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Issues Involved:
1. Applicability of Section 41(1) of the Income-tax Act, 1961 in relation to the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). 2. Justification of the Central Board of Direct Taxes (CBDT) in issuing Circular No. 683 dated 8.6.94. Issue-wise Detailed Analysis: 1. Applicability of Section 41(1) of the Income-tax Act, 1961 in relation to SICA: The petitioner, a company running a sugar mill and a distillery, faced financial difficulties leading to accumulated losses. Proceedings under SICA were initiated, and a revival scheme was sanctioned by the Board for Industrial and Financial Reconstruction (BIFR). The scheme included a clause stating that Section 41(1) of the Income-tax Act, 1961, would not apply to remissions, concessions, and reliefs given under the rehabilitation scheme. However, the scheme did not perform as expected initially, and the company later made a profit, leading to a one-time settlement of dues with financial institutions. The petitioner sought a waiver under Section 41(1) of the Income-tax Act regarding an interest amount of Rs. 332 lakhs but was denied by the Directorate of Income-tax. The petitioner argued that Section 41(1) does not provide financial assistance or relief to the sick unit, and thus, SICA's Section 19 should not apply. The petitioner contended that BIFR should have included a provision in the scheme exempting the company from Section 41(1) without requiring consent from the Income-tax authorities. The court examined Section 41(1) of the Income-tax Act, which deems the remission or cessation of a trading liability as profits and gains of business chargeable to tax. The court noted that excluding the operation of Section 41(1) would amount to a 'sacrifice' from the Central Government, as it would be foregoing potential tax revenue. Therefore, the question of excluding Section 41(1) falls under the purview of BIFR under Section 19 of SICA. The court concluded that BIFR should have formed an opinion on whether an exemption from Section 41(1) was necessary for the rehabilitation scheme and included it in the draft scheme. This draft should then have been circulated to the Director of Income-tax for consent, as required by Section 19(2) of SICA. 2. Justification of the CBDT in issuing Circular No. 683 dated 8.6.94: The CBDT issued Circular No. 683 in 1994, withdrawing earlier circulars that provided for the exclusion of Section 41(1) from rehabilitation schemes without requiring consent from the Income-tax authorities. The new circular stated that each case of fiscal concession would be considered on its merits, and consent would be required from the Director General of Income-tax. The petitioner's counsel argued that SICA, being a special legislation, should override the Income-tax Act, including Section 41(1). The court acknowledged that SICA has an overriding effect but only to the extent of inconsistency between the two laws. The court agreed with the CBDT's position that excluding Section 41(1) amounts to a 'sacrifice' from the Central Government and requires consent under Section 19 of SICA. The court held that BIFR should have communicated with the Income-tax Department as suggested by Circular No. 683 before finalizing the scheme. The procedure adopted by BIFR, which left the petitioner to seek exemption from the Director of Income-tax independently, was inconsistent with Section 19 of SICA. Conclusion: The court found that BIFR was not justified in finalizing the scheme without properly addressing the exemption from Section 41(1) of the Income-tax Act. Clauses 5.4 and 5.5(v) of the scheme were struck down. BIFR was directed to reconsider the petitioner's prayer for exemption, form its own opinion, and circulate the revised scheme for consent as required by Section 19 of SICA. The rest of the scheme remained valid and binding. The petition was partly allowed with no order as to costs.
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