High Court Of Calcutta
CIT vs. Hooghly Mills Co. Ltd.
Sections 32(1), 43(1)
Asst. Year 1989-90
D.K. Seth & R.N. Sinha, JJ.
IT Appeal No. 404 of 2000
26th June, 2003
Counsel Appeared
P.K. Bhowmick, for the Appellant : J.P. Khaitan & Sanjoy Bhowmick, for the Respondent
JUDGMENT
D.K. Seth, J. :
The appeal was admitted on the following two questions :
“(a) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in directing to recompute the cost of the assets treating the gratuity liability as part of the actual cost of the assets and allow depreciation accordingly ?
(b) Whether, on the facts and in the circumstances of the case the, Tribunal was justified in law in holding that the consideration of Rs. 2 crores shown in the agreement is not the real consideration unless liability towards payment of gratuity is spread over the consideration shown ?”
2. Pursuant to the agreement between the parties, the undertaking was taken over by the assessee. The agreement dt. 24th March, 1988, contains the following clauses :
“1. (A) The vendor shall sell and the purchaser shall purchase the said industrial undertaking w.e.f. 26th day of March, one thousand nine hundred and eighty-eight hereinafter called ‘the date of sale’ as a going concern and full benefit of industrial licences, permits, entitlements, tenancies including tenancy of Jute Corporation of India in respect of carpet backing shed and all other rights and benefits in connection with and appertaining to the said industrial undertaking free from all encumbrances, charges, attachments and lien whatsoever at the price of Rs. 2 crores (rupees two crores only)…………..
The vendor shall pay and discharge all liabilities towards all junior, senior officers, factory staff and workers of those who have been discharged or superannuated on or before the date of sale. All accrued leave dues, gratuity, liability on account of provident fund and bonus dues unpaid on the date of transfer in respect of such workmen will be on account of the vendor.
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 the purchaser’s account and shall be met by the purchaser.”
It is clear from cl. 6 of the agreement that the accrued gratuity liability for the entire period of service of the employees with the vendor would be on the purchaser’s account in addition to the said Rs. 2 crore being the consideration mentioned in cl. 1(A) above. Pursuant to those conditions, the actual cost of the liability accrued till the date of the transfer of the mill, on account of gratuity was assessed at Rs. 3,44,58,852. In the asst. yr. 1989-90, the learned Tribunal had held that in addition to the amount of Rs. 2 crore, the assessee-company had taken over the liability towards gratuity in respect of the existing employees accrued till the date of the transfer of the mill and this liability as on that date was arrived at on actuarial valuation at Rs. 3,44,58,852. There is no dispute with regard to the amount of the liability as calculated. Neither there is any dispute with regard to the continuation of the employees nor was there any dispute with regard to the taking over of the liability for payment of gratuity. It is not a case of inflated amount shown as consideration.
In this background, it is to be considered whether this amount would be added to the cost of acquisition for being distributed in the assets acquired. The learned Tribunal had held that this was part of the consideration and was to be distributed on different assets and had remanded the matter to the AO for distribution of the amount on depreciable and non-depreciable assets respectively. If this amount is treated to be the cost of acquisition of different assets and is treated to be a capital expenditure for acquiring the undertaking, in that event, the assessee would be entitled to depreciation in respect of the amount distributed on depreciable assets being cost of acquisition thereof. The learned Counsel for the Revenue had relied on the decisions in CIT vs. Dalmia Dadri Cement Ltd. (1980) 125 ITR 510 (Del), Guzdar Kajora Coal Mines Ltd. vs. CIT 1972 CTR (SC) 231: (1972) 85 ITR 599 (SC) and Kumudam Printers (P) Ltd. vs. CIT (1997) 140 CTR (Mad) 384 : (1997) 226 ITR 680 (Mad). But having regard to the facts and circumstances of this case, it appears that all these decisions are distinguishable on facts. Inasmuch as in the first two cases, the amounts were found to have been inflated and on that ground it was not allowed. In the third case, namely, Kumudam Printers (P) Ltd.‘s (supra), the liability was that of the vendor that accrued after the date of the purchase. It could not be treated to be the liability of the assessee and that too when the sum was agreed to be paid voluntarily without taking over the liability therefor. Even then the liability could not have been taken over because it was not a liability on that date when the property was acquired. It was a liability that accrued to the vendor after the property was sold. Therefore, such amount cannot form part of the consideration. Therefore, these three cases do not help the learned counsel for the Revenue.
On the other hand, Mr. Khaitan had relied on the decisions in CIT vs. Plasmac Machine Mfg. Co. Ltd. (1993) 201 ITR 650 (Bom) of the Bombay High Court and Puspa Perfumery Products (P) Ltd. vs. CIT (1992) 194 ITR 248 (Cal) of this High Court. In these two cases, the liabilities for payment of income-tax were taken over by the purchaser in respect of which deduction was claimed as revenue expenditure. In both these two cases, the Bombay High Court and the Calcutta High Court had held that these were not revenue expenditures. On the other hand, it was held in both the cases that these were in the nature of capital expenditure and were part of the consideration of acquisition of the property. In the present case, having regard to the terms and conditions of the agreement as stipulated above and the liability that had been taken over on the date of the transfer, it appears that this was apart of the consideration and as such is to be added to the cost of acquisition. Therefore, it is to be distributed, as rightly directed by the learned Tribunal, on the various assets acquired.
In terms of s. 4(1) of the Payment of Gratuity Act, the liability of the employer to pay gratuity to its employees accrues as soon the concerned employee completes five years’ continuous service, from the date the service is reckoned to be continuous, though payable on superannuation or retirement or resignation or death or disablement due to accident or disease. Sub-s. (2) prescribes fifteen days’ wages based on the rate of wages last drawn by the employee for every completed year of service or part thereof in excess of six months. Thus, with the continuation of employment, the gratuity continues to accrue on account of the respective employee. The right to receive gratuity is a right vested in the employee on completion of five years continuous service receivable from the date from which continuous service is reckoned. The employees, whose service was continuing after the transfer of the undertaking, were entitled to claim gratuity from the transferor on account of cessation of employment under him. But for their continuation under the assessee, it was not payable till the occurrence of any of the conditions mentioned in ss. 4(1)(a), (b) and (c) of the Payment of Gratuity Act. 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 was taken over by the assessee. Thus, this liability became part of the consideration paid for the assets transferred 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 the 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.
This appeal is, therefore, dismissed. There will, however, be no order as to costs.
R.N. Sinha, J. :
I agree.
[Citation : 266 ITR 257]
