2019 (5) TMI 198 - HC - Income Tax

Nature of expenditure - VRS expenditure - revenue expenditure or capital expenditure - HELD THAT - This Court, in the case of Commissioner of Income Tax Vs. Bhor Industries Ltd. . 2003 (2) TMI 20 - BOMBAY HIGH COURT has held that the expense towards voluntary retirement scheme is to save the expenditure and enduring benefits test cannot be applied. It was held that the expenditure must he allowed in the year in which it was incurred. Similarly, in the case of Commissioner of Income Tax Vs. Simpson And Co. Ltd. (No.1) 1996 (6) TMI 12 - MADRAS HIGH COURT held that the amount paid to the employee under voluntary retirement scheme is an allowable deduction since the expenditure was incurred on the ground of commercial expediencies. Eligible profits for the purpose of computing deduction u/s. 80HHC - inclusion of interest income earned from the customers and Hundies, interest of MSEB and MIDC - Revenue contends that by applying explanation (baa), 90% thereof will be deducted from the Assessee s business income -Tribunal held that these receipts had a close nexus to the Assessee s export business and that, therefore, the said explanation would not apply - HELD THAT - Interest income was from two sources. One was interest on deposits made by the Assessee with the electricity company and with the State Industrial Development Corporation. This was a small portion of the interest income. The amounts being extremely small, we do not entertain this question of the Revenue. The second head of the interest income was interest received from the customers on delayed payments. Correctly therefore, the Tribunal held that such interest was also part of the Assessee s export business. There is a reference to the income from Hundies. However, there is no clarity on this nature of income. The Assessing Officer has not discussed any facts relatable to this source. Only on this ground, this further question which represents the very small portion of the receipt, is not examined. - Decided against revenue.

Summary

Issues:
1. Treatment of VRS expenditure as revenue expenditure.
2. Inclusion of interest income in total eligible profits for deduction under Section 80HHC of the Income Tax Act, 1961.

Analysis:

Issue 1: Treatment of VRS Expenditure
The appeal filed by the Revenue challenges the Judgment of the Income Tax Appellate Tribunal regarding the treatment of VRS expenditure as revenue expenditure. The Respondent, a Private Limited Company, claimed the VRS expenditure as revenue expenditure for the Assessment Year 1999-2000. The Department contended that the expenditure was capital in nature. The Court referred to the case law of Commissioner of Income Tax Vs. Bhor Industries Ltd. and held that the expenditure towards voluntary retirement scheme should be allowed in the year it was incurred, rejecting the enduring benefits test. Additionally, citing the case of Commissioner of Income Tax Vs. Simpson And Co. Ltd., the Court emphasized that the amount paid to employees under VRS is an allowable deduction based on commercial expediencies.

Issue 2: Inclusion of Interest Income for Deduction
The second question pertains to the computation of the Assessee's income for deduction under Section 80HHC of the Income Tax Act, 1961. The Revenue argued for a deduction based on explanation (baa), but the Tribunal ruled that the receipts had a close nexus to the Assessee's export business, thus exempting them from the said explanation. The interest income in question came from two sources: interest on deposits with the electricity company and State Industrial Development Corporation, and interest received from customers on delayed payments. The Tribunal held that both sources of interest income were part of the Assessee's export business, dismissing the Revenue's contention.

In conclusion, the High Court of Bombay upheld the Tribunal's decision and dismissed the Income Tax Appeal, affirming the treatment of VRS expenditure as revenue expenditure and the inclusion of interest income in the Assessee's total eligible profits for deduction under Section 80HHC.