2012 (9) TMI 445 - HC - Income Tax

Disallowance of expenditure on VRS u/s 35DDA - non compliance with Rule 2BA - ITAT allowed the deduction - Held that - Rule 2BA is in the form of guidelines for the purpose of Section 10(10C) which relates to taxation of income/amount received by an employee under VRS scheme. The said Rule does not deal with the expenditure incurred by the employer when the assessee makes payment under the VRS scheme formulated by them. The treatment of expenditure or outgoing of the employer has to be dealt with under Section 35DDA and the prescribed rules if applicable. Rule 2BA which is applicable to the recipient i.e. the employee cannot be applied - in favour of assessee. Disallowance of Depreciation on UPS - ITAT allowed @ 60% treating the same as computers - Held that - As decided in CIT Vs. BSES Yamuna Power Ltd 2010 (8) TMI 58 - DELHI HIGH COURT that computer accessories and peripherals form an integral part of a computer system and therefore depreciation has to be allowed at the rate of 60% - as that the higher depreciation was not only allowed in respect of UPS but also in respect of printers switches etc. - in favour of assessee. Disallowance of deduction of 1/5th of the expenses relating to legal and professional expenses relating to closure of the Daruhera unit - ITAT allowed it - Held that - As decided in C.I.T v. D.C.M 2009 (1) TMI 2 - HIGH COURT DELHI the expenditure incurred on payment of retrenchment compensation and interest on money borrowed for payment of retrenchment compensation on closure of one of the units amongst other businesses of the assessee-company was revenue expenditure. It also held that closure of one unit did not amount to closure of business as it was not a separate and distinct business - in favour of assessee.

Summary

Issues:
1. Whether the Income Tax Appellate Tribunal was right in deleting additions based on the Transfer Pricing Officer's report.
2. Whether 10% of sales promotion and advertisement expenditure was deductible.
3. Various issues raised for assessment years 2005-06 and 2006-07.

Analysis:
1. The court admitted the appeal concerning the Tribunal's deletion of additions based on the Transfer Pricing Officer's report. However, the appeal regarding the deductibility of 10% of sales promotion and advertisement expenditure was not admitted.
2. Additional issues were raised for assessment years 2005-06 and 2006-07, including the eligibility of deductions under section 35DDA, depreciation on UPS, and legal expenses related to closure of a unit.
3. Regarding the applicability of Rule 2BA to expenditure under Section 35DDA, the court agreed with the tribunal's findings that Rule 2BA does not apply to employer expenditures under the VRS scheme.
4. The court upheld the tribunal's decision on allowing depreciation on UPS at 60%, considering them integral to computer systems based on factual findings and relevant case law.
5. The court addressed the deduction of legal and professional expenses related to the closure of a unit, emphasizing that the business had not ceased entirely, and the expenses were not capital in nature. The court cited precedents to support the view that closure of one unit does not equate to closure of the entire business.
6. Ultimately, the court found no substantial question of law arising from the issues raised for assessment years 2005-06 and 2006-07, and accordingly disposed of the application.