Commissiioner Of Income Tax vs M/S. Dalmia Agencies (P) Ltd.
2009 Latest Caselaw 2734 Del

*             IN THE HIGH COURT OF DELHI AT NEW DELHI

+                   ITA No. 329/2006

                                        Date of decision   : July 21, 2009


COMMISSIIONER OF INCOME TAX                                      ...Appellant.

                           Through:     Ms. Prem Lata Bansal, Advocate with
                                        Mr. Paras Chaudhry, Advocate and
                                        Ms. Anshul Sharma, Advocate.

              VERSUS

M/S. DALMIA AGENCIES (P) LTD.                                    ....Respondent

Through: Mr. R.M. Mehta, Advocate.

CORAM:

HON'BLE MR. JUSTICE A. K. SIKRI HON'BLE MR. JUSTICE VALMIKI J.MEHTA

1. Whether the Reporters of local papers may be allowed to see the judgment?

2. To be referred to the Reporter or not?

3. Whether the judgment should be reported in the Digest?

    %                      JUDGMENT



A. K. SIKRI , J.(ORAL)

1. The assessee had entered into a settlement with its workmen under

Section 18(1) of the Industrial Disputes Act. As per the settlement, lump sum

payment was made to the workers. The assessee/respondent herein had filed

return of income for the assessment year 2001-02 declaring a loss of

Rs.44,37,666/-. The return was processed under Section 143(1)(a) of the

Income Tax Act. Subsequently, the case was taken up for scrutiny and notices

under Section 143(2) were issued on 29.10.2002 by the Assessing Officer.

2. During the assessment, the Assessing Officer, inter alia, found that the

assessee company had claimed deduction of Rs.39,92,189/- representing

payment to permanent workmen/staff members at Dalmia Puram, legal as well

as ex-gratia compensation. The aforesaid amount of compensation was paid

by the assessee in terms of Memorandum of Settlement arrived at between

the assessee and its workmen under Section 18(1) of the Industrial Disputes

Act. The Assessing Officer was of the opinion that since the amount was paid

as lump sum compensation on the mutual understanding for the

resignation/retirement of the workmen, it would be in the nature of payment

made for voluntary retirement of those employees. The Assessing Officer,

thus, considered that such an amount would be covered by the provisions of

Section 35DDA and not under Section 37 of the Income Tax Act as claimed by

the assessee.

3. As per the provisions of Section 35DDA which came into effect from

01.04.2001, the deduction is allowed at the rate of 1/5 th of the expenditure

incurred during the year under 'Amortization of expenditure under Voluntary

Retirement Scheme' and the balance amount is allowed in four instalments in

the four subsequent years. Hence, the Assessing Officer passed the order

dated 30th January, 2004 allowing only 1/5 of the expenditure against full

expenditure claimed by the assessee for that year under Section 37 of the Act.

At the same time, the Assessing Officer also opined that this would amount to

concealment of income and initiated penalty proceedings under Section

271(1)(c) of the Income Tax Act. After issuing notice to the assessee under the

aforesaid provision and hearing his objections thereto penalty order dated

30.07.2004 was passed by the Assessing Officer imposing penalty of

Rs.12,63,048/-.

4. We may note at this stage that the assessee had accepted the

assessment orders whereby deduction of aforesaid amount paid by the

assessee to its workers was allowed under Section 35DDA of the Act.

However, the assessee challenged the penalty order on the ground that the

requirements of Section 271(1)(c) of the Act were not fulfilled and the penalty

proceedings were illegally initiated by the Assessing Officer and consequently

the penalty order passed also was not valid. In this behalf, submissions of the

assessee was that the claim made by the assessee, treating the aforesaid

payment as revenue expenses under Section 37(1) of the Income Tax Act, was

a bona fide move. Two opinions were possible and in case it was held by the

Assessing Officer that the claim is allowable under Section 35 DDA and not

under Section 37, that would mean that the Assessing Officer was not right in

initiating penalty proceedings. Contention of the assessee found favour with

the Commissioner of Income Tax (Appeals) who vide his order dated 8th

October, 2004 set aside the penalty levied against the assessee.

5. The revenue challenged this order before the I.T.A.T. but without any

success in as much as by reason of impugned order dated 30 th August, 2005,

the Tribunal has dismissed the appeal of the revenue. In the process, the

I.T.A.T. has observed as under:

" We have considered the rival contentions and the material on record. Firstly, we do agree with the observations of the CIT(Appeals) that all material facts were disclosed by the assessee and that there was no intention to conceal any particulars. The modus of claiming deduction was merely a matter of opinion and hence on that ground itself, no penalty is leviable. Secondly, nowhere in the assessment order we find any satisfaction recorded by the AO as to concealment by the assessee. This is a prerequisite before Commercial Enterprises in 246 ITR 568 and a host of other judgments which followed thereafter. Therefore, on any count, the penalty is not sustainable and hence we uphold the order of the CIT (Appeals) cancelling the same."

