2012 (12) TMI 719 - AT - Income Tax

Tribunal rules on bad debts, stockist discounts, sales tax subsidy, and capital gains

Dy. Commissioner of Income-tax. Circle 2(2). Hyderabad Versus Hyderabad Industries Ltd.

Dy. Commissioner of Income-tax. Circle 2(2). Hyderabad Versus Hyderabad Industries Ltd. - TMI Issues Involved:1. Allowance of bad debts under Section 36(1)(vii) of the Income Tax Act.2. Treatment of sales tax collection as capital receipt due to subsidy.3. Disallowance of discount given to stockists.4. Computation of capital gains arising from the transfer of an undertaking.Detailed Analysis:1. Allowance of Bad Debts under Section 36(1)(vii) of the Income Tax Act:The first issue pertains to the allowance of bad debts written off in the books of accounts. The Assessing Officer (AO) disallowed the bad debts claimed by the assessee due to a lack of evidence proving that the debts were part of the income in earlier years and that necessary recovery steps had been taken. The CIT(A) allowed the appeal, stating that the debts were indeed part of earlier income and written off in the current year, and it was not necessary for the assessee to prove the irrecoverability of the debts. This decision was supported by various case laws, including the Supreme Court's decision in TRF Ltd Vs CIT, which held that post-amendment of Section 36(1)(vii), it is sufficient if the bad debt is written off in the accounts. The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decision.2. Treatment of Sales Tax Collection as Capital Receipt:The second issue involves the treatment of sales tax subsidy received by the assessee under the Maharashtra Government Scheme as a capital receipt. The AO treated the sales tax collection as a trading receipt, citing several case laws. However, the CIT(A) allowed the appeal, stating that the subsidy was granted to set up an industry in a backward area and should be treated as a capital receipt, not liable for tax. This decision was supported by the Special Bench of ITAT in Reliance Industries Ltd. and other judicial precedents. The Tribunal set aside the issue to the AO to verify if the subsidy scheme was identical to the one considered in Reliance Industries Ltd. If so, it should be treated as a capital receipt.3. Disallowance of Discount Given to Stockists:The third issue concerns the disallowance of discounts given to stockists, which the AO treated as commission subject to TDS under Section 194H. The CIT(A) allowed the assessee's claim, differentiating between discounts and commissions and noting that discounts are abatements in sale prices, not commissions. The Tribunal upheld the CIT(A)'s decision, emphasizing that the discounts given to stockists were not commissions and thus not subject to TDS under Section 194H.4. Computation of Capital Gains from Transfer of Undertaking:The fourth issue involves the computation of capital gains arising from the transfer of the assessee's heavy engineering division. The AO applied Section 50C, treating the transaction as a sale of assets and computing capital gains accordingly. The CIT(A) ruled in favor of the assessee, stating that the transfer was a slump sale and not governed by Section 50C. The Tribunal upheld this decision, noting that Section 50C does not apply in the absence of a registered sale deed and that the transfer should be treated as a slump sale under Section 50B.Conclusion:The Tribunal's decision resulted in the partial allowance of the revenue's appeals for statistical purposes, affirming the CIT(A)'s decisions on the allowance of bad debts and the disallowance of discounts given to stockists, while remanding the issue of sales tax subsidy and the computation of capital gains for further examination by the AO.