2016 (4) TMI 1131 - AT - Income Tax

Tribunal Decision: Capital Gain, Compensation, Bad Debt, ESI Payment

The Tribunal upheld the CIT(A)'s decisions on various issues, including the deletion of capital gain under Section 50B of the Income Tax Act, disallowance ... Slump sale - assignment of values to individual assets and liabilities - capital receipt - reduction of cost of asset by compensation received - bad debts under Section 36(2) - deductibility under Section 43B where employees' contribution paid before filing returnSlump sale - assignment of values to individual assets and liabilities - Whether the transfer of Biax Division Unit II amounted to a slump sale attracting Section 50B. - HELD THAT: - The Tribunal held that slump sale provisions apply only where one or more undertakings are transferred for a lump sum consideration without values being assigned to individual assets and liabilities. In the present case the agreement and transaction recorded specific consideration for land, fixed assets and specified current assets, and not all loans and liabilities were taken over by the transferee. The transfer was therefore treated as itemised sale of assets and not a transfer of an undertaking as a whole. Reliance was placed on earlier tribunal authority to the same effect. Consequently Section 50B was held not attracted. [Paras 4]Transaction not a slump sale; provisions of Section 50B do not apply.Capital receipt - reduction of cost of asset by compensation received - Whether compensation received from the machine supplier must be reduced from the cost of the machinery or treated as capital receipt not affecting the asset's cost. - HELD THAT: - The Tribunal accepted that the settlement payment was made because the supplier failed to demonstrate contractual performance parameters. The settlement deed showed the compensation was not computed by reference to the cost of the machines and was not a discount, subsidy or reimbursement referable to acquisition cost. While the Tribunal agreed that the supplier's waiver of 10% invoice value should reduce the WDV of the machine (as directed by the CIT(A)), it held that the separate compensation paid for failure to meet performance parameters was a capital receipt and need not be netted from the capitalised cost of the machinery. [Paras 5, 8]Compensation for failure to meet performance parameters is a capital receipt and need not reduce the cost of the machinery; only the waived 10% invoice value reduces WDV.Bad debts under Section 36(2) - Whether the assessee was entitled to deduction for bad debts written off in the year where trade debtors were not transferred to the buyer. - HELD THAT: - The Tribunal accepted the CIT(A)'s finding that, as per the business transfer agreement, sundry debtors as on closing date were not transferred to the transferee. The debts were genuinely written off in the year under consideration and subsequently recovered and offered to tax in the later year. The assessee satisfied the conditions of Section 36(1)(vii) read with Section 36(2), and the AO's disallowance for alleged non-satisfaction of conditions was not sustained. [Paras 11, 12]Bad debts allowed as deductible under Section 36(2).Deductibility under Section 43B where employees' contribution paid before filing return - Whether employees' contribution to PF/ESI delayed but paid before filing return is disallowable under Section 43B. - HELD THAT: - The Tribunal followed the jurisdictional High Court decision holding that the curative amendment to Section 43B is to be applied retrospectively and that employees' contributions paid before the due date of filing the return are allowable. As the assessee paid the employees' contributions before filing the return, the addition made by the AO was not sustained. [Paras 13, 14]Amount of employees' contribution payable but paid before filing return is deductible; addition under Section 43B deleted.Final Conclusion: All grounds raised by Revenue were dismissed: the transfer was not a slump sale (Section 50B not attracted); the performance related compensation was treated as a capital receipt and not required to be reduced from the machinery cost (subject only to reduction for the waived 10% invoice value); the bad debt claim under Section 36(2) was allowed; and the delayed employees' contributions paid before filing the return were deductible under Section 43B. Issues Involved:1. Deletion of Capital Gain under Section 50B of the Income Tax Act.2. Deletion of disallowance of compensation on account of machine performance.3. Allowance of bad debt claim.4. Allowance of delayed payment of employees’ contribution towards ESI under Section 43B.Detailed Analysis:Issue 1: Deletion of Capital Gain under Section 50B of the Income Tax ActThe first issue raised by the Revenue is the deletion of capital gain amounting to Rs. 10,92,09,696/- under Section 50B of the Income Tax Act by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee, a Private Limited Company engaged in manufacturing thermoplastic films, sold its Biax Division Unit II to another company. The Assessing Officer (AO) treated this transaction as a slump sale under Section 2(42C) of the Act, arguing that the sale included all assets and liabilities for a lump sum consideration. The CIT(A) reversed this decision, noting that the transaction involved the sale of fixed assets and specified current assets without transferring all liabilities, thus not qualifying as a slump sale. The Tribunal upheld the CIT(A)'s decision, emphasizing that the transaction did not meet the definition of a slump sale as per Section 2(42C), which requires the transfer of an undertaking for a lump sum consideration without assigning values to individual assets and liabilities.Issue 2: Deletion of Disallowance of Compensation on Account of Machine PerformanceThe second issue concerns the deletion of disallowance of Rs. 2,56,26,930/- being compensation received due to the machine not performing at an agreed level. The assessee received compensation from a UK company for the failure to meet performance parameters of the purchased machinery. The AO considered this compensation as a reduction in the cost of machinery, thus reducing the depreciation claim. The CIT(A) disagreed, stating that the compensation was for non-performance and not a discount or subsidy related to the cost of machinery. The Tribunal supported the CIT(A)'s view, noting that the compensation was not linked to the cost of machinery but was for performance failure, thus not requiring a reduction in the machinery's cost for depreciation purposes.Issue 3: Allowance of Bad Debt ClaimThe third issue involves the allowance of a bad debt claim of Rs. 42,50,084/-. The AO disallowed the claim, arguing that the trade debtors were taken over by the transferee company, and the assessee did not fulfill the conditions of Section 36(2) of the Act. The CIT(A) found that the trade debtors were not transferred as per the agreement and that the bad debts were genuine, written off in the books, and later recovered and offered as income in the subsequent year. The Tribunal upheld the CIT(A)'s decision, confirming that the bad debts were genuine and the conditions under Section 36(2) were satisfied.Issue 4: Allowance of Delayed Payment of Employees’ Contribution towards ESI under Section 43BThe fourth issue is the allowance of delayed payment of employees' contribution towards ESI amounting to Rs. 50,289/-. The AO disallowed the payment due to a delay in deposit. However, the CIT(A) and the Tribunal found that the payments were made before the due date of filing the Income Tax Return under Section 139(1). The Tribunal referred to the jurisdictional High Court's decision in the case of M/s Vijay Shree Limited, which allowed such deductions if payments were made before the due date of filing the return, thus dismissing the Revenue's ground.ConclusionThe Tribunal dismissed the Revenue's appeal on all grounds, upholding the CIT(A)'s decisions on the deletion of capital gain under Section 50B, disallowance of compensation on account of machine performance, allowance of bad debt claim, and allowance of delayed payment of employees' contribution towards ESI.