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Income Tax Appellate Tribunal, KOLKATA BENCH “A” KOLKATA
Before: Shri N.V.Vasudevan & Shri Waseem Ahmed
आदेश /O R D E R PER Waseem Ahmed, Accountant Member:-
This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-XII, Kolkata dated 18.11.2013. Assessment was framed by ACIT, Range-12, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 31.12.2009 for assessment year 2006-07. Shri Sital Chandra Das, Ld. Departmental Representative represented on behalf of Revenue and Shri K.R. Vasudevan, Ld. Authorized Representative appeared on behalf of assessee.
DCIT Cir-12, Kol. Vs. M/s Linde India Ltd. Page 2 2. First issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition on account of settlement compensation for closed units of ₹4,77,420/-.
The briefly stated facts as culled out from the order of lower authorities and other documents are that the assessee is a limited company and engaged in the manufacturing business of various industrial and medical gases. The assessee was having several manufacturing units. However, a few of them were closed down in the earlier years but a manufacturing unit located at Chennai was closed in the year under consideration vide Memorandum of Settlement dated 30th September 2005 between the assessee and its union of employees. Other manufacturing units of the assessee were continuing. The reason for the closing down the unit was the continuous losses incurred by the assessee and there was no possibility for making the profit in the future. As a result of closure of the unit VRS amount was determined at Rs.1,28,89,938/- which was claimed by the assessee in terms of the provisions of Section 35 DDA of the Act i.e. 1/5 of the total Voluntary Retirement Scheme in five equal installments. 3.1 The assessee besides the VRS has also incurred an amount of Rs. 55,96,775/- representing ex-gratia / additional settlement payments to the employees of Chennai unit which was claimed as deduction u/s 37(1) of the Act. However, the AO observed that that the aforesaid additional payments made to the employees of Chennai units is nothing but representing the payment in connection with the VRS and therefore it is eligible for deduction in pursuance to the provisions of Section 35DDA of the Act. Accordingly the AO allowed 1/5 of Rs. 55,96,775/- i.e. Rs.11,19,355/- and remaining amount of Rs.44,77,400/- was disallowed and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to ld CIT(A). The assessee before the ld CIT(A) submitted that the provisions of section 35DDA speaks for the payments made to the employees in the nature of voluntary retirement scheme. Thus any payment which is over and above the voluntary retirement DCIT Cir-12, Kol. Vs. M/s Linde India Ltd. Page 3 scheme is not covered under the provisions of section 35DDA of the Act. It was also submitted that the assessee is running various other manufacturing units even after the closure Chennai unit. The aforesaid settlement compensation was paid to resolve the labour disputes amicably which was very much incurred in connection with the business of the assessee as a whole. The ld. CIT(A) after considering the submission of the assessee has deleted the addition made by the AO by observing as under:- “5.1.4 decision:- I have carefully considered the facts of the assessee, the material placed on record and submissions of the appellant company. I have also gone through the relevant provisions as also the principles of law laid down in the cases relied upon on behalf of the appellant. In this case, the facts clearly show that the ex-gratia/additional compensation has been paid not under the scheme of VRS, but under full and final settlement reached under the provisions of the Industrial Disputes Act. In my view the facts of the case of K. Ravindranathan Nair v. CIT [2001] 247 ITR 178 (SC) relied upon by the appellant are similar to those of the appellant’s case. In that case, where the assessee, processing cashewnats in ten units, closed some of the units in the wake of labour disputes, and carried on the business in the remaining units, the expenditure incurred under a settlement with the trade union representing the workers was allowable as business expenditure, since it was incurred in connection with the industrial health of the business as a whole. In the case of CIT v. Jai Parabolic Springs Ltd (200080 172 taxman 258/306 ITR 42(Delhi), the Hon'ble Delhi High Court has held that the revenue expenditure which is incurred wholly and exclusively for purpose of business m9ust be allowed in its entirely in year in which it is incurred; it cannot be spread over a number of years even if assessee has written it off in its books over a period of number of years. In the case of CIT v. Budhraja & Co. (1993) 204 ITR 656 (Ori), it has been held that payment of accrued liability to pay retrenchment compensation under section 25F of Industrial Disputes Act is an allowable deduction as business expenditure – CIT v. J.C. Budharaj & Co. (1993) 204 ITR 656 (Ori), - where services are terminated by payment of compensation with the result that a recurring liability is got rid of, the Hon'ble Bombay High Court in the case of Life Insurance Corporation of India v. CIT [1979] 119 ITR 900 (Bom) held that the amount paid by way of compensation is in the nature of revenue expenditure. The ratio laid down in the cases cited here are, in my view, applicable to the facts of the case. Further, the foremost condition that in order to sustain a claim for deduction by way of business expenditure under sec. 37(1) of the Act, the expenditure must have been incurred for the purpose of a business which was in existence in the year of DCIT Cir-12, Kol. Vs. M/s Linde India Ltd. Page 4 account, the profits of which are under am, is fulfilled in the appellant’s case. Having regard to the facts and circumstances of the case, it is held that the Assessing Officer was not justified in restricting the claim of expenditure to one-fifth and disallowing expending to the extent of Rs.44,77,420/-. Thus, the addition made by him is hereby deleted and this ground of appeal is allowed.”
