Assumed gratuity liability may be capital cost, but depreciation cannot be claimed on gratuity liability or land.

An assumed gratuity liability taken over as part of the consideration for acquiring an industrial undertaking can form part of the capital cost, because the purchase agreement must be read as a whole and the liability represents part of the price for an enduring capital asset. Depreciation, however, is confined to assets covered by the depreciation provision and cannot be claimed on a gratuity liability or on land, as neither falls within the eligible asset categories. The separate valuation of the components in the agreement also removes any need for remand on that issue.

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Issues: (i) Whether the assumed gratuity liability formed part of the capital cost of acquiring the industrial undertaking; (ii) whether depreciation was allowable under section 32 on the gratuity liability and the value of land.

Issue (i): Whether the assumed gratuity liability formed part of the capital cost of acquiring the industrial undertaking.

Analysis: The agreement for purchase of the undertaking had to be read as a whole. The purchaser agreed not only to pay a stated monetary consideration but also to take over the vendor's accrued and future gratuity liability. On that basis, the assumed liability was part of the consideration for acquiring an enduring capital asset.

Conclusion: The assumed gratuity liability was part of the capital expenditure incurred for acquisition of the undertaking.

Issue (ii): Whether depreciation was allowable under section 32 on the gratuity liability and the value of land.

Analysis: Depreciation under section 32 is confined to specified tangible assets and eligible intangible assets. The gratuity liability did not answer to any of those categories, and land is also outside the scope of depreciation. The separate valuation in the agreement made any remand unnecessary.

Conclusion: Depreciation was not allowable on the gratuity liability or on land.

Final Conclusion: The assessee was not entitled to depreciation on the assumed gratuity liability or on the land component, and the Revenue's appeal succeeded.

Ratio Decidendi: A liability assumed as part of the consideration for acquiring an undertaking may constitute capital expenditure, but depreciation is permissible only on assets specifically covered by section 32 and cannot be claimed on a gratuity liability or on land.

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