Case Note & Summary
The Commissioner of Income Tax-7, Mumbai appealed against the order of the Income Tax Appellate Tribunal (ITAT) dated 5th September 2011, which allowed the assessee, M/s Diageo India Pvt. Ltd., to deduct amounts paid as severance pay to its employees. The assessee had transferred its domestic whisky business, including its manufacturing facility at Nira, Pune, to UDV India Ltd. and paid Rs.39,66,774/- as severance pay to employees. The Assessing Officer initially held that the deduction could not be claimed under section 37(1) of the Income Tax Act, 1961, as it was akin to a Voluntary Retirement Scheme (VRS), and therefore only 1/5th of the amount could be deducted in the current assessment year under section 35DDA. The ITAT, however, allowed the full deduction under section 35DDA, holding that the amount could be amortized. The Revenue appealed, arguing that since the assessee had stopped its manufacturing activity, it was not entitled to the deduction. The High Court framed the substantial question of law as whether the ITAT erred in holding that the severance pay could be amortized under section 35DDA. The court noted that the ITAT had correctly applied section 35DDA, as the severance pay was akin to a VRS and the cessation of business did not bar amortization. The appeal was dismissed, affirming the ITAT's order.
Headnote
A) Income Tax - Severance Pay - Amortization under Section 35DDA - The issue was whether severance pay paid to employees upon transfer of business could be amortized under section 35DDA of the Income Tax Act, 1961. The court held that the ITAT correctly applied section 35DDA, as the severance pay was akin to a voluntary retirement scheme and the cessation of business did not preclude amortization. (Paras 1-3)
Issue of Consideration
Whether the amount paid on account of severance pay is allowed to be amortized under section 35DDA of the Income Tax Act, 1961?
Final Decision
The High Court dismissed the appeal, holding that the ITAT did not err in allowing amortization of severance pay under section 35DDA of the Income Tax Act, 1961.
Law Points
- Severance pay akin to VRS
- amortization under section 35DDA
- cessation of business not a bar
- section 37(1) not applicable
