2022 (2) TMI 439 - HC - Income Tax

Court rules VRS deduction based on full liability, not just paid amount. Commissioner's orders set aside.

Tata Refactories Limited Versus Commissioner of Income Tax, Sambalpur & another

Tata Refactories Limited Versus Commissioner of Income Tax, Sambalpur & another - TMI Issues:Interpretation of Section 35DDA of the Income Tax Act for deduction under Voluntary Retirement Scheme based on accrued liability or actual payment during the relevant year.Analysis:The appeal in question stemmed from an order by the Income Tax Appellate Tribunal (ITAT) concerning the Assessment Year 2001-02 and the interpretation of Section 35DDA of the Income Tax Act, 1961. The key query before the court was whether the allowance for deduction under the Voluntary Retirement Scheme (VRS) should be based on 1/5th of the liability for payment incurred under the mercantile system of accounting or on 1/5th of the actual payment made during the relevant year. The Appellant, engaged in manufacturing refractory products, implemented a VRS during the accounting year 2000-01, covering 291 employees with a liability of Rs. 12,83,51,995, which was accrued and accounted for in the books. This liability was amortized over 60 months starting from the accounting year 2000-01.The court delved into the relevant sections of the Income Tax Act, particularly Section 35DDA and Section 43(2), which define the treatment of expenses incurred under a VRS and the meaning of 'paid' in the context of accounting methods. It was noted that under Section 43(2), 'paid' encompasses amounts actually paid or incurred based on the accounting method used. The court emphasized that even if a liability is incurred and the Assessee follows the accrual system of accounting, the liability should be recognized in the year it was incurred, allowing for subsequent amortization.The Assessing Officer disallowed a portion of the deduction claimed by the Assessee, treating the balance as a contingent liability, a decision upheld by the Commissioner of Income Tax (Appeals) and the ITAT. However, the court opined that the ITAT erred in considering only the amount actually paid during the year, highlighting that the definition of 'paid' includes accrued liabilities. The court further critiqued the characterization of the expenditure as 'capital expenditure' by the authorities, emphasizing that the Assessee's accounting method and the nature of the liability should guide the treatment.In conclusion, the court ruled in favor of the Assessee, asserting that the deduction under the VRS scheme should be based on the entire accrued liability incurred, not solely on the amount paid during the relevant year. Consequently, the orders of the CIT (A) and the ITAT, along with the AO's decision, were set aside, and the appeal was allowed with no costs awarded.