N.P.GUPTA, J. - (1.) THIS appeal has been filed by the Revenue against the order of the Tribunal dt. 28th July, 2006, allowing the appeal of the assessee, and setting aside the order of the assessing authority, and the CIT and thereby allowing deduction for the full amount of Rs. 1,06,57,907 in the relevant year being the expenditure claimed under Section 37(1) of the IT Act, being the amount paid by the assessee, under the approved Voluntary Retirement Scheme (VRS), which scheme was approved under Section 10(10C) vide order dt. 12th Sept., 2000.
(2.) THE appeal was admitted on 29th March, 2007 by framing following substantial question of law: Whether in the facts and circumstances of the case, the Tribunal was in error in allowing the entire claim of deduction under Section 37(1) of the amount paid by the assessee towards the dues of its employees whose services were brought to an end under the Voluntary Retirement Scheme ? The necessary facts are that the assessee implemented a Voluntary Retirement Scheme floated by it, which was duly approved by the CIT under Section 10(10C) and claimed deduction of the entire expenses to the tune of Rs. 1,06,57,907 paid by way of terminal benefits, in the relevant assessment year. The learned AO disallowed the claim, and held, that it is not an expenditure of the nature described in Sections 30 - 36 but it is in the nature of capital expenditure. The terminal benefits of VRS is a long term benefit to the assessee company, which will be derived by the assessee over a period of number of years in the future. It was also considered, that a new Section 35DDA has been inserted by the Finance Act, 2001 w.e.f. 1st April, 2001, provision whereof is to take effect from 1st April, 2001, as such that provision would not be applicable. However, the insertion of the said section gives emphasis to the point, that nature of payment on account of VRS is an expenditure, which needs amortization, and no such provision was found in the Act for the earlier period, whereby the claim could be allowed. The learned CIT upheld the addition by finding that by effecting VRS there was brought into existence a clear advantage of an enduring nature, and therefore, the amount cannot be allowed as a deduction under Section 37(1). The learned CIT also considered the circular dt. 23rd Jan., 2001, issued by the CBDT providing that ex gratia amount paid under the VRS would not be admissible as revenue expenditure, as the test is of enduring benefit, and it is a capital expenditure, and directed it to be treated as capital expenditure.
(3.) THE learned Tribunal found, that the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT : [1980]124ITR1(SC) held, that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account, and the test of enduring benefit may break down, and also held, that by introducing the VRS the assessee sought to carry on its business more efficiently and profitably, and did not obtain any advantage in the capital field, inasmuch as its fixed capital remained untouched, Then, it was considered, that the circular of CBDT came to be considered by the Madras High Court in the case of Madura Coats v. Dy. CIT and Anr. : [2005]273ITR32(Mad) and was held to be invalid and ultra vires, by holding that in the said circular there is a positive direction to treat an ex gratia payment to an employee under VRS as capital expenditure, which direction is certainly adverse to the assessee. Therefore, to the extent the circular is against the interests of the assessees, it is liable to be held ultra vires. Then, the provisions of Section 35DDA were considered, and were found to be not applicable, as having come into force w.e.f. 1st April, 2001 only. Then, after considering some other judgments of different High Courts about the aspect of benefit of enduring nature, commercial expediency etc. it was found that the amount is admissible as deduction to the extent of full amount under the relevant year.;