The Commissioner Of Income Tax Petitioner v. M/S. O E N India Ltd.

JUDGMENT

Ramachandran Nair, J.

The question raised in the appeal filed by the department is whether the Income Tax Appellate Tribunal was justified in confirming the order of the first appellate authority who held that the assessee is entitled to deduction of expenditure of Rs. 66,75,665/- incurred by way of payments to employees who took retirement under the Voluntary Retirement Scheme (VRS) during the previous year.

2. When the matter came up for admission, we have heard Standing counsel appearing for the appellant and have also gone through the orders of the Income Tax Appellate Tribunal and other authorities who held in favour of the assessee. We notice that payment under the VRS is covered by a later amendment made in the Income Tax Act (hereinafter called “the Act”) by introducing Section 35DDA with effect from 1.4.2001 wherein the provision is to allow the expenditure through amortisation that is, in a phased manner by allowing the expenditure equally in the course of five assessment years. Even though position is now settled through a statutory amendment, the question to be considered is whether assessee is entitled to deduction of the full amount of compensation and other payments made to the employees under VRS as a revenue expenditure in the assessment for the previous year in which such payments were made. All payments to the employees under VRS for period prior to the introduction of Section 35DDA has to be necessarily considered under Section 37(1) of the Act which is the residuary provision for allowing all other items of business and professional expenditure not specifically covered by other provisions of the statute. We notice that the Tribunal has declared entitlement for the assessee for deduction of the entire amounts paid under the VRS as a revenue expenditure by virtue of consistent decisions of various High courts. We are of the view that a consistent view taken by different High Courts on a question of law should not be disturbed, if it is followed by the parties and the department for several years. Going by this principle, we do not want to disturb the finding of the Tribunal in favour of the assessee, and, therefore, we do not propose to issue notice to the assessee. However, since the Standing Counsel canvassed the correctness of the decision of the Tribunal and that of the decisions of other High Courts which were followed by the Tribunal, we deem it necessary to express our views on the subject.

3. Section 37(1) entitles the assessee for deduction of any expenditure incurred for the purpose of business or profession other than,

i) Expenditure which is of a capital nature;

ii) Expenditure incurred for personal purpose of the assessee.

4. Admittedly the payment made under VRS to allow premature retirement of employees is not a personal expenditure of the assessee and, therefore, the only question to be considered is whether the expenditure by way of payments made under the VRS for retirement of employees is a revenue expenditure and not a capital expenditure. The first decision on the subject appears to be that of the Bombay High Court in Commissioner Of Income-Tax, Mumbai… v. Bhor Industries Limited, Mumbai…. reported in (2003) 264 ITR 180 wherein the payment involved was Rs. 10 crores and the purpose for retrenchment was to close down one of it's industrial units. The Bombay High Court held that the expenditure is of a revenue nature and the full amount is allowable in the assessment relevant for the previous year in which payments were made. Same view has been expressed by the Madras High Court in COMMISSIONER OF INCOME-TAX v. SIMPSON AND CO. LTD. reported in (1998) 230 ITR 703 and the Calcutta High Court in COMMISSIONER OF INCOME-TAX v. MACHINERY MANUFACTURING CORPORATION LTD. reported in 198 ITR 559. In fact there is a recent judgment of the Rajastan High Court also taking the same view which is in COMMISSIONER OF INCOME-TAX v. P.I INDUSTRIES LTD. reported in (2009) CTR (Raj) 259. The assessments involved in all the above cases pertain to the period prior to introduction of Section 35 DDA of the Act. So much so, except the Rajastan High Court no other High Court had occasion to consider the scope, scheme and applicability of Section 35DDA of the Act. Even though the Rajastan High Court has referred to the Section in their judgment, the same was not applied because assessment in that case was for period prior to the introduction of Section 35DDA of the Act.

5. We notice from the decisions of various High Court stated above that the test applied by them to decide whether the expenditure incurred by the assessee is revenue or capital in nature is whether the assessee has created any fixed asset or not. Certainly, expenditure incurred for creation of an asset will be capital in nature and so much so, there cannot be any controversy on the finding in this regard. However, the question is whether the expenditure which does not lead to creation of fixed asset is always revenue expenditure. In our view, in order to constitute an expenditure as a capital expenditure, creation of asset is not mandatory. It is the settled position that expenditure incurred for achieving benefit of an enduring nature is also capital in nature. Applying this test, we feel the purpose of introduction of VRS which is to reduce the staff strength, is to achieve viability and profitability of the industry and the business in general of the assessee and the retrenchment of employees will give long term benefit to the assessee. In fact VRS to encourage massive retirement is to streamline the industry by restructuring the work force which is essentially to make it more viable and profitable. Therefore, the benefit will be of an enduring nature which will last for years to come. So much so, in our view, payment made under Voluntary Retirement Scheme for retirement of large number of employees is nothing but a capital expenditure which could be claimed as a deduction in a phased manner in the course of several years. It is for the assessee to estimate on a rational basis as to how many years the benefit is going to be enjoyed by the company and to write off the amount in a phased manner and claim deduction of only so much of the amount written off in the previous year and claim balance in the course of succeeding years. Section 35DDA is virtual declaration of the fact that expenditure incurred under VRS should not be allowed as a revenue expenditure in one year and it is in the nature of a capital expenditure to be amortized in the course of a few years. It is, therefore, our view that even for period prior to the introduction of Section 35DDA with effect from 1.4.2001, the assessee was entitled to claim deduction of expenditure incurred under VRS only in a phased manner in the course of a few years which has to be rationally fixed by the assessee themselves by making accounting entries. As already state, we have only expressed our opinion and we do not want to disturb the position settled through decisions of various High Courts in the course of several years, which was not contested before the Supreme Court. Therefore, following the above decisions of the various High Courts, we confirm the order of the Tribunal for the assessment year 1999-2000 and dismiss the departmental appeal.