Income Tax Appellate Tribunal - Ahmedabad
Contemporary Target Prafull ... vs Assessee on 11 August, 2011
आयकर अपीलीय अिधकरण,
अिधकरण, अहमदाबाद Ûयायपीठ 'सी
सी'
सी अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
" C " BENCH, AHMEDABAD
सव[ौी मुकुल कुमार ौावत, Ûयाियक सदःय एवं ौी ए.एन.पाहजा
ू , लेखा सदःय के सम¢ ।
BEFORE SHRI MUKUL Kr.SHRAWAT, JUDICIAL MEMBER AND
SHRI A.N. PAHUJA, ACCOUNTANT MEMBER
आयकर अपील सं./I.T.A. No.2921/Ahd/2009
( िनधा[रण वष[ / Assessment Year : 2005-06)
Contemporary Target बनाम/ The ACIT
Prafull Pvt.Ltd. Vs. Circle-1(2)
C-2/20, Industrial Baroda
Estate, Gorwa
Baroda
ःथायी ले खा सं . /जीआइआर सं . / PAN/GIR No. : AAACP 0351 L
(अपीलाथȸ /Appellant) .. (ू×यथȸ/Respondent)
अपीलाथȸ ओर से/Appellant by : Shri S.N. Soparakar
ू×यथȸ कȧ ओर से/ Respondent by : Shri G.S.Souryavanshi, Sr.D.R.
सुनवाई कȧ तारȣख/
/ Date of Hearing : 11/08/2011
घोषणा कȧ तारȣख /Date of Pronouncement : 21.10.2011
आदे श/O R D E R
PER SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER :
This is an appeal at the behest of the Assessee which has emanated from the order of Learned CIT(Appeals)-I Baroda dated 14/09/2009 and the grounds raised is reproduced below:-
"(1) The Learned CIT(A) has grossly erred in law and on facts in confirming action of the Assessing Officer in disallowing the amount of Rs.36,00,969/- as compensation to employees. Under the facts and circumstances of the case, the Learned CIT(A) ought to have allowed the said expenses as the relevant expenditure as resulted in to the ITA No.2921/Ahd/2009 Contemporary Target Praful Pvt.Ltd. vs. ACIT Asst.Year - 2005-06 -2- benefit of the assessee on revenue account i.e. uninterepted production and carrying on of the business and has resulted in avoiding the possible loss due to labour dispute/suspension of manufacturing activity. The expenditure is incurred wholly and exclusively for the purpose of business and commercial expediency."
2. Facts in brief as emerged from the corresponding assessment order passed u/s.143(3) of the I.T.Act dated 28/12/2007 were that the assessee- company is in the business of manufacturing of tooth-brushes. An income of Rs.1,41,24,120/- was declared, however, the assessment was made on an income of Rs.1,78,25,093/- An addition of Rs.30,00,969/- was made on account of claim of compensation paid to retiring employees. Assessing Officer's query was that the said payment was an ex-gratia payment, therefore not allowable. Assessing Officer's second objection was that the said expenditure was not incurred for earning the income of the year under consideration. In reply, assessee has explained that the company is a contract manufacturer of Colgate Palmolive India Limited for manufacturing of tooth-brush. There was general dissatisfaction amongst the employees regarding their pay structure and the employees have demanded higher wages. Looking to the margin of the profit and considering the "Cost Plus Arrangement" with the Colgate Palmolive India Limited, the company was not in a position to exceed to the demand for higher wages. The Company has opted to resolve the matter amicably with the workers. As per the amicable solution the company paid compensation to the employees on their resignation from the service. Subsequent to their resignation the company employed new workers so that there should not be any loss of production. On the basis of those facts, it was submitted before the Assessing Officer that the expenditure of Rs.36,00,969/- was an expenditure incurred for an un- ITA No.2921/Ahd/2009 Contemporary Target Praful Pvt.Ltd. vs. ACIT Asst.Year - 2005-06 -3- interrupted running of the business. It has also been explained that the compensation was paid to maintain the continuity of the business and the said payment was not made at the time of the closure of the business. It has also been mentioned that the payment was not under any retirement scheme. In support, few case laws have also been cited, e.g.:-
1. Shahzada Nand & Sons vs. CIT 108 ITR 358 (SC)
2. Sassoon J.David & Co. (P) Ltd. vs. CIT 118 ITR 261 (SC)
3. CIT vs. Machinery Manufacturing Corpn.Ltd. 198 ITR 559 (Cal High Court)
4. CIT vs. Bhor Industries Limited 264 ITR 180 (Bombay HC)
5. P.I. Industries Ltd. vs. ACIT 294 ITR 206
6. CIT vs. Simpson And Co.Ltd. 230 ITR 703
7. CIT vs. Assam Oil Co.Ltd. 154 ITR 647 2.1. However, the Assessing Officer was not convinced and held that the payment made to employees who have resigned from the job was a voluntary compensation to be covered u/s.35DD of the I.T.Act. The said amount was paid to 53 employees, which was like a Voluntary Retirement Scheme, hence such an expenditure is to be allowed if paid in terms of the provisions of section 35DDA of the I.T.Act. Since in the case of the assessee, as per Assessing Officer, no such claim was approved therefore the claim was disallowed.
