2018 (3) TMI 377 - AT - Income Tax

Depreciation - Determination of cost of plant and machinery - inclusion of payment on account of liability for gratuity, PF, bonus and other statutory liabilities - payment was made on behalf of the vendor - Held that - Since this issue is settled by the decision of the Hon ble Supreme Court in CIT vs Hooghly Mills Co. Ltd 2006 (11) TMI 137 - SUPREME Court as held 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. No depreciation can be granted on the gratuity liability taken over by the respondent assessee. Decided in favor of revenue.

Summary

Issues Involved:
1. Whether the payment on account of liability for gratuity, PF, bonus, and other statutory liabilities forms part of the cost of acquisition of depreciable assets when the payment was made on behalf of the vendor.

Issue-wise Detailed Analysis:

1. Payment on Account of Liability for Gratuity, PF, Bonus, and Other Statutory Liabilities:
The core issue in the appeal was whether the payment made by the assessee for liabilities such as gratuity, PF, and bonus on behalf of the vendor should be considered as part of the cost of acquisition of depreciable assets. The assessee, a private limited company engaged in manufacturing and trading jute goods, had taken over the assets of Meghna Jute Mills from M/s Gajanand Commercial (P) Ltd. as a going concern. As part of the agreement, the assessee also took over the statutory liabilities of the vendor, including salary, wages, gratuity, PF, and bonus.

The assessee capitalized these liabilities and claimed depreciation, treating them as part of the cost of acquisition of fixed assets. The Assessing Officer (AO) disallowed the depreciation claim on the grounds that these liabilities, though capital in nature, could not be capitalized under different depreciable fixed assets. The AO argued that these liabilities were the vendor's responsibility and should not be included in the cost of acquisition.

2. Assessee's Argument:
The assessee contended that the payment of these liabilities was indeed a capital expenditure and should be treated as part of the consideration paid for acquiring the assets. The assessee relied on the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. Hooghly Mills Co. Ltd., where it was held that such payments should be treated as part of the actual cost of assets and allowed depreciation accordingly.

3. CIT(A)'s Decision:
The Commissioner of Income Tax (Appeals) [CIT(A)] placed reliance on the decision of the Hon’ble Jurisdictional High Court in the case of Hooghly Mills and deleted the disallowance of depreciation. The CIT(A) agreed that the payment of these liabilities should be treated as part of the cost of acquisition and allowed depreciation as claimed by the assessee.

4. Revenue's Appeal:
The Revenue appealed against the CIT(A)'s decision, arguing that the payment of these liabilities on behalf of the vendor should not form part of the cost of acquisition of depreciable assets. The Revenue cited the decision of the Hon’ble Supreme Court in the case of CIT vs. Hooghly Mills Co. Ltd., where it was held that although such payments are capital in nature, they do not qualify for depreciation under Section 32 of the Income Tax Act, 1961.

5. Tribunal's Analysis and Conclusion:
The Tribunal referred to the Supreme Court's decision, which clarified that while the payment of gratuity and other liabilities is a capital expenditure, it does not fall under the categories specified in Section 32 for depreciation. The Supreme Court held that the gratuity liability is neither a tangible asset like buildings, machinery, plant, or furniture, nor an intangible asset of the kind mentioned in Section 32(1)(ii).

Based on the Supreme Court's ruling, the Tribunal concluded that no depreciation could be allowed on the gratuity liability taken over by the assessee. Consequently, the Tribunal allowed the Revenue's appeal and set aside the CIT(A)'s order, disallowing the depreciation claimed by the assessee on the payment of gratuity, PF, bonus, and other statutory liabilities.

Final Judgment:
The appeal of the Revenue was allowed, and the depreciation claimed by the assessee on the payment of gratuity, PF, bonus, and other statutory liabilities was disallowed. The Tribunal's order was pronounced on 07.03.2018.