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TMI Blog2018 (3) TMI 377X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is a private limited company engaged in the business of manufacturing and trading of jute goods. The assessee filed its return of income for the Asst Year 2011-12 declaring total income of Rs. 12,96,632/- . The assessee during the financial year 1994-95 pursuant to an agreement and award took over the land, factory building, godowns, plant and machinery and other movables at an agreed consideration from M/s Gajanand Commercial (P) Ltd , owner of Megna Jute Mills, as a going concern. As per the terms of the agreement and award the statutory liabilities on account of salary, wages, gratuity, PF, bonus etc were also taken over and to be paid and settled by the assessee in addition to the agreed and stated consideration. The assessee during the year capitalized all such liabilities paid and settled till 31.3.2011 pertaining to the period prior to take over to various fixed assets and claimed depreciation by treating the same as part of cost of acquisition and / or actual cost. 3.1. During the course of hearing, it was observed by the assessee from Annexure - A of Tax Audit Report, that the assessee had made addition on factory and non-factory building, plant & machinery an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant, machinery, equipments and other movables was fixed at Rs. 4.10 crores, out of which Rs. 3.90 crores was to be retained by M/s Padam Mercantiles (P) Ltd. for payment on account of salary, wages, gratuity, bonus and STL for the period up to March 15, 1994 and the balance amount of Rs. 20 lakhs was to be paid to M/s Gajanand Commercial (P) Ltd. which was duly compiled by. iv) In respect of the sale of land, building and other structures, the sale consideration was fixed at Rs. 90 lakhs which was paid in full by M/s Padam Mercantiles (P) Ltd.. As mentioned above, the assessee paid the entire liability of salary, wages, bonus etc. on behalf of M/s Gajanand Commercial (P) Ltd. but found that the actual liability was much more than what was mentioned in the Agreement/Award. The liability compromised of payment towards gratuity, employees P.F. and other statutory dues and the total payment made by the assessee as on 31st March, 2010 stood at Rs. 463.34 lakhs and after giving effect to the realization of Rs. 200.28 lakhs, an amount of Rs. 263.06 lakhs is outstanding in the name of M/s Padam Mercantiles (P) Ltd. which has been debited as advance receivable from M/s Gajanand Commercia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en included in the cost of undertaking as consideration thereof. However, instead of liabilities being paid by the vendor, the same had been paid and discharged by the assessee with no question of any recovery from the vendor. Thus, it became the part of cost of acquisition of the said jute mill and such expenses were rightly apportioned by assessee in respective fixed assets in proportionate to their values. The assessee placed reliance on the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs Hooghly Mills Co Ltd reported in 266 ITR 257 (Cal) wherein the question raised before the Hon'ble High Court was as under:- "Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in directing to recompute the cost of assets treating the gratuity liability as part of the actual cost of assets and allow depreciation accordingly." The Hon'ble Calcutta High Court affirming the order of this tribunal which treated the same as part of cost of acquisition and allowed depreciation thereon observed as under:- "The payment of gratuity to these employees till the date of transfer was deferred by reason of the terms of the agreement and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent 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. 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. 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 payable on superannuation or retirement or resignation or death or disablement due to accident or disease. In our opinion, this submission of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore. 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 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. 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, 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. It may be mentioned that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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