COMMISSIONER OF INCOME TAX, KOLKATA versus M/S. HOOGL Y MILLS CO. LTD.

Citation: [2006] SUPP. 9 S.C.R. 265 · Decided: 22-11-2006 · Supreme Court of India · Bench: S.B. SINHA · Disposal: Appeal(s) allowed

Judgment (excerpt)

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COMMISSIONER OF INCOME TAX, KOLKATA 
A 
v. 
M/S. HOOGL Y MILLS CO. LTD. 
NOVEMBER 22, 2006 
[S.B. SINHA AND MARKANDEY KA TJU, JJ.] 
B 
Income Tax Act, 1961-Section 32-Depreciation-On capital 
expenditure-Purchase of an undertaking-Accrued and future gratuity 
liability of the vendor also taken over by the purchaser-Claim for C 
depreciation on the gratuity liability by the purchaser-assessee-Claim 
allowed by Courts below-Plea of Revenue that the liability being a revenue 
expenditure and not capital expenditure, not entitled to depreciation-In 
appeal, held: The gratuity liability is a capital expenditure-Even it being 
capital expenditure, assessee not entitled to depreciation, because the liability 
does not fall under any of the categories mentioned in Section 32. 
D 
Words and Phrases-'Plant'-Meaning of in the context of Section 43 
(3) of Income tax Act, 1961. 
Respondent-assessee vide an agreement purchased an Undertaking and 
took over the accrued and future gratuity liability thereof. He claimed E 
depreciation under Section 32 of Income tax Act on the gratuity liability as 
the same was a capital expenditure. Commissioner of Income Tax (Appeals), 
Tribunal as well as High Court allowed the claim of the assessee. In appeal to 
this Court, appellant-Revenue contended that the liability being a revenue 
expenditure and not capital expenditure, assessee was not entitled to the F 
depreciation. 
Allowing the appeal, the Court 
HELD: I. It cannot be said that the expenditure on the taking over the 
gratuity liability of the employees of the vendor is not capital expenditure but G 
revenue expenditure. 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). However, qua the vendee the position would be different. Jn the present 
case, in the agreement between the vendor and the assessee, it is mentioned 
265 
II 
266 
SUPREME COURT REPORTS [2006] SUPP. 9 S.C.R. 
A that the vendor shall purchase the Industrial Undertaking as a going concern 
for a price of Rs.2 crores and shall also take over the gratuity liability. 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 
B capital expenditure because it is an expenditure incurred for acquiring an 
asset of an enduring nature. 1267-F-H; 268-A-B; G-H; 269-AI 
Metal Books Co. of India v. Workmen, 73 ITR 53 62-67 and Bharat Earth 
v. CIT, 245 ITR 428; Sassoon David v. CIT, 118 ITR 271, referred to. 
Altherton v. British and Helsbury Employees ltd., (1926) Ac 205, 
C referred to. 
2. However, even if it is held that the expenditure on taking over the 
gratuity liability is a capital expenditure, yet no depreciation is allowable on· 
the same because Section 32 of the Income Tax Act,states that depreciation 
D 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 oflncome Tax 
Act. Hence no depreciation can be claimed in respect of the gratuity liability 
E even if it is regarded as capital expenditure. In fact, depreciation cannot ev.en 
be allowed on land because that too is not mentioned in Section 32. (269-B-EI 
3. In the present case, the agreement of sale, separately mentioned the 
price of the land, building and the machinery. Had it been a case where the 
agreement to sale mentioned the entire sale price without separately 
F mentioning the value of the land, building or machinery, the .matter could have 
been remitted 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 . 
G to the Tribunal in this case. 1269-E-GJ 
H 
4. 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 deprecia

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