2018 (5) TMI 1573 - AT - Income Tax

Disallowance of Voluntary Retirement Scheme ( VRS ) retrenchment compensation - claim under section 35DDA denied - allowable busniss expenses - closure of unit - Held that - In order to save future losses, Aurangabad unit was closed down by the assessee-company. The closure is approved by the Board of Directors and there was an Agreement executed between the Worker s Union and the Assessee-Company for retrenchment of its employees on account of closure of the Aurangabad factory. These facts have not been rebutted by the Revenue. Amount in question have been paid by assessee-company on account of retrenchment compensation on closure of the Aurangabad unit of the assessee-company. The amount is thus paid for business purposes only and as such, it was an allowable deduction under section 37 of the I.T. Act. Provisions of Section 35DDA applied by the A.O. are not applicable in this case because assessee-company has not paid any service compensation under any scheme of voluntary retirement. In the absence of any contrary material brought on record, we are of the view that no interference is called for in the matter. - Decided against revenue.

Issues: Disallowance of Voluntary Retirement Scheme (“VRS”) retrenchment compensation

Detailed Analysis:
1. The Assessing Officer (A.O.) disallowed the VRS retrenchment compensation and did not allow the claim under section 35DDA of the I.T. Act, 1961.
2. The assessee-company, a manufacturing company engaged in auto components, closed its Aurangabad unit due to financial problems and lack of orders, resulting in retrenchment of employees.
3. The company paid retrenchment compensation based on 16 days' wages/salary for years of service served by the employees, not under VRS.
4. The Ld. CIT(A) deleted the addition after considering the material on record, stating that the closure of the factory and retrenchment of employees is not equivalent to a VRS scheme, making section 35DDA inapplicable. The payment was made for business purposes under section 37(1) of the I.T. Act.
5. The Ld. CIT(A) allowed the claim of the appellant, emphasizing that the expenditure on payments to retired employees was wholly and exclusively for business purposes, with no personal element involved.
6. The Tribunal found no merit in the Departmental Appeal, affirming that the amount was paid for business purposes only and was an allowable deduction under section 37 of the I.T. Act. The closure of the unit was approved by the Board of Directors, and an agreement was executed with the Worker’s Union for retrenchment of employees.
7. The Tribunal dismissed the Departmental Appeal, concluding that no interference was necessary as the payment was made for business purposes, and provisions of Section 35DDA did not apply due to the absence of any service compensation under a voluntary retirement scheme.

This detailed analysis provides a comprehensive overview of the judgment, addressing the issues involved and the reasoning behind the decision to allow the retrenchment compensation as a deductible business expense under section 37(1) of the I.T. Act.

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