Income Tax Appellate Tribunal - Kolkata
Acit, Cc-1(1), Kolkata, Kolkata vs M/S Padam Mercantiles (P) Ltd., Kolkata on 7 March, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH : KOLKATA
[Before Hon'ble Shri Aby. T. Varkey, JM & Shri M.Balaganesh, AM ]
I.T.A No. 1935/Kol/2016
Assessment Year : 2011-12
ACIT, CC-1(1), Kolkata -vs- M/s Padam Mercantiles (P) Ltd.
[PAN: AACCP 6604 N]
(Appellant) (Respondent)
For the Appellant : Shri Arindam Bhattacharjee, Addl. CIT
For the Respondent : None
Date of Hearing : 22.02.2018
Date of Pronouncement : 07.03.2018
ORDER
Per M.Balaganesh, AM
1. This is an appeal of the Revenue directed against the order passed by the Learned Commissioner of Income Tax (Appeals) - 1, Kolkata (in short the ld CITA) in Appeal No. 128/CIT(A)-1/W-1(2)/2014-15 dated 08.06.2016 against the order passed by the ACIT, Circle-1(2), Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short "the Act") dated 20.03.2014 for the Assessment Year 2011-12.
2. The only issue to be decided in the appeal of the revenue is as to whether the ld CITA was justified in holding that the payment on account of liability for gratuity, PF, bonus and other statutory liabilities forms part of cost of acquisition of depreciable assets, when the payment was made on behalf of the vendor, in the facts and circumstances of the case.
3. The brief facts of this issue is that the assessee is a private limited company engaged in the business of manufacturing and trading of jute goods. The assessee filed its 2 ITA No.1935/Kol/2016 M/s Padam Mercantiles (P) Ltd.
A.Yr.2011-12 return of income for the Asst Year 2011-12 declaring total income of Rs 12,96,632/- . The assessee during the financial year 1994-95 pursuant to an agreement and award took over the land, factory building, godowns, plant and machinery and other movables at an agreed consideration from M/s Gajanand Commercial (P) Ltd , owner of Megna Jute Mills, as a going concern. As per the terms of the agreement and award the statutory liabilities on account of salary, wages, gratuity, PF, bonus etc were also taken over and to be paid and settled by the assessee in addition to the agreed and stated consideration. The assessee during the year capitalized all such liabilities paid and settled till 31.3.2011 pertaining to the period prior to take over to various fixed assets and claimed depreciation by treating the same as part of cost of acquisition and / or actual cost.
3.1. During the course of hearing, it was observed by the assessee from Annexure - A of Tax Audit Report, that the assessee had made addition on factory and non-factory building, plant & machinery and vehicles to the tune of Rs 4,46,14,141/- in total. The assessee was asked to furnish documentary evidences (Bill, Challan, etc) in support of such addition. The purchase evidence relating to car worth Rs 21,90,328/- was furnished by the assessee. Regarding additions to other fixed assets, the assessee stated that no actual purchase regarding addition to fixed asset was made during the year. Pursuant to the sale agreement dated 21.03.1994 and 20.04.1994 between vendore, M/s Gajanand Commercial (P) Ltd., owner of Meghna Jute Mills and buyer, M/s Padam Mercantiles (P) Ltd. the vendor sold land, factory building, godowns, plant & machinery and other movables at a consideration of Rs. 5 crores. The buyer, M/s Padam Mercantiles (P) Ltd. have paid a sum of Rs. 138 lacs. (previous year Rs. 493 lacs) as liability to workers in respect of gratuity, employees provident fund and other statutory dues on behalf of the vendor over and above the purchase consideration. Based on the expert opinion obtained by the company, the amount so paid forms part of purchase consideration and have been apportioned in the ratio of respective fixed 2 3 ITA No.1935/Kol/2016 M/s Padam Mercantiles (P) Ltd.
A.Yr.2011-12 assets. Consequent to such capitalization, depreciation has been charged accordingly on the additions so made.
