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Issues: (i) Whether a hotel building is a plant entitled to depreciation at 15 per cent. (ii) Whether retrenchment compensation paid to employees of the transferor was capital expenditure incurred in connection with or incidental to the acquisition of capital assets so as to justify depreciation on that amount.
Issue (i): Whether a hotel building is a plant entitled to depreciation at 15 per cent.
Analysis: The issue was covered by the Supreme Court's ruling that a building used for running a hotel or cinema business is not plant for the purpose of depreciation. Once the building itself is not treated as plant, the claim for higher depreciation rate cannot be sustained.
Conclusion: The answer is in the negative and against the assessee.
Issue (ii): Whether retrenchment compensation paid to employees of the transferor was capital expenditure incurred in connection with or incidental to the acquisition of capital assets so as to justify depreciation on that amount.
Analysis: The compensation paid by the assessee was a liability of the seller and did not form part of the purchase consideration. It was not incurred for acquiring the hotel building or for improving the capital assets, nor did it increase the value of the assets brought into existence on purchase. Depreciation is not allowable where no tangible asset is acquired by the expenditure and no improvement is made in the capital asset. The Tribunal was therefore wrong in treating the amount as part of acquisition cost or as qualifying for depreciation.
Conclusion: The answer is in the negative and against the assessee.
Final Conclusion: The reference was answered wholly in favour of the Revenue, with both questions decided against the assessee.
Ratio Decidendi: Depreciation is allowable only where the expenditure is attributable to an asset or to an improvement in a capital asset; payment of another's liability that does not form part of the purchase consideration and does not increase the value of the acquired assets cannot be treated as acquisition cost for depreciation purposes.
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