Expenditure incurred in giving VRS to employees held revenue expenditure, HC.

1.  The assessee was, inter alia, engaged in the business of manufacturing electrical equipments. It claimed that it had large number of surplus employees which was affecting its economical day-to-day working and causing financial hardship and as a result, the assessee framed a Voluntary Retirement Scheme giving an option to its employees to seek voluntary retirement. 

2.  The VRS Scheme was duly approved by the Director General of Income-tax (Investigation) under section 10(10C) and rule 2BA of the Income-tax Rules, 1962. In terms of the said VRS Scheme, the appellant incurred an expenditure of Rs. 3,38,09,825 during the relevant previous year and the said sum was claimed as a revenue expenditure. 

3.  The Assessing Officer in course of the assessment proceedings obtained full details of the said expenditure incurred on account of VRS and after considering all the facts and circumstances, allowed deduction for the same. Subsequently, the Commissioner passed a revisional order under section 263 on ground that the Assessing Officer was bound by the Circular dated 23-1-2001 issued by the Board as to the eligibility of deduction of such payment on account of VRS and he should not have allowed such payment. 

4.  On appeal, the Tribunal upheld the impugned revisional order holding that the Assessing Officer was duty bound to follow the instruction of the CBDT and non-compliance of such instructions amounted to dereliction of duty and subordination.

On appeal HC held as under :

5.  In order to appreciate the question involved in instant appeal, it was necessary to consider the scope of section 119. 

6.  On a plain reading of the provision of section 119, it is clear that the circular issued by the Board under the aforesaid provision is meant for guiding the officers of the revenue for administrative purpose of enforcing the provisions of the Act. But when an authority under the Act is required to perform quasi-judicial functions, such authorities should be guided by the law of the land as enunciated by various judicial authorities which has binding effect. 

7.  If an existing circular is in conflict with the law of the land laid down by the High Courts or the Supreme Court, the revenue authorities, while acting quasi-judicially, should ignore such circulars in discharge of their quasi-judicial functions. 

8.  Applying the aforesaid principles to the facts of the case, it was found that the sole reason for invocation of section 263 was a circular dated 23-1-2001 issued in terms of section 119. The outcome of the original order of assessment was in tune with the Division Bench decisions of this Court in the cases of CIT v. Machinery Mfg. Ltd. [1992] 198 ITR 559 /[1993] 66 Taxman 143 and Grindlays Bank P.L.C. v. CIT [1993] 201 ITR 148 where the Division Bench in the former case held that the payment of compensation to induce the workmen to retire prematurely was an item of expenditure incurred by the company on the ground of commercial expediency in order to facilitate the carrying on of business and it was a revenue expenditure and allowable deduction and in the latter case, it was held that the entire initial contribution to staff pension fund in respect of past services of its members was deductible. 

9.  Thus, the Commissioner simply by taking aid of a circular which says that ex gratia payment made for gaining enduring benefit of VRS should be prima facie  treated as capital expenditure sought to reopen the assessment by invoking section 263 notwithstanding the fact that the said circular was in conflict with the view of this High Court which was binding upon the Assessing Officer. 

10.  It was, therefore, found that the authorities below committed substantial error of law in approving the reopening of the assessment on the basis of the circular in question and, thus, the order of the Tribunal and the order passed under section 263 were to be set aside.