Court In Commissioner Of Income-Tax v. Bhor

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN FRIDAY, THE 17TH SEPTEMBER 2010 / 26TH BHADRA 1932 ITA.No. 206 of 2010() --------------------- AGAINST THE ORDER DATED 25/09/2009 IN ITA 29/COCH/2008 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT: ----------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/RESPONDENT: --------------- M/S.O E N INDIA LTD., VYTTILA, KOCHI. THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 17/09/2010, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR &K.SURENDRA MOHAN, JJ. .................................................................... I.T. Appeal No.206 of 2010 .................................................................... Dated this the 17th day of September, 2010. C.R. JUDGMENT Ramachandran Nair, J. The question raised in the appeal filed by the department iswhether the Income Tax Appellate Tribunal was justified in confirmingthe order of the first appellate authority who held that the assessee isentitled to deduction of expenditure of Rs.66,75,665/- incurred by wayof payments to employees who took retirement under the VoluntaryRetirement Scheme (VRS) during the previous year. 2. When the matter came up for admission, we have heardStanding counsel appearing for the appellant and have also gonethrough the orders of the Income Tax Appellate Tribunal and otherauthorities who held in favour of the assessee. We notice that paymentunder the VRS is covered by a later amendment made in the IncomeTax Act (hereinafter called “the Act”) by introducing Section 35DDAwith effect from 1.4.2001 wherein the provision is to allow the expenditure through amortisation that is, in a phased manner byallowing 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 todeduction of the full amount of compensation and other payments madeto the employees under VRS as a revenue expenditure in theassessment for the previous year in which such payments were made.All payments to the employees under VRS for period prior to theintroduction of Section 35DDA has to be necessarily considered underSection 37(1) of the Act which is the residuary provision for allowingall other items of business and professional expenditure not specificallycovered by other provisions of the statute. We notice that the Tribunalhas declared entitlement for the assessee for deduction of the entireamounts paid under the VRS as a revenue expenditure by virtue ofconsistent decisions of various High courts. We are of the view that aconsistent view taken by different High Courts on a question of lawshould not be disturbed, if it is followed by the parties and thedepartment 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 ofthe Tribunal and that of the decisions of other High Courts which werefollowed by the Tribunal, we deem it necessary to express our views onthe subject. 3. Section 37(1) entitles the assessee for deduction of anyexpenditure incurred for the purpose of business or profession otherthan, i) Expenditure which is of a capital nature; ii) Expenditure incurred for personal purpose of the assessee. 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 ofthe Tribunal and that of the decisions of other High Courts which werefollowed by the Tribunal, we deem it necessary to express our views onthe subject. 3. Section 37(1) entitles the assessee for deduction of anyexpenditure incurred for the purpose of business or profession otherthan, 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 prematureretirement of employees is not a personal expenditure of the assesseeand, therefore, the only question to be considered is whether theexpenditure by way of payments made under the VRS for retirement ofemployees 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 VS. BHOR INDUSTRIES LTD. reported in (2003) 264 ITR 180 wherein thepayment involved was Rs.10 crores and the purpose for retrenchmentwas to close down one of it's industrial units. The Bombay High Courtheld that the expenditure is of a revenue nature and the full amount isallowable in the assessment relevant for the previous year in whichpayments were made. Same view has been expressed by the MadrasHigh Court in COMMISSIONER OF INCOME-TAX VS. SIMPSONAND CO. LTD. reported in (1998) 230 ITR 703 and the Calcutta HighCourt in COMMISSIONER OF INCOME-TAX VS. MACHINERYMANUFACTURING CORPORATION LTD. reported in 198 ITR 559.In fact there is a recent judgment of the Rajastan High Court alsotaking the same view which is in COMMISSIONER OF INCOME-TAX VS. P.I.INDUSTRIES LTD. reported in (2009) CTR (Raj) 259.The assessments involved in all the above cases pertain to the periodprior to introduction of Section 35 DDA of the Act. So much so,except the Rajastan High Court no other High Court had occasion toconsider the scope, scheme and applicability of Section 35DDA of theAct. Even though the Rajastan High Court has referred to the Section in their judgment, the same was not applied because assessment in thatcase was for period prior to the introduction of Section 35DDA of theAct. 5.We notice from the decisions of various High Court statedabove that the test applied by them to decide whether the expenditureincurred by the assessee is revenue or capital in nature is whether theassessee has created any fixed asset or not. Certainly, expenditureincurred for creation of an asset will be capital in nature and so muchso, there cannot be any controversy on the finding in this regard.However, the question is whether the expenditure which does not leadto creation of fixed asset is always revenue expenditure. In our view,in order to constitute an expenditure as a capital expenditure, creationof asset is not mandatory. It is the settled position that expenditureincurred for achieving benefit of an enduring nature is also capital innature. Applying this test, we feel the purpose of introduction of VRSwhich is to reduce the staff strength, is to achieve viability andprofitability of the industry and the business in general of the assesseeand the retrenchment of employees will give long term benefit to the assessee. In fact VRS to encourage massive retirement is to streamlinethe industry by restructuring the work force which is essentially tomake it more viable and profitable. Therefore, the benefit will be of anenduring nature which will last for years to come. So much so, in ourview, payment made under Voluntary Retirement Scheme forretirement of large number of employees is nothing but a capitalexpenditure which could be claimed as a deduction in a phased mannerin the course of several years. It is for the assessee to estimate on arational basis as to how many years the benefit is going to be enjoyedby the company and to write off the amount in a phased manner andclaim deduction of only so much of the amount written off in theprevious year and claim balance in the course of succeeding years.Section 35DDA is virtual declaration of the fact that expenditureincurred under VRS should not be allowed as a revenue expenditure inone year and it is in the nature of a capital expenditure to be amortizedin the course of a few years. It is, therefore, our view that even forperiod prior to the introduction of Section 35DDA with effect from1.4.2001, the assessee was entitled to claim deduction of expenditure incurred under VRS only in a phased manner in the course of a fewyears which has to be rationally fixed by the assessee themselves bymaking accounting entries. As already state, we have only expressedour opinion and we do not want to disturb the position settled throughdecisions of various High Courts in the course of several years, whichwas not contested before the Supreme Court. Therefore, following theabove decisions of the various High Courts, we confirm the order ofthe Tribunal for the assessment year 1999-2000 and dismiss thedepartmental appeal. C.N.RAMACHANDRAN NAIRJudge pms K.SURENDRA MOHANJudge