2008 (11) TMI 340 - HC - Income Tax

High Court allows deduction for VRS payment under Income-tax Act

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The High Court allowed the deduction of Rs.1,06,57,907 under section 37(1) of the Income-tax Act for the amount paid by the assessee towards terminal dues ... Revenue Expenditure under section 37 – Voluntary Retirement Scheme – The assessee implemented a voluntary retirement scheme floated by it, it was duly approved by the Commissioner under section 10(10C) and claimed deduction of the entire expenses to the tune of Rs.1,06,57,907, paid by way of terminal benefits in the relevant assessment year. The learned Assessing Officer disallowed the claim and held that it is not an expenditure of the nature described in sections 30 to 36 but it is in the nature of capital expenditure The Assessing officer disallowed the claim but the Tribunal allowed it. In this case Rajasthan High Court-held that the expenditure was clearly allowable as revenue expenditure under section 37(1) of the Act on the grounds of the following judgments (1.)Calcutta High Court, in CIT v. Machinery Manufacturing Corporation Ltd. (2.) CIT v. Simpson and Co. Ltd. (No. 1) (3.)judgment of the Bombay High Court in CIT v. Bhor Industries Ltd.– Decision in favor of assessee – against the revenue Issues Involved:1. Whether the Tribunal erred in allowing the entire claim of deduction under section 37(1) of the Income-tax Act for the amount paid by the assessee towards terminal dues under a voluntary retirement scheme (VRS).Detailed Analysis:1. Tribunal's Allowance of Deduction under Section 37(1):The Tribunal allowed the assessee's appeal, setting aside the orders of the assessing authority and the Commissioner, thus permitting the deduction of Rs.1,06,57,907 under section 37(1) of the Income-tax Act. This amount was paid by the assessee under an approved voluntary retirement scheme (VRS). The Tribunal's decision was based on the premise that the expenditure was for carrying on business more efficiently and profitably, without touching the fixed capital.2. Assessing Officer and Commissioner's Disallowance:The Assessing Officer disallowed the claim, categorizing the expenditure as capital in nature, arguing that the VRS provided long-term benefits to the company. The Commissioner upheld this view, asserting that the VRS created an enduring advantage, which is typically capital expenditure. The Commissioner also referenced a Central Board of Direct Taxes (CBDT) circular dated January 23, 2001, which directed that ex gratia payments under VRS be treated as capital expenditure.3. Tribunal's Reference to Judicial Precedents:The Tribunal referred to the Supreme Court's decision in Empire Jute Co. Ltd. v. CIT, which stated that expenditure for obtaining an enduring benefit might still be on revenue account if it facilitates business operations without affecting fixed capital. The Tribunal also considered the Madras High Court's ruling in Madura Coats v. Deputy CIT, which invalidated the CBDT circular as ultra vires, thereby supporting the assessee's position.4. Revenue's Argument:The Revenue contended that the expenditure resulted in an enduring benefit, thus qualifying as capital expenditure. They relied on the CBDT circular to support their stance.5. Assessee's Argument:The assessee argued that the expenditure was of revenue nature, citing the Supreme Court's judgment in Empire Jute Co. Ltd. v. CIT and the Madras High Court's ruling in Madura Coats v. Deputy CIT, which struck down the CBDT circular.6. Supreme Court's Precedents:The judgment discussed several Supreme Court cases:- Empire Jute Co. Ltd. v. CIT: Established that expenditure facilitating business operations without affecting fixed capital is revenue in nature.- CIT v. Ashok Leyland Ltd.: Held that compensation to terminate managing agency was revenue expenditure as it saved business expenditure without acquiring an enduring benefit.- Indian Cable Co. Ltd. v. Their Workmen: Confirmed that payments under VRS were for commercial expediency and allowable under section 37(1).- Sassoon J. David and Co. (P.) Ltd. v. CIT: Found that expenditure for terminating services was for commercial expediency, thus deductible.7. Other High Court Judgments:- CIT v. Machinery Manufacturing Corporation Ltd.: Payments for premature retirement and incentives were treated as revenue expenditure.- CIT v. Simpson and Co. Ltd. (No. 1) and CIT v. Bhor Industries Ltd.: Supported the view that such expenditures are revenue in nature.Conclusion:The High Court concluded that the expenditure incurred under the VRS was clearly allowable as revenue expenditure under section 37(1). The consistent legal position established by various judgments supported this view. Therefore, the question was answered in favor of the assessee, and the Revenue's appeal was dismissed.