Holding

The gratuity liability, though capital in nature, is not covered by the categories of assets specified in Section 32 and therefore cannot be depreciated.

Summary

The respondent, Hooghly Mills Co. Ltd., purchased an industrial undertaking from Fort Gloster Industries Ltd. and, under the sale agreement, assumed the vendor’s accrued and future gratuity liability of about Rs 3.5 crore. The assessee claimed depreciation on this amount under Section 32 of the Income Tax Act, arguing that the liability formed part of the capital consideration for the purchase. The Commissioner of Income Tax, the Income Tax Appellate Tribunal and the Calcutta High Court allowed the claim. On appeal, the Supreme Court examined whether the gratuity liability is a capital or revenue expenditure and whether it falls within the categories of assets eligible for depreciation under Section 32. The Court held that, although the liability is capital in nature for the purchaser, it does not qualify as a “building, machinery, plant, furniture or intangible business right” contemplated by Section 32, and therefore no depreciation can be allowed. Consequently, the Court set aside the earlier orders and allowed the appeal.

Issues considered

Whether the amount paid for taking over the vendor’s gratuity liability is a capital expenditure or a revenue expenditure.
Whether such gratuity liability, even if capital in nature, is eligible for depreciation under Section 32 of the Income Tax Act, 1961.

Legislation cited

Income Tax Act, 1961s. 32, s. 43(3)
Payment of Gratuity Act, 1972s. 4(1)

Subjects

depreciationcapital expendituregratuity liabilityIncome Tax ActSection 32purchase of undertakingtax assessmentrevenue vs capitalintangible assets

Judgment

-
COMMISSIONER OF INCOME TAX, KOLKATA A
v.
M/S. HOOGL Y MILLS CO. LTD.

NOVEMBER 22, 2006

[S.B. SINHA AND MARKANDEY KA TJU, JJ.] B

Income Tax Act, 1961-Section 32-Depreciation-On capital
expenditure-Purchase of an undertaking-Accrued and future gratuity
liability of the vendor also taken over by the purchaser-Claim for C
depreciation on the gratuity liability by the purchaser-assessee-Claim
allowed by Courts below-Plea of Revenue that the liability being a revenue
expenditure and not capital expenditure, not entitled to depreciation-In
appeal, held: The gratuity liability is a capital expenditure-Even it being
capital expenditure, assessee not entitled to depreciation, because the liability
does not fall under any of the categories mentioned in Section 32. D
Words and Phrases-'Plant'-Meaning of in the context of Section 43
(3) of Income tax Act, 1961.

Respondent-assessee vide an agreement purchased an Undertaking and
took over the accrued and future gratuity liability thereof. He claimed E
depreciation under Section 32 of Income tax Act on the gratuity liability as
the same was a capital expenditure. Commissioner of Income Tax (Appeals),
Tribunal as well as High Court allowed the claim of the assessee. In appeal to
this Court, appellant-Revenue contended that the liability being a revenue
expenditure and not capital expenditure, assessee was not entitled to the F
depreciation.

Allowing the appeal, the Court

HELD: I. It cannot be said that the expenditure on the taking over the
gratuity liability of the employees of the vendor is not capital expenditure but G
revenue expenditure. 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
basis). However, qua the vendee the position would be different. Jn the present
case, in the agreement between the vendor and the assessee, it is mentioned
265 II
266 SUPREME COURT REPORTS [2006] SUPP. 9 S.C.R.

A that the vendor shall purchase the Industrial Undertaking as a going concern
for a price of Rs.2 crores and shall also take over the gratuity liability. 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. Thus the entire amount of consideration is a
B capital expenditure because it is an expenditure incurred for acquiring an
asset of an enduring nature. 1267-F-H; 268-A-B; G-H; 269-AI

Metal Books Co. ofIndia v. Workmen, 73 ITR 53 62-67 and Bharat Earth
v. CIT, 245 ITR 428; Sassoon David v. CIT, 118 ITR 271, referred to.

