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2022 (2) TMI 439 - HC - Income TaxAmortisation of expenditure incurred under voluntary retirement scheme - Disallowance for deduction under the Voluntary Retirement Scheme u/s 35DDA - Whether the allowance for deduction under the Voluntary Retirement Scheme is to be made on the basis of 1/5th of the liability for the payment of Voluntary Retirement Scheme incurred under the mercantile system of accounting or is to be allowed on the basis of 1/5th of the actual payment made during the relevant year? - HELD THAT:- Having heard learned counsel for the partiers, this Court is of the view that the ITAT erred in treating the liability under the VRS scheme not as an accrued one but in proceeding on the basis that only the amount actually paid during the AY in question can be allowed. The definition of ‘paid’ under Section 43(2) of the Act contemplates an ‘accrued liability’. There is no dispute that the Appellant follows the accrual method of accounting. There is also no dispute regarding the actual amount that was incurred as liability by the assessee under the VRS scheme. As equally erroneous on the part of the CIT (A) to treat the expenditure towards the aforementioned liability as ‘capital expenditure’. There is no warrant for such a conclusion. It was not even the Department’s case that liability incurred for settling VRS dues would be ‘capital’ in nature. It needs to be borne in mind that the Assessee follows the mercantile accounting system and not the cash system and that its income is assessed under the head ‘profits and gains and business of profession.’ Question framed by this Court is answered in favour of the Assessee and against the Department by holding that allowance and deduction under the VRS scheme are to be based on the entire accrued liability incurred and not just of the amount actually paid during the relevant AY.
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