This appeal preferred by assessee is directed against order passed by learned CIT(A)-VI, Kolkata, dt. 26th Oct., 2004 for asst. yr. 2001-02 on following grounds: (i) For that learned CIT(A) erred in upholding order of AO, treating Rs. 3,52,46,000 on account of outstanding interest as income under s. 41(1) and treating Rs. 1,67,55,000 on account of write back of liability of principal sum as income holding same as trading receipt. (ii) For that learned CIT(A) erred in confirming action of AO in treating Rs. 5.20 crores as deemed profit under s. 41(1)/trading receipt under IT Act. Brief facts relating to this case are that assessee-company had obtained unsecured loan during earlier years from IFB Industries Ltd. and had provided for interest thereon and total amount of such unsecured loan together with interest accrued thereon as on 31st March, 2000 was Rs. 8,81,97,482 which comprised of principal loan amount of Rs. 5.20 crores and balance amount of Rs. 3,61,97,482 represented unpaid but accrued interest thereon. Since assessee-company had been consistently incurring operating losses since year 1995-96 and had accumulated losses to extent of Rs. 6,80,97,003 along with preliminary expenses of Rs. 42,62,447 against share capital of Rs. 9,99,80,000 thereby erasing paid-up capital of assessee- company by more than 70 per cent, lender company M/s IFB Industries Ltd. (in short IFBI) vide agreement dt. 9th Aug., 2000 assigned its unsecured loan together with interest due from assessee-company to Nurpur Gases Ltd. (in short NGL). After such assignment of unsecured loan by IFBI, M/s NGL approached assessee-company for compromise and settlement of dues which finalized on 10th Nov., 2000. said compromise and one-time settlement finalised between assessee-company and M/s NGL stipulated that assessee-company shall pay sum of Rs. 352.45 lakhs only towards outstanding interest of Rs. 3,61,97,482 and M/s NGL shall waive entire principal amount of loan of Rs. 5.20 crores and balance outstanding interest of Rs. 9,52,482 and entire dues of Rs. 881.97 lakhs shall stand discharged and liquidated. As result of aforesaid compromise, assessee-company liquidated entire unsecured loan from balance sheet as at 31st March, 2001 and transferred to capital reserve in balance sheet waived principal amount of loan of Rs. 5.20 crores and credited unpaid interest amount of Rs. 9,52,482 to its P&L a/c for year under consideration. AO during course of assessment proceedings has not accepted above mode of settlement by assessee and has observed that payment by assessee should first be apportioned against principal amount and has thereafter reducing payment from principal amount has treated balance principal amount of Rs. 1.68 crores together with interest of Rs. 3.52 crores, as income of assessee by invoking provisions of s. 41(1) of IT Act, 1961 and has accordingly taxed aforesaid amount. assessee has kly assailed order of AO before learned CIT(A) and has submitted that action of AO in invoking provision under s. 41(1) was not correct as assessee had not claimed unsecured loan of Rs. 5.20 crores either as expenditure, loss or trading liability in earlier year s assessment and, therefore, provision of s. 41(1) has no application. assessee has further submitted that since interest liability of Rs. 9,52,482 was not paid by assessee as result of compromise and waiver, assessee had itself offered aforesaid amount of Rs. 9,52,482 for tax and had credited same to P&L a/c. assessee has also relied on various decisions of Tribunals and Courts in support of its contention that provisions of s. 41(1) do not apply where no allowance or deduction has been granted to assessee in earlier assessment year. assessee has further submitted before learned CIT(A) that entire compromise between assessee- company and M/s NGL is duly supported by bona fide agreement between them wherein both have specifically agreed vide cl. 1(a) at p. 3 of agreement that entire payment of Rs. 352.45 lakhs being made by assessee to M/s NGL is on account of outstanding interest payment only and nothing else. assessee further contended before learned CIT(A) that AO while making addition has basically doubted compromise between assessee- company and M/s NGL observing that same has been made just to accommodate assessee. assessee contended that legality of position would have not been different at all even if assessee-company would have entered into compromise/settlement with IFBI. It was, therefore, pleaded by assessee before CIT(A) that entire waiver of unsecured loan of Rs. 5.20 crores was item of capital receipt which was not liable to tax under s. 41(1) of IT Act, 1961. assessee also submitted opinion report from M/s Price Water House & Co. before CIT(A) in support of its above contention. learned CIT(A) after considering above submission of assessee and opinion report of M/s Price Water House & Co. has observed that above submission of assessee and opinion basically relates to situation where one-time settlement had been made between two parties, i.e., loan debtors and creditors and relates to outstanding principal loan amount including interest which had been written off from accounts of both parties involved in settlement, whereas