IN THE ITAT BANGALORE BENCH ‘A’
State Bank of Mysore
Commissioner of Income-tax (Appeals)(LTU), Bangalore
IT Appeal No. 890 (Bang.) of 2011
[Assessment year 2007-08]
September 21, 2012
George George K, Judicial Member
This appeal instituted by the assessee is directed against the order of the CIT, LTU, Bangalore passed under section 263 of the Act dated 12.8.2011. The relevant assessment year is 2007-08.
2. The grounds of appeal raised read as follows:-
1. Initiating proceedings under section 263 of the Income-tax Act, 1961.
(a) The learned Commissioner of Income-tax (‘CIT’) erred in holding that the assessment order under section 143(3) is erroneous and prejudicial to the interest of revenue.
(b) The learned CIT erred in invoking the provisions of section 263 of the Act to direct the Assessing Officer to disallow the payments made by the appellant (‘Bank’) to its employees under the Exit Option Scheme.
(c) The learned CIT erred in holding that the assessment order is erroneous and prejudicial to the interests of the revenue as most of the other issues (discussed in the revisional order) were also held in favour of the appellant by various judicial precedents, notwithstanding and without prejudice to the above.
2. Payments made to the employees under the Exit Option Scheme – Rs. 7,09,56,323/-
(a) The learned CIT erred in directing the Assessing Officer to disallow the payments made by the Bank to its employees under the Exit Option Scheme by treating the same as capital expenditure.
(b) The learned CIT ought to have appreciated that the said expenditure was incurred purely on employee welfare measure and thus is eligible for deduction as revenue expenditure under the Act.
(c) Notwithstanding and without prejudice to our above contention, the learned CIT ought to have appreciated that any expenditure incurred by way of payments to employees in accordance with any scheme of voluntary retirement is eligible for deduction under section 35DDA of the Act and accordingly, the appellant shall be eligible for 1/5th of the total expenditure as deduction in assessment year 2007-08 and the balance in subsequent four assessment years.
3. Briefly stated the facts of the case are as follows :-
The assessee is a Public Sector Undertaking and is a subsidiary of State Bank of India. The assessee-bank has introduced an Exit option scheme for its officers. Pursuant to the aforesaid scheme, the assessee had made a payment of Rs. 7,09,56,323/- to its employees who opted for the said scheme. The assessee bank had claimed the aforesaid payment as revenue expenditure while filing its return of income for the assessment year 2007-08. The assessment under section 143(3) was completed on 19/11/2009 accepting the assessee-bank’s claim of the aforesaid payment as revenue expenditure. Later, the Commissioner of Income-tax issued notice under section 263 of the Act, since according to him, the assessment completed under section 143(3) on 19/11/2009 was erroneous and prejudicial to the interest of revenue for the following reasons:-
(a) The company in the Form 3CD Report Col.15 states “A sum of Rs. 7,09,56,323.23 has been debited to P&L A/c and deduction allowable under section 35DDA is Rs. 1,11,93,264,69/-“. However, in the computation of income, no adjustment has been made as per section 35DDA wherein only 1/5th of the eligible amount can be claimed as deduction allowable for 5 years. As per note at Sl.No.1 in the computation sheet, it is mentioned that “no adjustment made towards section 35DDA for VRS”. Hence, there is an excess claim of deduction to the extent of Rs. 5,67,65,058.54 having a tax effect of Rs. 1.91 crore which requires to be brought to tax as per provisions of section 35DDA.
(b) The deduction under section 88E claimed by the assessee amounting to Rs. 46,28,515/- needs to be verified since the records indicate that the conditions contained therein are not satisfied. This has resulted in short levy of tax to the tune of Rs. 51,93,194/-.
(c) On verification of the details, the Assessing Officer appears to have not gathered any information as to the depreciation claimed on investment in AFS category of Rs. 1,26,61,106/-. The applicability of the RBI guidelines read with. CBDT Circular 665 has not been looked into by the Assessing Officer. This has resulted in a short levy of tax of Rs. 42,61,728/-.
(d) The company has claimed depreciation in respect of computers @ 60%, but in the notes under column 4, it has been mentioned that computers includes printers, modem & other accessories. But as per provisions of the Income-tax Act in order to claim depreciation @ 60% in respect of computers the meaning of computer is “computers including computer software”, further computer software means “any computer programme recorded on any disc, tape, perforated media or other information storage device”. In the present case the break up is not available in respect of computers. Hence the excess depreciation claim has to be reworked and has to be disallowed in respect of printers, modem and other accessories.
