose is an allowable deduction under Section 36(1)(iii) of the Income Tax Act. If the interest allowed as a deduction in any assessment is waived, then of course such amount may be assessable under Section 41(1) of the Act. Counsel appearing for the assessee referred to the findings and observations in some orders produced in the court stating that no interest was charged by some Banks for some period and no waiver of interest was granted in the one time settlement. However, Standing Counsel submitted that when waiver is of consolidated amount, necessarily part of the interest also gets waived. We find force in this contention because the loan amount gets accumulated with interest accretion and even though final settlement does not show break-up details, necessarily a component of it is interest. An agreement between the parties granting waiver of part of the loan is not binding on the department because department is free to verify the break-up details 3 of accumulated loans and allocate from out of waiver, proportionate accretion towards interest. So much of the interest allowed as deduction from the preceding years that is waived by the Banks may be assessable under Section 41(1) of the Act. We do not wish to express any opinion on the assessability and on what amount assessment is called for because detailed facts have to be gone into by verifying the accounts of the assessee, the payments credited and the accumulations of interest added to the loan account. We, therefore, allow the appeal by setting aside the order of the Tribunal and remand the matter to the Assessing Officer for verifying the accounts of the assessee and making assessment, if possible under Section 41(1). We make it clear that no assessment is permissible under Section 28(iv) as the said Section has no application. The Assessing Officer should give sufficient opportunity to the assessee to substantiate their case. C.N.RAMACHANDRAN NAIR Judge P.S.GOPINATHAN Judge pms