in present case, third party i.e. M/s Nurpur Gases Ltd. is involved in settlement and loan amount including accrued interest had been assigned to Nurpur Gases Ltd. in accordance with agreement and, therefore, outstanding loan amount including interest had not ceased to exist except in accounts of assessee as loan amount has got new destination. learned CIT(A) has further held that plea of assessee for apportioning payment firstly with interest is not acceptable because IFB Industries had never foregone its principal or interest amount. learned CIT(A) has also observed that since assessee-company (had) straightway written off debt and transferred balance amount to capital reserve, assessee-company had obtained some benefit in respect of its liability to pay outstanding interest by way of cessation thereof and as per Expln. 1 to s. 41(1), remission or cessation for this purpose includes unilateral act of assessee by way of writing off such liability in its books of account. learned CIT(A) has accordingly held that sum of Rs. 361.97 lakhs minus Rs. 9.51 lakhs, i.e., Rs. 352.46 lakhs has rightly been added back to assessee s total income under s. 41(1) of IT Act and has further upheld order of AO that payment made by assessee-company should first be reduced from principal amount and balance amount should be treated as deemed profit under s. 41(1) as trading receipt of assessee. learned CIT(A), therefore, has confirmed addition of Rs. 5.20 crores made by AO as deemed profit under s. 41(1). assessee is aggrieved with such order of learned CIT(A) and has now come in appeal before us. In appeal before us, learned counsel for assessee while assailing t h e order of AO and CIT(A) has submitted that both AO and CIT(A) while upholding addition have ignored fact that assessee had made correct disclosure of principal amount of loan and interest thereon. It was pointed out by learned counsel for assessee that since loan outstanding with M/s IFBI was transferred to M/s NGL at discount of 30 per cent and thereafter M/s NGL has entered into bona fide settlement agreement with assessee by waiving principal amount and partly waiving interest outstanding, action of learned CIT(A) in upholding action of AO by first adjusting payment towards principal amount is highly unjustified and against terms of settlement agreement between parties. learned counsel for assessee has stated that M/s NGL has agreed to accept sum of Rs. 352.45 lakhs towards one-time settlement of entirety o f such loan and interest as per cl. 1 sub-s. (a) of settlement agreement between assessee and M/s NGL. It was further contended by learned Authorised Representative that above clause clearly speaks about fact that such payment of Rs. 352.45 lakhs will be adjusted towards outstanding interest and, therefore, action of AO and learned CIT(A) in first adjusting payment towards principal amount is without any basis and against contents of settlement agreement between parties. learned counsel for assessee has also filed paper book wherein balance sheet of assessee- company, deed of agreement between assessee and M/s NGL and other document has been filed. learned counsel for assessee has vehemently argued that once agreement is on record, action of AO and CIT(A) while taking different view without disputing agreement between parties is not correct. It has been contended by learned counsel that agreement has to be accepted in entirely and not in part. learned counsel has further drawn attention of this Bench at p. 37 of paper book wherein M/s IFBI has written to assessee regarding settlement of dues and confirming same. It has been argued by learned counsel that once agreement has not been disputed and assessee has entered relevant entries in books of account as per deed of agreement, it is not justified on part of Revenue to dispute such agreement between parties and thereafter making disallowance on some other ground only on basis of assumption and surmises. In support of his contention, he has relied on judgment of Tribunal, Mumbai Bench in case of Amitabh Bachchan vs. Dy. CIT (2005) 97 TTJ (Mumbai) 516, wherein it was held that Revenue cannot assess more than real income in respect of transaction entered into by parties. Relying on para 10 of above order, learned counsel has submitted that Revenue cannot blow both hot and cold while considering assessee s agreement with M/s NGL. learned counsel for assessee has, therefore, submitted that it was not justified on part of Revenue to take contrary stand in relation to assessee s agreement w i t h M/s NGL without disputing and doubting genuineness of such agreement. learned counsel for assessee has further relied on decision of Hon ble Calcutta High Court in case of CIT vs. Modest Enterprises Ltd. (1994) 207 ITR 618 (Cal), wherein it was held that assessee-company had option to allocate amount received back from debtors either towards capital or towards interest. learned counsel has submitted that facts involved in present case are similar to one which were disposed of by Hon ble Calcutta High Court in case of Modest Enterprises Ltd. (supra). As in this case also, both assessee and lender M/s NGL had agreed to allocate payment towards outstanding interest. learned counsel