6. Reason given by the I.T.A.T. that in the assessment order, no satisfaction

is recorded by the Assessing Officer as to concealment by the assessee and

setting aside the order on that ground, relying upon the judgment in the case

of Ram Commercial Enterprises 246 ITR 56, no more remains valid in view of

legislative amendment in Section 271 by the Finance Act, 2008. By this

amendment, sub-section 1(B) is inserted to Section 271 of the Income Tax Act

retrospectively with effect from 1st April, 1989 as per which it is not necessary

for the Assessing Officer to record such a satisfaction. It is for this reason that

on 18th July, 2008, this Court taking note of the aforesaid amendment observed

that the matter is to be now examined on merits.

7. For this reason, we heard the counsel for the parties on merits. Section

35DDA inter alia states 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 instalments for each of the remaining

succeeding previous years. Thus, this provision is applicable when Voluntary

Retirement Scheme is introduced by the assessee and under this scheme,

payments are made by the assessee to his employees on their voluntary

retirement. It is well known that many times various companies come out with

such Voluntary Retirement Schemes to ease out unwanted/surplus employees.

The purpose is to give honourable exit with "golden hand shake". Indubitably

there exist specific provisions in the Industrial Disputes Act to retrench surplus

employees which can also be restored to by the employer. However,

invocation of those provisions normally leads to litigation between the

retrenched workmen and employer. Furthermore, the provisions of

retrenchment etc. which are contained in Industrial Disputes Act would cover

only those employees who are 'workmen' within the meaning of Section 2(s) of

the Industrial Disputes Act' and it would not include non workmen/other

employees. Guided by these considerations, Voluntary Retirement Scheme is

normally introduced with benevolent objective to give extra benefits to the

employees who come forward and opt for such a scheme by taking much more

benefits which otherwise may not be available to such employees under the

law. Section 35 DDA of the Act covers such a situation.

In the present case, what we find from the orders of the

Assessing Officer as well as C.I.T. (Appeals) that assessee is engaged in the

business of manufacturing of cement pipes and fittings, agricultural activities

and investment in shares. It had closed its Rockfort unit at Dalmia Puram.

Because of its closure, closure notice was issued to its employees whose

services were no longer required as a result of the aforesaid closure. It appears

that this led to a dispute between the employees and the employer which

resulted into settlement under Section 18(1) of the Industrial Disputes Act. It

was because of this reason that the assessee believed that the payment made

in a settlement arrived at under Section 18(1) of the Industrial Disputes Act,

would qualify as revenue expenditure and it could claim the entire deduction

under Section 37 of the Income Tax Act.

8. Interestingly, even the Assessing Officer in the assessment order took

note of the judgment of the Supreme Court in the case of Indian Cable

Company Limited Vs. Its Workment AIR 1972 SC 2195. In this case, the Apex

Court held that when payment is made to workmen, who retire prematurely, it

is treated as expenditure incurred on the ground of commercial expediency

and thus expenditure so incurred would be allowable as an expenditure under

Section 37(1) of the Income Tax Act. This also demonstrates that in the income

tax return filed by the assessee when the assessee is claiming expenditure

because of payment made under Section 18(1) of the Industrial Disputes Act

and not under the Voluntary Retirement Scheme, it was a bona fide move on

the part of the assessee and two views in the matter were possible, namely,

whether the claim was to be allowed under Section 37(1) of the Act or it was

allowable under Section 35DDA of the Act. In such circumstances, even if the

Assessing Officer ultimately held that claim could be allowed only under

Section 35DDA, we are of the view that it was not a case where the assessee

had concealed the income or had furnished inaccurate particulars. In fact as

observed by the C.I.T.(Appeals) and as well as by I.T.A.T. complete disclosure

was made by the assessee in this behalf.

6. We are, therefore, of the opinion that ingredients of Section

271(1)(c) of the Act are not satisfied in the present case and the findings

arrived at by the two authorities below, which are concurrent, are findings of

facts on this aspect. No substantial question of law arises for determination

and this appeal is accordingly dismissed.

A. K. SIKRI, J

VALMIKI J. MEHTA, J

JULY 21, 2009 Ne