Is it against the rule to edit/modify/enhance a wordpress theme/plugin (which is freely available) and redistribute the same with a link back added to my site! Can i upgrade a theme / plugin which is discontinue and redistribute the same for free on wordpress ? is this against the rule ? Hope this is the right section ?
I have not read Wordpress TOS but it has already been done. Take example of this original plugin http://wordpress.org/extend/plugins/hyper-cache/ and here the extended one from different author http://wordpress.org/extend/plugins/hyper-cache-extended/ . The author of the extended plugin have mentioned the original author and so I guess it is ok as long as you give credit to where it is due.
As long as you give due credit to the original author everything is alright. Afterall the person who developed it from scratch needs the credit.
I've also seen it done many times with credit given to the original author. I don't think there is anything wrong with benefiting from your hard work with a link-back to your website as long as you mention the person who originally created the plugin.