further submitted that identical decisions were taken by Hon ble Allahabad High Court in case of Ramji Lal Rais vs. ITO (1963) 49 ITR 167 (All) and by Hon ble Calcutta High Court in case of Gopi Ram Govinda Ram, In re (1936) 4 ITR 157 (Cal). learned counsel for assessee has thereafter contended that waiver of loan by creditors cannot be taxed under s. 41(1) of Act as same is outside scope of this section. learned counsel has submitted that remission of liability in case of loan cannot be taxed in hands of assessee as evident from plain reading of said section and as also decided by this Tribunal in case of Nisha Singhania & Ors. vs. ITO in ITA No. 538/Kol/2001, dt. 28th Jan., 2005. learned counsel has pleaded that though assessee has cited various judgments before learned CIT(A). Same have been rejected by CIT(A) holding that waiver of loan by M/s NGL is trading receipt in hands of assessee which is liable to be taxed under s. 41(1). It has been vehemently argued by learned counsel that there cannot be any trading receipt on account of waiver of loan, hence finding of AO and learned CIT(A) while assuming above waiver of loan as trading receipt in hands of assessee is wrong. In support of his contention, he has relied on decision of Hon ble Bombay High Court in case of CIT vs. Mahindra & Mahindra (1973) 91 ITR 130 (Bom), wherein it was held that receipt is not taxable if it is referable to fixed capital. He has also relied on decision of Hon ble Delhi High Court in case of D.L.F. Housing & Construction (P) Ltd. vs. CIT (1982) 29 CTR (Del) 199: (1982) 141 ITR 806 (Del) wherein it was held that income does not include fixed capital or realizing of fixed capital by turning it into some other form of capital or money. learned counsel has also relied on judgment of Hon ble Gujarat High Court reported in case of CIT vs. Bhavnagar Bone Fertilizers Co. Ltd. (1987) 59 CTR (Guj) 116: (1987) 166 ITR 316 (Guj), wherein it was held that credit balance on transfer of capital reserve account is not benefit arising to assessee from business and hence cannot be assessable as income from business. learned counsel has also rebutted observation of learned CIT(A) that whole exercise was done by assessee, M/s IFBI and M/s NGL for inflating market value of shares and has contended that learned CIT(A) while giving such finding was not justified as same was not based on any material available on record and was rather not at all related to issue involved in this case. Concluding his argument, learned counsel for assessee has vehemently argued that since entire transactions were duly disclosed by assessee in its books of account as per settlement deed entered by assessee with M/s NGL and such settlement agreement has not been disputed by Revenue at any stage, action of AO and learned CIT(A) in making addition only on mere presumption and assumption and without appreciating clause of settlement agreement between parties is not justified and, therefore, addition confirmed by learned CIT(A) is liable to be deleted. In his rival submission, learned Departmental Representative for Revenue has relied heavily on order of AO and CIT(A). It has been submitted by learned Departmental Representative that it was not always necessary that assessee (has) to get benefit by way of cash for application of provisions of s. 41(1) of Act and since loan owed by assessee to M/s NGL was trading liability which was written back in year under consideration. Application of provision of s. 41(1) was perfectly justified. In support of his argument, he has relied on following judgments: (i) In case of Express Newspapers (P) Ltd. vs. CIT (1997) 138 CTR (Mad) 12: (1997) 227 ITR 325 (Mad); (ii) In case of CIT vs. Manohar Bandhu (1983) 37 CTR (Bom) 184: (1984) 148 ITR 108 (Bom); (iii) In case of CIT vs. T.V. Sundaram Iyengar & Sons Ltd. (1996) 136 CTR (SC) 444: (1996) 222 ITR 344 (SC); (iv) In case of CIT vs. Aries Advertising (P) Ltd. (2002) 175 CTR (Mad) 630: (2002) 255 ITR 510 (Mad). It has, therefore, been submitted by learned Departmental Representative that order of learned CIT(A) be upheld. In his rejoinder, learned counsel for assessee has submitted that t h e case laws relied by learned Departmental Representative are not identical to fact involved in this case. It has further been submitted by learned counsel for assessee that so far as trading transaction is concerned, same may be trading transaction for M/s NGL but certainly not for assessee. not for assessee. We have given our careful consideration to rival submission made before us and have perused orders of tax authorities. We have also considered case laws cited by both parties and paper book filed before us. In this instant case, Revenue has added sum of Rs. 5.20 crores on account of waiver of loan by lender under s. 41(1) of Act. learned CIT(A) while sustaining addition has upheld order of AO that payment by assessee to lender M/s NGL should first be apportioned against outstanding principal and balance principal amount together with interest should be added under s. 41(1) of Act and has, therefore, confirmed addition of Rs. 5.20 crores in hands of assessee. assessee on other hand has disputed order of Revenue contending that payment by assessee