2015 (10) TMI 2307 - HC - Income Tax

Depreciation on the written down values of assets after including the gratuity liability taken over - ITAT allowed the claim - Held that - the question is no longer res integra since the point has already been decided in favour of the Revenue by the Supreme Court in the case of the assessee itself in the case of Commissioner of Income Tax vs. Hooghly Mills Co. Ltd. reported in (2006 (11) TMI 137 - SUPREME Court) wherein held 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, licences, 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. The matter needs re-consideration by Their Lordships. - Decided in favour of revenue as directed.

Summary

Issues:
- Whether depreciation can be allowed on the written down values of assets after including the gratuity liability taken over?
- Whether the consideration shown in the agreement is the real consideration unless liability towards payment of gratuity and leave salary is spread over the consideration shown?

Analysis:
1. Depreciation on Assets with Gratuity Liability:
The High Court considered the appeal challenging the Income Tax Appellate Tribunal's decision allowing depreciation on fixed assets acquired by the assessee, including gratuity and leave salary liability. The Tribunal directed the Assessing Officer to consider the present-day value of these liabilities as part of the asset cost for depreciation purposes. The Revenue appealed, questioning the Tribunal's decision. Mr. Agarwal argued citing a Supreme Court judgment that depreciation is only allowable on tangible and intangible assets specified in the Income-tax Act, excluding liabilities like gratuity. However, the Court acknowledged Mr. Khaitan's argument that the liability incurred for acquiring assets should be considered as part of the asset cost for depreciation.

2. Application of Supreme Court Judgment:
Mr. Khaitan highlighted differences in the agreement under consideration from the one in the Supreme Court case, emphasizing clauses related to assumed liabilities and apportionment of consideration. He contended that the liability on gratuity taken over by the purchaser became part of the consideration, warranting depreciation. The Court acknowledged the differences but noted that it is bound by the Supreme Court's views. However, it expressed the need for the matter to be reconsidered by the Supreme Court.

3. Liability as Consideration for Assets:
Mr. Khaitan argued that the liability assumed by the buyer for gratuity should be considered as part of the asset cost, as it was incurred for acquiring the assets. He referred to Section 43(2) regarding incurred liabilities. The Court agreed with the argument but stated that any re-consideration should be done by the Supreme Court.

In conclusion, the High Court allowed the appeal but expressed the need for the Supreme Court to re-examine the issue of allowing depreciation on assets considering liabilities like gratuity. The Court acknowledged the arguments regarding the nature of liabilities incurred for asset acquisition but emphasized its adherence to the Supreme Court's precedent.