TaxTMI 
TaxTMI 
2022 (2) TMI 439
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.... was framed for consideration by this Court: "Whether on the facts and in the circumstances of the case and on a true and proper interpretation of Section 35DDA of the Income Tax Act, 1961, the allowance for deduction under the Voluntary Retirement Scheme is to be made on the basis of 1/5th of the liability for the payment of Voluntary Retirement Scheme incurred under the mercantile system of accounting or is to be allowed on the basis of 1/5th of the actual payment made during the relevant year?" 4. The background facts are that, the Appellant Assessee is stated to be engaged in the business of manufacture and sale of refractory products. The Appellant follows the mercantile system of accounting and its accounts are maintained on accru....
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....or profession. "(2) In Sections 28 to 41 and in this section, unless the context otherwise requires.... 'paid' means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head Profits and gains of business or profession" 8. Under Section 43(2) of the Act, the word 'paid' means "actually paid" or "incurred" according to the method of accounting upon the basis of which the profits or gain are computed under the head 'profits and gain of business or profession'. In other words, the above definition does not require actual payment of a sum for it to be treated as expenditure. Even if the liability is 'incurred' and the Assessee is following the accrual system of ....
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.... by the assessee under the VRS scheme. 11. In the circumstances, it was equally erroneous on the part of the CIT (A) to treat the expenditure towards the aforementioned liability as 'capital expenditure'. There is no warrant for such a conclusion. It was not even the Department's case that liability incurred for settling VRS dues would be 'capital' in nature. It needs to be borne in mind that the Assessee follows the mercantile accounting system and not the cash system and that its income is assessed under the head 'profits and gains and business of profession.' 12. For the aforesaid reasons the question framed by this Court is answered in favour of the Assessee and against the Department by holding that allowance and deduction under the ....