2017 (5) TMI 1731 - AT - Income Tax

Addition on account of settlement compensation for closed units - AO has treated the payment made to the employees of Chennai unit in addition to the payment of VRS in the nature of VRS AND applied the provisions of section 35DDA and accordingly allowed 1/5th of such expenses and remaining expenses were disallowed - CIT-A deleted the addition made by the AO by observing that the additional payment is not covered under section 35DDA - HELD THAT - In the instant case the assessee was having several units and few of them were close down. All the units of the assessee constitute a single business. In consequence to the closure of the units based in the Chennai the assessee had to pay certain compensation over and above the VRS to the employees therefore in our considered view the extra payment is eligible for deduction under section 37(1) of the Act. In view of above we do not find any reason to interfere in the order of ld CIT(A). We hold accordingly and this ground of appeal of the Revenue is dismissed. Addition on account of advance written off - CIT-A delete the addition - HELD THAT - From the details furnished by the assessee in the paper book it is found that the assessee had given full details of each item of the advances. The amounts represented advances given to the parties for the purchase of raw materials advance to employees security deposited with the landlord electricity and telephones etc. The advances were given during the course of business. The amount became irrecoverable from the parties to whom the advances were made. Thus the advances were totally connected with the business activities of the assessee. The learned CIT (Appeals) was justified in observing that the amount of advance was a trading loss. After seeing the details of amounts it is observed that the assessee was not required to take a lengthy litigation for recovering the small amounts. In our opinion therefore the approach of the learned CIT (Appeals) is justified. claim of deduction is allowable as trading loss u/s 37 of the Act. AO is directed accordingly. Ground taken by the Revenue is therefore dismissed.

Summary

Issues Involved:
1. Deletion of addition on account of settlement compensation for closed units.
2. Deletion of addition on account of advance written off.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Settlement Compensation for Closed Units:

The Revenue challenged the deletion of an addition of ?4,77,420/- made by the Assessing Officer (AO) regarding settlement compensation for closed units. The assessee, a limited company engaged in manufacturing industrial and medical gases, had closed its Chennai unit due to continuous losses. The Voluntary Retirement Scheme (VRS) amounting to ?1,28,89,938/- was claimed under Section 35DDA of the Income Tax Act, 1961, to be amortized over five years. Additionally, the assessee incurred ?55,96,775/- as ex-gratia/settlement payments to employees, claimed as a deduction under Section 37(1). The AO treated this payment as part of the VRS, allowing only 1/5th of the amount and disallowing ?44,77,400/-.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, noting that the ex-gratia payment was not under the VRS scheme but as part of a settlement under the Industrial Disputes Act. The CIT(A) relied on various judicial precedents, including K. Ravindranathan Nair v. CIT and CIT v. Jai Parabolic Springs Ltd, to conclude that the expenditure was incurred for the business's overall industrial health and should be allowed under Section 37(1).

The Tribunal upheld the CIT(A)'s decision, emphasizing that the additional payment was over and above the VRS and thus not covered under Section 35DDA. The Tribunal cited similar judgments, including K. Ravindranathan Nair vs. CIT and Jayshree Tea & Industries Limited vs. CIT, reinforcing that such settlement payments are allowable as business expenditure under Section 37(1).

2. Deletion of Addition on Account of Advance Written Off:

The Revenue also contested the deletion of an addition of ?36.99 lakhs made by the AO concerning advances written off. The assessee had written off ?95,76,604/- in advances, including ?36.99 lakhs as advances to suppliers, employees, and security deposits, which the AO disallowed, attributing the write-off to negligence rather than irrecoverability.

The CIT(A) deleted the addition, stating that the advances were business-related and their write-off was a trading loss. The CIT(A) referenced cases like Travancore Tea Estates Co. Ltd. v. CIT and CIT v. Inden Biselers, which held that bad debts or trading losses incurred wholly and exclusively for business purposes are allowable deductions.

The Tribunal concurred with the CIT(A), noting that the advances were connected to the business and had become irrecoverable. The Tribunal also referred to the assessee's own case in ITA No. 131/Kol/2010, where similar write-offs were allowed, emphasizing that the loss was incidental to the business and should be allowed as a trading loss under Section 37.

Conclusion:

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The settlement compensation was deemed allowable under Section 37(1) as it was not part of the VRS scheme, and the advances written off were considered trading losses connected to the business, thus deductible under Section 37. The Tribunal's decision was pronounced in open court on 03/05/2017.