Case: The Commissioner of Income Vs. M/S. Diageo India Private Limited

B.P. Colabawalla J.1. This Appeal under section 260A of the Income Tax Act 1961 filed by the Commissioner of Income Tax-7, Mumbai takes exception to the order passed by the Income Tax Appellate Tribunal, Mumbai (hereinafter referred to as the ITAT) on 5th September 2011. By the impugned order, the ITAT has allowed in favour of the assessee the deductions of the amounts paid by it to its employees on account of severance pay. The ITAT took the view that though the Assessee was not entitled to claim the said deduction under section 37(1), it could be amortized under the provisions of section 35DDA of the Act. Being aggrieved by this finding of the ITAT, the present Appeal has been filed.2. Mr Tejveer Singh, the learned counsel appearing on behalf of the Appellant, submitted that the ITAT erred in applying the provisions of section 35DDA of the Act inasmuch as, in the facts of the present case, the Assessee had transferred its domestic whisky business (i.e. its manufacturing facility at Nira, Pune) to one UDV India Ltd. He therefore contended that the Assessee Company had stopped its manufacturing activity in relation to their Nira plant and was therefore not entitled to the deduction of the amount of Rs.39,66,774/- paid to its employees as severance pay. He submitted therefore that this Appeal gives rise to a substantial question of law that is required to be answered by this Court and reads as under :-(A) Whether on the facts and circumstances of the case and in law, the Honble ITAT has erred in holding that amount paid on account of severance pay is allowed to be amortized under section 35DDA3. The facts stated briefly are that the Assessee filed its return of income on 1st November 2004 declaring a total loss of Rs.6,62,98,483/-. The return was processed under section 143(1) of the Act and after issuing the necessary notices to the Assessee, the Assessing Officer passed his order on 29th December 2006 under section 143(3) of the Act. With reference to the deduction claimed by the Assessee of the sum of Rs.39,66,774/- in relation to severance pay, the Assessing Officer first held that this deduction could not be claimed under section 37(1) of the Act as the same was on par and/or akin to a Voluntary Retirement Scheme (VRS) and in view thereof, the provisions of section 35DDA of the Act were attracted. He therefore held that if at all the expenses / deduction could be allowed, the same could be only to the extent of 1/5th of the amount claimed, being a sum of Rs.7,93,355/- in the current Assessment Year and the balance in the next immediately four succeeding years. Thereafter, the Assessing Officer went on to hold that since the business of the Assessee qua its manufacturing facility located at Nira, Pune had been sold / transferred and the manufacturing business of the Assessee in relation to the Indian made foreign liquor had ceased, the Assessee was not entitled to the said deduction even under the provisions of section 35DDA, as these expenses were not incurred for carrying on the business of the Assessee. 4. Being aggrieved by the order of the Assessing Officer dated 29th December 2006, the Assessee preferred an Appeal before the CIT (Appeals) who, by his order dated 7th January 2010, confirmed the findings of the Assessing Officer with reference to the disallowance of the deduction of Rs.39,66,774/- incurred by the Assessee on account of severance pay. 5. Being dissatisfied with the order of the CIT (Appeals), the Assessee approached the ITAT. After considering the entire factual matrix, the ITAT at paragraph 9 of its order observes thus:-9. Having heard the rival contentions and having perused the material on record, we are inclined to hold that expenditure on severance pay is a revenue expenditure for the simple reason that the authorities below have proceeded on the fallacious assumption that the payment of severance pay is an expenditure connected with closing down of business, whereas not only assessee continues to carry on the business, but he does so more efficiently, by outsourcing the production of alcoholic beverages. The expenditure incurred on this restructuring of business model, in our humble understanding, cannot be treated at par with expenses on closing down the business. The judicial precedents cited by the authorities below deal with the situations where business was being closed down. That is not the case before us. In this view of the matter, the judicial precedents cited by the authorities below are not really decisive of the issue in appeal before us. In our considered view, the payments for severance pay, in a situation in which employees are being paid these amounts due to change in the business model and the assessee continues to remain in the same business even after these payments, are normally deductible under section 37(1) of the Act. However, overriding provisions of section 35DDA(1) w.e.f. 1st April 2001 specifically provide that 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 installments for each of the four immediately succeeding previous years