Sections 35DDA, 37, Rule 2BA — Deduction u/s.35DDA for expenditure on voluntary retirement cannot be denied on the ground that the scheme is not in accordance with the guidelines prescribed u/s.10(10C) read with Rule 2BA.
Facts:
The assessee was engaged in manufacturing and trading business. During the previous year relevant to A.Y. 2005-06 the assessee, as a part of restructuring of its business, closed down the manufacturing operations of its unit at Dharuhera. A voluntary retirement scheme known as ‘Employees Voluntary Retirement Scheme — 2004’ was framed which was applicable only to the employees of the closed unit. One-fifth of the expenditure incurred on voluntary retirement was claimed as a deduction u/s.35DDA.
The Assessing Officer (AO) disallowed the claim on the ground that since the scheme was not framed in accordance with Rule 2BA, the scheme is not VRS but a substitution of retrenchment compensation payable to the employees and hence the provisions of section 35DDA are not applicable. As regards the allowability of the expenditure u/s.37 he held that deduction can be allowed u/s.37(1) only in respect of those expenses which are incurred for the purposes of business. This, according to the AO, pre-supposes that the business continues to be carried on by the assessee. Since the expenditure under consideration was incurred in the closure of business or the transfer of business, the AO held that the same is not deductible u/s.37.
Aggrieved, the assessee preferred an appeal to the CIT(A) who held that the expenditure under consideration was incurred in terms of VRS and was not in the nature of retrenchment compensation. However, he held that the expenditure is not allowable u/s.35DDA since the VRS of the assessee did not comply with the conditions laid down by Rule 2BA.
Aggrieved, the assessee preferred an appeal to the Tribunal where it was contended that the Department has not challenged the finding of the CIT(A) that the expenditure is not in the nature of retrenchment compensation but is an expenditure on VRS and therefore such a finding has become final.
Held:
The Tribunal, for the following reasons, held the scheme of the assessee to be VRS, to which the provisions of section 35DDA are applicable:
(a) the deletion of conditionalities originally incorporated in the Bill shows that the legislative amendment was not to incorporate all the conditions of section 10(10C) in section 35DDA;
(b) the Legislature left the scheme of voluntary retirement open ended and did not place any restriction on the scheme. Thus, plain language of the provision supports the case of the assessee;
(c) it is not a case of taking guidance from a definition section;
(d) for sustaining the arguments of the learned DR, the provision contained in section 35DDA will have to be modified by incorporating a part of section 10(10C) in it. In our view, such an incorporation does not find support from any rule of construction stated before us.
The expenditure under consideration was held to be allowable u/s.35DDA.
As regards allowability u/s.37(1) of the Act, the Tribunal held that the assessee was required to prove that the closed unit was a part and parcel of the same business of the assessee. It stated that in order to give a finding, the assessee was required to prove that common control and management; interlinking of finances; common employees, no material effect of closure of the business on other businesses. Since the requisite material to give these findings was not on record the Tribunal did not give its finding on this aspect.
The appeal filed by the assessee on this ground was allowed.
