2023 (3) TMI 140 - AT - Income Tax

Capital gain u/s 50B - slump sale - disallowances made towards sundry debtors not collectible, bank guarantee, provision towards warranties, advance license liability and adjustment to net worth toward assets acquired - whether expenses and deductions claimed by the assessee as a deduction / adjustment to the purchase price is allowable? - HELD THAT - As noticed that the assessee has sold capacitor business and component business on slump sale basis. As per section 2(42C) slump sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. We will therefore first look at the provisions of section 50B of the Act which contain the special provision for computation of capital gains in case of slump sale. Net worth is defined in Explanation 1 to section 50B as the difference between the aggregate value of total assets of the undertaking or division and the value of its liabilities as appearing in books of account . The aggregate value of total assets of the undertaking or division is the sum total of WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets, The book value in case of other assets. Net worth is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act. As per section 50B, no indexation benefit is available on cost of acquisition, i.e., net worth. Lower authorities have not examined the evidences submitted and have not verified the terms of the agreement. Assessee also has not given before the lower authorities which would help the CIT(A)/AO to understand the facts, with regard to the clear breakup of the various adjustments made and how the same is relatable to the completion accounts to substantiate that it is an adjustment to purchase price - issue of various adjustments disallowed by the CIT(A)/AO with regard to the computation of capitals gains should be remitted to the AO for a de novo verification of facts. AO is directed to consider the adjustments made based on completion accounts, objections filed by the purchaser, the details of bank guarantee invoked etc., before deciding the case. AO is also directed to keep in mind the decision of the coordinate bench in the case of Bhoruka Aluminium Ltd 2022 (8) TMI 1348 - ITAT BANGALORE while deciding the allowability of the various adjustments claimed by the assessee against the provisional purchase price. The assessee is directed to submit all the relevant details and cooperate with the proceedings. It is ordered accordingly. Non deduction of TDS - disallowance towards payments to sales executives is also done on the basis that the assessee failed to furnish any credible evidence or details relating to the payments before the lower authorities - We therefore remit both these issues back to the AO to verify the details of tax deducted, evidences of sales promotion activity and the explanations the assessee would provide in this regard. The assessee is directed to submit the relevant evidences and documents in this regard and cooperate with the proceedings. Appeal filed by the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of sundry debtors not collectible while computing capital gains.
2. Disallowance of bank guarantee invoked by the purchaser.
3. Disallowance of various liabilities and expenses incurred out of the slump sale consideration.
4. Recalculation of net worth of depreciable assets transferred.
5. Disallowance of environment expenses.
6. Disallowance of commission payments.
7. Levy of interest under sections 234C and 234D of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Sundry Debtors Not Collectible:
The assessee contended that the sundry debtors amounting to Rs.92,76,060 were not collectible and should be considered while computing the capital gains. The CIT(A) upheld the disallowance, but the Tribunal noted that the purchaser had invoked the bank guarantee to cover these unrealized trade receivables, which should be allowed as a deduction from the purchase price. The Tribunal remitted this issue back to the AO for de novo verification of facts.

2. Disallowance of Bank Guarantee Invoked by the Purchaser:
The assessee claimed a deduction of Rs.1,24,00,000 towards the bank guarantee invoked by the purchaser. The CIT(A) upheld the disallowance, stating that no other deduction apart from net worth is permissible under Section 50B. The Tribunal found that the agreement allowed for such adjustments to the purchase price and remitted the issue back to the AO for verification.

3. Disallowance of Various Liabilities and Expenses:
The assessee claimed deductions for liabilities and expenses incurred out of the slump sale consideration, including bank guarantee commission, provision for warranties, and other liabilities. The CIT(A) upheld these disallowances. The Tribunal noted that these adjustments were part of the completion accounts as per the agreement and remitted the issue back to the AO for a fresh examination.

4. Recalculation of Net Worth of Depreciable Assets Transferred:
The AO recalculated the net worth by reducing the assets acquired from 01.01.2009 to 31.07.2009, amounting to Rs.51,00,881. The CIT(A) upheld this disallowance. The Tribunal directed the AO to consider the adjustments based on completion accounts and objections filed by the purchaser, in line with the decision in the case of Bhoruka Aluminium Ltd.

5. Disallowance of Environment Expenses:
The CIT(A) sustained a disallowance of Rs.70,000 out of the environment expenses due to the absence of tax deduction at source. The Tribunal remitted this issue back to the AO to verify the details of tax deducted and the evidence of sales promotion activity.

6. Disallowance of Commission Payments:
The CIT(A) upheld the disallowance of Rs.13,00,153 towards commission payments, stating that the assessee failed to furnish credible evidence. The Tribunal remitted this issue back to the AO for verification of the relevant details and documents.

7. Levy of Interest under Sections 234C and 234D:
The Tribunal did not specifically address the levy of interest under sections 234C and 234D, but the overall appeal was allowed for statistical purposes, implying that these issues would also be reconsidered during the de novo verification by the AO.

Conclusion:
The Tribunal remitted the issues back to the AO for a fresh examination, directing the AO to consider the adjustments based on completion accounts, objections filed by the purchaser, and the terms of the agreement. The AO was also instructed to keep in mind the decision in the case of Bhoruka Aluminium Ltd. The assessee was directed to submit all relevant details and cooperate with the proceedings. The appeal was allowed for statistical purposes.