DCIT, CHENNAI vs. M/S. A. T. C. LTD., HOSUR

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

This is an appeal filed by the Revenue against the Order dated 02.08.2016 of Commissioner of Income Tax (Appeals)-1, Chennai, in (New No.ITA191/CIT(A)-1/2013-14) for the AY 2010-11 and raised the following grounds of the appeal:

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2.0 Ground Nos.1 & 4 are general in nature which do not require specific adjudication.

3.0 Ground Nos.2.1 & 2.2 are related to the disallowance made u/s.35DD of Income Tax Act. During the assessment proceedings, the AO found that the assessee had claimed a sum of Rs.26,19,034/- as an admissible deduction u/s.35DD of Income Tax Act (in short ‘the Act’). The amount related to the payment made to the employees under Voluntary Retirement Scheme. During the assessment proceedings, the Assessing Officer (hereinafter referred to as ‘AO’) called for the details and found that the assessee was having two manufacturing units i.e. one Leather Division and another one is Cigarette Division. The operation of the Leather Division has been discontinued since November, 2006 and the expenditure in respect of Voluntary Retirement Scheme claimed u/s.35DD

ITA No.3106/Mds/2016 :- 3 -: was related to the Leather Division, which was closed. Therefore, the AO held that expenditure related to the closed business cannot be set off against the existing business as per the principles governing u/s.28 & 29 of income tax act and accordingly, disallowed the expenditure stating that the two lines of business are distinct and exclusive of each other where there is no interconnection, interlacing or inter-dependence. The AO also relied on the decision of jurisdictional of High Court in the case of India Manufacturers (Madras) Pvt. Ltd. v. CIT [155 ITR 774 (MAD.)].

4.0 Aggrieved by the Order of the AO, the assessee filed appeal before the Learned Commissioner of Income Tax(Appeals) (hereinafter referred to as ‘Ld.CIT(A)’), and the Ld.CIT(A) allowed the assessee’s appeal. The Ld.CIT(A) in Para Nos.17 & 18 made a detailed discussion which is extracted as under:

“17. In the perusal of the financials placed on record shows that the appellant's business comprised of two divisions viz., cigarette and leather division and that both functioned under the changed name of ATC Ltd from Asia Tobacco Co. Ltd., from 5th of January, 2009. That there were unity of administration and decision making in the form of Directors and there was interlacing of the affairs of both the divisions. There was also interlacing and interlinking as also common fund pool. In these circumstances, in my considered view the two divisions run by the appellant cannot be held to be two separate businesses for the purpose of determining the eligibility of amortization of the retrenchment compensation u/s.35DDA. The argument of the appellant also that the Act does not specify the pre- requisite of the business to be carried on for the claim of such retrenchment compensation, having regard to the fact that the retrenchment compensation was announced and awarded when the business was still in existence. Also that the case-law relied upon by the AO in India Manufacturers (Madras) P Ltd v. CIT 155 ITR 774 would not be applicable having regard to the Taxation Laws Amendment Act, 1985 w.e.f. 1.4.77, 1.4.99 and s.70 as substituted by Finance Act, 2002 w.e.f. 1.4.2003. Further, the Act has introduced through the Finance Act, 2001 w.e.f. 1.4.2001, a new section 35DDA in the Income-tax Act regarding amortization of expenditure incurred under Voluntary Retirement Scheme. The section provides that the expenditure incurred by way of payment of any sum to an employee at the time of his voluntary retirement, in accordance with any scheme of voluntary retirement, would be allowable as deduction over a period of five years. The payments made in accordance with any scheme or schemes of voluntary retirement are only' covered within the purview of the said section. Such payments are normally in the nature of ex-gratia payments and are made over and above the regular terminal benefits like pension, gratuity, leave encashment etc. in respect of which normal provisions of the Act will apply. The amendment will take effect from 1st April, 2002 and will, accordingly,

ITA No.3106/Mds/2016 :- 4 -: apply in relation to the assessment year 2002-2003 and subsequent years. 18. Taking the sum totality of facts before me into account discussed as in the foregoing, I am of the considered opinion that the view taken by the AO in not allowing the claim of deduction u/s.35DDA cannot be upheld. The AO is directed to modify the order accordingly. This ground of appeal is allowed”.

