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Income Tax Appellate Tribunal, DELHI BENCH ‘D’ NEW DELHI
Before: SHRI G.D. AGRAWAL & SHRI SUDHANSHU SRIVASTAVA
against order dated 31/01/2014 passed by the Ld. Commissioner of Income Tax (Appeals) – XIX New Delhi for assessment year 2009 – 10.
2.0 The brief facts of the case are that the assessee company is in the business of manufacturing of oil and air filters, rear-view mirrors and plastic components. The return of income was filed declaring a total income of Rs. 71,91,226/-.
Subsequently, the return was revised declaring income of Rs. 1,58,62,441/-. The case was selected for scrutiny. During the course of assessment proceedings, the Assessing Officer (AO) noted that the assessee had made full claim of compensation amounting to Rs. 1,54,22,290/- paid on account of retrenchment/retirement of employees in its computation of income. The AO noted that as per Schedule 13 to the balance sheet, the assessee had itself mentioned the amount of Rs. 1,54,22,290/- as deferred Voluntary Retirement Scheme (VRS) expenditure and had written off 1/5th of the same in the profit and loss account. The AO was of the view that the allowability of the VRS expenditure was governed by specific provision of section 35 DDA of the Income Tax Act, 1961 (‘the Act’) and not section 37(1) of the Act. As per the admittance of the assessee before the AO, the company had no scheme of voluntary retirement or retrenchment. The AO proceeded to make an addition of Rs. 1,54,22,290/- to the income of the assessee.
2.1 The AO further noted that the assessee had also claimed expenditure of Rs. 75,79,037/- pertaining to expenditure on retrenched/retired employees whereas no provision had been made by the assessee in its accounts for the assessment year.
The assessee had debited Rs. 7,98,181/- and Rs. 67,80,856/- under prior period expenses and deferred VRS expenses in its books for the next assessment year i.e. AY 10-11. The AO noted that this amount was not an ascertained or accrued liability for the year under consideration as the compensation-liability had crystallised only during the succeeding assessment year. The AO proceeded to add back this amount also to the income of the assessee. The assessment was completed at an income of Rs. 3,89,38,510/- after making two more additions relating to disallowance of charity and donation and sales tax demand.
2.2 Aggrieved, the assessee approached the Ld. first appellate authority and the Ld. Commissioner of Income Tax (Appeals) held in favour of the assessee by holding that both the amounts of retrenchment compensation/retirement compensation amounting to Rs. 1,54,22,290/- as well Rs. 75,79,037/- for which no provision had been made in the books of accounts during the year under consideration was an allowable expenditure.
2.3 Now, the Department is in appeal before the ITAT and has challenged the action of the Ld. CIT (Appeals) in deleting both the additions. 3 3.0 None was present on behalf of the assessee/respondent when the appeal was called out for hearing.
No adjournment application was also received on behalf of the assessee/respondent. The Ld. senior Departmental Representative (DR) submitted that the assessee company was in the process of liquidation and that the notice of hearing of this appeal had been served on the official liquidator. The Ld. senior departmental representative placed on record evidence of service of notice on the official liquidator. Accordingly, in view of the facts, we deem it appropriate to hear the appeal ex parte qua the assessee/respondent.
4.0 The Ld. senior departmental representative read out extensively from the assessment order and vehemently argued that the Ld. CIT (Appeals) had erred greatly in deleting the impugned disallowance without appreciating the observations of the AO as well as the settled legal position.
5.0 Having heard the Ld. senior departmental representative and having perused the orders of the authorities below, we note that the retrenchment compensation of Rs. 1,54,22,290/- was paid to the employees upon the closure of assessee’s unit at 29, DLF Industrial Area, Faridabad and was 4 not a payment with reference to the voluntary retirement of the employees at the site unit. The DLF unit was closed w.e.f. 5th of December 2008 and the matter was settled with the workers’ union on 20th of December 2008 whereby as per the retrenchment settlement the workers were entitled to retrenchment compensation of 30 days for each year of service already rendered, one month notice pay and gratuity as per law.
