Deduction under section 35DDA of the Income Tax Act is available towards amortization of expenditure incurred under the voluntary retirement scheme. The present article covers the conditions for claiming deduction under section 35DDA; the amount of deduction available under section 35DDA and deduction provisions in case of amalgamation/ demerger/ reorganization.

Conditions for claiming deduction under section 35DDA

Following are the conditions for getting eligible for claiming deduction under section 35DDA of the Income Tax Act

a. An assessee has paid a sum of amount to an employee,

b. Such amount is paid on account of the voluntary retirement of the employee, and

c. Such voluntary retirement is in accordance with any scheme/ schemes of voluntary retirement.

If all the above conditions are satisfied, the assessee paying the sum (i.e. incurring the expenses) would be eligible for availing the deduction, against such expenses, under section 35DDA of the Income Tax Act.

Notably, expenditure claimed as deduction under section 35DDA will not be allowed as the deduction under any other provisions of the Income Tax Act.

Amount of deduction available under section 35DDA-

Entire eligible expenditure would be allowable as a deduction in five equal instalments. The deduction would be available from the previous year in which the expenditure is incurred till the next four succeeding previous year.

Suppose, M/s. A has incurred a total expenditure of INR 10 Lakhs under voluntary retirement scheme during the previous year 2020-2021. Accordingly, M/s. A would be eligible to claim deduction under section 35DDA of INR 2 Lakhs each for consecutive five previous years starting from the previous year 2020-2021.

Deduction under section 35DDA during amalgamation, demerger or reorganization-

In case the assessee, claiming deduction under section 35DDA (prior to completion of five years of deduction) is transferred to another company under a scheme of amalgamation or demerger or reorganization. Then, the remaining deduction will be allowable as explained hereunder-

Situation Corresponding applicability of deduction provisions of section 35DDA of the Income Tax Act
An assessee (being an Indian company) is transferred to another Indian company under the scheme of amalgamation. Deduction under section 35DDA will be available to the amalgamated company.
Undertaking of an Indian company is transferred to another Indian company under the scheme of demerger. Deduction under section 35DDA will be available to the resulting company.
Reorganization of business under any of the following situation-

  • The firm is succeeded by a company [wherein, conditions laid down under section 47(xiii) are fulfilled]; or
  • The proprietary concern is succeeded by a company [wherein, conditions laid down under section 47(xiv) are fulfilled]; or
  • Private company/ unlisted public company is succeeded by a Limited Liability Partnership [wherein, conditions laid down under section 47(xiib) are satisfied].
Deduction under section 35DDA will be available to the successor company.

Additionally, it is important to note that the amalgamating/ demerged/ firm, proprietary concern or company will not be eligible to claim the deduction under section 35DDA during the previous year in which amalgamation/ demerger/ succession took place.

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