IT depreciation on improvement to lease hold

[CA siba prasad mishra]

Can any one inform me regarding the depreciation rate for IMPROVEMENT TO LEASE HOLD...like my assesee has taken a premises on lease and has done some renovation  on that building...how to claim depreciation on that......Your earliest response is highly solicited.

[srinivasan]

Sir
If the premises is taken on rent , the expenditure incurred  , are to be taken  as revenue as per the provisions of section 30(a)(1) of the income tax Act.However if any capital item identifiable  has also been created, the depreciation on the same should be as per the block of assets to which it falls.
srinivasan

[CA siba prasad mishra]

Sir many more thanks for your reply. what should be the rate of depreciation?? is it 100% or we can take 50%...please assist me with some  case laws......Thanks

[shobha nagrani]

Sir, as Srinivasan Sir has correctly pointed out, the position is that expenditure on leasehold can be treated as revenue because no capital asset has come into being refer: CIT Vs. Madras Auto Service (P) Ltd., 233 ITR 468

Please see section 30 which reads as follows:

"Sec.30: In respect of rent, rates, taxes, repairs and insurance for premises, used for the purpose of the business or profession, the following deductions shall be allowed:



a) Where the premises are occupied by the assessee –

i)                   as a tenant, the rent paid for such premises, and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs;

ii)                 otherwise than as a tenant, the amount paid by him on account of current repairs to the premises;

b) any sums paid on account of land revenue, local rates or municipal taxes;

c) the amount of any premium paid in respect of insurance against risk of damage or destruction of the premises;

Explanation: For the removal of doubts, it is hereby declared that the amount paid on account of the cost of repairs referred to in sub clause (i), and the amount paid on account of current repairs referred to in sub clause (ii) of clause (a), shall not include any expenditure in the nature of capital expenditure."

The position was considered in detail in DCIT v. Chaya Lakshmi Creations (P.) Ltd [2010] 6 taxmann.com 29 (Hyd. - ITAT) where it was held as follows:

In view of this decision of the Tribunal by majority opinion, even after introduction of Sec.32(1A) or Explanation 1 to Sec.32, the assessee is entitled to claim the expenditure on repair/maintenance of premises taken on lease u/s 30(a)(i) in respect of expenditure incurred in the process of earning the profit.

After incurring the expenditure the assessee has not obtained any new enduring benefit. No capital asset came into existence. The assessee continued to exhibit feature films in the very same premises probably with a little more profit. Admittedly the seating capacity was not increased after the expenditure. However, it may be little more attractive and comfortable for cine goers. Therefore, the expenditure incurred by the assessee is only for carrying on the business of exhibiting feature films. Therefore, the expenditure incurred by the assessee was an integral part of profit earning process. Therefore, it is not correct to say that the assessee has obtained any enduring benefit because of this expenditure. The assessee can use the premises taken on lease only during the lease period as found by the assessing officer. After expiry of the lease period, the assessee has to leave the entire thing as it is and handover the same to the lessor. The nature of work undertaken by the assessee is to carry on the business and not to obtain any asset. Furthermore, as already observed, no capital asset of enduring nature came into existence. In other words, the assessee has not acquired any asset/ income earning apparatus. It is well settled principles of law that the expenditure incurred for acquisition of an asset is capital expenditure and expenditure incurred in the process of earning profit is revenue expenditure. In the case before us, the assessee incurred the expenditure in order to attract more customers and make the customers comfortable. Therefore, it is obvious that that the assessee has to incur the expenditure, in order to carry on the business and in the process of earning profit and, therefore, the expenditure is of revenue in nature.

The full text of the judgement is available here: http://www.taxmann.com/TaxmannFlashes/flashbn14-7-10_2.htm

[CA siba prasad mishra]

Thanks a lot for your support..Now i am referring my case...suppose i am decorating my outlets all over india...say the case for a ice cream parlor, who has to make a attractive shops of a same style across india....Is the expenditure  made on improvement on leasehold can be claimed 100% after bringing the same into the depreciation schedule..But its a case of emergence of new asset. As the interior decoration is also a benefit of enduring nature.am i correct??

[ashutosh majumdar]

What are the nature of the fittings. Are they embedded to the wall and non-removable or can they be simply carted away on termination of the lease. This may decide whether the advantage is "enduring" or not.

I would strongly advice you to be content with the depreciation that the law gives you. If you argue that it is a revenue expenditure, there will be litigation with the income-tax department and you will spend a lot of money and time on CAs and Lawyers rather than on your business.

[CA siba prasad mishra]

Thanks . then its better to bring into Depreciation schedule and to claim 100%.

[srinivasan]

If you claim 100% depreciation, or charge it to revenue , it is the same as regards the taxability
As pointed out by Mr  Ashutosh, you may not get the relief at the ITO level and may have to fight your case.Your decision will also depend on the quantum of amount and the risk your company can take.