(e) In the 3CD report, the CA has qualified that a sum of Rs. 1,15,566/- has been paid as penalty. But the same has not been added back in the computation. This has resulted in under assessment to a tune of Rs. 1,15,566/- having tax effect of Rs.38,899.
4. The assessee objected to the proposed revision order under section 263 of the Act vide letter dated 26/11/2010. The objection of the assessee with regard to proposed disallowance of Rs. 7,09,56,323/- reads as follows:-
“In this connection, it is submitted that as per the provisions of section 35DDA of the Income-tax Act, 1961 (“the Act”) where an assessee incurs any expenditure by way of payment to the employees in connection with their voluntary retirement in accordance with any scheme, one fifth of the amounts paid shall be eligible for deduction in each year. In other words, the deduction in respect of such payments is allowed equally in five years commencing from the year in which the payments were made to the employees.
As per section 10(10C) of the Act, where an employee receives any amounts under any schemes for voluntary retirement or voluntary separation, deduction shall be allowed under this section for a sum of not exceeding Rs. 5,00,000/-. In other words, if the amounts received are in excess of Rs. 5,00,000/- then the deduction is restricted to a maximum of Rs. 5,00,000/-.
However, the proviso to section 10(10C) imposes a condition that an employee will be eligible for deduction under this section, only if the voluntary retirement scheme (VRS), under which the employee receives the amounts, has been framed in accordance with the guidelines as laid down in Rule 2BA of the Income-tax Rules. In other words, the deduction is allowed only if the scheme of VRS complies with the conditions/requirements as provided in Rule 2BA.
In this case, the employees who retired under the Exit Policy of the Bank were not eligible for the deduction under section 10(10C) of the Act, since the scheme did not comply with the requirements for Voluntary Retirement Scheme as provided in Rule 2BA, A copy of the circular is enclosed.
Accordingly, it is submitted that as the scheme was not framed in accordance with the guidelines prescribed in Rule 2BA, the provisions of sections 35DDA and 10(10C) of the Act are not applicable to the payments made by the Bank”.
5. The CIT(A) however rejected the assessee’s objection and directed the Assessing Officer to withdraw the deduction of Rs.7,09,56,323/- being debited to P&L account. The relevant finding of the CIT(A) reads as follows:-
“On perusal of the records of the assessee show that it has debited a sum of Rs. 7,09,56,323.43/- to the profit and loss account during the previous year. According to the assessee the voluntary retirement scheme is not in accordance with Rule 2BA. The voluntary retirement scheme is called the Exit Option Scheme. The perusal of the scheme shows that it seeks to permit eligible officers in JMGS-I and above to whom the State Bank of Mysore officers services regulation 1979 are applicable who feel frustrated and de-motivated due to lack of career prospects. It also applies to officers who had crossed 58 years between 30.2.06 to 10.7.2006. The perusal of the scheme shows that it has resulted in enduring benefit to the assessee by permitting frustrated and de-motivated officers to exit the bank. In other words such expenditure is capital in nature and cannot be allowed under any provisions of the Income-tax Act due to the restrictions placed by sec.36DDA as well as by the nature of such expenditure. The Assessing Officer is directed to withdraw the deduction of Rs. 7,09,56,323.43/- being VRS expenditure debited to the profit and loss account”.
6. The assessee being aggrieved is in appeal before us.
7. The learned AR submitted that a plain reading of provisions of section 35DDA of the Act, it is clear that compliance with the conditions of Rule 2BA is mandatory only to avail exemption under section 10(10C) of the Act by the employees and thus the said rule is not relevant to claim of deduction under section 35DDA of the Act. Further, the learned AR submitted that in the Finance Bill, 2009 the deduction under section 35DDA was linked to the provisions of Rule 2BA. In other words, it was submitted, that compliance with Rule 2BA would be mandatory in order to avail deduction under section 35DDA. However, when the bill was finally enacted, the link between section 35DDA and Rule 2BA was deleted. Therefore, it was contended that the deletion of conditionalities originally incorporated in the Bill show that legislative intendment was not to incorporate all the conditions of section 10(10C) in section 35DDA. The learned counsel also relied on the decision of the Delhi Bench of the Tribunal in the case of Sony India (P.) Ltd. v Addl. CIT51 SOT 96 (Delhi) (URO). Alternatively it was contended that the VRS expenditure would be otherwise allowable under section 37 of the Act in the event such expenditure is treated as not eligible deduction under section 35DDA in view of non-compliance of Rule 2BA. It was submitted that in view of the judicial precedents in the following cases, VRS expenses are held to be revenue in nature and accordingly allowed as deduction under section 37 of the Act:-
(i) CIT v George Oakes Ltd.  197 ITR 288;
(ii) CIT v Sri Ramavilas Service Ltd.  211 ITR 763;
