Payment to ex-employees not eligible for tax deduction

Case Name:** The Commissioner of Income Tax vs. Cadbury India Ltd. **Key Takeaways:** 1. Payments made to ex-employees who opted for voluntary retirement are not eligible for deduction under the Income Tax Act. 2. However, the Assessee can claim deduction for such payments under a different provision of the Act, if the requirements are met. 3. The court upheld the Tribunal's decision to allow capital gains deduction on the sale of land, even though the building on the land had been depreciated. **Issue:** Whether the payments made by Cadbury India Ltd. to consultants and ex-employees were eligible for tax deductions. **Facts:** - Cadbury India Ltd. filed its income tax return for the assessment year 2001-02, declaring a total income of Rs. 78.82 crores. - The Assessing Officer observed that Cadbury had sold land and a building in Colaba for Rs. 8 crores and claimed capital gains exemption under Section 54EC. - The Assessing Officer disallowed certain deductions claimed by Cadbury, including payments to consultants and ex-employees. - Cadbury appealed the Assessing Officer's decision, and the matter reached the High Court. **Arguments:** - The Revenue argued that the Tribunal had failed to properly consider the Assessing Officer's reasons for disallowing the deductions. - Cadbury argued that the Tribunal's decision was in accordance with the law and should be upheld. **Key Legal Precedents:** - CIT v. Citibank (261 ITR 570): Allowed the bifurcation of land and building for the purpose of computing capital gains. - CIT v. Ace Builders (281 ITR 210): Held that the deeming fiction under Section 50 of the Income Tax Act is limited to the computation of capital gains under Sections 48 and 49, and does not convert a long-term capital asset into a short-term one. **Judgment:** - The High Court dismissed the Revenue's appeal, finding that the Tribunal's decision did not raise any substantial questions of law. - The court upheld the Tribunal's conclusion that the payment of Rs. 1.67 lakh to ex-employees who opted for voluntary retirement was not eligible for deduction under Section 35DDA. - However, the court agreed that the deduction could have been claimed under Section 37 of the Income Tax Act, as the Tribunal had allowed. - The court also upheld the Tribunal's decision to allow capital gains deduction on the sale of land, even though the building had been depreciated, based on the precedents cited. **FAQs:** Q: Why were the payments to ex-employees not eligible for deduction under Section 35DDA? A: The court found that the payments made to ex-employees who opted for voluntary retirement were not eligible for deduction under Section 35DDA of the Income Tax Act. However, the court noted that the deduction could have been claimed under Section 37 of the Act, which the Tribunal had allowed. Q: How did the court determine the treatment of capital gains on the sale of the land and building? A: The court relied on the precedents set in the CIT v. Citibank and CIT v. Ace Builders cases. These cases established that the bifurcation of land and building for the purpose of computing capital gains is permissible, and that the deeming fiction under Section 50 does not convert a long-term capital asset into a short-term one. Based on these principles, the court upheld the Tribunal's decision to allow capital gains deduction on the sale of the land. Q: What was the overall outcome of the case? A: The High Court dismissed the Revenue's appeal, finding that the Tribunal's decision did not raise any substantial questions of law. The court upheld the Tribunal's rulings on the deductibility of payments to consultants and ex-employees, as well as the computation of capital gains on the sale of the land and building.

1. Heard Mr.Sureshkumar appearing for the Revenue in support of this Appeal and Mr.Irani appearing for the Assessee. The order passed on 25 May 2012 in Income Tax Appeal No.975/Mum/2005 is subject matter of this Appeal.

2. According to Mr.Sureshkumar, four questions at paras 4(a) to (d) are substantial questions of law. He submits that the amount being meager or small should not prevent this Court from considering the questions, because they are indeed the substantial questions of law. He submits that on each one of them there were reasons assigned by the Assessing Officer and by the Commissioner. The Tribunal does not refer or deal with them. It comes to the conclusion and in relation to the question at page 4, which did not either approve or modify the view of the Assessing Officer and the Commissioner. It is this approach of the Tribunal, which raises the substantial questions of law.

3. For instance, our attention is invited by Mr.Sureshkumar to the claims covered by these grounds to submit that the Tribunal erred in holding that the Assessee is entitled to capital gain on sale of the property, in respect of which deprecation is claimed by the Assessee. In that regard, it is submitted that computation has not been done as has been noted by the Tribunal in para 8.4 of its order. The departmental representative had pointed out as to how the Commissioner was right in concluding that the bifurcation into two parts i.e. land and building is done only for the purposes of the Assessment Year in question namely 2001-02. Therefore, that was not permissible and the Tribunal should have considered as to whether the Commissioner was justified in the conclusion that he reached. Our attention is invited to the Commissioner's order in that regard.

4. Mr.Irani, appearing on behalf of the Assessee, on the other hand, submits that the questions as raised at page 4 cannot be termed as substantial questions of law. They have been answered in accordance with law laid by this Court and at least two decisions have been referred to by the Tribunal in that regard. Merely because the claim has been upheld and the benefit is given to the Assessee does not mean that this Court should entertain the Appeal. He, therefore, submits that the Appeal be dismissed.

