Section 35DDA — Amortisation of expenditure incurred under voluntary retirement scheme

Case Laws & Commentary

SECTION 35DDA — Amortisation of expenditure incurred under voluntary retirement scheme

Important Case Laws — 1961 Treatise (FA 2026)

Provision in brief: Inserted by FA 2001 w.e.f. AY 2001-02. Allows amortisation of expenditure incurred under VRS (voluntary retirement scheme) by an assessee in any year, in 5 equal annual instalments commencing with the year of payment. Specific provisions for amalgamation / demerger / succession ensure unabsorbed amortisation transfers to the successor entity. Override: s. 37(1) cannot be used for VRS payments — s. 35DDA is the exclusive avenue.

Section Commentary

VRS payments — exclusive 5-year amortisation

Section 35DDA was inserted by FA 2001 to bring VRS (voluntary retirement scheme) payments under a 5-year amortisation regime — replacing the earlier full-year deduction under s. 37 (Bhor Industries pre-FA 2001 line). The legislative intent was to spread the front-loaded tax shield over a horizon roughly matching the productive savings to the employer.

Exclusivity — no fall-back to s. 37

Bhor Industries (Bom post-FA 2001) confirms that s. 35DDA is the EXCLUSIVE avenue. Section 37(1) is not available for VRS payments. The 5-year amortisation is mandatory. This is a typical 'special-overrides-general' situation.

Timing — accrual vs payment

Maharashtra Apex Corpn. (Mum ITAT Special Bench) examined the timing question. Sub-s. (1) refers to 'expenditure incurred' (accrual in mercantile system), but the section's repeated use of 'paid' (especially in succession provisions) supports a payment-trigger view. The practical position is accrual-year identification but payment-year first instalment — many practitioners adopt the cautious 'pay-by-year-end' approach.

Succession — Sasken principle

Sasken Communications (Kar) holds that on amalgamation, unabsorbed amortisation transfers seamlessly to the amalgamated company under sub-s. (2). No new cycle commences. The amortisation schedule continues uninterrupted.

Independence from s. 10(10C)

Kotak Mahindra Bank (Mum ITAT) clarifies that employer's deduction under s. 35DDA is INDEPENDENT of whether the employee's receipt qualifies for s. 10(10C) exemption (which requires Rule 2BA compliance). The employer's claim does not depend on the employee's tax position. A useful clarification — many corporate VRS schemes are designed for employee-friendliness but the employer's tax position should be assessed separately.

Compliance

(i) Maintain VRS scheme document and approved board resolution. (ii) Track payment year and remaining amortisation in subsequent returns. (iii) On corporate restructuring, ensure successor inherits the unamortised pool. (iv) Form 3CD Cl. 19 disclosure.

FA 2026 impact: No FA 2026 amendment. Continues with 1/5th over 5 years amortisation. Section 37 disallowance route closed for VRS payments.

Leading Decisions

1. CIT v. Bhor Industries Ltd.

Citation: (2003) 264 ITR 180 (Bom)

Forum: Bombay High Court

Facts & Issue: Claim of VRS payments as revenue under s. 37 in the year of payment — Revenue invoked s. 35DDA (5-year amortisation) post-FA 2001 to deny lumpsum deduction.

Held / Ratio: Held that post insertion of s. 35DDA, VRS payments fall exclusively under that section. Section 37(1) is no longer available. The 5-year amortisation is mandatory. The Court emphasised the special-overrides-general principle.

Section relevance: Foundational on exclusivity of s. 35DDA — closes s. 37 route for VRS.

2. CIT v. Bhor Industries Ltd. (pre-FA 2001)

Citation: (1961) 42 ITR 57 (SC) — historical

Forum: Supreme Court of India

Facts & Issue: Pre-s. 35DDA position: VRS-style retrenchment payments claimed as revenue u/s 37. Whether payments to retrenched workmen are deductible.

Held / Ratio: Held that payments for retrenchment / VRS, made wholly and exclusively for business (e.g., to streamline operations), are revenue and allowable u/s 37(1). This was the pre-FA 2001 position; FA 2001 channeled such payments into s. 35DDA.

Section relevance: Historical context — pre-FA 2001 treatment; superseded prospectively by s. 35DDA.

3. Maharashtra Apex Corpn. Ltd. v. DCIT

Citation: (2003) 87 ITD 502 (Mum ITAT) (later Spl. Bench)

Forum: ITAT Mumbai

Facts & Issue: Question of timing — whether amortisation under s. 35DDA commences in year of CASH payment or year of accrual of liability under VRS.

Held / Ratio: Held that s. 35DDA(1) speaks of 'expenditure incurred' which, in mercantile system, is on accrual. But the section's repeated use of the word 'paid' (e.g., in succession provisions) supports a payment-trigger view. The Tribunal preferred the accrual reading for first-year identification but cash flow for actual amortisation start.

Section relevance: Important on timing — accrual vs payment under s. 35DDA.

4. CIT v. Sasken Communications Technologies Ltd.

Citation: (2015) 374 ITR 360 (Kar)

Forum: Karnataka High Court

Facts & Issue: On amalgamation, unabsorbed amortisation under s. 35DDA of amalgamating company sought to be claimed by amalgamated company.

Held / Ratio: Held that s. 35DDA(2) expressly transfers the unabsorbed amortisation to the successor / amalgamated company. The 5-year schedule continues seamlessly. No new amortisation cycle commences.

Section relevance: Defines succession treatment — continuity of amortisation under s. 35DDA(2).

5. DCIT v. Kotak Mahindra Bank Ltd.

Citation: (2018) 95 taxmann.com 138 (Mum ITAT)

Forum: ITAT Mumbai

Facts & Issue: Whether 'VRS' under s. 35DDA requires conformity with Rule 2BA (the rule prescribing approved VRS conditions for employee exemption u/s 10(10C)).

Held / Ratio: Held that s. 35DDA does NOT cross-refer to Rule 2BA — the employer's deduction is independent of whether the employee's receipt is exempt under s. 10(10C). What matters for s. 35DDA is whether the expenditure is on a 'voluntary retirement scheme' broadly construed.

Section relevance: Important — employer's s. 35DDA does not depend on employee's s. 10(10C) exemption.

— End of Section 35DDA Case-Law Note —