S. 35DDA — Claim for deduction of 1/5th of the expenditure incurred on VRS cannot be denied merely on the ground that there was no manufacturing activity during the year, particularly when similar expenses are allowed in the previous year.

The assessee-company had in its return of income claimed a
deduction of Rs.19,18,441 being 1/5th of the total expenditure incurred on VRS.
The Assessing Officer (AO) disallowed this on the ground that the expenditure
was incurred subsequent to closure of the business and hence VRS expenditure was
not wholly and exclusively incurred for the purpose of business.

In appeal to the CIT(A) observed that during the current year
there was no manufacturing activity, hence, the question of allowability of
expenses relating to manufacturing business did not arise. He confirmed the
disallowance on further appeal by the assessee:

The Tribunal noted that :

(a) the AO observed that “the assessee-company is engaged
in the business of manufacturing chemicals and trading of scientific
instruments”;

(b) the CIT(A) while considering the assessee’s claim of
depreciation has observed that during the year the assessee had not undertaken
any manufacturing activity and that the business income was by way of trading,
service charges and commission. He upheld the disallowance of depreciation on
plant and machinery, but allowed depreciation on non-manufacturing items
(computer, furniture and motor cars) as the assessee was having some business
activity during the year, and

(c) in the A.Y. 2001-02 similar disallowance made by the AO
on the ground that expenditure has been incurred subsequent to closure of
business was deleted by the CIT(A) and the Tribunal had, on an appeal by the
Revenue, upheld the action of the CIT(A),

Following the order of the Tribunal for the earlier year and
also keeping in view that merely because the assessee has closed its
manufacturing activity did not mean that the assessee has not carried out its
business activities, the claim of the assessee was held allowable.