5. After hearing both sides, what we have noted is that the return declaring total income of Rs.78,82,04,357/- was filed on 30 October 2001 alongwith copies of Balance Sheet, Profit & Loss account and Tax Audit Report under section 44AB. This return was processed and details regarding several aspects were called for. The Assessment was completed on 30 October 2001. The Assessing Officer observed that the Assessee had transferred land and building at Colaba for consideration of Rs.8 crores and the agreement in that regard has been referred to. The property was purchased in the year 1973. The Assessee computed Long Term Capital Gain separately in respect of land and in respect of building, treating the building as non depreciable asset. The capital gain claimed was exempted under section 54EC, as the Assessee has made investment in NABARD Bonds. The Assessing Officer observed that the land and the building was purchased as composite unit and the sale was also composite. In such circumstances, the bifurcation or segregation was made in Assessment Year 2001-02 and earlier years no bifurcation has been made by the Assessee. The bifurcation was made only in 2002 to claim benefit of deduction. The Assessing Officer, therefore, computed Short Term Capital Gain under section 50 of the Income Tax Act, 1961 and which came to Nil. With regard to the claim that the income has to be computed as generated from house property, the Assessing Officer held that the asset held by the Assessee as business asset, which was not let out and depreciation on which had been claimed. Therefore the order of the Assessing Officer resulted in disallowance of excess depreciation of Rs.80 lakhs. He also observed that there was no Capital Gain and hence no question of allowing deduction under section 54EC arises.

6. With regard to other claims and which are factual the basic facts are set out in paras 3 & 3.4 of the Paper Book.

7. With regard to all the questions and most of which emanate from ground No.12 before the First Appellate Authority, the Tribunal came to the conclusion that the payment of Rs.1.5 lakh and which has been made to the consultant in connection with framing of the scheme, Rs.96,450/- towards gifts and Rs.1,67,000/- towards incentive to ex-employees who opted for VRS, the deduction may have been claimed under section 34DDA of the Act. It is only a sum of Rs.96,450/- paid to employees at the time of Voluntary Retirement, which could be allowed as deduction under section 35DDA. The payment made to ex-employees is not eligible for deduction. Even other expenditure of Rs.1.5 lakh was not liable under section 35DDA. However, the deduction could have been claimed and allowed under section 37 of the Act only in the relevant year. Hence, merely invoking wrong provisions should not disentitle the Assessee from claiming the deduction if the same can be otherwise claimed and granted and with recourse to another provision in the Income Tax Act, 1961. In the present case, that was permitted and the reasons for the same as assigned in para 9.2 cannot be termed as vitiated by any error of law apparent on the face of the record. The Tribunal's approach also cannot be termed as perverse. We are of the view, therefore, that questions (a) & (b) cannot be said to be substantial questions of law.

8. With regard to questions (c) and (d), the Tribunal noted that the records would indicate that section 50 was invoked and ought to be applied, in case of depreciation asset the land does not fall within the same and therefore capital gain has to be computed in respect of land separately as long term capital gain. The bifurcation of land and building into separate part for the purpose of capital gain may have been done in the Assessment Year in question, but that was permissible and in that regard the Tribunal relied upon the judgment of this Court in the case of CIT v.s. Citibank (261 ITR 570), hence the bifurcation as made ought not result in total denial of the claim is the conclusion reached. The Tribunal has referred to relevant facts in paras 8.3 and 8.4. It found that the gain in respect of land portion has to be computed as long terms capital gain and the Assessee has invested this gain in NABARD bonds. Therefore, it would be entitled to deduction under Section 54EC of the Act. It would be so entitled in respect of short term capital gain under under section 50 in respect of building portion, if the same was held for more than three years. That is the conclusion reached relying on another judgment of this Court in the case of CIT v/s. Ace Builders (281 ITR 210). It is for the purpose of recomputing the capital gain, but in tune with this judgment that the matter was restored to the file of the Assessing Officer. We have perused both judgments, copies of which have been placed before us.

9. The Division Bench in the case of Ace Builders (supra) deals with the situation where there was a firm in which the Assessee was a partner. It was dissolved. The Assessee was allotted a flat against the balance standing to its credit in the capital account with the firm. That flat was shown as capital asset in the books of account and depreciation was claimed and allowed from year to year. In the previous year relevant to the assessment year 1992-93 that flat was sold and net sale proceeds were invested in `UTI capital gains scheme' with view to claim deduction. Nil income was declared under the head “income from capital gains” for the assessment year 1992-93. There also the Assessing Officer denied the relief and on identical grounds as are found in the present case. The Assessing Officer's exercise was upheld by the Commissioner. However, before the Tribunal, section 50 was considered and together with the deeming fiction. The Tribunal, therefore, allowed the exemption under section 54E, that has been upheld by this Court. The Division Bench held that there was nothing in section 50 to suggest that fiction created is not restricted in its application to sections 48 & 49, but to other provisions as well. Section itself makes it clear that the deeming fiction created in sub-sections 1 & 2 is restricted only to the mode of computation of capital gains contained in sections 48 & 49. In other words, section 50 does not convert a long term capital asset into short term capital asset. Once this is the view taken by the Division Bench of this Court and which has been followed by the Tribunal in the present case, then we are of the view that the Tribunal's order even with regard to questions (c) & (d) does not raise any substantial question of law.

10. Appeal is , thus, devoid of merits and is dismissed. No costs.

(A.A. SAYED, J.) (S.C.DHARMADHIKARI,J.)