(iii) CIT v Simpson & Co.  230 ITR 794
(iv) Sassoon J David Co.(P.) Ltd. v CIT  118 ITR 261
(v) CIT v Bhor Industries Ltd.  264 ITR 180
(vi) CIT v Assam Oil Co. Ltd.  154 ITR 647
8. The learned DR on the other hand supported the revision order of the CIT.
9. We have heard the rival submissions, perused the materials available on record and the case laws cited. To be eligible for deduction under section 35DDA, there is no requirement for the VRS scheme to be in compliance of Rule 2BA. A comparison of provisions of section 35DDA and section 10(10C) reads as follows:-
|Section 35DDA||Section 10(10C)|
|“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, one-fifth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance shall be deducted in equal instalments for each of the four immediately succeeding previous years”.||“Any amount received (or receivable by an employee of –|
(a) a public company; or
(b) any other company; or
(c) an authority established under…;
Provided that schemes of the said companies or authorities (or societies or Universities or the Institutes referred to in sub-clauses (f) and (g), as the case may be, governing the payment of such amount are framed in accordance with such guidelines (including inter alia criteria of economic viability) as may be prescribed;
9.1 It is clear from the proviso to section 10(10C) that in order to claim an exemption under this section in respect of any payments received/receivable by an employee under any voluntary retirement scheme/schemes, such scheme/schemes must comply with the guidelines prescribed in this regard i.e. guidelines prescribed under Rule 2BA. In other words, the employee is entitled to exemption under section 10(10C) of the Act only if the voluntary retirement scheme fully complies with the conditions as prescribed in Rule 2BA. There are no such provisions in section 35DDA of the Act similar to proviso to section 10(10C), so as to include the conditionalities of Rule 2BA into section 35DDA of the Act. A plain reading of provisions of section 35DDA of the Act, it is clear that compliance with the conditions of Rule 2BA is mandatory only to avail exemption under section 10(10C) of the Act by the employees and thus the said rule is not relevant to deduction under section 35DDA of the Act.
9.2 In the Finance Bill, 2001, the deduction under section 35DDA was linked to the provisions of Rule 2BA. In other words compliance with Rule 2BA would be mandatory in order to avail deduction under section 35DDA. However, when the bill was finally enacted, the link between section 35DDA and Rule 2BA was deleted. Accordingly, the deletion of conditionalities originally incorporated in the Bill shows that legislative intendment was not to incorporate all the conditions of section 10(10C) in section 35DDA. Thus, the legislature has finally left the scheme of voluntary retirement open-ended and did not place any restriction on the scheme,
9.3 The recent decision of the Hon’ble Delhi Tribunal in the case of Sony India (P.) Ltd. (supra) wherein it was held that the assessee was entitled to deduction of one-fifth of the VRS expenditure under section 35DDA of the Act and further it was clarified that compliance with Rule 2BA is not mandatory in such cases. The operative portion of the said decision is given hereunder :-
“It was submitted by the assessee that in the Bill, leading to enactment of section 35DDA, provision was made regarding the application of rule 2BA. That portion was deleted when the bill was passed and, thus, the conditionalities of that rule have not been incorporated intentionally in the section. It was, therefore, found that the deletion of conditionalities originally incorporated in the Bill showed that legislative intendment was not to incorporate all the conditions of section 10(10C) in section 35DDA. Finally, the Legislature left the scheme of voluntary retirement open-ended and did not place any restriction on the scheme. Thus, plain language of the provision supports the case of the assessee. Further, it was not a case of taking guidance from a definition section. For sustaining the arguments of the revenue, the provision contained in section 35DDA would have to be modified by incorporating a part of section 10(10C) in it. It was held that, such an incorporation did not find support from any rule of construction. Thus, there was no compelling reason to read section 35DDA as suggested by the revenue. Therefore, the scheme of the assessee was held to be a VRS, to which the aforesaid provision was applicable”.
9.4 In view of the aforesaid discussion and the order of the Tribunal in the case of Sony India (P.) Ltd. (supra), we direct the Assessing Officer to allow 1/5th of Rs. 7,09,56,323.23 as deduction under section 35DDA for the concerned assessment year. Therefore, the issue on merits is partly allowed as indicated above.
10. In the result, the appeal of the assessee is partly allowed.