2014 (4) TMI 393 - AT - Income Tax

Tribunal Upholds Disallowance on Specific Items, Allows Depreciation on Civil Work

The Tribunal upheld the disallowance of depreciation on specific items but allowed depreciation on civil and flooring work expenditure, treating it as ... Allowability of depreciation @10% on certain items as against 100% claimed by the assessee - nature of expenditure on Civil work, flooring work, and finishing work, etc incurred by assessee as tenant - Held that:- If the expenditure were to be considered as capital expenditure in the hands of the owner, it has to be considered as capital expenditure in the hands of the tenant, who is the assessee so far depreciation and other benefits are concerned - if the expenditure has to be treated as revenue expenditure in the hands of the owner, it would amount to revenue expenditure even in the hands of the assessee tenant - In no uncertain terms that the capital expenditure incurred, whether by the owner on his premises or by a nonowner on the premises taken on rent or lease etc. for carrying on his business, shall not be allowed as deduction in full in the year of its incurring, but will be capitalized entitling it to depreciation – the expenditure incurred by the assessee on `Civil work, flooring work, and finishing work, etc,’, the same does not pass the test of revenue expenditure to be deductible in full - the amount has been rightly capitalized by the AO as well as CIT(A) making the assessee eligible for depreciation on it – Decided against Assessee. Issues:1. Depreciation rate on certain items claimed by the assessee.Analysis:The appeal was against the CIT (A)'s order related to the assessment year 2009-10. The main issue was the depreciation rate claimed by the assessee on certain items. The AO observed that the assessee claimed 100% depreciation on the Emporio Showroom premises taken on lease. The AO disagreed with the assessee's claim and allowed depreciation at 10% per annum, resulting in disallowance. The CIT (A) accepted the 100% depreciation claim for most items except specific expenditures. The assessee appealed against the limited disallowance, focusing on the expenditure incurred on civil and flooring work. The contention was that this expenditure should be allowed as a deduction under section 37(1) of the Act. The assessee relied on a judgment of the Kerala High Court to support this argument.The Tribunal noted that the premises were leased for nine years, and the expenditure was incurred immediately after taking possession. Referring to relevant case laws, the Tribunal held that such expenditure on total renovation should be considered capital expenditure, not current repairs. The Tribunal highlighted the essence of Explanation 1 to section 32, which treats capital expenditure on a leased building as if owned by the assessee for depreciation purposes. The judgment in the Joy Alukkas India case was discussed, emphasizing that the retrieval test for irretrievability at the end of the lease period should not be universally applied. The Tribunal upheld the capitalization of the expenditure on civil and flooring work, making the assessee eligible for depreciation.The Tribunal's decision was based on the interpretation of Explanation 1 to section 32 and relevant case laws, emphasizing that capital expenditure on leased premises should be treated as capital expenditure, entitling the assessee to depreciation benefits. The Tribunal dismissed the appeal, upholding the disallowance of depreciation on specific items and affirming the capitalization of the expenditure on civil and flooring work.