Amortisation of expenditure incurred under voluntary retirement scheme: Sec. 35DDA

Amortisation of expenditure incurred under voluntary retirement scheme: Sec. 35DDA

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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 subsection (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

  1. 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.

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