JUDGMENT
S.H. Kapadia, J.
1. Being aggrieved by the judgment and order dt, 21st Jan., 2002, passed by the Tribunal allowing the appeal filed by the assessee for asst. yr. 1996-97, the Department has come to this Court by way of appeal under Section 260A of the IT Act.
Facts
2. In this appeal, we are concerned with accounting year ending 31st March, 1996, corresponding to asst. yr. 1996-97, During the accounting year ending 31st March, 1996, the company claimed voluntary retirement scheme (VRS) expenses amounting to Rs. 10,02,23,735 incurred at Borivli plant. As per the annual report, VRS expenses was to be written off within a period of 60 months. In the past, the company had incurred VRS expenses for other plants and under the books of the company, such expenses were written off over a period of 36 months. Therefore, when for the accounting year ending 31st March, 1996, VRS expenses amounting to Rs. 10,02,23,735 incurred for Borivli plant came to be written off within 60 months, the officer disallowed the said expenses to the tune of Rs. 9,68,82,917. In other words, the AO amortized the said expenses over a period of five years and allowed deduction only to the tune of Rs. 33,40,818 for the accounting year ending 31st March, 1996, and the AO disallowed the claim for the balance amount. Consequently, the AO came to the conclusion that the balance amount of Rs. 9,68,82,917 constituted excess claim, which was disallowed. Being aggrieved, the assessee preferred an appeal before the CIT(A), who agreed with the AO and, accordingly, took the view that once the management in its books spreads over the amount of Rs. 10,02,23,735 over a period of 60 months then, the Department was right in not giving the full deduction of Rs. 10,02,23,735 during the assessment year in question. Being aggrieved, the assessee carried the matter in appeal to the Tribunal. The Tribunal took the view that VRS expenses was not incurred for acquiring any asset. That, it was incurred in order to reduce the cost. That, under the VRS the liability stood ascertained, quantified and paid. That, the liability was discharged during the accounting year ending 31st March, 1996. The Tribunal also found that the VRS had been approved by the CIT. In the circumstances, the appeal was allowed. Being aggrieved by the decision of the Tribunal, the matter has come before us in appeal under Section 260A of the IT Act.
3. The question of law on which our opinion is sought is question ‘B’, which reads as follows :
“Whether, on the facts and in the circumstances of the case, the Tribunal was correct in allowing the liability as revenue expenditure or it should be spread over the same by taking into consideration, the years for which the scheme is to be implemented and consider the tax effect exceeding the limit prescribed by the Board ?”
Question ‘A’ falls in question ‘B’ and, therefore, we have reframed a composite question quoted above.
Arguments
4. Mr. R.V. Desai, learned senior counsel appearing on behalf of the Department, vehemently urged that payment of VRS resulted in a benefit of enduring nature to the company and, therefore, it was a capital, expenditure. In the alternative, he contended that, even if this Court holds that the expenditure, was a revenue expenditure, the AO was right in not allowing the full deduction of Rs. 10,02,23,735 during the assessment year in question and that the AO was right in spreading over the said expenditure for a period of 60 months. He contended that the annual report for the accounting year ending 31st March, 1996, itself shows that the VRS was for a period of 60 months and that the company had written off an amount of Rs. 33,40,818 annually for a period of 5 years. He contended that in view of the annual report of the company, no evidence was required from the Department’s side in support of the spread over of the expenses for a period of 60 months. He contended that this spread over of expenses for five years in the books of the company itself proves that the company was seen a benefit of enduring nature for a period of five years by introducing the scheme. He, therefore, contended that in this case, in any event, the Department was right in disallowing the excess claim of Rs. 9,68,82,917. Mr. R,V. Desai, learned senior counsel for the Department, also relied upon the recent judgment of this Court in the case of Taparia Tools Ltd v. Jt CIT (2003) 126 Taxman 544 (Bom).
5. On the other hand, Mr. Mistry, learned counsel for the assessee, contended that it is not open for the Revenue to contend that VRS expenses were incurred in the capital field as the AO has himself proceeded to give deduction to the assessee to the tune of Rs. 33,40,818. He pointed out that even according to the Department, the said expenses was a revenue expenditure and it is for this reason that the AO has given deduction of a smaller amount of Rs. 33,40,818 as Rs. 33,40,81 as against the assessee’s claim for deduction of Rs. 10,02,23,735. Mr. Mistry submitted that there was no merit in the alternative argument of the Department. He contended that in this case the concept of deferred revenue expenditure was not applicable as no continuing benefit accrued to the assesses beyond the assessment year in question. He contended that, in this case, there is no finding of fact recorded by the AO of any such continuing benefit accruing to the assessee in the future years. He contended that in order to attract the concept of spread over of VRS expenses, three conditions are required to be satisfied viz., existence of a continuing benefit beyond the assessment year in question; secondly, if such continuing benefit exists, there ought to be an income stream coming in order to match with the expenditure, He contended that in the present case, there is no finding of such income stream coming in and, therefore, the matching concept discussed in Tapana’s case (supra) did not apply. Lastly, it was submitted that unlike Tapana’s case, there is no challenge to the genuineness or bona fides of the VRS. He, therefore, contended that the judgment of this Court in Tapana’s case (supra) did not apply to the facts of this case. He relied upon the Judgment of the Supreme Court in the case of CIT v. Ashok Leyland Ltd. in support of his contention that compensation paid for termination of the services was a payment made with a view to save business expenditure in the accounting period as well as a few subsequent years but, such payment was not made for acquiring benefit or income-yielding asset. By avoiding business expenditure, the company could not be said to have acquired enduring benefit or any income-yielding asset.
