Commissioner of Income Tax, Kolkata Vs. M/S. Hoogly Mills Co. Ltd  Insc
841 (22 November 2006)
S. B. Sinha
& Markandey Katju
J U DG
M E N T (Arising out of Special Leave Petition (Civil) No. 15520/2006)
MARKANDEY KATJU, J.
appeal by special leave has been filed against the impugned judgment of the
Calcutta High Court dated 26.6.2003 in ITA No.404 of 2000.
the learned counsel for the parties and perused the record.
respondent M/s. Hooghly Mills Co. Ltd. had by an agreement dated 24.3.1988 with
the vendor, purchased an Undertaking and by the same agreement had also taken
over the accrued and future gratuity liability of the vendor, which amounted to
Rs.3.5 crores. The respondent assessee claimed that since this amount of Rs.3.5
crores towards gratuity is capital expenditure hence it is entitled to
depreciation on the sum under Section 32 of the Income Tax Act.
CIT (Appeal) as well as the tribunal allowed the assessee's claim and their
orders were upheld by the High Court by the impugned judgment.
counsel for the appellant contended in this appeal that the expenditure on the
taking over the gratuity liability of the employees of the vendor is not
capital expenditure but revenue expenditure. He has referred to Section 4(1) of
the Payment of Gratuity Act, under which the liability of the employer to pay
gratuity to its employees accrues as soon as the concerned employee completes
five years' continuous service, and such gratuity is payable on superannuation
or retirement or resignation or death or disablement due to accident or
opinion, this submission of the learned counsel for the appellant suffers from
a fallacy. No doubt, qua the vendor, the gratuity liability is a revenue
expenditure, which is allowable as revenue expenditure in the year in which it
has accrued (if the assessee maintained its account on mercantile 271), etc.
However, qua the vendee the position would be different. In the present case,
in the agreement dated 24.3.1988 between the vendor (Fort Gloster Industries
Ltd.) and the assessee, it is mentioned that the vendor shall purchase the
Industrial Undertaking w.e.f. 26.3.1988 as a going concern for a price of Rs.2 crores
and shall also take over the gratuity liability. In clause 1(C) of the said
agreement it is stated:
The amount of consideration agreed to be paid by the purchaser to the vendor
shall be apportioned amongst the following heads:
in Lacs) (A) Land 5 (B) Buildings, structures, godowns sheds and all other constructions
and properties of immovable nature at the said premises 35 (C) Plant, Machinery
and other movables 160 200 In the same agreement it was also stated :
addition to the consideration as mentioned in 1(A), the accrued and future
gratuity liability of the taken over workers, junior and senior officers, on
their retirement or otherwise on termination of their services payable under
the Payment of Gratuity Act or otherwise including for the entire period of
service with the Vendor shall be on Purchaser's account and shall be met by the
Purchaser." Thus in the same agreement of sale of the Undertaking it was
not only mentioned that the vendee will pay to the vendor the sum of Rs.2 crores
as a consideration but in addition to it will also take over accrued and future
gratuity liability of the employees. It is well settled that an agreement has
to be read as a whole. Hence the consideration for the sale was not only Rs.2 crores
but in addition the gratuity liability of the vendor as well.
the entire amount of consideration is a capital expenditure because it is an
expenditure incurred for acquiring an asset of an enduring 205. Each case,
however, has to be determined on its own facts and no hard and fast rule can be
laid down therefor.
even if we reject the aforesaid submission of the learned counsel for the
Revenue (as we are inclined to do) and hold that the expenditure on taking over
the gratuity liability is a capital expenditure, yet in our opinion no
depreciation is allowable on the same because Section 32 of the Income Tax Act
states that depreciation is allowable only in respect of buildings, machinery,
plant or furniture, being tangible assets, and know- how patents, copyrights,
trade marks, licenses, franchises or other business or commercial rights of
similar nature being intangible assets.
gratuity liability taken over by the respondent does not fall under any of
those categories specified in Section 32. Hence, in our opinion, no
depreciation can be claimed in respect of the gratuity liability even if it is
regarded as capital expenditure. The gratuity liability is neither a building,
machinery, plant or furniture nor is an intangible asset of the kind mentioned
in Section 32(1)(ii). Hence, we fail to see how depreciation can be allowed on
the same. In fact, depreciation cannot even be allowed on land because that too
is not mentioned in Section 32.
be mentioned that in the present case, the agreement of sale, dated 24.3.1988
separately mentioned the price of the land, building and the machinery.
been a case where the agreement to sale mentioned the entire sale price without
separately mentioning the value of the land, building or machinery, we would
have remitted the matter to the tribunal to calculate the separate value of the
items mentioned in Section 32 and granted depreciation only on these items.
However, in the present case, the agreement itself mentioned the value of the
building, plant and machinery. Hence it is not necessary to remit the matter to
the tribunal in this case.
doubt, the word `plant' had been given the deeming meaning vide Section 43(3)
but even this deeming meaning does not include the gratuity liability. Hence,
in our opinion no depreciation can be granted on the gratuity liability taken
over by the respondent assessee.
result, this appeal has to be allowed. The impugned judgment of the High Court
as well as the Income Tax Authorities which have allowed depreciation on the
gratuity liability are set aside and it is directed that the assessee is not
entitled to any depreciation allowance on the gratuity liability nor on the
value of the land in respect of the concern purchase by it. The appeal is
allowed. No order as to costs.