2012 (12) TMI 289 - AT - Income Tax

Initiating proceedings u/s 263 - Disallowance of payments made under Exit Option Scheme(VRS) as Employee welfare measure - held that - It is eligible for deduction u/s 35DDA of the Act and accordingly, the appellant shall be eligible for 1/5th of the total expenditure as deduction in assessment year 2007-08 and the balance in subsequent four assessment years. further it was clarified that compliance with Rule 2BA is not mandatory in such cases. It was, therefore, found that the deletion of conditionalities originally incorporated in the Bill showed that legislative intendment was not to incorporate all the conditions of section 10(10C) in section 35DDA. Finally, the Legislature left the scheme of voluntary retirement open-ended and did not place any restriction on the scheme. Thus, plain language of the provision supports the case of the assessee. Assessing Officer directed to allow 1/5th of Rs. 7,09,56,323.23 as deduction under section 35DDA for the concerned assessment year. Decision in CIT Versus SONY INDIA PVT. LTD. 2012 (6) TMI 286 - ITAT DELHI Followed.

Issues Involved:
1. Initiation of proceedings under section 263 of the Income-tax Act, 1961.
2. Disallowance of payments made to employees under the Exit Option Scheme.
3. Verification of deduction under section 88E.
4. Depreciation claimed on investment in AFS category.
5. Depreciation on computers and related accessories.
6. Penalty payment not added back in computation.

Issue-wise Detailed Analysis:

1. Initiation of Proceedings under Section 263 of the Income-tax Act, 1961:
The primary issue raised by the appellant was the initiation of proceedings under section 263 by the Commissioner of Income-tax (CIT), arguing that the assessment order under section 143(3) was erroneous and prejudicial to the interest of revenue. The CIT directed the Assessing Officer to disallow payments made by the appellant under the Exit Option Scheme, treating them as capital expenditure. The appellant contended that the expenditure was purely an employee welfare measure and should be eligible for deduction as revenue expenditure.

2. Disallowance of Payments Made to Employees under the Exit Option Scheme:
The CIT directed the Assessing Officer to disallow the payments made by the Bank to its employees under the Exit Option Scheme, treating the same as capital expenditure. The appellant argued that the expenditure was incurred purely on employee welfare measures and thus eligible for deduction as revenue expenditure. Alternatively, the appellant contended that the expenditure should be eligible for deduction under section 35DDA of the Act, allowing 1/5th of the total expenditure as deduction in the assessment year 2007-08 and the balance in subsequent four assessment years.

3. Verification of Deduction under Section 88E:
The CIT noted that the deduction under section 88E claimed by the assessee amounting to Rs. 46,28,515/- needed verification, as the records indicated that the conditions contained therein were not satisfied, resulting in a short levy of tax.

4. Depreciation Claimed on Investment in AFS Category:
The CIT observed that the Assessing Officer did not gather information regarding the depreciation claimed on investment in the AFS category of Rs. 1,26,61,106/-, resulting in a short levy of tax. The applicability of the RBI guidelines read with CBDT Circular 665 was not looked into by the Assessing Officer.

5. Depreciation on Computers and Related Accessories:
The CIT found that the company claimed depreciation on computers at 60%, but the notes mentioned that computers included printers, modems, and other accessories. The CIT directed that the excess depreciation claim should be reworked and disallowed in respect of printers, modems, and other accessories.

6. Penalty Payment Not Added Back in Computation:
The CIT noted that a sum of Rs. 1,15,566/- paid as a penalty was not added back in the computation, resulting in under-assessment with a tax effect of Rs. 38,899.

Judgment Analysis:

Payments Made to Employees under the Exit Option Scheme:
The Tribunal examined whether the payments made under the Exit Option Scheme qualified for deduction under section 35DDA. It was noted that section 35DDA does not require compliance with Rule 2BA, which is mandatory only for claiming exemption under section 10(10C). The Tribunal referenced the Finance Bill, 2001, which initially linked section 35DDA to Rule 2BA, but this link was deleted in the final enactment, indicating legislative intent not to incorporate the conditions of section 10(10C) into section 35DDA. The Tribunal also cited the Delhi Tribunal's decision in Sony India (P.) Ltd., which supported the view that compliance with Rule 2BA is not mandatory for deductions under section 35DDA. Consequently, the Tribunal directed the Assessing Officer to allow 1/5th of the payment as a deduction under section 35DDA for the assessment year 2007-08.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal directing the Assessing Officer to allow the deduction under section 35DDA. The Tribunal's decision clarified that the conditions of Rule 2BA are not relevant for deductions under section 35DDA, and the legislative intent was to keep the scheme of voluntary retirement open-ended without restrictions.

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