2013 (10) TMI 107 - HC - Income Tax

Benefit of section 35DDA of the Income Tax Act - Deductibility of expenditure incurred on VRS - Applicability of Rule 2BA - Held that - Section 35DDA reveals that no mention is made of any rule in the body of this Section. On the other hand, Rule 2BA of the Rules, a specific reference to Section 10(10C) of the Act is made and it is captioned as Guidelines for purposes of Section 10(10C) . Moreover the language of Rule 2BA of the Rules makes it very clear that the amount received is by the employee and for the purpose of claiming benefit under Section 10(10C) of the Act, this has nothing to do with the employer s claim, which is under a different claim under Section 35DDA of the Act - Rule 2BA of the Rules is attracted and applicable only to a circumstance, where the benefit of Section 10(10C) of the Act is sought for and not in a situation where the provisions of section 35DDA of the Act is called in aid Decided against the Revenue.

Summary

Issues:
1. Interpretation of Section 35DDA of the Income Tax Act regarding deduction of expenditure on voluntary retirement scheme.
2. Applicability of Rule 2BA of the Income Tax Rules to voluntary retirement schemes under Section 35DDA.

Issue 1 - Interpretation of Section 35DDA:
The appeal by the revenue challenged the order of the Income Tax Appellate Tribunal regarding the deduction of expenditure incurred on a voluntary retirement scheme under Section 35DDA of the Income Tax Act. The respondent, a Public Sector Bank, claimed a deduction for expenses related to employees who took voluntary retirement. The Commissioner disallowed the deduction, considering it as capital expenditure due to the scheme's nature. The Tribunal allowed the appeal partially, stating that the scheme falls under Section 35DDA, allowing the deduction to be spread over five assessment years. The revenue contended that even under Section 35DDA, the deduction allowed should align with Rule 2BA of the Rules, which sets guidelines for Section 10(10C) regarding voluntary retirement schemes.

Issue 2 - Applicability of Rule 2BA:
The Revenue argued that compliance with Rule 2BA of the Rules is necessary for deduction under Section 35DDA, emphasizing that if an employee cannot claim benefits under Section 10(10C), the employer should not be entitled to deductions under Section 35DDA. However, the Tribunal's order and a thorough analysis of Section 35DDA, Section 10(10C), and Rule 2BA revealed that Rule 2BA applies to circumstances seeking benefits under Section 10(10C) and not to situations invoking Section 35DDA. The High Court upheld the Tribunal's decision, dismissing the appeal as they found no grounds to disturb the view that Rule 2BA is only applicable when claiming benefits under Section 10(10C) and not under Section 35DDA.

This judgment clarifies the interpretation of Section 35DDA and the applicability of Rule 2BA to voluntary retirement schemes, providing guidance on the eligibility for deductions under different sections of the Income Tax Act based on the nature of the scheme and the benefits sought by employees and employers.