Findings
6. As stated above, the first contention advanced on behalf of the Department was, VRS expenditure was not deductible as it was capital in nature. The Department is estopped from raising this contention. The assessee claimed deduction of Rs. 10,02,23,735 for the accounting year ending 31st March, 1996. However, the AO restricted the deduction at Rs. 33,40,818. Consequently, the AO disallowed Rs. 9,68,82,917 as excess claim. The assessee preferred an appeal to the CIT(A) against disallowance of Rs. 9,68,82,917. No appeal was preferred by the Department against order of assessment, In the circumstances, it is not open for the Department now to contend that the entire expenses was in the capital field.
7. Now coming to the alternate argument of the Department, it is true that in the annual report for the accounting year 31st March, 1996, the company has written off VRS expenses over a period of 60 months, In the earlier years, the company has written off such expenses over a period of 36 months at the rate of Rs. 55,68,025 whereas during the accounting year ending 31st March, 1996, it has written off a smaller amount of Rs. 33,40,818. Therefore, the Department cannot have any grievance about the change of the period over which the amount is written off. Further, in the case of Tapana Tools Ltd. (supra) this Court has considered the entire case law on the concept of spread over and, in conclusion, this Court has categorically laid down that spread over concept should generally be applied in cases involving special type of assets. That case concerns deferred revenue expenditure. In that matter, Rs. 100 was borrowed for a period of five years. In the first year Rs. 55 was paid back to the lender. In that matter, the assessee had the benefit of Rs. 100 for a period of five years. In the accounts, the company had debited the P&L a/c at the rate of Rs. 11 spread over for a period of five years. In that matter, the annual report contained a note. In that note, it was stipulated that Rs. 55 constituted deferred revenue expenditure written off over a period of five years. In that matter, on facts, the Department had doubted the bona fides of the scheme. In such circumstances, the Court took the view that in cases of deferred revenue expenditure, because of its special feature, its spread over is warranted. In Tapana’s case (supra), the life of non-convertible debenture (NCD) was five years and under the NCD, there was a stream of income coming in over a period of five years and the Court was, therefore, required to apply a matching concept. In the case of Taparia Tools (supra), there was a categorical finding of fact recorded by the AO regarding the income stream/benefit extending over the life of NCD. On the other hand, in the present case, there is no such finding. In the case of Taparia Tools, there was a finding of fact indicating distortion of profits. There was no such finding in the present case. For the above reasons, the judgment of Tapana’s case (supra) has no application to the facts of this case. In the case of CIT v. Ashok Leyland (supra) compensation was paid for termination of the services of managing agents in order to save business expenditure in the accounting period as well as during the subsequent years. It was held that by avoiding certain business expenditure, the company did not acquire any benefit of enduring nature. It was held that by avoiding certain business expenditure the company did not acquire any income-yielding asset. It was, therefore, held by the Supreme Court that the expenditure was of a revenue nature and, it was an allowable deduction in computing the profit of the assessee-company. Applying the ratio of the judgment of the Supreme Court to the facts of this case, in the present matter, the VRS expenses was incurred by the company to save on the expense. This expense was not referable to any income-yielding asset. It is well settled that, ordinarily, revenue expenditure, which is incurred wholly and exclusively for the purposes of business, must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years even though the assessee has written it off in its books over a period of years. It is only in cases of special type of assets that the spread over is warranted. In the case of Empire Jute Co. Ltd. v. CIT , it has been held by the Supreme Court that there are cases where the test of enduring benefit may break down. In that case, expenditure was incurred to remove certain restrictions on the number of working hours so that the assessee could increase its profits. The company was a member of Indian Jute Mills Association which was floated to protect the trade. The members of the association had undertaken to work their looms for a limited hours every week. The “loom hours” were bought by the assessee from another member to increase the profits. The question which arose before the Supreme Court was whether the purchase price paid constituted revenue expenditure. It was held by the Supreme Court that purchase of “additional loom hours” did not add to the fixed capital of the assessee and nor did it make any addition to the existing profit-making apparatus. It was held by the Supreme Court that in certain cases, the test of enduring benefit may not apply. In our view, in this case on facts, the Judgment of the Supreme Court in Empire Jute Mills’ case (supra) would apply.
8. Before concluding, we may mention that in the present case, the assessee had incurred VRS expenses not to the tune of Rs. 10,02,23,735. That, the assessee had incurred VRS expense of only Rs. 6,79,06,431. The remaining expenses were on account of gratuity, bonus, L.T.A., etc. Therefore, one fails to understand how expenses on account of gratuity, bonus and L.T.A. could be spread over by the AO over a period of 60 months.
Conclusion
9. Taking into account the above reasons, we answer the above quoted question in the affirmative i.e., in favour of the assessee and against the Department.
10. Accordingly, the above appeal is disposed of with no order as to costs.