2010 (3) TMI 1171 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of VRS expenditure for Jamshedpur and Jammu Units.
2. Classification of VRS expenditure as revenue or capital expenditure.

Summary:

Issue 1: Disallowance of VRS expenditure for Jamshedpur and Jammu Units

The assessee claimed VRS expenditure of Rs. 5,66,33,237/- as revenue expenditure, which included amounts for Jamshedpur Unit (Rs. 4,10,90,573/-) and Jammu Unit (Rs. 1,07,23,833/-). The A.O. disallowed the expenditure, treating it as capital expenditure, and the CIT(A) confirmed this disallowance for the Jamshedpur and Jammu Units while allowing the amount for the Head Office. The CIT(A) held that the closure of these units amounted to the closure of business activities and thus, the expenditure could not be allowed u/s 37(1) of the Act. The CIT(A) emphasized that the units were independent, had separate accounts, and their closure did not affect the functioning of other units.

Issue 2: Classification of VRS expenditure as revenue or capital expenditure

The assessee argued that the VRS expenditure was part of a business restructuring project named 'New Dawn' and should be considered as revenue expenditure. The restructuring involved closing some units and relocating employees, but the overall business continued. The assessee relied on various judicial principles, including the Supreme Court's decision in K. Ravindranathan Nair 247 ITR 178, which supported the claim that such expenditure is revenue in nature. The CIT(A) did not accept this contention, stating that the units were independent and their closure reduced the business size rather than just the workforce.

Judgment:

The Tribunal considered the issue and found that the assessee's business was a single business despite the independent functioning of the units. The Tribunal noted that the restructuring helped modernize and increase the business turnover and profits. The principles applied by the CIT(A) to allow the Head Office expenditure were equally applicable to the Jamshedpur and Jammu units. The Tribunal concluded that the VRS expenditure was incurred in the course of business restructuring and should be allowed as revenue expenditure u/s 37(1). The appeal was decided in favor of the assessee, allowing the VRS expenditure for Jamshedpur and Jammu Units as revenue expenditure.

Order:

The appeal was decided accordingly, and the order was pronounced in the open court on 26th March 2010.