The Assessing Officer has also held that the expenditure was not a general expenditure as prescribed u/s.37 of the I.T.Act therefore also not to be allowed. Being aggrieved the matter had gone in first appeal.
ITA No.2921/Ahd/2009Contemporary Target Praful Pvt.Ltd. vs. ACIT Asst.Year - 2005-06 -4-
3. Before the Learned CIT(Appeals) again it was reiterated that as a result of negotiations it was agreed that the workers who have taken voluntary retirement would be granted compensation in addition to the gratuity and PF, etc. However, ld.CIT(A) was of the view that w.e.f. 01/04/2001, i.e. Assessment Year 2001-02 section 35DDA of the I.T.Act had been inserted and provided for amortization of expenditure incurred under Voluntary Retirement Scheme (VRS). The learned CIT(Appeals) has concluded in the following manner:-
"It is quite apparent from a plain reading of the section that
(a) the entire expenditure incurred on payment of compensation at the time of voluntary retirement of employees would no longer be allowable, (b) such expenditure would be amortized over five years @ 1/5th of the amount for each year, and (c) the expenditure would be allowable only if it was incurred in connection with the voluntary retirement of employees "in accordance with any scheme or scheme of voluntary retirement". In the instant case, no scheme of voluntary retirement was framed by the appellant company.
By using the expression in accordance with "any scheme or schemes of voluntary retirement", the intention of the legislature is manifest: it is not intended that voluntary retirement should be undertaken in an un-regulated or arbitrary manner, but it should be in a regulated and transparent manner. In the instant case, the appellant has itself admitted that there was no scheme of voluntary retirement under which the compensation was paid. Accordingly, in my opinion, not only would the assessee not be entitled to claim the entire expenditure on compensation but it would not also be eligible to be amortised @ 1/5th of the expenditure over five years. In this view of the matter, it is ITA No.2921/Ahd/2009 Contemporary Target Praful Pvt.Ltd. vs. ACIT Asst.Year - 2005-06 -5- held that the AO was justified in making the disallowance of Rs.36,00,659/- which is confirmed."
4. From the side of the assessee ld.AR Mr.S.N.Soparkar appeared and placed reliance on a decision of ITAT Mumbai "G" Bench in the case of Dy.CIT vs. Warner Lambert (India) (P) Ltd. (2011) 26 DTR (Mumbai)(Trib) 121. The Learned Authorised Representative has also placed reliance on a decision of the Hon'ble Bombay High Court pronounced in the case of CIT vs. Bhor Industries Ltd. 264 ITR 180 (Bom) :: [ 180 CTR 508] (Bom).
5. On the other hand, from the side of the Revenue, ld. Sr.DR Mr.G.S.Souryavanshi has placed reliance on the decision of Hon'ble Kerala High Court in the case of CIT vs. O E N India Ltd. [2011] 196 TAXMAN 131 (Ker.) and of CIT vs. Travancore Titanium Products Ltd. [1993] 70 TAXMAN 80 (Ker.).
6. Having heard the submissions of both the sides, it is an admitted fact that there is no dispute about the nature and the correctness of the impugned payment which was made to the workers who have resigned from the job and on their resignation the assessee-company has decided to resolve the issue by making a payment of compensation of Rs.36,00,969/-. It has also not been disputed that the amount in question was not under any scheme, such as, VRS. We have noticed that in this regard the Revenue Authorities have cited a provision of IT Act, namely section 35DDA ITA No.2921/Ahd/2009 Contemporary Target Praful Pvt.Ltd. vs. ACIT Asst.Year - 2005-06 -6- which is in respect of "amortization" of expenditure incurred under voluntary retirement scheme. This section prescribes that where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement in accordance with any scheme or schemes of voluntary retirement, 1/5th of an amount so paid shall be deducted in computing the profits and gains of the business. This section also prescribes that the balance shall be deducted in equal installments for each of the four immediately succeeding years. On plain reading of this section, it is clear that the scope of this section is limited one. This section refers to an expenditure made in accordance with an scheme of voluntary retirement. Meaning thereby a scheme is required to be floated for the employees seeking voluntary retirement. Meaning thereby the scheme mentioned u/s.35DDA of the I.T.Act is altogether meant for an expenditure incurred only as authorized and recognized under a specific scheme. According to our humble understanding Section 35DDA of the I.T.Act do not cover an expenditure made to workers on their resignation and claimed as an expenditure incurred u/s.37(1) of the I.T.Act. We, therefore hold that the expenditure in question, i.e., compensation paid to the employees on their resignation and not on their retirement was an expenditure to be considered under the provisions of section 37(1) of the I.T.Act, that whether it was an expenditure wholly and exclusively incurred for the purpose of the business.
