1998 (5) TMI 3 - SC - Income Tax

Supreme Court: Additional construction cost qualifies for depreciation.

The Supreme Court upheld the decision that a sum paid for additional construction of a building was rightly included in the cost of the building for ... Depreciation on building cost - capital expenditure forming part of building cost - distinction between land and building for depreciation - commercialisation charges versus building costDepreciation on building cost - capital expenditure forming part of building cost - commercialisation charges versus building cost - Whether the sum of Rs. 36,96,516 paid by the assessee should be included in the cost of the building for the purpose of claiming depreciation for the specified assessment years. - HELD THAT: - The Court upheld the findings of the Tribunal and the High Court that the payment of Rs. 36,96,516 was made in respect of the additional built-up area created by the multi-storeyed building and therefore constituted expenditure on construction of a business asset. The High Court's conclusion that the plot's conversion to commercial use had already been effected in 1962 by a separate payment of Rs. 3,65,875 was accepted; accordingly, the later sum was not for further commercialisation of the land but for obtaining the right to use the additional constructed area for commercial purposes. Additional ground rent mentioned in the indenture was a separate matter. The Court distinguished the decision in CIT v. Alps Theatre on the ground that that case concerned the separate proposition that depreciation can be allowed only on the cost of a building and not on land; the present question was whether the particular sum should be classified as part of the building's cost, which the Court held it rightly was.The sum of Rs. 36,96,516 is part of the cost of the building and the assessee is entitled to claim depreciation thereon for the assessment years in question.Final Conclusion: Appeals dismissed with costs. Issues:- Entitlement to claim depreciation on a sum paid for construction of a building.- Distinction between cost of land and cost of building for depreciation purposes.Entitlement to claim depreciation on a sum paid for construction of a building:The case involved the question of whether the assessee was entitled to claim depreciation on a sum of Rs. 36,96,516 paid for constructing a new multi-storeyed building for business purposes. The assessee had purchased an existing residential building and later demolished it to construct a new building. The High Court, Commissioner (Appeals), and Tribunal all concluded that the amount paid for additional construction was rightly added to the cost of the building for claiming depreciation. The High Court emphasized that the payment was made for the additional space constructed by the assessee, which formed part of the cost of the building. The court held that the amount was expended to create a business asset and, therefore, was a legitimate part of the construction cost, allowing the assessee to claim depreciation on it.Distinction between cost of land and cost of building for depreciation purposes:The Department contended that the amount paid for commercial use of the land should be added to the cost of the land, not the building, for depreciation calculation purposes. However, the High Court rejected this argument, stating that the payment was made for additional construction and not for the land itself. The court highlighted that the land had already been converted for commercial use in 1962, and the subsequent payment was specifically for the construction of the building. The High Court upheld the view that the sum paid was part of the cost incurred by the assessee in constructing the building and, therefore, eligible for depreciation. The court distinguished this case from previous judgments that focused on the distinction between the cost of land and building for depreciation purposes, emphasizing that the key issue was whether the amount in question should be included in the cost of the building, not the land.In conclusion, the Supreme Court dismissed the appeals and upheld the decision that the sum paid for additional construction was rightly included in the cost of the building for claiming depreciation. The court clarified that the payment was for creating a business asset and, therefore, formed part of the construction cost eligible for depreciation, distinct from the cost of the land.