There are basically two angles to a VRS. Firstly, there is the issue ofexemption of amounts received in the hands of employees. Secondly, there isthe issue of the allowability of deduction in the hands of the employer.

As far as the treatment in the hands of employees is concerned, an exemptionhas been provided under Section 10(10C), in respect of any amounts receivedby an employee of certain entities (inter-alia, payments by proprietorshipsand partnership firms are excluded) at the time of his voluntary retirement,if it is in accordance with any scheme or schemes of voluntary retirement,to the extent that such amount does not exceed Rs 5,00,000. However, suchVRS should be framed in accordance with prescribed guidelines and should beapproved by the chief commissioner or the director general of income-tax.

This exemption is available only once in a life time.

Rule 2BA lays down the parameters prescribed for the claiming of anexemption under a VRS. In respect of the concerned entities, the exemptionunder Section 10(10C) would be available provided the scheme covers thefollowing requirements:

(i) The employee must have completed 10 years of service or 40 years ofage;
(ii) Directors of a company or a co-operative society are excluded from thebenefit, but otherwise it should apply to all employees, including workersand executives of the concerned entities;
(iii) The VRS should have been drawn to result in overall reduction in theexisting strength of the employees; (iv) The vacancy caused by the voluntaryretirement should not be filled up;
(v) The retiring employee of a company should not be employed in anothercompany or concern belonging to the same management; and
(vi) The amount receivable under the VRS should not exceed the amountequivalent to three months' salary for each completed year of service orsalary at the time of retirement multiplied by the balance months of serviceleft before the date of the employee's retirement on superannuation.

The other facet of the issue is the allowability of the deduction in thehands of the concerned entity.

Under Section 40A(7)(a), no deduction is to be allowed in respect of anyprovision (whether called as such or by any other name) made by the assesseefor the payment of gratuity to his employees on their retirement or ontermination of their employment for any reason. However, under Section40A(7)(b), `this prohibition does not apply in relation to any provisionmade by the assessee for the purpose of payment of a sum by way of anycontribution towards an approved gratuity fund or for the purpose of paymentof any gratuity that has become payable during the previous year.

Since under Section 40A(7)(a), any provision for payment of gratuity onretirement or on termination is not allowable, there is a genuine doubt howthe employer would get the benefit of deduction of a payment under a VRSsince there can be no doubt that in the broader sense of the term, thepayment under a VRS is nothing but a payment of gratuity.

It is doubtful whether a scheme for voluntary retirement could be consideredas an approved gratuity fund for the purpose of Section 40A(7)(b) in orderto get the benefit of allowability of the deduction on payment to the fund.But if the gratuity has become payable and also been paid in the same year,it would be an allowable deduction even though not paid through an approvedgratuity fund.

There is a third facet to the question. Under Section 43B of the Act,inter-alia, any sum payable by the assessee as an employer by way ofcontribution to any provident fund or superannuation fund or gratuity fundor any other fund for the welfare of employees is to be allowed only in theyear of actual payment. Further, there is a specific restriction that suchamounts payable to funds should be paid within the concerned due date forpayment.

However, tribunals have interpreted this restrictive clause as meaning thatas long as the payment is made during the financial year in which theliability arises, the amount will be allowable.

It is clear that the provisions of Section 43B for allowability of paymentis not applicable to a VRS. Because under a VRS there is not necessarily a"contribution to a fund." The payment under a VRS, though under a scheme,does not necessarily mean that it should be through a fund. The paymentcould be directly by the employer to the employee.

This means that the restrictive covenant and/or the benefits of Section 43Bwould not be available in respect of a scheme where the payment is madedirectly to the employees.

It is difficult to envisage that because of the restrictive covenant ofSection 40A(7)(a) of the Act, the payment made under a VRS, whetherrecognised or otherwise, would not be considered to be an availablededuction. The only way to interpret these provisions so that they do notproduce an untended disallowance is to assume that it is only a provisionwhich is disallowable.

An actual payment, if made under a scheme, would not be a subject matter ofdisallowance. Even where the assessee is following the mercantile basis ofaccounting, the provision in the accounts coupled with the payments in thesame financial year should give the benefit of allowability of deduction tothe concerned employer. This is clear from the provisions of Section40A(7)(b).

The only other question which arises is whether if a scheme is made out inone financial year and the provision has been made in the accounts for thatfinancial year, but the payment itself is made, say, in the next financialyear, would the benefit of deduction be available in respect of the paymentmade in the next year?

There seems to be a genuine doubt on this issue and, therefore, it isnecessary that the payment should be made during the time that the scheme isopen and not deferred to another year. In any event, usually, payments underVRS are made only while the scheme is in vogue. Thus, the disallowabilityof such amounts would be difficult for the assessing officer to sustain.

However, it would be useful if a clarification is forthcoming either by wayof an amendment of the Act or by way of a circular from the CBDT on thisissue.

The author is a Mumbai-based chartered accountant