was first to be apportioned against outstanding interest as per cl. (1)(a) of settlement agreement between assessee and M/s NGL which is available at p. 41 of paper book which is reproduced hereunder for sake of clarity: parties confirm that entirety of said dues which was approximately Rs. 881.97 lakhs only stands discharged and liquidated by way of NGL waiving entirety of principal amount of Rs. 520 lakhs only and accepting payment of Rs. 352.45 lakhs only towards outstanding interest. As observed above, Revenue has treated above settlement as not tenable and has added Rs. 520 lakhs to be taxed under s. 41(1) presuming that payment of loan to extent of Rs. 352 lakhs by assessee was first to be apportioned against principal amount and, therefore, balance outstanding principal amount along with interest thereon was to be taxed under s. 41(1) of Act. We have also considered fact that AO and learned CIT(A) while holding that payment first to be apportioned against outstanding principal amount, has not rebutted or disputed genuineness of agreement which clearly lays down that payment by assessee was first to be apportioned against outstanding interest and assessee has accordingly offered balance interest amount for taxation and has transferred entire principal amount of loan to capital reserve being out of purview of s. 41(1). Since learned CIT(A) has treated waiver of principal loan amount as trading receipt, we first deal with this issue and for facility of reference reproduce hereunder provisions of s. 41(1). "Where allowance or deduction has been made in assessment for any year in respect of loss, expenditure or trading liability incurred by a s s e s s e e (hereinafter referred to as first-mentioned person) and subsequently during any previous year, (a) first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, amount obtained by such person or value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as income of that previous year, whether business or profession in respect of which allowance or deduction has been made is in existence in that year or not; or (b) successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by first-mentioned person or some benefit in respect of trading liability referred to in cl. (a) by way of remission or cessation thereof, amount obtained by successor in business or value of benefit accruing to successor in business shall be deemed to be profits and gains of business or profession, and accordingly chargeable to income-tax as income of that previous year." From above definition of s. 41(1), it is well evident that principal loan amount cannot be taken under purview of above section as also held by this Tribunal in case of Nisha Singhania (supra) relied by learned Authorised Representative wherein this Tribunal by relying (on) order of Hon ble Gujarat High Court in case of CIT vs. Chetan Chemicals (P) Ltd. (2004) 188 CTR (Guj) 572: (2004) 267 ITR 770 (Guj) and order of co-ordinate Bench in case of Jt. CIT vs. Binani Zinc Ltd. (2004) 88 TTJ (Cal) 346: (2003) 84 ITD 691 (Cal) has held that loan cannot be added under s. 41(1) of Act. relevant observation of co-ordinate Bench in case of Binani Zinc Ltd. (supra) is reproduced hereunder: "Where person has obtained, in any manner whatsoever, any amount in respect of inter alia, expenditure by way of remission or cessation thereof, amount obtained by such person or value of benefit accruing to him shall be deemed to be profits and gains of business. Provided such expenditure has been allowed as deduction in any year. It is sine qua non for bringing remission or cessation of liability to tax under s. 41(1), that allowance or deduction has been made in assessment for any year for loss, expenditure or trading liability in respect of which such remission or cessation has been made. fortiorari, if expenditure, for whatever reason, has not been allowed as deduction in any previous year and liability in respect of such expenditure ceases in current previous year, such cessation of liability cannot be brought to tax in current previous year." Again coming to action of AO in first apportioning payment towards outstanding principal amount, we find that above action of AO was not tenable as assessee in this case has apportioned payment towards outstanding interest as per settlement deed with M/s NGL. Since such payments were allocated towards interest as per settlement deed entered between parties, in our considered opinion, case law of jurisdictional High Court relied by learned counsel for assessee in case of Modest Enterprises (supra) is squarely applicable wherein it was held by their Lordships as under: "The assessee-company had option to allocate amount received back from debtors either towards capital or towards interest. In this case, it was allocated towards capital. It is not case that law does not permit such adjustment when amount is received from debtors towards capital and creditors also want to do so. It is only where neither debtor nor creditor makes any appropriation either to capital or interest, that it would be open to Revenue to treat payment as applicable to outstanding interest. This is settled position of law in case of CIT vs. Maharajadhiraja Kameshwar Singh of