Section 35DDA of ITA, 1961 : Section 35Dda: Amortisation Of Expenditure Incurred Under Voluntary Retirement Scheme

Explanation using Example

Imagine a company, XYZ Pvt. Ltd., decides to restructure its operations and reduce its workforce. It introduces a Voluntary Retirement Scheme (VRS) where employees can choose to retire early, and in return, they receive a lump sum payment. Let's say an employee opts for the VRS and is paid an amount of ₹500,000. According to Section 35DDA of the Income-tax Act, 1961, XYZ Pvt. Ltd. can claim a deduction of one-fifth of this amount (₹100,000) in the current financial year when the payment is made. The remaining ₹400,000 can be claimed in equal installments over the next four years (₹100,000 each year).

Now, if XYZ Pvt. Ltd. goes through an amalgamation with another company, ABC Ltd., before the four-year period is over, ABC Ltd. can continue to claim the remaining deductions in the subsequent years as if the amalgamation had not occurred.

Similarly, if XYZ Pvt. Ltd. demerges into two companies, the new company that takes over the business can claim the deductions in the remaining years.

Also, if XYZ Pvt. Ltd. reorganizes its business and a new company takes over through succession, the new company can avail of the deductions just like XYZ Pvt. Ltd. would have before the reorganization.

However, in the year of amalgamation, demerger, or succession, no deduction for the VRS expenditure will be allowed to the original company (XYZ Pvt. Ltd.).

Lastly, the deduction for VRS expenditure under Section 35DDA cannot be claimed under any other provisions of the Income-tax Act.