Depreciation on leasehold improvements allowed where permanent capital works are treated as owned during the lease term.

Capital expenditure incurred by a leasehold assessee on permanent improvements to rented property was held eligible for depreciation under section 32(1). The expenditure on partitions, tiling and mosaic flooring was treated as a business investment in leasehold improvements, and the assessee was regarded in law as owner of those improvements during the lease term. The fact that the improvements would ultimately revert with the building on expiry of the lease did not negate ownership for depreciation purposes. Depreciation was therefore allowable on the capital cost of the permanent leasehold improvements.

---

---

Issues: Whether depreciation was allowable under section 32(1) on capital expenditure incurred by a leasehold assessee in making permanent improvements to property taken on lease.

Analysis: The assessee was engaged in the business of taking buildings on rent, making permanent improvements, and re-letting them for higher returns. The expenditure on partitions, tiling, and mosaic flooring was capital in nature and was incurred as a business investment. For the duration of the lease, the assessee was treated as the owner in law of the permanent improvements, and the fact that the improvements would ultimately go with the building on expiry of the lease did not defeat ownership during the lease period.

Conclusion: Depreciation was allowable on the capital expenditure incurred for permanent leasehold improvements, and the question was answered in favour of the assessee.

---