High Court: Gratuity liability part of acquisition cost for depreciation calculation. Liability deemed capital expenditure for depreciation on assets.

The High Court held that the gratuity liability should be included in the cost of acquisition for depreciation calculation as it was part of the consideration amount in the agreement for acquiring the undertaking. The liability towards payment of gratuity was deemed a capital expenditure, entitling the assessee to depreciation on depreciable assets. The Court emphasized that the liability, though deferred, was integral to the consideration paid for the assets transferred. The decision favored the assessee, affirming the inclusion of gratuity liability in the cost of acquisition, with the appeal dismissed and no order as to costs.

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Issues:
1. Whether gratuity liability should be considered as part of the actual cost of assets for depreciation calculation.
2. Whether the consideration amount in the agreement should include the liability towards payment of gratuity.

Analysis:
1. The High Court considered whether the gratuity liability should be included in the actual cost of assets for depreciation calculation. The agreement between the parties clearly stated that the purchaser would take over the accrued and future gratuity liability of the employees, in addition to the consideration amount mentioned in the agreement. The Tribunal had held that this liability should be added to the cost of acquisition and distributed on depreciable and non-depreciable assets. The Court examined relevant precedents and distinguished cases where amounts were found to be inflated. It concluded that in this case, the gratuity liability was a part of the consideration and should be treated as capital expenditure for acquiring the undertaking, entitling the assessee to depreciation on depreciable assets.

2. The Court also deliberated on whether the consideration amount in the agreement should include the liability towards payment of gratuity. It noted that as per the Payment of Gratuity Act, the employer's liability to pay gratuity accrues as soon as the concerned employee completes five years of continuous service. The liability for gratuity was deferred by the terms of the agreement, and the assessee took over the liability payable by the vendor. The Court emphasized that this liability was part of the consideration paid for the assets transferred and should be treated as capital expenditure. It highlighted that if the vendor had paid these liabilities, the amount would have been included in the cost of the undertaking. Since the purchaser took over this liability, it was considered an adjustment of the consideration amount and could not be excluded from the cost.

In conclusion, the Court upheld the Tribunal's decision in favor of the assessee, affirming that the gratuity liability should be considered in the cost of acquisition for depreciation calculation. The appeal was dismissed, with no order as to costs.

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