2014 (7) TMI 606 - HC - Income Tax

Amortization of expenses u/s 35DDA of the Act - Amount paid to employees as severance pay Held that - The Tribunal has rightly held that the Assessee would be entitled to the deduction in relation to severance pay though the assessee would not be entitled to the deduction u/s 37(1) of the Act but u/s 35DDA - the deduction claimed by the Assessee will have to be amortized u/s 35DDA and only 1/5th of the expenditure was allowable in the current AYs and the Assessee would be entitled to deduction of the amount in each of the four subsequent AYs as well - it is only on the ground that the manufacturing activity of the Assessee had ceased that the AO disallowed the deduction - there is no justification for denying the deduction to the Assessee Company and granting the same as per the provisions of section 35DDA of the Act - the order of the Tribunal cannot be faulted on any ground thus, no substantial question of law arises for consideration Decided against Revenue.

Summary

Issues:
Appeal under section 260A of the Income Tax Act 1961 regarding deductions on severance pay; Interpretation of provisions of section 35DDA; Whether severance pay can be allowed as a deduction under section 37(1) or amortized under section 35DDA.

Analysis:

1. The Commissioner of Income Tax-7, Mumbai filed an appeal challenging the order of the Income Tax Appellate Tribunal (ITAT) allowing deductions on severance pay to the assessee. The ITAT held that while the assessee was not entitled to claim the deduction under section 37(1), it could be amortized under section 35DDA of the Act. The appellant contended that the assessee had stopped its manufacturing activity and, therefore, was not entitled to the deduction. The main issue was whether the ITAT erred in allowing the amortization of severance pay under section 35DDA.

2. The Assessing Officer disallowed the deduction claimed by the assessee on severance pay under section 37(1) as it was akin to a Voluntary Retirement Scheme (VRS) and applied the provisions of section 35DDA. The CIT (Appeals) upheld this decision. However, the ITAT disagreed, stating that the severance pay was a revenue expenditure and not connected with closing down the business. The ITAT held that the assessee could amortize one-fifth of the expenditure in the current assessment year and the balance over the next four years under section 35DDA.

3. The ITAT found that the assessee continued its business more efficiently by outsourcing production, and the restructuring expenses were not the same as closing down the business. The ITAT concluded that the severance pay could be amortized under section 35DDA, allowing the deduction over five years. The High Court upheld the ITAT's decision, stating that the assessee was entitled to the deduction under section 35DDA and dismissed the appeal, finding no substantial question of law.

4. The High Court emphasized that the ITAT's decision was based on factual findings and interpretation of the law, which were not erroneous. The court noted that the Assessing Officer's disallowance was based on the cessation of manufacturing activity, a finding reversed by the ITAT. Therefore, the deduction on severance pay was rightfully allowed under section 35DDA, and the court found no grounds to interfere with the ITAT's decision.

5. In conclusion, the High Court dismissed the appeal, affirming the ITAT's decision to allow the deduction of severance pay under section 35DDA and stating that no substantial question of law was raised. The court highlighted the factual and legal reasoning behind the ITAT's decision, emphasizing that the assessee's restructuring expenses were distinct from closing down the business, warranting amortization under section 35DDA.