The Revenue, being aggrieved, is in appeal before us.
The ld DR vehemently supported the order of AO whereas the ld. AR before us filed a paper book which is running from pages 1 to 123 and reiterated the submission as made before the learned CIT(A). The ld AR relied on the order of Ld. CIT(A).
We have heard rival contentions of both the parties and perused the materials available on record. From the foregoing discussion, we find that AO has treated the payment made to the employees of Chennai unit in addition to the payment of VRS in the nature of VRS. Therefore the AO applied the provisions of section 35DDA and accordingly allowed 1/5th of such expenses and remaining expenses were disallowed. However the ld. CIT-A deleted the addition made by the AO by observing that the additional payment is not covered under section 35DDA of the Act. On perusal of the Memorandum of Settlement dated 30.09.2005 which is placed on pages 52 to 60 of the paper book and we also find that the impugned payment was paid over & above the VRS payment. Thus, it cannot be covered under section 35DDA of the Act. The relevant extract of the settlement deed reads as under:- “6. ADDL. VR EXGRATIA Employees who have 60 months or less service left for attaining superannuation ago (i.e. 60 years) on the date of opting for voluntary retirement, will be paid an additional VR ex-gratia amount of 25% (twenty five percent) of the respective voluntary retirement compensation amount payable as per Clause 5 above, subject to the total amount consisting of voluntary retirement compensation and additional VR ex-gratia, in no case, exceeding the overall limit of Rs.5 Lakhs (Rupees Five lakhs only).”
DCIT Cir-12, Kol. Vs. M/s Linde India Ltd. Page 5 In the similar facts & circumstances the Courts have decided the issue in favour of assessee as detailed under. The Hon’ble Supreme Court in the case of K. Ravindranthan Nair vs. CIT reported in 114 taxman 53 has decided the issue in favour of assessee. The relevant extract of the judgment is reproduced below : “The Tribunal went on to hold that the facts were sufficient to establish a nexus between the payment and the business. The Tribunal noted, correctly, that it was for the assessee to decide how he would conduct his business. For the purposes of continuing his business, he had to reduce the number of units from ten to six. Any incidental expenses in reducing those units was an expenditure incurred in the course of conducting the business and allowable under s. 37.”
Similarly we also find support & guidance from the judgment of Hon’ble Calcutta High Court in the case of Jayshree Tea & Industries Limited vs. CIT reported in 143 taxman 143 has decided the issue in favour of assessee. The relevant extract of the judgment is reproduced below : “The assessee was carrying on business through 21 units. Such business consisted of different kinds of business but all were being assessed at the hands of the assessee as one business or in other words the assessee was being assessed for the income of all the different units together at the hands of the assessee as of one assessee though the accounts may be kept separately for each unit. Admittedly, in the business expediency accounts are kept for each unit separately so as to enable the assessee to find out or keep track of the fact as to whether the particular unit was running at a loss or profit; and instead of constituting separate businesses in its wisdom the assessee might carry on all the units as one business. As soon as it was found that there was unity of control and management the inter-connection and inter-lacing is to be presumed and would be apparent. The very finding, that even after the closure of the Allahabad unit the business was carried on by the assessee, was itself a pointer to the oneness of the business. When the unit was under the control of one management, the inter-connection, inter-lacing and inter-dependence is a fait accompli. The payment was made for the purpose of closing down the losing unit so as to run the business profitably bona fide even though ultimately the approval was denied and the assessee could not get the denial reversed in Courts where the assessee took the proceedings. Therefore, the expenditure was bona fide and eligible to be construed to have been made for the purpose of the business.—Sree Meenakshi Mills Ltd. vs. CIT (1967) 63 ITR 207 (SC) relied on.”
DCIT Cir-12, Kol. Vs. M/s Linde India Ltd. Page 6 The ratios laid down by the Hon’ble Courts in the above cases are applicable to the facts of the case in hand. In the instant case the assessee was having several units and few of them were close down. All the units of the assessee constitute a single business. In consequence to the closure of the units based in the Chennai, the assessee had to pay certain compensation over and above the VRS to the employees, therefore in our considered view the extra payment is eligible for deduction under section 37(1) of the Act. In view of above we do not find any reason to interfere in the order of ld CIT(A). We hold accordingly and this ground of appeal of the Revenue is dismissed.
7. Next issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by AO for ₹ 36.99 on account of advance written off.
8. The assessee, in the year under consideration has written off advance for ₹95,76,604/- in its profit and loss a/c. During the course of assessment proceedings, AO observed that out of the said advance a sum of ₹36.99 lacs consist of small amount which were provided as advance to the suppliers, employees, security deposits etc. It was also observed that these advances were written off on the ground that the recoveries or adjustment were not made due to lack of information. Thus the AO found that these were written off due to negligence of the assessee and they did not become irrecoverable in a normal course of business. Therefore, the AO disallowed a sum of ₹36.99 lakh and added to the total income of assessee.
