BIFR rehabilitation relief requires objective financial assessment, so capital gains exemption was refused while interest and penalty were deleted.

Relief under a BIFR rehabilitation scheme must be tested against an objective assessment of the company's actual financial position, and exemption from capital gains tax cannot be claimed as of right merely because the scheme contemplates such consideration. Applying that standard, the Court held that the company's profitability and exit from rehabilitation justified refusal of the exemption, while its continuing liabilities could still be noted. The substantive tax liability was upheld, but interest and penalty for the period during which the dispute remained pending were deleted.

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Issues: Whether, in the facts of the case and having regard to the BIFR rehabilitation scheme and the company's financial position, the petitioner was entitled to exemption from capital gains tax on sale of assets.

Analysis: Section 32 of the Sick Industrial Companies (Special Provisions) Act, 1985 gives overriding effect to directions issued in rehabilitation proceedings. The BIFR had directed the income-tax authorities to consider exemption from capital gains tax, but the grant of such relief still depended on an objective assessment of the actual financial position. The Court noted that the company had shown profitability and had emerged from the rehabilitation phase, while also observing that its future liabilities, including preference share redemption, could not be ignored. On the material placed before it, the refusal to grant exemption could not be held illegal or arbitrary. At the same time, since the matter had remained pending through multiple rounds of proceedings, the demand for interest and penalty for that period was not justified.

Conclusion: The petitioner was not entitled to exemption from capital gains tax, but it was entitled to relief against interest and penalty for the period during which the dispute remained pending.

Final Conclusion: The writ petition succeeded only to the limited extent of deleting interest and penalty for the pendency period, while the substantive tax liability was upheld.

Ratio Decidendi: Relief under a BIFR rehabilitation scheme must be tested on the basis of an objective assessment of the actual financial position, and exemption from capital gains tax cannot be claimed as of right merely because the scheme contemplates consideration of such relief.

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