BIFR rehabilitation relief and section 14A disallowance: loss set-off allowed, interest disallowance deleted, administrative expense sustained.

A BIFR-sanctioned rehabilitation scheme that expressly granted relief from the operation of section 72(3) was treated as overriding the restrictive tax rule on brought-forward business loss set-off, so the assessee was entitled to the benefit where the scheme had been approved after the Income-tax Department's views were considered. On section 14A, the interest-related disallowance was not sustainable because the assessee had sufficient interest-free funds in relation to the investments, but the administrative expenditure disallowance was maintained because no supporting material was produced to rebut it. The discussion therefore records partial relief on loss set-off and interest expenditure, with the administrative disallowance left intact.

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Issues: (i) Whether the assessee was entitled to set off brought forward business loss in view of the BIFR-sanctioned scheme and the statutory interplay with the Income-tax Act; (ii) whether the disallowance under section 14A was sustainable in respect of interest expenditure and administrative expenditure.

Issue (i): Whether the assessee was entitled to set off brought forward business loss in view of the BIFR-sanctioned scheme and the statutory interplay with the Income-tax Act.

Analysis: The sanctioned scheme from BIFR specifically contemplated relief from the operation of section 72(3) of the Income-tax Act. Once the scheme was sanctioned after consideration of the Income-tax Department's views, no further insistence on independent compliance could be raised to deny the statutory benefit. The special rehabilitation framework was treated as overriding the restrictive application of the income-tax provision in the facts of the case.

Conclusion: The disallowance of the set-off of brought forward business loss was not justified and the issue was decided in favour of the assessee.

Issue (ii): Whether the disallowance under section 14A was sustainable in respect of interest expenditure and administrative expenditure.

Analysis: The assessee had substantial interest-free funds compared with the investments, so the interest component of the disallowance could not be sustained. However, in respect of the administrative expenditure, no supporting details were furnished to dislodge the disallowance.

Conclusion: The disallowance was deleted for the interest component and sustained for the administrative component, so the issue was partly decided in favour of the assessee.

Final Conclusion: The appeal succeeded only to the extent of relief on the loss set-off and the interest-related disallowance, while the administrative disallowance under section 14A remained undisturbed.

Ratio Decidendi: A BIFR-sanctioned rehabilitation scheme granting relief from a tax restriction can prevail where the scheme expressly covers the relevant loss set-off issue, and a section 14A disallowance of interest cannot stand when sufficient interest-free funds are available.

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