Transfer of employee-related liabilities under slump sale not sufficient for deduction under section 43B - Actual payment mandatory to claim benefit

 Recently, the Hon’ble Income-tax Appellate Tribunal, Hyderabad (‘ITAT’) in the case of Deputy Commissioner of Income-tax v. Corteva Agriscience Services India (P.) Ltd. has held that a company cannot claim deduction under section 43B of the Income-tax Act, 1961 (‘the Act’) on the basis of a notional or deemed payment merely because employee related liabilities such as leave encashment and bonus were transferred to another company pursuant to a slump sale. The ITAT clarified that section 43B permits deduction only upon actual payment of the specified liabilities within the prescribed time and that a mere transfer of obligation to another entity does not satisfy this requirement.

 

In the instant case, the assessee filed its return of income for AY 2019-20 claiming deduction towards leave encashment and bonus under section 43B. During the year, it transferred one of its business undertakings on a slump sale basis along with assets, employees, and related outstanding liabilities. The assessee contended that upon transfer of such liabilities to the transferee company, the obligation stood discharged and should be treated as payment within the prescribed timeline. The return was processed and, in the intimation, order passed by the Centralized Processing Centre (‘CPC’) disallowed the deduction on the ground that no actual payment had been made. While the CIT(A) granted relief accepting the assessee’s contention, the Revenue challenged the same before the Tribunal.

 

The Tribunal held that section 43B clearly mandates actual payment as a condition precedent for deduction and does not recognise any concept of deemed discharge through contractual transfer. It further observed that whether the transferee company paid the amount or claimed deduction in its own return is irrelevant for determining the assessee’s entitlement. Since the assessee failed to demonstrate actual payment within the prescribed due date, the ITAT set aside the relief granted by the CIT(A) and upheld the disallowance.

 

The ruling reinforces that compliance with section 43B must be substantive and not merely procedural. It provides important clarity for businesses undertaking restructurings or slump sales by affirming that deductions for employee-related statutory liabilities will be available only upon actual payment within the stipulated timelines, thereby preventing claims based solely on accounting or contractual arrangements.