3.2. The ld AO requested the assessee to produce the sale agreement made between M/s Gajanand Commercial (P) Ltd and the assessee. The assessee in reply furnished a copy of the expert's opinion relating to nature of outstanding liability of Rs 263.06 lakhs in the name of M/s Padam Mercantiles (P) Ltd , which has been debited as advance receivable from M/s Gajanand Commercial (P) Ltd. The ld AO observed that on perusal of the document furnished (expert's opinion), the following facts were revealed:-
i) M/s Gajanand Commercial (P) Ltd. decided to sell the jute mill owned by it in terms of the resolution passed at the Extra Ordinary General meeting of the company held on 4th March, 1994. Negotiations were held and subsequently, it entered into an agreement with M/s Padam Mercantiles (P) ltd. for the sale of the major portion of plant, machinery, equipments and other movables.
ii) M/s Gajanand Commercial (P) Ltd. again passed a resolution at the Extra Ordinary General meeting held on 20th April, 1994 to sell the land, factory godown, building etc., to M/s Padam Mercantiles (P) Ltd.
iii) In terms of the resolution as aforesaid plant, machinery, equipments and other movables was fixed at Rs. 4.10 crores, out of which Rs. 3.90 crores was to be retained by M/s Padam Mercantiles (P) Ltd. for payment on account of salary, wages, gratuity, bonus and STL for the period up to March 15, 1994 and the balance amount of Rs. 20 lakhs was to be paid to M/s Gajanand Commercial (P) Ltd. which was duly compiled by.
iv) In respect of the sale of land, building and other structures, the sale consideration was fixed at Rs. 90 lakhs which was paid in full by M/s Padam Mercantiles (P) Ltd..
As mentioned above, the assessee paid the entire liability of salary, wages, bonus etc. on behalf of M/s Gajanand Commercial (P) Ltd. but found that the actual liability was 3 4 ITA No.1935/Kol/2016 M/s Padam Mercantiles (P) Ltd.
A.Yr.2011-12 much more than what was mentioned in the Agreement/Award. The liability compromised of payment towards gratuity, employees P.F. and other statutory dues and the total payment made by the assessee as on 31st March, 2010 stood at Rs. 463.34 lakhs and after giving effect to the realization of Rs. 200.28 lakhs, an amount of Rs. 263.06 lakhs is outstanding in the name of M/s Padam Mercantiles (P) Ltd. which has been debited as advance receivable from M/s Gajanand Commercial (P) Ltd. The liability that was payable by the vendor to its employees at the date of sale and this liability was actually the liability of the vendor. If the vendor had paid those liabilities, he could have claimed the value thereof as cost of the assets sold and in that event this amount would have been included in the cost of undertaking as consideration thereof. But this was taken over by the purchaser and as such this was an adjustment of the amount payable as consideration. Therefore, this could not be excluded from the cost of acquisition.
Addition to different fixed assets was made as follows:
Sl. No. Assets Rate of Depn. Additions Depr. Claimed
1 Factory Building 10% 30,94,262/- 3,09,426/-
2 Non-factory 5% 14,78,476/- 73,923/-
building
3 Plant & 15% 3,78,51,075/- 56,77,661/-
Machinery
4,24,23,813/- 60,61,010/-
Thus, the expenditure paid by the assessee on behalf of vendor relating to outstanding gratuity, PF, bonus etc. was capital expenditure in nature, but it cannot be capitalized under different depreciable fixed assets viz. Factory building, non-factory building, plant & machinery on proportionate basis. Thus, depreciation of Rs. 60,61,010/- claimed by the assessee is disallowed.
4 5 ITA No.1935/Kol/2016M/s Padam Mercantiles (P) Ltd.
A.Yr.2011-12
4. The assessee stated that there is no dispute as to the factum of :-
a) Purchase of jute mill by the assessee .
b) Incurring of expenses on behalf of vendor for clearing old dues.
c) Treatment of same as Capital expenditure and not as Revenue expenditure.
d) Capitalisation of said expenses by assessee in the proportion of the value of assets held in its accounts treating the same as part of consideration paid.
e) Depreciation claim made by the assessee on such additions to the fixed assets.