9. Aggrieved, assessee preferred an appeal before Ld . CIT(A). The assessee before Ld. CIT(A) submitted that all the items of advance were directly connected with the business operation and therefore they were incidental to the business. Ld. CIT(A) after considering the submission of assessee deleted the addition made by AO by observing as under:- “5.2.4 Decision:
DCIT Cir-12, Kol. Vs. M/s Linde India Ltd. Page 7 Now, the case of the Assessing Officer is that the first item is only trade advance, whereas the balance represented by small items which were written off because collection or adjustment could not be made due to lack of information/persuasion, and, therefore, the same were not allowable as business loss. The case of the appellant. On the other hand is that the first item was business loss because the bank guarantee provided as security was en-cashed by the seller, whereas the second item represented by advances of smaller amounts all the advances given were of revenue nature and were lying unadjusted in the books of account for a reasonably long period, either because the advances could not be recovered on subsequent follow-ups or because of non-adjustments of accounting entries thereof in the books. From the facts, it is apparent that the Assessing Officer has not appreciated the facts in its entirety. The forfeiture of security deposit of Rs.20,36,160/- given to National Fertilizers Limited is clearly a trading loss in view of the explanation offered. Similarly, most of the advances to suppliers, employees, security deposits for electricity and telephones, etc. Related to the closed business units. In the case of Travancore Tea Estates Co. Ltd. V. CIT [19792] 197 ITR 528 (Ker), it has been held that under sec. 28, a bad debt which cannot be written off may be allowed as a trading loss, provided the loss is incurred wholly and exclusively for the purpose of the business of the assessee. In the case of CIT v. Inden Biselers [1989] 47 Taxman 225 [1990] 181 ITR 69 (Mad), it has been held that ‘even though the expenditure is not admissible for the computation of the total income either as a bad debt or as an expenditure wholly incurred for the purpose of business, still, it can be allowed as an expenditure as a trading loss if it arises directly from carrying on the business and is incidental to the business. The facts of the reported cases are similar to those of the appellant’s case. Therefore, I am of the view that the Assessing Officer was not justified in disallowing the claim of loss of bad advances written off as a trading loss. Therefore, the addition of Rs.36,99,359/- is deleted.”
The Revenue, being aggrieved, is in appeal before us on the following ground:- “2. That on the facts and in the circumstances of the case and as per law ld. CIT(A) erred in deleting the addition made by the AO amounting Rs.36,99,359/- on account of bad advance.”
Before us both the parties relied on the order of Authorities Below as favorable to them.
DCIT Cir-12, Kol. Vs. M/s Linde India Ltd. Page 8 11. We have carefully considered the entire material on record and the rival submissions. From the details furnished by the assessee in the paper book it is found that the assessee had given full details of each item of the advances. The amounts represented advances given to the parties for the purchase of raw materials, advance to employees, security deposited with the landlord, electricity and telephones etc. The advances were given during the course of business. The amount became irrecoverable from the parties to whom the advances were made. Thus, the advances were totally connected with the business activities of the assessee. The learned CIT (Appeals) was justified in observing that the amount of advance was a trading loss. After seeing the details of amounts, it is observed that the assessee was not required to take a lengthy litigation for recovering the small amounts. In our opinion, therefore, the approach of the learned CIT (Appeals) is justified. In this connection we also rely in the order of assessee’s own case in for A.Y. 2004-05 dated 16.10.2015 wherein the relevant extract is reproduced below:- “8. The learned counsel for the Assessee has also submitted before us in the course of hearing that the Ghatkopar unit of the Assessee was sold during the previous year due to several problems including labour problems and the advances and expenses written oil related to this unit and this unit remained closed for a long time prior to its closure. We are satisfied that on the fans as pleaded by the Assessee before the AO which were not controverted by the AOICIT(A), the loss in question was incidental to the business of the Assessee. The reason assigned by the AO was that there was negligence on the part of the Assessee in not keeping proper records and this fact influenced his decision in not allowing the claim of the Assessee. In our view once the fact that the loss is incidental to Assessee's business is accepted than the strict evidence of irrecoverability of the losses in uestion cannot be insisted upon. The circumstances of the case show that the Assessee made a provision in the books of accounts in the year 2000 and claimed the loss only in the year 2004. The company after review of the books of accounts and after due diligence and discussion with the statutory auditors came to the conclusion that detailed reconciliation and accounting adjustments of these advances was no longer possible due to lack of information and non- availability of old records in the year 2000 itself but waited for 4 years before writing off the loss in the year 2004-05. We are of the view in the given facts and circumstances of the case, the deduction claimed ought to have been allowed. We hold and direct accordingly. The grounds raised by the Assessee are accordingly accepted.”