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CASE NO.: Appeal (civil)  5149 of 2006

PETITIONER: Commissioner of Income Tax, Kolkata

RESPONDENT: M/s. Hoogly Mills Co. Ltd

DATE OF JUDGMENT: 22/11/2006

BENCH: S. B. Sinha & Markandey Katju

JUDGMENT: J U DG M E N T (Arising out of Special Leave Petition (Civil) No. 15520/2006)

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 of  2000.          Heard the learned counsel for the parties and perused the record.

       The 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.

       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 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  basis) vide Metal Books Co. of India Vs. Workmen (73 ITR 53 [62-67]),  Bharat Earth Vs. CIT (245 ITR 428), Sassoon David Vs. CIT (118 ITR  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 :

"(C)    The amount of consideration agreed to be paid by

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the purchaser to the vendor shall be apportioned amongst  the following heads :

                                                       (Rs. 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 :

       "In 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.

       Thus the entire amount of consideration is a capital expenditure  because it is an expenditure incurred for acquiring an asset of an enduring  nature, vide Altherton Vs. 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 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 in the present case, the agreement of sale,  dated 24.3.1988 separately mentioned the price of the land, building and the  machinery.

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       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  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.

       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  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.