2014 (6) TMI 468 - AT - Income Tax

Deletion of disallowance of bad debts/ advances written off Allowability to deduct the losses and debts of subsidiary company Separate legal entity Held that - The fact about FBII having become financially unviable due to exigencies mentioned have not been disputed by the AO - The fact that assessee advanced amount in its books of account which has been accepted by the department and the amounts have been actually written off as bad debt are clearly allowable u/s 36(1)(vii) - in any case it becomes a business loss of the assessee thus, there was no infirmity in the order of CIT(A) Decided against Revenue. Addition on discontinued operation - Pharma division sold under slump sale Held that - The facts have not been disputed by the AO - The liabilities qua the sundry creditors have been disallowed on a misconception that they were provided in the business transfer agreement whereas assessee has demonstrated that it is part of the business transfer agreement which has been properly appreciated by the CIT(A) - The issue about the amounts having been transferred from the assessee s pharma division carried out in the name of Vita Life (pharma division) and subsequent payments are also demonstrated in the books of account which have been duly verified - the relief has been granted after proper verification of the facts, there was no reason to interfere in the finding of CIT(A) Decided against Revenue.

Summary

Issues:
1. Disallowance of bad debts/advances written off
2. Disallowance of employee's contribution to PF/ESI fund
3. Addition of sundry creditors of discontinued operations of Pharma Division sold under slump sale

Issue 1: Disallowance of Bad Debts/Advances Written Off:
The Revenue appealed against the CIT(A)'s order directing the deletion of an addition of Rs. 64,45,245 on account of bad debts/advances written off. The assessing officer disallowed the claim, stating that losses or debts of a separate legal entity, Fashion Brands International Inc. (FBII), could not be deducted from the profits of the assessee company. The CIT(A) allowed the claim, citing commercial expediency for business purposes. The Tribunal upheld the CIT(A)'s decision, emphasizing that the advances to FBII were for promoting the assessee's business, making the bad debts allowable under Section 36(1)(vii). The Tribunal dismissed the Revenue's appeal on this ground.

Issue 2: Disallowance of Employee's Contribution to PF/ESI Fund:
The ground related to the payment of PF and ESI was dismissed in favor of the assessee as the amounts were paid before the due date of filing the return. Hence, the Tribunal upheld the dismissal of this ground.

Issue 3: Addition of Sundry Creditors of Discontinued Operations of Pharma Division Sold Under Slump Sale:
Regarding the addition of Rs. 18,53,000 on account of sundry creditors of the Pharma Division sold under a slump sale, the assessing officer disallowed the claim, stating that the liabilities were already included in the sale. However, the CIT(A) allowed the claim, noting that the liabilities were not considered during the slump sale as per the business transfer agreement. The Tribunal agreed with the CIT(A)'s findings, emphasizing that the liabilities were transferred before the execution of the business transfer agreement and were not part of the slump sale. The Tribunal dismissed the Revenue's appeal on this issue.

In conclusion, the Tribunal upheld the CIT(A)'s decisions on all three issues raised in the appeal, dismissing the Revenue's appeal.