Amortisation of expenditure incurred under voluntary retirement
scheme: Sec. 35DDA
1) Where an assesse 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.
2) Provisions in case of Amalgamation
Where the assesse, 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) Provisions in case of Demerger
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) Provisions in case of Reorganisation
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.
4(A). 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 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.
Errors in claims of amortization expenses u/s 35DDA
Section 35DDA of the Act provides that where an assesse incurs any expenditure by way of
payment to an employee under any voluntary retirement scheme, he shall be allowed
deduction equal to one fifth of such expenditure for a period of five years beginning with the
year in which such expenditure is incurred. While computing tonnage income of a tonnage
tax company under section 115VG, provisions of section 30 to 43B shall apply as if every
loss, allowance or deduction had been given full effect to for that previous year itself.
During test check in Orissa, Rajasthan and West Bengal charges, we found that four assesses
irregularly claimed and were allowed expenses towards amortisation under section 35DDA
which resulted in under assessment of income to that extent involving revenue impact of RS.
5.38 crore .
Illustrative case :
In Rajasthan, CIT Kota charge, M/s Chambal Fertilizers and Chemicals Ltd. claimed and
was allowed deduction of RS. 60.42 lakh every year from AY 08 to AY 10, being one-fifth of
- 3.02 crore of the expenditure incurred on VRS expenses related to ISCL, India Steamship
Ltd (shipping division) which was merged (amalgamated) with the assesse company from 01
September 2004 and the expenditure of RS. 3.02 crore pertained to the period prior to merger
of ISCL (shipping division) under the scheme of voluntary retirement. We observed that
assesse company (resultant company) opted for tonnage tax scheme under Chapter XII G of
the Act in respect of its shipping division from 01 April 2005 and as such the assesse was not
entitled for amortisation of any expenses incurred on VRS being the income of its shipping
division computed in the manner laid down under the section of 115VG. Irregular allowance
of amortisation of VRS expenses resulted in under assessment of income of RS. 1.81 crore
(RS. 60.42 lakh per year from AY 08 to AY 10) involving tax effect of RS. 68.38 lakh
including interest. ITD accepted the observation and stated that remedial action u/s 148 was
being taken.
Thus, AOs allowed irregular amortisation expenses under section 35DDA which resulted in
under assessment of income.
