49 Income – Expenditure – Sections 2(24) and 36(1)(v) : A. Ys. 2002-03 and 2003-04 – Grant received from Government – Assessee a sick unit, receiving grant for disbursement of voluntary retirement payments – Grant received by assessee from Government cannot be treated as income – Payment to employees towards voluntary retirement scheme from grant allowable as deduction – Payment of gratuity from fund granted by Government is deductible u/s. 36(1)(v)

The assessee, a company owned by the Government of India, manufactured and marketed three wheelers. The assessee was a sick unit and was implementing revival or rehabilitation approved by the Board for Industrial and Financial Reconstruction. The Government of India remitted a grant out of the national renewal fund for implementation of a voluntary retirement scheme. Payment was made by the assessee to the employees towards the voluntary retirement scheme out of the grant. For the A. Y. 2002-03, the assessee furnished the return showing income at Rs. 2,51,25,472 for the current year and setting off part of brought forward losses against the income. The Assessing Officer treated the grant as income of the assessee and disallowed the expenditure incurred by it on voluntary retirement scheme and also disallowed gratuity. The Commissioner (Appeals) and the Tribunal confirmed this.  

On appeal by the assessee, the Allahabad High Court reversed the decision of the Tribunal and held as under:

“i)    The grant or subsidy was forwarded by the Government of India to help the assessee in its revival by making payment to employees towards voluntary retirement scheme. It was a voluntary remittance fund by the Government of India to the assessee. The Department failed to show anything so as to bring “grant” or “subsidy” it within any particular clause of section 2(24) of the Act. The amount of grant received by the assessee from the Government of India could not be treated as income.

ii)    The payment to employees towards voluntary retirement scheme was to be allowed. The narrow interpretation straining language of section 36(1)(v) of the Act so as to deny deduction to the assessee should not be followed since the objective of the fund was achieved. The payment of gratuity was to be allowed.”