ACIT, New Delhi V. M/s. Lumax Automotive Systems Ltd., Delhi

ITA 114/DEL/2015

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 5438 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-05-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2010-2011
• Appeal Filed On: 07-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES D : DELHI BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA.NO.114/DEL./2015 ASSESSMENT YEAR 2010-2011 THE ACIT, CIRCLE-15(1), C.R. BUILDING, NEW DELHI. VS M/S. LUMAX AUTOMOTIVE SYSTEMS LTD., 63-64, GOKHALE MARKET, DELHI. PAN AAACL6930D (APPELLANT) (RESPONDENT) FOR REVENUE : SHRI AMIT JAIN, SR. D.R. FOR ASSESSEE : - NONE - DATE OF HEARING : 01.05.2018 DATE OF PRONOUNCEMENT : 02.05.2018 ORDER PER BHAVNESH SAINI, J.M. THIS DEPARTMENTAL APPEAL HAS BEEN DIRECTED AGAINS T THE ORDER OF THE LD. CIT(A)-VIII, NEW DELHI, DATED 07 TH OCTOBER, 2014, FOR THE A.Y. 2010-2011, CHALLENGING THE ORDER OF THE LD. CIT(A) IN DELETING THE DISALLOWANCE OF VOLUNTARY RE TIREMENT SCHEME (VRS) RETRENCHMENT COMPENSATION OF RS.57,2 5,789/- 2 ITA.NO.114/DEL./2015 M/S. LUMAX AUTOMOTIVE SYSTEMS LTD., DELHI. 2. THE A.O. DISALLOWED THE ABOVE AMOUNT OF VRS RETRENCHMENT COMPENSATION AND DID NOT ALLOW CLAIM U NDER SECTION 35DDA OF THE I.T. ACT, 1961. 3. THE ASSESSEE FILED WRITTEN SUBMISSIONS BEFORE L D. CIT(A) WHICH IS REPRODUCED IN THE APPELLATE ORDER I N WHICH THE ASSESSEE BRIEFLY EXPLAINED THAT ASSESSEE-COMPANY IS A MANUFACTURING COMPANY AND IS ENGAGED IN THE BUSINES S OF MANUFACTURING OF AUTO COMPONENTS, SUCH AS, FILTERS, REAR VIEW MIRRORS AND PLASTIC COMPONENTS OF DIFFERENT VARIETI ES FOR DIFFERENT O.E.M. VEHICLE MANUFACTURERS. THERE WAS A LSO DEMERGER OF OTHER UNITS AS PER THE DIRECTIONS OF HO NBLE DELHI HIGH COURT. THE ASSESSEE-COMPANY, DURING THE ASSESS MENT YEAR, HAD SEVEN MANUFACTURING UNITS AT FARIDABAD, G URGAON, MANESAR, PUNE AND AURANGABAD WITH CORPORATE/HEAD OF FICE AT OKHLA INDUSTRIAL AREA, NEW DELHI. THE ASSESSEE-COMP ANY HAD CLOSED DOWN ITS AURANGABAD UNIT ON 31 ST MARCH, 2010 WHICH WAS MANUFACTURING REAR VIEW MIRRORS ON ACCOUNT OF L ACK OF ORDERS, FINANCIAL PROBLEMS AND ON ACCOUNT OF NON- 3 ITA.NO.114/DEL./2015 M/S. LUMAX AUTOMOTIVE SYSTEMS LTD., DELHI. MODERNIZATION OF PLANT AND MACHINERY WHICH WERE VER Y OLD AND NOT COMPETITIVE WITH THE MODERN MANUFACTURING UNITS AND CONTINUING LOSSES IN THE UNIT AND ON ACCOUNT OF THE SAME, THE DIRECTORS OF THE COMPANY IN THEIR BOARD MEETING, HA D DECIDED TO CLOSE DOWN ITS FACTORY UNIT AT AURANGABAD. ACCOR DINGLY, MANAGEMENT HAD GIVEN A GENERAL NOTICE TO THE FACTOR Y WORKERS FOR CLOSURE OF THE UNIT W.E.F. 31 ST MARCH, 2010. THE COMPANY MANAGEMENT AND THE WORKERS UNION HAD ENTERED INTO AN AGREEMENT WITH REGARD TO TERMS OF THE RETRENCHMENT COMPENSATION AND OTHER DUES TO THE WORKERS. THE DET AILS WERE FILED ON RECORD. OUT OF 59 EMPLOYEES, 56 EMPLOYEES HAD TAKEN THEIR DUES AND SUBMITTED THEIR RESIGNATION. OUT OF 03 LEFT-OVER EMPLOYEES, 02 EMPLOYEES HAD TAKEN THEIR DUES IN F.Y . 