Depreciation on assumed vendor liabilities is unavailable where the payment forms acquisition cost, not a depreciable asset.

Liabilities assumed on acquisition of an undertaking as a going concern, including gratuity, provident fund, bonus and other accrued statutory dues of the vendor, may form part of the composite acquisition cost, but they do not by themselves become depreciable assets. Depreciation under section 32 is confined to specified asset classes such as buildings, machinery, plant, furniture and eligible intangibles, so an assumed vendor liability cannot be depreciated merely because it was capitalised in the buyer's books. On that basis, the claim for depreciation on the transferred employee and statutory liabilities was held unsustainable, and the disallowance was not to be restored.

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Issues: Whether liabilities taken over and paid towards gratuity, provident fund, bonus and other statutory dues of the vendor formed part of the cost of acquisition or actual cost of depreciable assets so as to entitle the assessee to depreciation.

Analysis: The liability in question arose under the transfer arrangement by which the assessee took over the undertaking as a going concern. The amount paid towards the vendor's accrued employee liabilities was treated as part of the composite consideration for acquisition of the undertaking. However, depreciation under section 32 is allowable only on specified depreciable assets such as buildings, machinery, plant, furniture, and eligible intangible assets. A liability assumed on behalf of the vendor, even if capital in nature, does not itself become a depreciable asset and cannot be depreciated merely because it was capitalised in the assessee's accounts. The governing principle was that such assumed liability may enter into the acquisition cost of the undertaking, but depreciation can be claimed only on assets falling within the statutory ambit of depreciation.

Conclusion: The claim for depreciation on the gratuity and other statutory liabilities was not sustainable; the Revenue's challenge failed and the disallowance was not to be restored.

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