Slump sale and bad debt principles clarified: separate asset transfer, book write-off, and limited machinery cost adjustment

A transfer of an undertaking was treated as outside the slump sale provisions because the business was not conveyed as a going concern with the full bundle of assets and liabilities; separate valuation of assets, retention of financial assets, and non-assumption of liabilities showed the statutory ingredients were unmet. Bad debts written off in the books were allowed as deduction where the debts related to the assessee's division, the write-off was supported by records, and later recovery was offered to tax. Compensation connected with machinery performance issues reduced actual cost only to the extent shown to relate to cost adjustment, so the depreciation claim could not be cut back in full.

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Issues: (i) Whether the transfer of the undertaking amounted to a slump sale under the Income-tax Act, 1961; (ii) Whether the assessee was entitled to deduction of bad debts written off; (iii) Whether the compensation received for the machinery required reduction from the cost of the machinery and consequently affected the depreciation claim.

Issue (i): Whether the transfer of the undertaking amounted to a slump sale under the Income-tax Act, 1961.

Analysis: The transaction was examined on the basis of the business transfer agreement and the surrounding factual matrix. The unit was not transferred as a going concern with all assets and liabilities. Assets were valued separately, land valuation was separately identified, financial assets were retained, and all loans and liabilities were not taken over by the transferee. On those facts, the statutory ingredients of a slump sale were not satisfied.

Conclusion: The transfer was not a slump sale, and the Revenue's challenge on this issue failed.

Issue (ii): Whether the assessee was entitled to deduction of bad debts written off.

Analysis: The debts were written off in the relevant assessment year as trade debts of the assessee's division. The relevant debtors were not transferred with the undertaking, the write-off was supported by the books, and the recovery in the subsequent year was offered to tax. The factual findings recorded by the lower authorities were found to be justified and unsupported by any contrary material from the Revenue.

Conclusion: The deduction for bad debts was rightly allowed in favour of the assessee.

Issue (iii): Whether the compensation received for the machinery required reduction from the cost of the machinery and consequently affected the depreciation claim.

Analysis: The compensation arose from the settlement relating to non-achievement of performance parameters and was not treated as reducing the entire cost of the machinery. The assessee had capitalised the full invoice value of the machinery, and only the portion found relatable to reduction in cost was required to adjust the written down value. The remaining compensation retained the character of capital receipt. The depreciation adjustment was therefore confined to the limited extent accepted on the facts.

Conclusion: The assessee was not liable for the full reduction suggested by the Revenue, and the depreciation issue was decided against the Revenue.

Final Conclusion: The appeal failed on the substantive issues decided on merits, while the ground relating to belated employees' provident fund contribution was left open because of low tax effect.

Ratio Decidendi: A transfer is not a slump sale unless the undertaking is transferred as a going concern with the essential bundle of assets and liabilities; bad debts written off in the books are deductible when the factual materials support the write-off; and compensation linked to machinery cost reduces actual cost only to the extent it is shown to relate to such cost reduction.

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