2026 (1) TMI 1575 - AT - Income Tax

Actual payment requirement: transfer of employee liabilities on slump sale does not qualify as payment, deduction denied.

Section 43B's actual payment requirement was held to govern claims for employees' liabilities transferred on a slump sale: contractual transfer to a ... Disallowance of liabilities in respect of leave encashment and bonus payment u/s 43B - Actual payment required for deduction u/s 43B V/S deemed payment by transfer of liabilities for Section 43B - intimation issued u/s 143(1)(a) - HELD THAT:- Tribunal held that Section 43B allows specified deductions only in the year in which the sum is actually paid; there is no deeming provision in the Act that treats transfer of liabilities to a third party as payment for Section 43B purposes. Reliance was placed on the principle in Union of India v. Exide Industries [2020 (4) TMI 792 - SUPREME COURT] and on Tribunal precedent that a taxpayer cannot, by contract, shift statutory obligations and claim deduction without actual payment. Assessee's reliance on decisions concerning conversion of interest into paid-up capital or on other authorities dealing with different factual matrices was found inapplicable to employees' dues. Consequently the CIT(A)'s deletion of the AO's 43B adjustment was set aside and the A.O.'s adjustment upheld. [Paras 14, 15, 16, 19] Order of the CIT(A) set aside adjustment u/s 43B upheld for want of actual payment. Adjustments made in the intimation u/s 143(1) in respect of such deduction are barred as being debatable or unlawful - HELD THAT: - The Tribunal held that the A.O. in processing under Section 143(1)(a) may adjust incorrect claims that are apparent from the return. The issue of deduction under Section 43B in the present facts was not regarded as a 'debatable' question preventing adjustment at the processing stage; accordingly the assessee's contention that the adjustment was impermissible at 143(1) was dismissed. [Paras 21] Ground that the issue was debatable and thus not adjustable under Section 143(1) rejected. Final Conclusion: The Tribunal admitted the Revenue's appeal; on the merits it held that Section 43B deductions require actual payment and that transfer of employee liabilities does not amount to deemed payment, set aside the CIT(A)'s order and upheld the A.O.'s 43B adjustment; the Rule 27 application was admitted but the grounds raised therein were rejected. Issues: (i) Whether an assessee can claim deduction under Section 43B of the Income-tax Act, 1961 in respect of employees' liabilities (leave encashment, bonus, gratuity provision) by treating transfer of such liabilities to a transferee on slump sale as deemed payment on or before the due date under Section 139(1); (ii) Whether adjustments made in the intimation under Section 143(1) of the Income-tax Act, 1961 in respect of such deduction are barred as being debatable or unlawful, and whether the application under Rule 27 of the Income-tax (Appellate Tribunal) Rules, 1963 raising such grounds is maintainable.Issue (i): Whether transfer of employees' liabilities to a transferee on slump sale amounts to payment for claiming deduction under Section 43B of the Income-tax Act, 1961.Analysis: Section 43B permits specified deductions only when the sum is actually paid by the assessee, and the proviso allows payment on or before the due date under Section 139(1) to qualify. The statutory text contains a non obstante clause prioritising actual payment as the condition for allowance. Contractual transfer of liabilities to a third party does not, by itself, extinguish the statutory requirement of actual payment by the assessee. Authorities addressing conversion of interest into paid-up capital or extinguishment by issuance of securities were distinguished on facts where the obligation was actually discharged; those decisions dealing with interest conversion are not analogous to transfer of employees' dues. Allowing deduction merely on the basis that the transferee later paid or did not claim deduction would permit circumvention of the actual payment requirement and is inconsistent with the statutory scheme and earlier decisions holding that statutory obligations cannot be shifted by contract to claim deduction under Section 43B.Conclusion: Deduction under Section 43B cannot be claimed by treating transfer of employees' liabilities to a transferee as deemed payment; actual payment by the assessee on or before the due date under Section 139(1) is required. This conclusion is against the assessee.Issue (ii): Whether the adjustment in the intimation under Section 143(1) was impermissible as a debatable issue and whether the grounds raised in the Rule 27 application are maintainable.Analysis: Section 143(1) permits adjustment of incorrect claims apparent from the return; a prima facie incorrect claim visible on the face of the return can be adjusted in the processing intimation after offering an opportunity to the assessee. The question of whether the Section 43B deduction met the statutory actual payment requirement was not a debatable legal issue preventing adjustment at the processing stage where the claim is objectively incorrect on the return. Rule 27 permits the respondent to support the first appellate authority's order, and the Tribunal admitted the Rule 27 application to decide the raised grounds. The specific grounds arguing that the adjustment was debatable or that the intimation was non-speaking were examined and found unsustainable on the statutory scheme and record showing opportunity was provided before adjustment.Conclusion: The adjustment made under Section 143(1) was permissible as a prima facie adjustment apparent from the return; the Rule 27 application was admitted but the specific grounds challenging the adjustment were rejected. These conclusions are against the assessee.