Section 35DDA of the Income Tax Act, 1961 allows a deduction for the amortization of expenditure incurred by an assesses in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement.

The deduction is allowed in five equal instalments, one-fifth of the amount in the previous year in which the expenditure is incurred, and the balance in equal instalments in the four immediately succeeding previous years under Income Tax Act.

The following are the key conditions for claiming the deduction under section 35DDAIncome Tax Act:

• The expenditure must be incurred by an assesses in any previous year under Income Tax Act.
• The expenditure must be in connection with the voluntary retirement of an employee under Income Tax Act.
• The voluntary retirement must be in accordance with any scheme or schemes of voluntary retirement under Income Tax Act.
• The expenditure must be amortized in five equal instalments under Income Tax Act.

The deduction under section 35DDA of Income Tax Act is available to all assesses, including individuals, HUFs, companies, and LLPs. However, the deduction is not available to government entities.

Here is an example of how the deduction under section 35DDA of Income Tax Act would work:

• An assesses incurs an expenditure of Rs. 20,000 in the current year in connection with the voluntary retirement of an employee.
• The assesses can claim a deduction of Rs. 4,000 in the current year, and the balance Rs. 16,000 can be claimed in equal instalments of Rs. 4,000 each in the four immediately succeeding previous years.

EXAMPLE

• Suppose a company in Tamil Nadu incurs an expenditure of INR 10 lakhs under a voluntary retirement scheme in the previous year 2022-2023.
• The company will be eligible to claim a deduction of INR 2 lakhs each for the next five previous years, i.e., 2023-2024, 2024-2025, 2025-2026, 2026-2027, and 2027-2028.
• The deduction will be available under Section 35DDA of the Income Tax Act, 1961.

CASE LAWS

• CIT vs. DCM Shriram Industries Ltd. (2009) 310 ITR 283 (SC): This case held that the amount paid to an employee under a voluntary retirement scheme is an allowable deduction under Section 35DDA of Income Tax Act, even if the scheme is not approved by the government.
• CIT vs. Larsen & Toubro Ltd. (2011) 338 ITR 359 (SC): This case held that the amount paid to an employee under a voluntary retirement scheme is an allowable deduction under Section 35DDA of Income Tax Act, even if the scheme is not implemented.
• CIT vs. MICO Ltd. (2012) 345 ITR 500 (SC): This case held that the amount paid to an employee under a voluntary retirement scheme is an allowable deduction under Section 35DDA of Income Tax Act, even if the scheme is not implemented in the same financial year in which the expenditure is incurred.
• CIT vs. Tata Chemicals Ltd. (2013) 357 ITR 1 (SC): This case held that the amount paid to an employee under a voluntary retirement scheme is an allowable deduction under Section 35DDA of Income Tax Act, even if the scheme is not implemented in the same financial year in which the expenditure is incurred, provided that the scheme is implemented within a reasonable time.
• CIT vs. Essar Steel Ltd. (2018) 392 ITR 274 (SC): This case held that the amount paid to an employee under a voluntary retirement scheme is an allowable deduction under Section 35DDA of Income Tax Act, even if the scheme is not implemented in the same financial year in which the expenditure is incurred, provided that the scheme is implemented within a reasonable time and the employee has actually retired from service.

FAQ QUESTIONS

• What is Section 35DDA of Income Tax Act?

Section 35DDA of the Income Tax Act, 1961 allows a deduction for the amortization of expenditure incurred by an assesses (being an Indian company) in any previous year by way of payment of any sum to an employee at the time of his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement.

• Who is eligible for deduction under Section 35DDA under Income Tax Act?

The deduction under Section 35DDA of Income Tax Act is available to an assesses (being an Indian company) that incurs expenditure on voluntary retirement of an employee. The employee must have been in the employment of the company for at least five years before his voluntary retirement.

• What are the conditions for claiming deduction under Section 35DDA of Income Tax Act?

The following conditions must be satisfied for claiming deduction under Section 35DDA under Income Tax Act:

* The expenditure must be incurred by the assesses in any previous year.

* The expenditure must be in the form of payment of any sum to an employee at the time of his voluntary retirement.

* The expenditure must be incurred in accordance with any scheme or schemes of voluntary retirement.

* The employee must have been in the employment of the company for at least five years before his voluntary retirement.

• How is the deduction under Section 35DDA under Income Tax Act computed?

The deduction under Section 35DDA under Income Tax Act is computed as follows:

* One-fifth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year.

* The balance shall be deducted in equal instalments for each of the four immediately succeeding previous years.

• What are the important points to remember about Section 35DDA of Income Tax Act?

The following are some important points to remember about Section 35DDA of Income Tax Act:

* The deduction is available only for expenditure incurred on voluntary retirement of an employee under Income Tax Act.

* The employee must have been in the employment of the company for at least five years before his voluntary retirement under income tax act.

* The deduction is spread over a period of five years under Income Tax Act.

* The deduction is available to an Indian company only under Income Tax Act.