2017 (5) TMI 1731 - AT - Income Tax

Tribunal upholds CIT(A)'s decision allowing settlement compensation & advances written off as trading losses.

DCIT, Circle-12, P-7, Kolkata Versus M/s Linde India Ltd. (M/s BOC India Ltd), Oxygen

DCIT, Circle-12, P-7, Kolkata Versus M/s Linde India Ltd. (M/s BOC India Ltd), Oxygen - TMI Issues Involved:1. Deletion of addition on account of settlement compensation for closed units.2. Deletion of addition on account of advance written off.Issue-wise Detailed Analysis:1. Deletion of Addition on Account of Settlement Compensation for Closed Units:The Revenue challenged the deletion of an addition of Rs. 4,77,420/- made by the Assessing Officer (AO) regarding settlement compensation for closed units. The assessee, a limited company engaged in manufacturing industrial and medical gases, had closed its Chennai unit due to continuous losses. The Voluntary Retirement Scheme (VRS) amounting to Rs. 1,28,89,938/- was claimed under Section 35DDA of the Income Tax Act, 1961, to be amortized over five years. Additionally, the assessee incurred Rs. 55,96,775/- as ex-gratia/settlement payments to employees, claimed as a deduction under Section 37(1). The AO treated this payment as part of the VRS, allowing only 1/5th of the amount and disallowing Rs. 44,77,400/-.The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, noting that the ex-gratia payment was not under the VRS scheme but as part of a settlement under the Industrial Disputes Act. The CIT(A) relied on various judicial precedents, including K. Ravindranathan Nair v. CIT and CIT v. Jai Parabolic Springs Ltd, to conclude that the expenditure was incurred for the business's overall industrial health and should be allowed under Section 37(1).The Tribunal upheld the CIT(A)'s decision, emphasizing that the additional payment was over and above the VRS and thus not covered under Section 35DDA. The Tribunal cited similar judgments, including K. Ravindranathan Nair vs. CIT and Jayshree Tea & Industries Limited vs. CIT, reinforcing that such settlement payments are allowable as business expenditure under Section 37(1).2. Deletion of Addition on Account of Advance Written Off:The Revenue also contested the deletion of an addition of Rs. 36.99 lakhs made by the AO concerning advances written off. The assessee had written off Rs. 95,76,604/- in advances, including Rs. 36.99 lakhs as advances to suppliers, employees, and security deposits, which the AO disallowed, attributing the write-off to negligence rather than irrecoverability.The CIT(A) deleted the addition, stating that the advances were business-related and their write-off was a trading loss. The CIT(A) referenced cases like Travancore Tea Estates Co. Ltd. v. CIT and CIT v. Inden Biselers, which held that bad debts or trading losses incurred wholly and exclusively for business purposes are allowable deductions.The Tribunal concurred with the CIT(A), noting that the advances were connected to the business and had become irrecoverable. The Tribunal also referred to the assessee's own case in ITA No. 131/Kol/2010, where similar write-offs were allowed, emphasizing that the loss was incidental to the business and should be allowed as a trading loss under Section 37.Conclusion:In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The settlement compensation was deemed allowable under Section 37(1) as it was not part of the VRS scheme, and the advances written off were considered trading losses connected to the business, thus deductible under Section 37. The Tribunal's decision was pronounced in open court on 03/05/2017.