INCOME TAX

Admissibility of ex-gratia amount paid by assessees for gaining enduring benefit or advantage under Volun- tary Retirement Scheme (VRS)—regarding

Circular No. NIL

Dated 23/1/2001

To

All Chief Commissioners of Income-tax.

All Directors-General of Income-tax.

Subject : Admissibility of ex-gratia amount paid by assessees for gaining enduring benefit or advantage under Volun- tary Retirement Scheme (VRS)—regarding

Sir,

It is noticed that a number of assessees have resorted to restructuring of human resources, financial engineering, etc. Invariably, ex-gratia payments are made in order to encourage such schemes to further long-term advantage to the assessee by way of profitability, competitiveness and also to further induction of technology. Particular mention may be made of the Voluntary Retirement Schemes (VRS) of the banking sector in this connection. The question arises whether the ex-gratia amount is allowable as revenue expenditure. In this connection, the primary test is to see whether any enduring benefit has resulted to the assessees by making an expenditure. In the event, the expenditure is laid out for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. If any such asset or advantage for enduring benefit of the business is thus acquired or brought into existence, it would be immaterial whether the source of payment was the capital or the income of the concern or whether payment was made once and for all or was made in instalments. While it is not ordinarily easy to evolve a fool-proof test for ascertaining whether in a given case, expenditure is capital or revenue, the Assessing Officers normally decide the character of expenditure on the facts and circumstances of each case. They consider the nature and the ordinary course of business and the objects for which the expenditure has been laid out. Towards this purpose, the test of enduring benefit is a useful tool in considering the ex-gratia amount, prima facie, as a capital expenditure. In this view of the matter, the expenditure, as said above, is to be treated as capital expenditure.

This may be brought to the notice of all concerned.

Yours faithfully,

(Sd.) Samar Bhadra,

Under Secretary to the Government of India.

[F. No. 200/79/2000-ITA-I]