ITA No.2921/Ahd/2009Contemporary Target Praful Pvt.Ltd. vs. ACIT Asst.Year - 2005-06 -7- After taking this stand now we have to examine whether the expenditure in question is allowable u/s.37(1) of the I.T.Act. This aspect has also been minutely considered by us. Revenue has not alleged that the payment was bogus in nature or the assessee has failed to substantiate the genuineness of the expenditure. Once it was so, then the only area for our consideration is that whether the expenditure was wholly and exclusively for the running of the business. This fact has also not been disputed that the assessee- company continued its business of manufacturing of tooth-brush. It is also not in dispute that the impugned payment was not made at the time of closure of the business. It is also not the case that an ex- gratia payment was made as a charity towards employees. It was a business decision taken by the assessee to run the manufacturing activity without any obstacle or hindrance. To resolve the dispute with the wrokers, it was amicably settled to pay the compensation in addition to the salary, etc. to those workers who have opted to resign from the service.
7. With this background, we have examined a decision of ITAT "B" Bench Bombay in the case of Bhor Industries Ltd. (ITA No.114/Mum/2000,A.Y. 1996-97) order dated 21/01/2002, authored by one of us, wherein a decision cited was Machinery Manufacturing Corporation Ltd. 198 ITR 559 for the proposition that the payment of compensation to induce workmen to retire prematurely is an item of expenditure incurred by the company on the ground of commercial expediency in order to facilitate the ITA No.2921/Ahd/2009 Contemporary Target Praful Pvt.Ltd. vs. ACIT Asst.Year - 2005-06 -8- carrying on the business and therefore it was held as an allowable revenue expenditure. An another decision cited was George Oakes Limited 197 ITR 289 (Mad.) for the legal proposition that if the purpose of retrenching the nine workmen was only to contain the loss and to reorganize the branch by reducing the staff, then those were the matter of the decision by the management and pertained to business consideration hence nothing but for the purpose of business expediency therefore allowable as revenue expenditure. One more decision was cited viz. Ramavilas Services 211 ITR 763 (Mad.) wherein it was held that the 'retrenchment compensation' or the "notice pay" to the employees opted for voluntarily retirement as per the terms agreed between the management and the employees is a deductible expenditure. The tone and toner of these decisions were that the nature of such payment was made in order to effect the economy of a manufacturing unit as also to rationalize its personnel. Almost a unanimous view has also been taken that by making such payment no asset of enduring nature came into existence. Mere economic benefit could not be treated as a creation of an asset, hence, courts have said that retrenchment compensation was allowable as revenue expenditure. That decision of the Tribunal has been confirmed by the Hon'ble Bombay High Court reported as CIT vs. Bhor Industries Ltd. 264 ITR 180 (180 CTR 508)[Bom], wherein it was concluded as under:-
ITA No.2921/Ahd/2009Contemporary Target Praful Pvt.Ltd. vs. ACIT Asst.Year - 2005-06 -9- "In the case of CIT vs. Ashok Leyland (supra) compensation was paid for termination of the services of managing agents in order to save business expenditure in the accounting period as well as during the subsequent years. It was held that by avoiding certain business expenditure, the company did not acquire any benefit of enduring nature. It was held that by avoiding certain business expenditure the company did not acquire any income-yielding asset. It was, therefore, held by the Supreme Court that the expenditure was of a revenue nature and, it was an allowable deduction in computing the profit of the assessee-company. Applying the ratio of the judgment of the Supreme Court to the facts of this case, in the present matter, the VRS expenses was incurred by the company to save on the expense. This expense was not referable to any income-yielding asset. It is well settled that, ordinarily, revenue expenditure, which is incurred wholly and exclusively for the purposes of business, must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years even though the assessee has written if off in its books over a period of year. It is only in cases of special type of assets that the spread over is warranted. In the case of Empire Jute Co.Ltd. vs. CIT (1980) 17 CTR (SC) 113: (1980) 124 ITR 1 (SC), it has been held by the Supreme Court that there are cases where the test of enduring benefit may break down. In that case, expenditure was incurred to remove certain restrictions on the number of working hours so that