5.0 Aggrieved by the Order of the Ld.CIT(A), the Department is on appeal before us.

Appearing for the Department, the Learned Departmental Representative (hereinafter referred to as ‘Ld.DR’) argued that the assessee has closed his business of Leather Division and the Leather Division is not in existence. The business has been closed and the profit and gains of the business are only from Cigarette Division. Both the activities of Leather and Cigarette Divisions are independent activities not interlaced and interdependent business activities. Therefore, the Ld.DR contended that the losses of the Leather Division which was already closed, cannot be set off against the profits of the Cigarette Division and accordingly, the deduction claimed u/s.35DD relating to VRS of Leather Division is not allowable against the profits of the Cigarette Division. The Ld.DR placed reliance on the decision of India Manufacturers (Madras) Pvt. Ltd. vs. CIT [155 ITR 774 (MAD).] cited in the Assessment Order. On the other hand, the Learned Authorized Representative (hereinafter referred to as ‘Ld.AR’) submitted that the assessee company is having two manufacturing Divisions i.e. Leather Division and Cigarette Manufacturing Division. Though, the company has two Divisions, there is a common management and administration and the overall control vested with the ITA No.3106/Mds/2016 :- 5 -:

Directors of the company. Further, there is a complete interconnection with all the business activities in terms of common accounting, common administration and other supporting functions including interlacing of finance. The assessee has made a similar claim for the AYs 2007-08 to 2009-10 which was allowed by the AO and in the current AY, the AO has taken a different stand inconsistent with the earlier stand taken by the Department. The assessee, further, argued that as per the scheme of the VRS the expenditure is allowable u/s.35DDA.

6.0 We heard both the parties and perused the material placed on record and gone through the provisions of Sec.35DDA of Income Tax Act and for the sake of convenience, we re-produce Sec.35DDA of Income Tax Act which reads as under:

"16[Amortisation of expenditure incurred under voluntary retirement scheme. 17 35DDA. (1) 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. 19[(2) Where the assessee, being an Indian company, is entitled to the deduction under sub-section (1) and the undertaking of such Indian company entitled to the deduction under sub-section (1) is transferred, before the expiry of the period specified in that sub- section, to another Indian company in a scheme of amalgamation, the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the amalgamation had not taken place. (3) Where the undertaking of an Indian company entitled to the deduction under sub- section (1) is transferred, before the expiry of the period specified in that sub-section, to another company in a scheme of demerger, the provisions of this section shall, as far as may be, apply to the resulting company, as they would have applied to the demerged company, if the demerger had not taken place. (4) Where there has been reorganisation of business, whereby a firm is succeeded by a company fulfilling the conditions laid down in clause (xiii) of section 47 or a proprietary concern is succeeded by a company fulfilling the conditions laid down in clause (xiv) of section 47, the provisions of this section shall, as far as may be, apply to the successor company, as they would have applied to the firm or the proprietary concern, if reorganisation of business had not taken place.

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20[(4A) Where there has been reorganisation of business, whereby a private company or unlisted public company is succeeded by a limited liability partnership fulfilling the conditions laid down in the proviso to clause (xiiib) of section 47, the provisions of this section shall, as far as may be, apply to the successor limited liability partnership, as they would have applied to the said company, if reorganisation of business had not taken place.] (5) No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) in the case of the amalgamating company referred to in sub-section (2), in the case of demerged company referred to in 21[sub-section (3), in the case of a firm or proprietary concern referred to in sub-section (4) and in the case of a company referred to in sub- section (4A)] of this section, for the previous year in which amalgamation, demerger or succession, as the case may be, takes place. (6) No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act.]] 7.0 As per the provisions of Sec.35DDA of Income Tax Act, expenditure towards VRS shall be deducted in equal installments of five years. The assessee is carrying on business with two different activities i.e. Leather Division and Cigarette Division. The Ld.AR argued that both the Divisions are carried on by the same company i.e. ATC Ltd., and come under one umbrella of the same company. Both the Divisions are under the common management, common administration and complete interconnection with all the business activities in terms of support functions including the interlacing of funds. The Co-ordinate ‘H’ Bench, ITAT, Mumbai, in in the case of M/s.APTE Amalgamations Ltd., v. DCIT in which the assessee placed reliance held as under:

view of the matter, the order passed by the CIT(A) is confirmed. Ground no.1 is dismissed.” Respectfully following the above order of the Tribunal and keeping in view that merely because the assessee has closed his manufacturing activities does not mean that the assessee has not carried out its business activities as also held by the ld. CIT(A) (supra), which has not been controverted by the revenue, we are of the view that the assessee is entitled to the deduction of expenses of Rs.19,18,441/- and accordingly the ld. CIT(A) was not justified in upholding the disallowance of VRS expenditure of Rs.19,18,441/-. The disallowance made by the AO and sustained by the ld. CIT(A) in this regard is deleted. The ground taken by the assessee is, therefore, allowed.

