Effect of order passed by Board for Industrial and Financial Reconstruction under scheme for rehabilitation of sick units on determination of losses

1. The Sick Industrial Companies (Special Provisions) Act, 1985 was passed by the Parliament and received the assent of the President on 8-1-1986.  The Act was introduced with a view to securing timely detection of sick units and speedy determination by the Board for Industrial and Financial Reconstruction (BIFR) of remedial and other measures required to be taken for their rehabilitation.

2. Under section 17(3) of the Sick Industrial Companies (Special Provisions) Act, 1985, in cases where it is not practicable for a sick industrial company to make its net worth positive within a reasonable time, the BIFR is empowered to sanction a scheme providing for such remedial measures in relation to the said sick company for its rehabilitation.  Section 32(1) of this Act reads as follows :—

“The provisions of this Act and of any rules or schemes made thereunder shall have effect notwithstanding anything inconsistent therewith in any other law except the provisions of the Foreign Exchange Regulation Act, 1973, and the Urban Land (Ceiling and Regulation) Act, 1976, for the time being in force or in the Memorandum or Articles of Association of an Industrial company or in any other instrument having effect by virtue of any law other than this Act.”

The Central Board of Direct Taxes have been advised that if a scheme is sanctioned in pursuance of section 17(3) of the Act, it will have an overriding effect over the provisions of the Income-tax Act by virtue of section 32 of the Act.

3. Consequently, if the BIFR sanctions a scheme under section 17(3) of the Act specifically excluding or limiting the application of sections 41(1), 79 and 115J or of any one or more of these sections of the Income-tax Act, 1961 in respect of assessment years which are also specified, then the Assessing Officer will have to take due cognizance of this order and give effect to the same.  Such a situation may arise in the case of a sick industrial company which has debited its account in respect of its interest liability in a particular assessment year.  Subsequently, if in a scheme sanctioned by the BIFR, banks are directed to either waive or reduce the interest liability, this remission will become chargeable to tax under section 41(1) of the Income-tax Act in the year of reduction or waiver by the banks.  It is possible that for speedier rehabilitation, the BIFR in its scheme provides that section 41(1) would not apply in the case of the sick company.  The Assessing Officer, in these circumstances, will not subject to tax the remission or cessation of interest liability under section 41(1).

4. It may, however, be clarified that section 32(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 refers only to the “Provisions of this Act, and of any rules or scheme” made thereunder and not to orders passed under section 17(2).  Therefore, orders passed by BIFR under section 17(2) will not have the effect of overriding the provisions of the Income-tax Act.

Circular : No. 523, dated 5-10-1988.

Note : In CIT v. Bangabasi Theatres (P.) Ltd.  [1993] 71 Taxman 408 (Cal.), it was observed that it has been laid down in Instruction No. 1807, dated 14-5-1985 that the department accepted the decision in the Presidency Medical Centre (P.) Ltd. v. CIT [1977] 108 ITR 838 (Cal.) prior to assessment year 1984-85.

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