G. KRISHNAMURTHY, SR. VICE-PRESIDENT: Order assessee in firm deriving income from manufacture and sale of things and other hardware goods and also agricultural implements. For assessment year under appeal return of income was filed showing income of Rs. 27,705. After examining accounts and after making certain minor disallowance s, total income was assessed on Rs. 29,018. Subsequently CIT by invoking provision of s. 263 initiated proceedings as in his view assessment made by ITO was erroneous and prejudicial to interests of Revenue because of remission of interest of Rs. 1,20,373 given by assessee s bankers was not brought to tax under provisions of s. 41(1) of IT Act, 1961. non-inclusion of interest under s. 41 (1) was considered by CIT as resulting in loss or revenue facts relating to this sum are as under : 2 . assessee alongwith two other concerns, namely. M/s Chetan Swarup Vinod Swarup and M/s Chaten Gupta & Co. originally belonged to family known as Chetan Swarup Gupta. All these three concerns were having their independent business and were allowed certain overdraft facilities by Oriental Bank of Commerce in 1977. As on 31st March 1981 they owed to Bank sum or Rs. 15,40,430. Shri Alok Gupta son of Shri Chetan Gupta approached bankers to review outstanding liabilities and to grant remission. bank considered request and came to following decision on 15th May 1981 : "3.2 As it already been stated, Chetan Gupta & Co. & Anand Iron & Steel Industries are lying closed as there is no one to look after affairs of these firms. In fact borrower s had adjusted outstandings of Vankashwara Steel Private Limited after disposing of unit. Lata Shri Chetan Gupta s son Alok Gupta is looking after affairs of firm Chetan Swarup Vinod Swarup and he does not have much experience in line. outstandings have mainly piled up with application of interest. In effort to adjust outstanding of Group as whole. Alok Gupta has approached Bank with request that since they have already sold one unit viz. Venkateshwara Steel Pvt. Ltd. and since two out of remaining units are lying closed, Bank may grant concession in interest charged and accept payment of Rs. 12,000 lacs for full and final settlement of outstanding of Rs. 15.40 lacs which have piled up with application of interest. He has proposed to pay 50 per cent of sum i.e. Rs. 6.00 lacs within week s time and balance amount of Rs. 6.00 lacs within 45 days of Bank s communicating of acceptance of arrangement. 3.3. Recommendations : Keeping in view facts enumerated above, matter is being placed before Board of Directors for its consideration and it is recommended that borrowers offer of Rs. 12.00 lacs as full and final settlement of outstanding of Rs. 15.40 lacs may please be accepted. borrowers will be asked to make payment of Rs. 6.00 lacs immediately on signing agreement. balance amount of Rs. 6.00 lacs will by paid within 15 days time." Thus as against liability of Rs. 15.40 lacs it was settled for Rs. 12 lacs of which Rs. 6 lacs was to be paid immediately and balance of Rs. 6 lacks was to be paid within 15 days time. ITO verified from bank as to how interest was adjusted by bank to assessee account and it was revealed that bank had charged interest on over draft facilities availed of by assessee in following manner : Year Period Amount 1978 January-December Rs. 35,389.80 1079 -do- Rs. 34,153.50 1980 -do- Rs. 45,761.80 1981 January-March Rs. 12,197.00 Rs. 1,26,501.38 Against above interest of Rs. 128.501 CIT mentioned in his order that rebate of Rs. 1,20,373 was allowed to assessee in terms of Broad s resolution dt 12th May 1981 reproduced above. According to him this rebate should have been brought to tax by ITO under provisions of s. 41 (2) of IT Act. 3. In response to notice issued by CIT under s. 263 assessee contended that remission of Rs. 1.20,373 was not out of interest or towards interest but out of capital and therefore there was no question of invoking provisions of s. 41 (2). CIT refused to accept this submission. This is what he said. "I am afraid that I cannot subscribe to this view because it is clear from bank memorandum dt. 12th May 1981 that Sri Alok Gupta had specifically approached bank for remission of interest and that bank met his claim in same spirit. there is no doubt in my mind that there was consensus in this respect between two. It therefore, does not lie in assessee s mouth to raise plea that remission should be considered toward capital. ITO is therefore, directed to reframe assessment after duly keeping in view provisions of s. 41(2) of IT Act as explained above and demand and recover whatever additional tax is found due from assessee." Aggrieved by this order of CIT, present appeal is filed. contention urged on behalf of assessee was that there was hooting in resolution dt. 12th May 1981 passed by Bank that remission given by them was towards interest and that too sum of Rs. 1,20,373 was given by way of rebate out of interest of Rs. 1,28,501. In absence of any specific remission given by Bank, it must be construed that remission given by bank was only out of capital and not out of interest. In any case there was nothing specific about it in bank s resolution even though request was made to bank that it was on account of interest that loan amount had accumulated to Rs. 15.40 lacs and owing to financial strain on closure of business, that amount should be sealed down it was interest component that was remitted. It is, therefore, pointed out that view taken by CIT was erroneous and that there was no prejudice caused to interests or Revenue by order passed by ITO. ld. Departmental Representative relied upon order of CIT and submitted that even casual reading of board s resolution would show that it was interest that was remitted and therefore, provisions of s. 41 were properly applied and that order of CIT must be upheld. 