2006 (11) TMI 137 - SC - Income Tax

Respondent under an agreement with the vendor, purchased an undertaking and had also taken over the accrued and future gratuity liability of the vendor - assessee claimed that since this amount of ₹ 3.5 crores towards gratuity is capital expenditure hence it is entitled to depreciation on the sum u/s 32 - 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

Summary

Issues:
1. Whether the expenditure on taking over gratuity liability is capital or revenue expenditure.
2. Whether depreciation is allowable on the gratuity liability under section 32 of the Income-tax Act.

Analysis:
1. The first issue revolves around determining the nature of the expenditure incurred in taking over gratuity liability. The appellant argued that it should be considered revenue expenditure, citing the Payment of Gratuity Act. However, the court disagreed, stating that the entire consideration for the sale, including the gratuity liability, constitutes a capital expenditure. The court emphasized that each case must be assessed based on its specific facts, and in this case, the expenditure was for acquiring an enduring asset, making it capital in nature.

2. Moving on to the second issue, the court addressed the question of whether depreciation could be claimed on the gratuity liability under section 32 of the Income-tax Act. The court clarified that depreciation is only allowable on tangible and specific intangible assets listed in the Act. Since gratuity liability does not fall under any of these categories, depreciation cannot be claimed on it. The court highlighted that even land, which is not mentioned in section 32, cannot be depreciated. The court further explained that the agreement of sale in this case separately mentioned the values of land, building, and machinery, making it unnecessary to remit the matter to calculate depreciation separately.

In conclusion, the court allowed the appeal, setting aside the judgments that allowed depreciation on the gratuity liability. It was directed that the assessee is not entitled to any depreciation allowance on the gratuity liability or the value of the land regarding the purchased concern. The court emphasized that depreciation is only applicable to specific assets listed in the Income-tax Act, and gratuity liability does not qualify for depreciation under section 32.