2012- 2013 AND ONLY ONE EMPLOYEE REMAINED UNPAID AT THE T IME OF ASSESSMENT PROCEEDINGS. IT WAS SUBMITTED THAT GENER ALLY THERE ARE TWO WAYS FOR PAYMENT TO THE EMPLOYEES OF THE CO MPANY ON THEIR LEAVING THE SERVICE OF THE COMPANY IN MID WAY , OTHER THAN RETIREMENT, EITHER THROUGH RETRENCHMENT OR OPTING T HE SCHEME OF VRS IN CASE THERE IS ANY SCHEME OF VRS ENFORCED IN THE 4 ITA.NO.114/DEL./2015 M/S. LUMAX AUTOMOTIVE SYSTEMS LTD., DELHI. ORGANISATION. IN CASE OF VRS, THE COMPANY MADE TERM S OF THE OFFER OF RETRENCHMENT AND IT IS NOT OBLIGATORY ON T HE PART OF THE EMPLOYEES TO ACCEPT THE VRS. SECTION 35DDA OF THE I .T. ACT IS APPLICABLE IN RESPECT OF THE EXPENDITURE MADE IN CO NNECTION WITH THE VOLUNTARY RETIREMENT. THIS PROVISION IS AP PLICABLE WHEN VRS IS INTRODUCED BY THE ASSESSEE-COMPANY AND PAYME NTS ARE MADE BY THE ASSESSEE-COMPANY TO ITS EMPLOYEES ON TH EIR VOLUNTARY RETIREMENT. HOWEVER, IN THE CASE OF THE A SSESSEE- COMPANY, ITS AURANGABAD UNIT WAS CLOSED WITH RETREN CHMENT OF ALL THE WORKERS AND STAFF AS ON 31 ST MARCH, 2010. THE SERVICE COMPENSATION WAS PAID TO THE EMPLOYEES OF THE COMPA NY WHICH IS BASED ON 16 DAYS WAGES/SALARY FOR THE YEARS OF S ERVICE SERVED BY THEM. PAYMENTS WERE MADE TO THE WORKERS AND STAF F ON THEIR RETRENCHMENT. THUS, NO PAYMENT IS MADE FOR VRS. IT IS, THEREFORE, AN ALLOWABLE DEDUCTION UNDER SECTION 37( 1) OF THE I.T. ACT. THE RETRENCHMENT COMPENSATION WAS PAID DUE TO BUSINESS EXPEDIENCY. IT WAS PAID FOR THE PURPOSE OF BUSINESS TO SAVE THE FUTURE BUSINESS LOSSES. THE ASSESSEE-COMPANY RELIED UPON SEVERAL DECISIONS IN SUPPORT OF THE ABOVE CONTENTIO N. IT WAS ALSO 5 ITA.NO.114/DEL./2015 M/S. LUMAX AUTOMOTIVE SYSTEMS LTD., DELHI. SUBMITTED THAT SERVICE RETRENCHMENT COMPENSATION WA S ALLOWED IN EARLIER YEAR AS WELL UNDER SECTION 37(1) OF THE I.T. ACT. 4. THE LD. CIT(A) CONSIDERING THE MATERIAL ON RECO RD, DELETED THE ENTIRE ADDITION. HIS FINDINGS ARE REPRO DUCED AS UNDER : FINDINGS : 1 HAVE PERUSED THAT ASSESSMENT ORDER, GROUNDS OF AP PEAL, WRITTEN SUBMISSION AND DISCUSSED THE MATTER WITH TH E AR VERY CAREFULLY. THE APPELLANT COMPANY HAD CLOSED IT S BUSINESS AT AURANGABAD UNIT FOR WHICH THE BOARD RES OLUTION AND NATURE OF CLOSURE OF FACTORY NOTICE BY THE EMPL OYER IS REPRODUCED BELOW:- CERTIFIED TRUE COPY OF THE BOARD RESOLUTION PASSED AT THE BOARD METTING OF LUMAX AUTOMOTIVE SYSTEMS LIMITED HELD ON 29 JANUARY 2010 AT 63-64, GHOKALE MARKET, NEW DELHI-110054 THE COMPANY AUTHORIZES ITS BOARD TO TAKE THE DECISI ON OF CLOSER OF LOSS MAKING FACTORIES OF THE COMPANY. 