2006 (7) TMI 94 - AT - Income Tax

Business Expenditure - AO contended that assessee is not entitle for deduction in respect of the amount paid for VRS on the ground that it is of capital nature - Held that AO contention was not correct and set aside

Summary

Issues:
1. Disallowance of VRS amount as capital expenditure.
2. Applicability of circular regarding VRS amount.
3. Applicability of section 35DDA for deduction of VRS amount.
4. Charging of interest under section 234B.

Issue 1: Disallowance of VRS amount as capital expenditure:
The appeal arose from the disallowance of the VRS amount claimed by the assessee as a deduction under section 37(1). The Assessing Officer disallowed the deduction citing the provisions of new section 35DDA. However, the Tribunal found that the nature of the expenditure, not the treatment in account books, should determine the deduction eligibility. The Tribunal noted that the VRS aimed to improve manpower utilization and skill levels, not to gain enduring benefits in the capital field. Citing the Supreme Court's view, the Tribunal held that if the advantage was to facilitate trading operations without affecting fixed capital, it should be considered revenue expenditure. The Tribunal allowed the deduction for the full VRS amount.

Issue 2: Applicability of circular regarding VRS amount:
The circular directing treatment of VRS payments as capital expenditure was deemed invalid and ultra vires by the Madras High Court. The Tribunal disagreed with the Commissioner's view that the circular applied to the assessment year, emphasizing that the law in force on April 1 of the assessment year should prevail. Precedents supported this stance, indicating that circulars issued after the relevant assessment year's start date should not apply. Thus, the Tribunal held the circular inapplicable to the assessment year under consideration.

Issue 3: Applicability of section 35DDA for deduction of VRS amount:
The Tribunal clarified that section 35DDA, allowing amortization of VRS expenditure over five years, was prospective and applied from 2002-03 onwards. As the assessment year in question was 2000-01, the Tribunal deemed section 35DDA irrelevant. Precedents from other High Courts supported immediate deduction of VRS expenditure in the year incurred, rejecting the notion of spreading it over multiple years. Therefore, the Tribunal allowed the full deduction of the VRS amount without considering section 35DDA.

Issue 4: Charging of interest under section 234B:
The Commissioner had not entertained the ground regarding interest charged under section 234B, claiming no appeal was permissible against such charging. However, the Tribunal disagreed, citing a Supreme Court decision that consequential matters like interest should be considered. The Tribunal directed the matter to be decided accordingly, indicating that the charging of interest under section 234B needed proper assessment.

In conclusion, the Tribunal allowed the appeal, overturning the disallowance of the VRS amount as capital expenditure and directing a review of interest charged under section 234B. The Tribunal emphasized the nature of the expenditure, rejected the circular's applicability, and disregarded section 35DDA for the deduction, ensuring the assessee's entitlement to the full VRS amount deduction for the relevant assessment year.