Business expenditure: Capital or revenue expenditure: Section 35DDA: A. Y. 2007-08: Payment to employees under voluntary retirement scheme: Compliance with Rule 2BA is for benefit u/s. 10(10C): No such compliance mandatory for deduction in the hands of employer u/s. 35DDA: Deduction allowable:

For the A. Y. 2007-08, the assessee, a public sector bank, had claimed deduction of Rs. 7,09,53,323.23 as deductible expenditure incurred to meet the claims of employees who had taken voluntary retirement. The Assessing Officer allowed the deduction as revenue expenditure. Exercising the powers u/s. 263 of the Income-tax Act, 1961, the Commissioner held that the expenditure was in the nature of capital expenditure and disallowed the amount on the ground, inter alia, that even applying the provisions of section 35DDA the voluntary retirement scheme was not in consonance with rule 2BA of the I. T. Rules 1962. The Tribunal held that this was a case where the scheme was covered u/s. 35DDA. The condition imposed in Rule 2BA with reference to the recipient for the purpose of section 10(10C) was not attracted to the provisions of section 35DDA. Since under the provisions u/s. 35DDA the entire amount could not be allowed as deduction, but it could be spread over a period of five years, one-fifth of the expenditure could be allowed and the balance spread over the following four assessment years.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

“i) There was no mention of any rule in section 35DDA. On the other hand, in rule 2BA there is a specific reference to section 10(10C). The language of rule 2BA made it clear that the amount received is by the employee and for the purpose of claiming the benefit u/s. 10(10C). This has nothing to do with the employer’s claim, which is a different claim u/s. 35DDA.

ii) The Tribunal rightly took the view that rule 2BA is attracted and applicable only to a circumstance, where the benefit u/s. 10(10C) is sought for and not in a situation where the provisions of section 35DDA are called in aid.”