2011 (12) TMI 103 - HC - Income Tax

Voluntary Retirement Scheme (VRS) u/s 35DDA - assessee company had paid certain additional benefits also alongwith VRS - AO arrived at a conclusion that the scheme floated by the assessee was not in conformity with Rule 2BA of the Income Tax Rules and, therefore, benefit of Section 10(10C) was not available. Since Section 10(10C) was not available, the assessee was liable to deduct the tax at source on the payments made to the employees. - Held that - The factual position which emerges from the aforesaid discussion is that (a) in the assessment orders passed in the case of employees, the Department accepted that the employees were entitled to the benefit of Section 10(10C) of the Act; (b) as per the judgment of Gujarat High Court in Arunkumar T. Makwana Versus Income-Tax Officer. (2006 -TMI - 9895 - GUJARAT High Court), merely because payment of more than Rs. 5 lakhs is made would not mean that the schemes are not in conformity with Rule 2BA and the provisions of Section 10(10A) of the Act; (c) wherever any payment is made in excess of Rs. 5 lakhs and payments made in regard to early bird incentives, the tax has been deducted by the company on such payments made and that tax is paid to the Government. - Assessee can not be treated as assessee-in-default having regard to the principles laid down by this Court in Nestle India Pvt. Ltd. (2000 -TMI - 15273 - DELHI High Court)

Issues Involved:
1. Compliance of the Voluntary Retirement Scheme (VRS) with Rule 2BA of the Income Tax Rules.
2. Applicability of Section 10(10C) of the Income Tax Act for tax exemption on VRS payments.
3. Determination of the assessee as "assessee-in-default" under Section 201(1A) for not deducting tax at source on VRS payments.
4. Bona fide conduct of the assessee in not deducting tax at source.

Issue-wise Detailed Analysis:

1. Compliance of the Voluntary Retirement Scheme (VRS) with Rule 2BA of the Income Tax Rules:
The assessing officer observed that the VRS introduced by the assessee company did not conform to Rule 2BA of the Income Tax Rules. Specifically, the scheme provided additional benefits such as medical coverage, monthly pensions, and one-time medical allowances which exceeded the limits prescribed by Rule 2BA. The revenue argued that the scheme's benefits exceeded the amount equivalent to three months' salary for each completed year of service and the Rs. 5 lakh cap, thus failing to comply with Rule 2BA.

2. Applicability of Section 10(10C) of the Income Tax Act for tax exemption on VRS payments:
Section 10(10C) provides tax exemption for amounts received under a VRS, up to Rs. 5 lakhs, if the scheme complies with Rule 2BA. The CIT(A) and ITAT found that the payments made by the assessee under the VRS could not be treated as profit in lieu of salary and were eligible for exemption under Section 10(10C) to the extent of Rs. 5 lakhs. They noted that the additional benefits were discretionary and not a part of the VRS, and wherever payments exceeded Rs. 5 lakhs, tax was deducted accordingly.

3. Determination of the assessee as "assessee-in-default" under Section 201(1A) for not deducting tax at source on VRS payments:
The assessing officer determined a short deduction of Rs. 13,94,55,417 and interest under Section 201(1A) due to the assessee's failure to deduct tax at source on VRS payments. However, the CIT(A) and ITAT held that the assessee could not be treated as "assessee-in-default" as it had acted in a bona fide manner. The CIT(A) observed that the employees' assessments had granted tax exemption under Section 10(10C) for VRS payments up to Rs. 5 lakhs, and the department's stance was contradictory.

4. Bona fide conduct of the assessee in not deducting tax at source:
The CIT(A) and ITAT found that the assessee acted in good faith, making a fair estimate of tax liability and deducting tax on payments exceeding Rs. 5 lakhs, including early bird incentives. The CIT(A) relied on the Gujarat High Court's judgment in Arun Kumar T. Makwana and Circular No. 640 issued by the CBDT, which clarified that only the excess amount above Rs. 5 lakhs is subject to tax. The ITAT upheld this view, noting that the assessee's conduct was not malafide.

Conclusion:
The High Court affirmed the findings of the CIT(A) and ITAT, concluding that the assessee's VRS complied with the guidelines to the extent of Rs. 5 lakhs, and additional discretionary benefits did not invalidate the scheme's compliance with Rule 2BA. The court held that the assessee could not be treated as "assessee-in-default" under Section 201(1A) due to its bona fide conduct. The appeals were dismissed, and no substantial questions of law arose.

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