Accrued gratuity liability assumed on acquisition forms part of purchase consideration and actual cost, not revenue expenditure.

A contractual assumption of the transferor's accrued gratuity liability, taken over by the purchaser as part of the bargain for acquiring an undertaking, forms part of the purchase consideration and the actual cost of acquisition. The liability was an existing obligation up to the date of transfer, so its discharge by the purchaser was capital in nature and could be distributed among the acquired assets for depreciation purposes. The monetary price could not be treated as the sole consideration, because the true transfer value also included the assumed gratuity obligation. The resulting principle is that such an accrued transferor liability is not revenue expenditure but part of acquisition cost.

---

---

Issues: (i) Whether the gratuity liability taken over by the purchaser formed part of the actual cost of the acquired undertaking and was to be added to the cost of acquisition for depreciation purposes; (ii) Whether the agreed consideration of Rs. 2 crores could be treated as the sole consideration notwithstanding the purchaser's assumption of the vendor's accrued gratuity liability.

Issue (i): Whether the gratuity liability taken over by the purchaser formed part of the actual cost of the acquired undertaking and was to be added to the cost of acquisition for depreciation purposes.

Analysis: The agreement specifically provided that the accrued gratuity liability for the employees' past service would be borne by the purchaser in addition to the cash consideration. The liability had accrued up to the date of transfer and was the vendor's existing obligation, though payment was deferred by contractual arrangement. Such liability, when assumed as part of the transfer, represents a component of the price paid for acquiring the business undertaking and is therefore capital in nature.

Conclusion: The gratuity liability was rightly treated as part of the actual cost of acquisition and was liable to be distributed among the acquired assets for depreciation purposes, in favour of the assessee.

Issue (ii): Whether the agreed consideration of Rs. 2 crores could be treated as the sole consideration notwithstanding the purchaser's assumption of the vendor's accrued gratuity liability.

Analysis: The contractual terms showed that the monetary price was not the entirety of the bargain, because the purchaser also undertook to discharge the vendor's accrued gratuity obligation in respect of past service. The arrangement was not one of inflated valuation but of a genuine additional burden assumed as part of the transfer. Hence the true consideration necessarily included that liability.

Conclusion: The consideration could not be confined to Rs. 2 crores, and the assumed gratuity liability was part of the transfer consideration, in favour of the assessee.

Final Conclusion: The assumed gratuity liability was capital expenditure forming part of the acquisition cost of the undertaking, and the Tribunal's direction to include it in the cost of the acquired assets was affirmed.

Ratio Decidendi: A contractual assumption of an existing and accrued liability of the transferor, undertaken as part of the transfer of an undertaking, forms part of the purchase consideration and the actual cost of the acquired assets, and is not revenue expenditure.

---