Darbhanga (1933) 1 ITR 94 (PC). In instant case, payment is not open one and assessee as creditor had appropriated it to principal, leaving no room for controversy. principle laid down by judicial committee has been explained and reiterated by Supreme Court in CIT vs. T. S. PL. P. Chidambaram Chettiar (1971) 80 ITR 467 (SC)." Apart from above, we also find that identical case came before Hon ble Calcutta High Court in case of Gopiram Gobindram (supra) wherein it was held as under: "Where interest is outstanding on principal sum due and creditor receives open payment from debtor without any appropriation of payment as between capital and interest by either debtor or creditor, presumption is that payment is attributable, in first instance towards outstanding interest." Apart from above two cases, we find that in case of Ramji Lal (supra), Hon ble Allahabad High Court held that though under general law of appropriation if creditor has not appropriated particular payment against principal or interest, it is open to him to appropriate it either towards principal or interest. We also find that case law relied by learned Departmental Representative for Revenue is not identical to facts of case involved in present case. As in case of Express Newspapers (P) Ltd. (supra) relied by learned Departmental Representative for Revenue, assessee had made excess provision on account of interest payable which was found at lower side at time of settlement of accounts, which was considered taxable under s. 41(1), whereas in case of Manohar Bandhu (supra), assessee owed Rs. 51,130 to commission agent through whom it purchased goods and after discontinuance of service of such commission agent, settlement was made at Rs. 16,000 against outstanding of Rs. 51,130 and balance amount was added under s. 41(1). We find that this case also relates to expenditure earlier debited by assessee in P&L a/c. case law relied by learned Departmental Representative in case of T.V. Sundaram Iyengar & Sons Ltd. (supra) also, assessee itself had treated money as its own money and taken amount to its P&L a/c. Whereas in case of Aries Advertising (P) Ltd. (supra), assessee itself treated money as its own money and took amount to its P&L a/c. On other hand, we find that case laws relied by assessee are identical to case of assessee and waiver of principal amount cannot be held as trading liability to be added under s. 41(1) as held by this Tribunal in case of Nisha Singhania (supra) and since assessee has recorded entries in its books of account as per settlement deed entered by him with M/s NGL and such settlement deed has not been disputed by Revenue and addition has been made by AO on mere suspicion and without bringing any material, evidence on record to controvert such settlement deed entered by assessee with M/s NGL, above action of learned CIT(A) in confirming addition of Rs. 520 lakhs was unjustified, since assessee in this case has disclosed all relevant facts and material available on record and has accordingly maintained books of account as per agreement and objection raised by t h e AO and CIT(A) on such agreement between parties considering same as tool of tax evasion was not at all justified as assessee is at liberty to manage its affairs in manner of tax planning and if tax planning is lawful then it would be incorrect to allege deliberate intention and device of income, as also observed by Hon ble Calcutta High Court in case of Modest Enterprises (supra) vide para 9 of its order. We, therefore, after perusing facts, considering argument and also after going through various decisions of Tribunals and High Courts including that of Hon ble Calcutta High Court find that there is no dispute to fact that assessee has passed various entries in its books of account as per settlement agreement entered with M/s NGL and since this Tribunal in case of Nisha Singhania (supra) and Binani Zinc Ltd. (supra) has already held that unsecured loan cannot be taxed as trading receipt under s. 41(1) and action of assessee in first apportioning payment towards outstanding interest has also been justified by Calcutta High Court in case of Gopiram Gobindram (supra). In our considered opinion, action of learned CIT(A) in ignoring above settlement agreement and thereafter upholding action of AO in first above settlement agreement and thereafter upholding action of AO in first apportioning payment towards principal amount and thereafter adding entire balance principal amount and outstanding interest amount under s. 41(1) of Act was not justified, keeping in view of fact that assessee has rightly offered unpaid outstanding interest for taxation by crediting same in its P&L a/c and by transferring waived principal amount to general reserve as per settlement agreement and since waiver of principal amount does not come under purview of s. 41(1) as held by this Tribunal in above two cases, in our considered opinion, action of AO and CIT(A) in making addition of Rs. 520 lakhs in hands of assessee was not justified. We, therefore, delete such addition made by AO and confirmed by CIT(A) and accept ground raised by assessee in this regard. In result, appeal filed by assessee is allowed. *** IFB SECURITIES LTD. v. INCOME TAX OFFICER