4.1. In the opinion of the ld AO, though these are capital expenditure (not allowable as revenue expenditure) but it cannot be captilaised under different depreciable assets, entitling assessee to claim depreciation. The assessee had purchased the jute mill from M/s Gajanand Commercial (P) Ltd , the vendor. The liability that was payable by the vendor to its employees as on the date of sale was actually the liability of the vendor. If the vendor had paid those liabilities, it would have increased the consideration and claimed the value thereof as the cost of the assets sold. In that event, this amount would have been included in the cost of undertaking as consideration thereof. However, instead of liabilities being paid by the vendor, the same had been paid and discharged by the assessee with no question of any recovery from the vendor. Thus, it became the part of cost of acquisition of the said jute mill and such expenses were rightly apportioned by assessee in respective fixed assets in proportionate to their values. The assessee placed reliance on the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs Hooghly Mills Co Ltd reported in 266 ITR 257 (Cal) wherein the question raised before the Hon'ble High Court was as under:-
"Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in directing to recompute the cost of assets treating the gratuity liability as part of the actual cost of assets and allow depreciation accordingly."5 6 ITA No.1935/Kol/2016
M/s Padam Mercantiles (P) Ltd.
A.Yr.2011-12 The Hon'ble Calcutta High Court affirming the order of this tribunal which treated the same as part of cost of acquisition and allowed depreciation thereon observed as under:-
"The payment of gratuity to these employees till the date of transfer was deferred by reason of the terms of the agreement and the liability accrued till that date and payable by the transferor and is liable to be added to the consideration mentioned in the agreement. It cannot be construed otherwise. This is to be treated as capital expenditure. This is the liability that was payable by the vendor at the date of sale of its employees and this liability was actually the liability of the vendor. If the vendor had paid those liabilities, he could have claimed the value thereof as cost of the assets sold and in that event, this amount would have been included in the cost of undertaking as consideration thereof. But this was taken over by the purchaser and as such this was an adjustment of the amount payable as consideration. Therefore, this cannot be excluded from the cost of consideration. Therefore, we agree with the grounds in favour of the assessee and affirm the order of the learned Tribunal, appealed against."
Accordingly, the assessee pleaded before the ld CITA to allow the depreciation as claimed by the assessee in the sum of Rs 60,61,010/- .
5. The ld CITA placed reliance on the decision of the Hon'ble Jurisdictional High Court in the case of Hooghly Mills supra and deleted the disallowance of depreciation in the sum of Rs 60,61,010/- . Aggrieved, the revenue is in appeal before us on the following grounds:-
1. That the Ld. CIT(A) erred in deciding that 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 this payment was made on behalf of the vendor.
2. The appellant craves leave to make any addition, alteration and modification etc of ground or grounds on or before the date of hearing of the appeal .6 7 ITA No.1935/Kol/2016
M/s Padam Mercantiles (P) Ltd.
A.Yr.2011-12
6. None appeared on behalf of the assessee. Since this issue is settled by the decision of the Hon'ble Supreme Court in CIT vs Hooghly Mills Co. Ltd in Civil Appeal No. 5149 of 2006 dated 22.11.2006, we decided to hear the ld DR and proceeded to dispose off this appeal. We find that the ld DR had rightly placed reliance on the aforesaid decision of the Hon'ble Supreme Court supra. The Supreme Court order is reproduced hereunder:-
"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 N0. 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 l(C) of the said agreement it is stated:7 8 ITA No.1935/Kol/2016
M/s Padam Mercantiles (P) Ltd.
A.Yr.2011-12 "(C) The amount of consideration agreed to be paid by 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 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 therefore.
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.
8 9 ITA No.1935/Kol/2016M/s Padam Mercantiles (P) Ltd.
A.Yr.2011-12 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."
The ratio laid down by the apex court in the aforesaid case squarely applies to the facts of the instant case before us and respectfully following the same , we allow the ground raised by the revenue.
7. In the result, the appeal of the revenue is dismissed.
Order pronounced in the Court on 07.03.2018
Sd/- Sd/-
[A.T. Varkey] [ M.Balaganesh ]
Judicial Member Accountant Member
Dated : 07.03.2018
SB, Sr. PS
Copy of the order forwarded to:
1. ACIT, CC-1(1), Kolkata, Aaykar Bhawan Poorva, 110, Shantipally, 3rd Floor, Kolkata-700107.
2. M/s Padam Mercantiles (P) Ltd., 6B, Clive Row, Ground Floor, Kolkata-700001.
9 10 ITA No.1935/Kol/2016M/s Padam Mercantiles (P) Ltd.
A.Yr.2011-12
3. C.I.T(A)- , Kolkata 4. C.I.T.- Kolkata.
5. CIT(DR), Kolkata Benches, Kolkata.
True copy By Order Senior Private Secretary Head of Office/D.D.O., ITAT, Kolkata Benches 10