2003 (2) TMI 20 - HC - Income Tax

Expenditure incurred on VRS - incurred wholly and exclusively for the purposes of business - this expense was not referable to any income-yielding asset Held that revenue expenditure which is incurred wholly and exclusively for the purposes of business must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years even though the assessee has written it off in its books over a period of years

Summary

Issues:
Interpretation of voluntary retirement scheme expenses as revenue or capital expenditure.

Detailed Analysis:
Issue 1: Interpretation of voluntary retirement scheme expenses as revenue or capital expenditure
Facts: The case involved voluntary retirement scheme (VRS) expenses claimed by the company for the assessment year 1996-97. The Assessing Officer disallowed a significant portion of the claimed expenses, leading to an appeal by the assessee. The Commissioner of Income-tax (Appeals) and the Tribunal had differing opinions on the treatment of these expenses.

Arguments: The Department argued that VRS expenses resulted in an enduring benefit to the company, making it a capital expenditure. They also contended that even if considered revenue expenditure, the expenses should be spread over a period of 60 months. The assessee's counsel countered that the Department itself acknowledged the expenses as revenue in nature by allowing a partial deduction. They argued against the spread-over concept, citing lack of continuing benefit and income stream matching.

Findings: The court noted that the Department was estopped from arguing the entire expenses were capital, as no appeal was made against the initial assessment. The court analyzed the treatment of VRS expenses in the company's annual report and compared it to past practices. They referenced the Taparia Tools Ltd. case regarding spread-over concept application to special assets. The court distinguished the present case from Taparia Tools Ltd., emphasizing the lack of findings on enduring benefits and income streams. They cited the Ashok Leyland Ltd. case to support the deduction of VRS expenses as revenue expenditure. The court also highlighted the Empire Jute Co. Ltd. case to illustrate cases where the test of enduring benefit may not apply.

Conclusion: The court ruled in favor of the assessee, affirming that the VRS expenses should be treated as revenue expenditure. The judgment emphasized the lack of enduring benefits and income-yielding assets in the case. The appeal was disposed of with no costs awarded.