6 ITA.NO.114/DEL./2015 M/S. LUMAX AUTOMOTIVE SYSTEMS LTD., DELHI. RESOLVED THAT THE BOARD APPROVED TO CLOSE THE C-10, MIDC, VALUJ, AURANGABAD FACTORY DUE TO SHORTAGE OF FUNDS, LACK OF ORDERS IN HAND AND NON MODERNIZATION OF OLD PLANT AND MACHINERY. FURTHER RESOLVED THAT MR. NITIN JAIN. EXECUTIVE DIRECTOR AND/OR MR. J.S. NAIN BE AND ARE HEREBY JOI NTLY OR SEVERALLY AUTHORIZED TO SETTLE THE MATTER WITH WORK ERS, AND TAKE ALL OTHER NECESSARY ACTIONS IN THIS REGARD. NOTICE OF CLOSURE OF FACTORY BY AN EMPLOYER SAME OF THE EMPLOYER: LUMAX AUTOMOTIVE SYSTEMS LTD. ADDRESS: C10, WALUJ, AURANGABAD. DATED 29 TH DAY OF JANUARY, 2010. IN ACCORDANCE WITH PROVISION OF THE INDUSTRIAL DISP UTE ACT, 1947 WE HEREBY GIVE NOTICE TO ALL CONCERNED THAT IT IS OUR DECISION TO AFFECT THE CLOSURE SPECIFIED IN THE ANN EXURE. WITH EFFECT FROM 31 S ' MARCH, 2010. SIGNATURE 7 ITA.NO.114/DEL./2015 M/S. LUMAX AUTOMOTIVE SYSTEMS LTD., DELHI. U.K. JAIN CHAIRMAN AND MANAGING DIRECTOR THIS FACTORY HAS BEEN SUFFERING HEAVY AND PERPETUAL LOSSES FOR THE 2-3 YEARS DUE TO VARIOUS R EASONS, THE MAJOR ONES IS FINANCIAL PROBLEM. WE HAVE LOST ORDER S FROM OUR VALUED AND 'OMINOUS CUSTOMER. FURTHER, DUE TO L OSSES AND PAUCITY OF FUNDS THE UNIT IS NOT ABLE TO UPGRAD E MACHINES AND TESTING FACILITIES, THEREBY ADVERSELY EFFECTED QUALITY OR OUR PRODUCTS. DWINDLING QUALITY OF PRODU CTS AND HIGHER MANUFACTURING COST HAS FORCED US OUT OF THE COMPETITION AND ULTIMATELY LOSS OF ORDERS FROM THE CUSTOMERS. IF WE STILL CONTINUE WITH THIS FACTORY, THE OTHER FACTORIES WILL AFFECT AND THE WHOLE COMPANY WILL FA CE THE CONSEQUENCES. WITH A VIEW TO OVERCOME FROM THIS PRO BLEM, THE MANAGEMENT HAS DECIDED TO CLOSE THE FACTORY AND REQUEST 8 ITA.NO.114/DEL./2015 M/S. LUMAX AUTOMOTIVE SYSTEMS LTD., DELHI. THE WORKERS TO TAKE THEIR FULL AND FINAL SETTLEMENT FROM THE COMPANY. MANAGEMENT IS ALSO OPEN TO ANY VIABLE SUGGESTIONS FROM THE CONCERNED WORKMEN.' THE CLOSURE OF FACTORY RETRENCHMENT O F EMPLOYEES IS NOT EQUIVALENT TO VOLUNTARY RETIREMENT SCHEME OF GROUP OF EMPLOYEES UNDER THE VRS SCHEME. HENCE THE PROVISION FOR 35DDA IS NOT APPLICABLE IN THIS CASE. THE APPELLANTS CLAIM IS MADE U/S 37(1) OF THE IT ACT WHICH IS PERMISSIBLE IN LAW. THE APPELLANT INCURRED EXPENDITURE ON PAYMENTS MADE TO RETIRED EMPLOYEES O F CLOSED UNIT AS FULL AND FINAL SETTLEMENT OF THEIR D UES. HENCE THIS IS MADE FOR BUSINESS PURPOSE. IT IS MADE WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPOSE OF APPE LLANT COMPANY AND THERE IS NO ELEMENT OF PERSONAL ELEMENT INVOLVED IN SUCH PAYMENTS TO RETIRED EMPLOYEES. THEREFORE, THE AOS ADDITION OF RS.57,25,789/- IS N OT PROPER AND JUSTIFIED. I ALLOW THE CLAIM OF THE APPE LLANT AS PER ITS COMPUTATION OF INCOME U/S 37(1) OF THE IT A CT. ALL 9 ITA.NO.114/DEL./2015 M/S. LUMAX AUTOMOTIVE SYSTEMS LTD., DELHI. THE GROUNDS OF APPEAL RELATING TO THIS ONE ISSUE OF ALLOWABILITY OF RETRENCHMENT COMPENSATION OF THE SE CTION 37(1) ARE ALLOWED. IN THE RESULT, THE APPEAL IS ALLOWED. 5. AFTER CONSIDERING THE SUBMISSIONS OF THE LD. D. R. IN THE LIGHT OF FINDINGS OF THE LD. CIT(A), WE DO NOT FIND ANY MERIT IN THE DEPARTMENTAL APPEAL. THE ASSESSEE-COMPANY EX PLAINED THAT IT HAS CLOSED DOWN ITS AURANGABAD UNIT DUE TO HEAVY LOSSES SUFFERED BY THE ASSESSEE-COMPANY. THE ASSESSEE-COMP ANY IN THIS YEAR HAS DECLARED LOSS OF RS.4.34 CRORES IN TH E RETURN OF INCOME AND AFTER MAKING ADDITION AS WELL, THE NET T AXABLE LOSS HAVE BEEN DETERMINED AT RS.3.77 CRORES. THEREFORE, THE CONTENTION OF THE ASSESSEE-COMPANY IS CORRECT THAT IN ORDER TO SAVE FUTURE LOSSES, AURANGABAD UNIT WAS CLOSED DOWN BY THE ASSESSEE-COMPANY. THE CLOSURE IS APPROVED BY THE BO ARD OF DIRECTORS AND THERE WAS AN AGREEMENT EXECUTED BETWE EN THE WORKERS UNION AND THE ASSESSEE-COMPANY FOR RETRENC HMENT OF ITS EMPLOYEES ON ACCOUNT OF CLOSURE OF THE AURANGAB AD FACTORY. 10 ITA.NO.114/DEL./2015 M/S. LUMAX AUTOMOTIVE SYSTEMS LTD., DELHI. THESE FACTS HAVE NOT BEEN REBUTTED BY THE REVENUE. THEREFORE, IT IS CLEAR THAT AMOUNT IN QUESTION HAVE BEEN PAID BY ASSESSEE- COMPANY ON ACCOUNT OF RETRENCHMENT COMPENSATION ON CLOSURE OF THE AURANGABAD UNIT OF THE ASSESSEE-COMPANY. THE AMOUNT IS THUS PAID FOR BUSINESS PURPOSES ONLY AND AS SUCH , IT WAS AN ALLOWABLE DEDUCTION UNDER SECTION 37 OF THE I.T. AC T. PROVISIONS OF SECTION 35DDA APPLIED BY THE A.O. ARE NOT APPLIC ABLE IN THIS CASE BECAUSE ASSESSEE-COMPANY HAS NOT PAID ANY SERV ICE COMPENSATION UNDER ANY SCHEME OF VOLUNTARY RETIREME NT. IN THE ABSENCE OF ANY CONTRARY MATERIAL BROUGHT ON RECORD, WE ARE OF THE VIEW THAT NO INTERFERENCE IS CALLED FOR IN THE MATTER. THE DEPARTMENTAL APPEAL STANDS DISMISSED. 6. IN THE RESULT, APPEAL OF THE DEPARTMENT IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (LP SAHU) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER DELHI, DATED 02 ND MAY, 2018 VBP/- 11 ITA.NO.114/DEL./2015 M/S. LUMAX AUTOMOTIVE SYSTEMS LTD., DELHI. COPY TO 1. THE APPLICANT 2. THE RESPONDENT 3. CIT(A) CONCERNED 4. CIT CONCERNED 5. D.R. ITAT D BENCH, DELHI 6. GUARD FILE. // BY ORDER // ASSISTANT REGISTRAR : ITAT DELHI BENCHES : DELHI.