Thus, it was in consequence to the settlement that payment was made to 62 workers were made on this account. Although, the expenditure was reflected under voluntary retirement compensation, the same was not voluntary retirement compensation and the same was compensation paid on account of commercial expediency to save future business losses and, thus, was allowable as a deduction under section 37 (1) of the Act. The Ld. Commissioner of Income Tax (Appeals) has admitted additional evidences during the course of appellate proceedings and has also noted that the AO was called upon to examine these evidences and furnish a remand report in terms of 46A of the Income Tax Rules, 1962 but the AO chose not to respond. It has been noted by the Ld. CIT (Appeals) that there were documentary evidences to the effect that considerable dispute had arisen between the workers of the Faridabad unit and the management of the assessee company as the management had taken a decision to close down its Faridabad unit which was no longer a viable commercial unit in terms of profitability. The Ld. CIT (Appeals) has placed reliance on the judgement of the Hon’ble Delhi High Court in the case of CIT versus Dalmia Agencies (Private) Limited in ITA 329/2006 while allowing the assessee’s claim wherein the Hon’ble Delhi High Court had held that payment made in settlement under the Industrial Disputes Act would qualify as revenue expenditure under section 37 of the Income Tax Act. We find no reason to interfere with the findings of the Ld. CIT (Appeals) in this regard. We also note that the Hon’ble Apex Court has held in the case of Kedarnath Jute Manufacturing Co Ltd reported in 83 ITR 263 (SC) that the allowance of deduction is not dependent on the nature of entries in the books of accounts and the deduction/allowance can as well be claimed by the assessee in the computation of income filed. Accordingly we dismiss ground No. 1 of the Department’s appeal.
5.1 Coming to the second issue before us which is the deletion of disallowance of Rs. 75,79,037/- on account of service compensation and other allowances payable to the employees of the company who were retrenched during the year under appeal.
These expenses were disallowed on the ground that the said expenses were ascertained/accrued liability in AY 2009-10 i.e. the year under appeal but no provision had been made for the same in the books of account in that year but were shown as deferred VRS expenditure/ prior period expenditure in AY 2010- 11 and since the assessee was following Mercantile system of accounting, the expenditure could not be allowed. It has been noted by the Ld. CIT (Appeals) that this amount pertained to workers and staff at 29, DLF Industrial Area, Faridabad which was closed in December 2008. Thus, it was a provision for expenditure which had crystallised during the year under consideration. Before the Ld. CIT (Appeals), the assessee had submitted that this expenditure had accrued and and was scertained during assessment year 2008-2009 itself but due to oversight and inadvertence the provision of the same was not made in the books of accounts.. The Ld. CIT (Appeals) has accepted the assessee’s contention and while placing reliance on the judgement of the Hon’ble Apex Court in the case of Kedarnath Jute Manufacturing Company Limited versus CIT (supra) held that the impugned amount which had accrued and ascertained in the year under consideration was an allowable expenditure. We note that the Hon’ble Apex Court has held in the case of Metal Box Company vs. Their Workmen reported in 73 ITR 53 (SC) has held that in case of an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharges at a future date, would be a proper deduction. Just as actual receipts as well as accrued due are brought in for income tax assessment, so also the liabilities accrued due would have to be taken into account. It is not the case of the Department that this amount had not crystallised for payment during the year under consideration and the only error was that the provision for the same had not been made in the books of accounts. We are of the opinion that the assessee deserves to succeed on this issue also. Placing reliance and respectfully following the ratio of the aforesaid judgement of the Hon’ble Apex Court in the case of Metal Box Company, we find no reason to interfere with the findings of the Ld. CIT (Appeals) in this regard and we dismiss ground No. 2 raised by the Department.
6.0 In the final result the appeal of the Department stands dismissed.
Order pronounced in the open court on 20th November, 2018.