and section 35DDA(6) further provides that no deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act. In effect thus, as long as a payment is within the scope of section 35DDA(1), it cannot be allowed as a deduction under section 37(1). The scope of section 35DDA(1) is fairly wide as it covers not only a VRS payment in accordance with an approved scheme, but also any payment made to the employee in connection with his voluntary retirement whether or not in terms of the provisions of Rule 2 BA. There cannot be a dispute that the sum paid to the employees, in essence, is a payment in connection with their voluntary retirement. In this view of the matter, even though the amount paid to the employees is a revenue expenditure, it is required to be amortized nevertheless under section 35DDA of the Act. We, therefore, hold that only one fifth of the expenditure on severance pay was allowable in this assessment year. The assessee will, however, get deductions of same amount in each of the four subsequent assessment years as well.6. On the perusal of the said paragraph, it is clear that the ITAT being the last and the highest fact finding authority under the Act, has rendered a categorical finding that:-i) the Assessee continues its business;ii) it does so more efficiently by outsourcing the production of alcoholic beverages andiii) expenditure incurred on restructuring of its business cannot be treated at par with expenditure incurred for closing down the business.7. In view thereof and in our opinion rightly, the ITAT held that the Assessee would be entitled to the deduction of Rs.39,66,774/- in relation to severance pay. However, the ITAT further held that the Assessee would not be entitled to the said deduction under section 37(1) of the Act but under section 35DDA thereof. It is in the light of the provisions of section 35DDA that the ITAT held that the deduction claimed by the Assessee of Rs.39,66,774/- will have to be amortized under section 35DDA and only 1/5th of the expenditure was allowable in the current assessment year and the Assessee would be entitled to deduction of the same amount in each of the four subsequent assessment years as well. Not only are we in agreement with the findings of the ITAT but under no circumstances can it be contended that the said findings are vitiated on the ground of perversity or error apparent on the face of the record requiring our interference in this Appeal. It is important to note that it is only on the ground that the manufacturing activity of the Assessee had ceased that the Assessing Officer disallowed the said deduction. Even the Assessing Officer came to a finding that otherwise this deduction would be allowable to the Assessee Company under the provisions of section 35DDA of the Act. As noted above, this finding of the Assessing Officer and the CIT (Appeals) regarding closure of business of the Assessee Company has been reversed by the ITAT in the impugned order.

Decision reasoning: 1[ds]6. On the perusal of the said paragraph, it is clear that the ITAT being the last and the highest fact finding authority under the Act, has rendered a categorical findingthe Assessee continues its business;ii) it does so more efficiently by outsourcing the production of alcoholic beverages andiii) expenditure incurred on restructuring of its business cannot be treated at par with expenditure incurred for closing down the business.7. In view thereof and in our opinion rightly, the ITAT held that the Assessee would be entitled to the deduction of Rs.39,66,774/in relation to severance pay. However, the ITAT further held that the Assessee would not be entitled to the said deduction under section 37(1) of the Act but under section 35DDA thereof. It is in the light of the provisions of section 35DDA that the ITAT held that the deduction claimed by the Assessee of Rs.39,66,774/will have to be amortized under section 35DDA and only 1/5th of the expenditure was allowable in the current assessment year and the Assessee would be entitled to deduction of the same amount in each of the four subsequent assessment years as well. Not only are we in agreement with the findings of the ITAT but under no circumstances can it be contended that the said findings are vitiated on the ground of perversity or error apparent on the face of the record requiring our interference in this Appeal. It is important to note that it is only on the ground that the manufacturing activity of the Assessee had ceased that the Assessing Officer disallowed the said deduction. Even the Assessing Officer came to a finding that otherwise this deduction would be allowable to the Assessee Company under the provisions of section 35DDA of the Act. As noted above, this finding of the Assessing Officer and the CIT (Appeals) regarding closure of business of the Assessee Company has been reversed by the ITAT in the impugned order. In view thereof, there is no justification for denying the said deduction to the Assessee Company and granting the same as per the provisions of section 35DDA of the Act. In this view of the matter, the order of the ITAT cannot be faulted on any ground.