Depreciation on land not allowed, pre-operative interest taxable as income from other sources

DEPUTY COMMISSIONER OF INCOME-TAX Versus CAPITAL CARS P. LTD.

DEPUTY COMMISSIONER OF INCOME-TAX Versus CAPITAL CARS P. LTD. - [2007] 295 ITR (AT) 224 (Delhi), ITD 114, 286, TTJ 113, 1120, Issues Involved:
1. Deduction of depreciation on the cost of land component of a building.
2. Taxation of interest earned during the pre-operative period.

Detailed Analysis:

Issue 1: Deduction of Depreciation on Cost of Land Component of the Building

The Revenue's appeal challenges the order allowing depreciation on the land component of a building. The Assessing Officer (AO) disallowed the depreciation, estimating the land value as one-third of the total purchase consideration, citing the Supreme Court's decision in CIT v. Alps Theatre [1967] 65 ITR 377. The Commissioner of Income-tax (Appeals) (CIT(A)) ruled in favor of the assessee, relying on CIT v. Hindustan Times Ltd. [1998] 231 ITR 741.

The Departmental representative argued that the purchase deed indicated the acquisition of both the building and an undivided interest in the land. The AO's estimation of the land value was deemed fair and reasonable based on common knowledge of construction costs.

The legal issue centers on whether the depreciation should include the land component. The Supreme Court in Alps Theatre held that land does not depreciate and allowing depreciation on it would misrepresent the true income. The case of Hindustan Times Ltd. was distinguished as it involved payments for additional office space post-construction, not applicable here.

The assessee's counsel contended that the entire payment was for the superstructure, citing Union of India v. Gosalia Shipping P. Ltd. [1978] 113 ITR 307 and other cases to argue that the substance of the transaction should be considered. However, the Tribunal found that the agreement included both the building and the proportionate share in the land, making the facts align more with Alps Theatre.

The Tribunal concluded that the subject matter of the agreement was both land and building, and the consideration was paid for both. Thus, the CIT(A) erred in allowing depreciation on the land component. The AO's estimation method, in the absence of a valuation report from the assessee, was upheld as reasonable.

Issue 2: Taxation of Interest Earned During Pre-Operative Period

The AO taxed the interest earned during the pre-operative period as "income from other sources," rejecting the assessee's claim that it should reduce the capital cost, citing Bongaigaon Refinery and Petrochemicals Ltd. v. CIT [2001] 251 ITR 329. The CIT(A) ruled in favor of the assessee, interpreting the Supreme Court's decision as allowing adjustment of interest directly connected with capital expenditure against the capital cost.

The Departmental representative supported the AO's view, referencing the Supreme Court's decisions in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172 and other cases, which held that interest income from surplus funds is taxable as "income from other sources."

The Tribunal agreed with the AO, distinguishing the facts from Bongaigaon Refinery, where receipts were directly connected with construction work. In the present case, the interest income was from surplus funds, making it taxable under section 56 as per Tuticorin Alkali Chemicals. The CIT(A) misinterpreted the Supreme Court's ratio in Bongaigaon Refinery.

Conclusion:

The Tribunal allowed the Revenue's appeal on both grounds, ruling that:
1. Depreciation on the land component of the building is not allowable.
2. Interest earned during the pre-operative period is taxable as "income from other sources."

The order was pronounced in the open court on January 31, 2007.