Altherton v. British and Helsbury Employees ltd., (1926) Ac 205,
C referred to.
2. However, even if it is held that the expenditure on taking over the
gratuity liability is a capital expenditure, yet no depreciation is allowable on·
the same because Section 32 of the Income Tax Act,states that depreciation
D 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. The gratuity liability taken over by the respondent does
not fall under any of those categories specified in ·section 32 oflncome Tax
Act. Hence no depreciation can be claimed in respect of the gratuity liability
E even if it is regarded as capital expenditure. In fact, depreciation cannot ev.en
be allowed on land because that too is not mentioned in Section 32. (269-B-EI

3. In the present case, the agreement of sale, separately mentioned the
price of the land, building and the machinery. Had it been a case where the
agreement to sale mentioned the entire sale price without separately
F mentioning the value of the land, building or machinery, the .matter could have
been remitted 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 .
G to the Tribunal in this case. 1269-E-GJ

4. 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, no depreciation can be granted on the gratuity liability taken over by .
the respondent assessee. [269-G-H)
H
..... COMMNR. OF INCOME TAX, KOLKATA '" HOOGLY MILLS CO. LTD. [MAR.KANDEY KA TJU, J] 267

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5149 of2006. A

... From the Judgment and Order dated 26-6-2003 of the High Court of
Calcutta in l.T. Appeal No. 404/2000.

K.P. Pathak. A.S.G., Chidananda D.L., B.V. Balaram Das, Gaurav Dhingra
and Navaneet Baruah for the Appellant. B
Jaideep Gupta, Dipak Kumar Jena, Minakshi Jena, Pabitra Biswas and
Indra Sawhney for the Respondent.

The Judgment of the Court was delivered by
c
MARKANDEY KATJU, J. Leave granted.

This appeal by special leave has been filed against the impugned
judgment of the Calcutta High Court dated 26.6.2003 in ITA No. 404 of2000.

Heard the learned counsel for the parties and perused the record. D
The respondent Mis. 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 E
hence it is entitled to depreciation on the sum under Section 32 of the Income
Tax Act.

The 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.
F
Learned 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 G
payable on superannuation or retirement or resignation or death or disablement
due to accident or disease.

In our opinion, this submission of the learned counsel for the appellant
suffers from a fallacy. No doubt, qua the vendor, the gratuity liability is a H
268 SUPREME COURT REPORTS [2006] SUPP. 9 S.C.R.

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
basis) vide Metal Books Co. ofIndia v. Workmen, (73 ITR 53 [62-67]), Bharat
Earth v. CIT(245 ITR428), Sassoon Davidv. CIT, (118 ITR271), 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.)
B 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.7 crores and
shall also take over the gratuity liability. In clause l(C) of the said agreement
it is stated :

"(C) The amount of consideration agreed to be paid by the purchaser
c to the vendor shall be apportioned amongst the following heads :

(Rs. in Lacs)

(A) Land 5
(B) Buildings, structures, godowns sheds and all
D other constructions and properties of
immovable nature at the said premises 35
(C) Plant, Machinery and other movables 160
200
E In the same agreement it was also stated :

"In addition to the consideration as mentioned in l(A), the accrued
and future gratuity tiability of the taken over workers, junior and
senior officers, on their retirement or otherwise on tennination of their
services payable under the Payment of Gratuity Act or otherwise
F 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
G 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.

Thus the entire amount of consideration is a capital expenditure because
H
COMMNR. OF INCOME TAX. KOLKATA 1•. HOOGLY MILLS CO. LTD. [~t>\RKANDEY KATJU, J.] 269

it is an expenditure incurred for acquiring an asset of an enduring nature, vide A
Altherton v. British and Helsbury Employees Ltd., (1926) AC 205. Each case,
however, has to be determined on its own facts and no hard and fast rule can
be laid down therefor.

However, 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 B
on taking over the gratuity liability is a c~pital 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 C
rights of similar nature being intangible assets.

The 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, D
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 Sectio'n 32.

It may be mentioned that in the present case, the agreement of sale, E
dated 24.3.1988 separately mentioned the price of the land, building and the
machinery.

Had it 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 F
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.
G
No 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.

As a result, this appeal has to be allowed. The impugned judgment of H
270 SUPREME COURT REPORTS [2006] SUPP. 9 S.C.R.

A 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.

B KKT. Appeal allowed.