4 . Now question ultimately comes to what exactly does banks resolution convey and whether there is anything to suggest that it was interest that accumulated that was given up by bank or capital also was reduced. It is no doubt true that resolution refers to fact that outstanding amount piled up mainly due to charging of interest and that bank was approached to grant concession and accept payment of Rs. 12 lacs in full and final settlement of outstanding. But in actual recommendation part all that was said was that borrower s request of Rs. 12 lacs no full and final settlement of outstanding of Rs. 15.40 lacs was to be accepted. Thus there was nothing specific to show that it was interest that was given up by bank. In this connection we wish to refer to order passed by Tribunal, Delhi Bench `B in case of Chetan Gupta vs. ITO ITA. No. 456 of 1970-71 which was referred to us and which contained somewhat similar facts and circumstances. There assessee obtained cash credit from Bank of Bikaner and Jaipur Ltd. Delhi. As on 12th June 1961 sum of Rs. 4,13,293 was owing to bank. As assessee failed to clear arrears bank brought suit for its recovery in Civil Court in Delhi. suit was ultimately compromised by assessee agreeing to pay Rs. 1,25,000 in full and final settlement. This naturally resulted in remission of Rs. 2,88,293. This sum included sum of Rs. 31.239 interest that was allowed to assessee in earlier years. ITO wanted to bring this sum of Rs. 31,239 to tax under provisions of s. 10(2) (vi) of old Act on ground that remission granted resulted in assessee getting benefit out of interest allowed earlier as deduction. When matter reached Tribunal Bench held relying upon decision of Privy Council reported in AIR 1922 Privy Council 233 and AIR 1946 Privy Council 145 and AIR Madhya Bharat 154 that in absence of any appropriation by one side or other well established general rule of appropriation of amounts was that money must first be applied in payment of interest by creditor and then in payment of capital. Applying this rule Bench held that there was nothing to hold that payment of Rs. 1,25,000 was not towards interest in overdraft account. It therefore, held that there was no justification In treating sum of Rs. 31,239 as remission of interest i.e., to say Bench held that payment made by assessee must first be appropriated towards interest and then towards capital. If same principle is applied here, sum of Rs. 12 lacs paid by assessee must be first appropriated towards interest and only balance towards capital. If that was so. there would be no question of remission of any amount out of interest. resolution passed by board reproduced above does not show mode or manner of appropriation of amount by Bank In absence of any method of appropriation general rule of appropriation of money paid by debtor to creditor would apply and under rule amount paid should first be appropriated towards interest. Such being case there is no question of remission of interest at all. This view later followed by Delhi Bench D in case of same assessee for asst. yr. 1968-69 vide ITA No. 309 of 1973-74. discussion on this point would be found in paragraph 10 at page 63 of paper book. This rule of appropriation has also been approved off by Supreme Court in case of Meghraj & Others vs. Mst. Dayabai and Others AIR 1970 SC 161. Supreme Court held that under Order 21 r.1 of CPS 1908 in case of payment of decretal amount by mortgagor, its appropriation must be toward interest first and then towards principal unless mortgagee was informed that payment was towards principal and mortgagee agreed to it. Supreme Court in this case explained provisions of Contract Act particularly s. 60 and held that normal rule was that payment must be appropriation towards interest. We are, therefore, of opinion that in absence of anything in Board s resolution passed appropriating amount paid by assessee towards capital and then towards interest, we hold that payment made by assessee should first be appropriated towards interest and then towards capital. If amount of Rs. 12 lacs was appropriated towards interest then there is no question of remission of interest. In any case there is nothing in resolution to suggest as mentioned by CIT in his order that sum of Rs. 1,20,373 was given by way of rebate out of interest of Rs. 1,28,501. For these reasons we hold that view taken by CIT is not proper and justified and as consequence there is no prejudice caused to interest of Revenue at all. 5. In result, appeal is allowed. *** ANAND IRON & STEEL INDUSTRIES v. INCOME TAX OFFICER