the assessee could increase its profits. The company was a member of Indian Jute Mills Association which was floated to protect the trade. The members of the association had undertaken to work their looms for a limited hours every week. The "loom hours" were bought by the assessee from another member to increase the profits. The question which arose before the Supreme Court was whether the purchase price paid constituted revenue expenditure. It was held by the Supreme Court that purchase of "additional loom hours" did not add to the fixed capital of the assessee and nor did it make any addition to the existing profit-making apparatus. It was held by the Supreme Court that in certain cases, the test of enduring benefit may not apply. In our view, in this case on facts, the judgement of the Supreme Court in Empire Jute Mills' case (supra) would apply."ITA No.2921/Ahd/2009
Contemporary Target Praful Pvt.Ltd. vs. ACIT Asst.Year - 2005-06
- 10 -
8. From the side of the Revenue a decision of OEN India Ltd. 196 Taxman 131(Ker.) has been cited, wherein the question was in respect of payment under VRS covered by a later amendment in the Act by the introduction of section 35DDA w.e.f. 01/04/2001. In that context, it was held that section 33DDA is a virtual declaration of the fact that expenditure incurred under VRS should not be allowed as a revenue expenditure in one year and held that it is in the nature of a capital expenditure to be amortised in the course of few years. There the issue was slightly different from the facts of the present appeal because the payment was not under VRS and the Hon'ble Court was not considering the applicability of the provisions of section 37(1) vis-a-vis the introduction of section 35DDA in the Statute, but only the provisions of Sec.35DDA. One more decision has been cited by Revenue of Hon'ble Kerala High Court in the case of CIT vs. Travancore Titanium Products Ltd. 70 Taxman 80 (Ker.) and the question was ex-gratia bonus payment to employees arising out of an order of the Government. The Hon'ble Court was of the view that as regards the admissibility of the expenditure u/s.37(1), the section being a residual provision, its aid could not be restored to unless and until established that none of the provisions of sections 30 to 36 was applicable. It was noted by the Court that having found that the ex-gratia payment of bonus was covered under section 36 and the expenditure was deductible u/s.36(1)(ii) therefore the assessee could not make use of the provisions contained in section 37(1) of the IT Act. Even this precedent is not applicable. Rather a decision of CIT vs. Warner Lambert (India) (P) Ltd. 56 DTR 121 (Tri)[Bom] is to be applied because a payment to employees on voluntary retirement was held as deductible u/s.37(1) of the Act. In view of the totality of the ITA No.2921/Ahd/2009 Contemporary Target Praful Pvt.Ltd. vs. ACIT Asst.Year - 2005-06
- 11 -
circumstances of the case and the reasons assigned hereinabove, we hereby hold that the expenditure in question was incurred wholly and exclusively for the purpose of the business after taking into consideration the commercial expediency of the business as also for the smooth running of manufacturing activity of the company. This ground is therefore allowed.
9. In the result, the appeal of the Assessee is allowed.
Order signed, dated and pronounced in the Court on 21/10/2011.
Sd/- Sd/-
( A.N. PAHUJA ) ( MUKUL Kr. SHRAWAT )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Pronounced in the Court
Sd/-[AM] Sd/- [JM]
(A.K.G.) (M.K.S.)
Dated 21/ 10 /2011
टȣ.सी.नायर, व.िन.स./T.C. NAIR, Sr. PS
आदे श कȧ ूितिलǒप अमेǒषत/Copy
षत of the Order forwarded to :
1. अपीलाथȸ / The Appellant
2. ू×यथȸ / The Respondent.
3. संबंिधत आयकर आयुƠ / Concerned CIT
4. आयकर आयुƠ(अपील) / The CIT(A)-I, Baroda
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड[ फाईल / Guard file.
आदे शानुसार/ BY ORDER, स×याǒपत ूित //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) उप/ आयकर अपीलीय अिधकरण, अिधकरण, अहमदाबाद / ITAT, Ahmedabad
1. Date of dictation....................... 03/10/2011
2. Date on which the typed draft is placed before the Dictating Member 04/10/2011.................. Other Member.....................
3. Date on which the approved draft comes to the Sr.P.S./P.S.................
4. Date on which the fair order is placed before the Dictating Member for pronouncement......
5. Date on which the fair order comes back to the Sr.P.S./P.S.........21.10.11
6. Date on which the file goes to the Bench Clerk..................... 21.10.11
7. Date on which the file goes to the Head Clerk..................................
8. The date on which the file goes to the Assistant Registrar for signature on the order..........................
9. Date of Despatch of the Order..................