8.0 In the assessee’s case similar deduction was claimed by the assessee in the earlier years which was allowed by the AO. Therefore, the assessee’s case is squarely covered by the decision relied upon by the assessee cited supra. In the case of India Manufacturers (Madras) Pvt. Ltd. v. CIT [155 ITR 774 (MAD.)], the facts are distinguishable and the deduction related to the expenditure u/s.37(1) before introduction of Sec.35DDA of Income Tax Act. Sec.35DDA is introduced in respect of the expenditure relating to VRS of the company. Therefore, the case law relied upon by the Revenue is distinguishable and not applicable in the assessee’s case.

9.0 Respectfully, following the decision of Co-ordinate ‘H’ Bench ITAT, Mumbai in the case of M/s.APTE Amalgamations Ltd., v. DCIT, we are of the view that the assessee is entitled for deduction of expenses amounting to Rs.26,19,034/- under VRS and the order of the Ld.CIT(A) is upheld.

The Revenue’s appeal in Ground Nos.2.1 & 2.2 are dismissed.

10.0 Ground No.3.1 is related to the additional depreciation claimed on plant and machinery. The assessee has installed CCTV cameras in the ITA No.3106/Mds/2016 :- 8 -: factory premises and claimed depreciation as additions to the plant and machinery @15% and additional depreciation u/s.32(2) amounting to Rs.7,64,693/- @20%. The assessee contended that, since the CCTVs were installed in the factory premises, they are qualified to be plant and machinery for the purpose of depreciation. The AO was of the view that CCTVs are not classified as the plant and machinery and as per Sec.32 & 43(3), the assets are in the nature of furniture and fixtures and accordingly, restricted the depreciation to 10% and also disallowed the depreciation claimed u/s.32(1)(2)(a) of Income Tax Act.

11.0 Aggrieved by the Order of the AO, the assessee filed appeal before the Ld.CIT(A) and the Ld.CIT(A) allowed the assessee’s appeal. The Ld.CIT(A) observed that the CCTVs are continuously utilized to monitor production and security of the employees and as such forms an integral part of production. The Ld.CIT(A) also relied on the decision of CIT v. SLM Maneklal Industries Ltd. (205 ITR 547).

12.0 Aggrieved by the Order of the Ld.CIT(A), the Revenue is on appeal before us. Appearing for the Revenue, the Ld.DR argued that the CCTVs in the factory premises consisting of cameras supported with a network with electrical fittings, etc., can be grouped as electrical fittings but not as plant and machinery and argued that the AO has rightly made the addition. On the other hand, the Ld.AR supported the Orders of the lower authorities.

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13.0 We heard the rival submissions and perused the material placed before us.

The Ld.CIT(A) in his in Para No.2.1 observed that the CCTVs installed in the factory premises continuously utilized to monitor the machineries and security of the employees and as such forms an integral part of the production and therefore, partakes character of plant in the production process. The Ld.CIT(A) also relied on the decision in the case of CIT v. SLM Maneklal Industries Ltd. (205 ITR 547). There is no dispute that the assessee has installed the CCTV cameras in the factory premises and CCTV cameras are used for monitoring the production activity and security of the machinery and employees. CCTV Cameras installed in the factory premises cannot be grouped as electrical fittings and furniture and fixtures in the light of functions performed and the purpose for which they were installed. They were installed for the purpose of monitoring the production activity and the security which can be monitored from the administrative office itself. The Electrical fittings and the furniture cannot perform the same functions. The Hon’ble Punjab & Haryana High Court in the case of CIT vs. Subrata Dutta Choudhary reported in 197 taxmann.com 71 held that fax machine and CCTVs systems used in the business premises of the assessee are to be treated as part and parcel of the plant and machinery and depreciation is allowable thereon @25%.

Therefore, respectfully, following the decision of Hon’ble Punjab & Haryana

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High Court, we do not find any reason to interfere with the Order of the Ld.CIT(A) and the same is uphold. The Revenue’s appeal ground on this issue is dismissed.

14.0 In the result, the appeal of the Revenue is dismissed.

Order pronounced in the Open Court on 17th March, 2017, at Chennai.