2020 (11) TMI 874 - HC - Income Tax

Expenditure incurred toward payment of voluntary retirement compensation of the employees taken over - As per revenue Expenditure not incurred solely and exclusively for the purpose of business - assessee formulated the scheme wherrein sum was paid as retirement benefit to the employees who availed benefit of the scheme not only for past services but also for remaining years of service with the company - HELD THAT -Scheme was admittedly sanctioned by the Chief Commissioner for the exemption under Section 10(10C) of the Act and it was a contractual obligation and was an ascertained liability. It is also pertinent to mention here that the genuineness of the scheme was not doubted by any of the authorities, rather the same was approved by Chief CIT. CIT(Appeals) as well as the tribunal held that payment of compensation under the scheme was to induce workmen to retire prematurely and the decision of the assessee was purely on the ground of commercial expediency to curtail the expenditure in future and to facilitate for carrying on the business. Thus, the expenditure incurred under the scheme has been treated as revenue expenditure. It is pertinent to mention that Supreme Court in 'EMPLOYERS IN RELATION TO THE MANAGEMENT OF INDIAN CABLE CO 1972 (4) TMI 100 - SUPREME COURT has also held that expenditure incurred by the company under the scheme has to be treated as an item of expenditure incurred by the company on the ground of commercial expediency and the same is allowable under Section 37(1) of the Act. In view of aforesaid enunciation of law by the Supreme Court, the expenses incurred by the assessee under the scheme have been incurred solely and exclusively for the purposes of business and are entitled for deduction under Section 37(1) of the Act. - Decided in favour of assessee.

Summary

Issues:
1. Claim of deduction for expenditure incurred towards voluntary retirement compensation.
2. Consideration of business purpose and tax avoidance in taking over employees.
3. Disallowance of compensation paid towards the scheme by the Assessing Officer.
4. Interpretation of Section 37(1) of the Income Tax Act for allowable expenditure.
5. Commercial expediency and business purpose of the expenditure under the scheme.

Analysis:

Issue 1: Claim of deduction for expenditure towards voluntary retirement compensation
The appeal involved questions on whether the assessee could claim deduction for the expenditure incurred towards voluntary retirement compensation of employees taken over from another company. The Assessing Officer disallowed the compensation as it was not deemed wholly and exclusively for the business purpose of the assessee.

Issue 2: Business purpose and tax avoidance in taking over employees
The revenue argued that the transaction between the assessee and the previous company was merely a share purchase, and the liability under the scheme was not a business expense but a personal liability of the previous company. It was contended that the scheme was a device to avoid tax and the employees taken over did not render services to the assessee.

Issue 3: Disallowance of compensation by the Assessing Officer
The Assessing Officer disallowed the entire compensation paid towards the scheme as it was not considered to be incurred wholly and exclusively for the business purpose of the assessee. This decision led to the appeal by the revenue and subsequent proceedings.

Issue 4: Interpretation of Section 37(1) for allowable expenditure
Section 37(1) of the Income Tax Act was analyzed to determine if the expenditure under the scheme could be considered as allowable business expenditure. The tribunal and authorities considered the nature of the expenditure and its relation to the business operations of the assessee.

Issue 5: Commercial expediency and business purpose of the expenditure
The Senior Counsel for the assessee argued that the expenditure under the scheme was incurred for commercial expediency to facilitate business operations and save future expenses. Various legal precedents were cited to support the contention that the expenditure was allowable under Section 37(1) of the Act.

The judgment concluded that the expenditure under the scheme was incurred solely and exclusively for the business purpose of the assessee, as approved by the Chief Commissioner and in line with commercial expediency. The decision was supported by legal precedents and the acceptance of a similar view in a previous case involving the assessee. Consequently, the substantial questions of law were answered against the revenue, and the appeal was dismissed for lack of merit.