2010 (9) TMI 918 - HC - Income Tax

Payment under Voluntary Retirement Scheme Whether the expenditure on voluntary retirement scheme is a revenue expenditure and not a capital expenditure Held that - It is the settled position that expenditure incurred for achieving the benefit of an enduring nature is also capital in nature. Purpose of introduction of the VRS is to reduce the staff strength, to achieve viability and profitability of the industry , it will give long-term benefit to the assessee. Benefit will be of an enduring nature which will last for years to come Section 35DDA is virtual declaration that expenditure incurred under VRS is not a revenue expenditure and it is in the nature of a capital expenditure to be amortized in the course of a few years. However in cases pertaining to the period prior to the introduction of section 35DDA Bombay High Court held that it is an revenue expenditure Same view has been expressed in CIT v. Simpson and Co. Ltd 1996 (6) TMI 12 - MADRAS HIGH COURT , CIT v. Machinery Manufacturing Corporation Ltd. 1991 (6) TMI 15 - CALCUTTA HIGH COURT and CIT v. P. I. Industries Ltd. 2008 (11) TMI 340 - RAJASTHAN HIGH COURT Following the decisions of various High Courts, order of the Tribunal for the assessment year 1999-2000 was confirmed and departmental appeal was dismissed Allowed as revenue expenditure Against the revenue.

Summary

Issues:
Whether the Income-tax Appellate Tribunal was justified in confirming the deduction of expenditure incurred under the voluntary retirement scheme as a revenue expenditure.
Whether the expenditure by way of payments made under the voluntary retirement scheme for retirement of employees is a revenue or capital expenditure.

Analysis:
The High Court considered the question raised in the appeal regarding the justification of the Income-tax Appellate Tribunal in confirming the deduction of expenditure under the voluntary retirement scheme as a revenue expenditure. The Tribunal's decision was based on a statutory amendment introducing section 35DDA of the Income-tax Act, allowing the expenditure to be amortized over five assessment years. The Court acknowledged the consistent view of various High Courts in favor of allowing such deductions and decided not to disturb the Tribunal's finding. The Court emphasized the importance of not disturbing settled positions when followed for several years by parties and the Department.

The Court analyzed the nature of the expenditure under the voluntary retirement scheme to determine whether it qualifies as a revenue or capital expenditure. It referenced judgments from different High Courts, including the Bombay High Court, Madras High Court, Calcutta High Court, and Rajasthan High Court, which supported the view that such expenditure is of a revenue nature and allowable in the relevant assessment year. The Court highlighted that the purpose of the voluntary retirement scheme is to achieve long-term benefits, such as reducing staff strength to enhance viability and profitability. It concluded that the expenditure for retirement of employees is a capital expenditure, eligible for deduction in a phased manner over several years, even before the introduction of section 35DDA.

The Court discussed the distinction between revenue and capital expenditure, emphasizing that expenditure leading to enduring benefits is considered capital in nature. It noted that the voluntary retirement scheme aims to streamline industries by restructuring the workforce for long-term viability and profitability. Therefore, the Court determined that the payments made under the scheme constitute capital expenditure, requiring amortization over multiple years. The Court upheld the Tribunal's decision, following the precedent set by various High Courts and confirming the entitlement of the assessee to claim deductions for the expenditure incurred under the voluntary retirement scheme in a phased manner.