1987 (7) TMI 140 - AT - Income Tax

Depreciation Only on Building Structure, Not Leasehold Premiums: Tribunal Decision

The Tribunal upheld the Commissioner's decision to disallow depreciation on a premium paid for leasehold rights, stating that depreciation is only ... Depreciation Issues:1. Allowance of depreciation on premium paid for leasehold rights.2. Inclusion of premium in the cost of construction for depreciation.3. Applicability of Supreme Court and High Court decisions on depreciation claims.4. Alternate claim for allowance of certain charges as revenue deduction.Analysis:Issue 1: Allowance of depreciation on premium paid for leasehold rightsThe appeal concerns the assessment of depreciation allowance on a premium paid by an assessee for acquiring leasehold rights. The Commissioner of Income-tax issued a notice under section 263, deeming the allowance of depreciation on the premium as erroneous and prejudicial to revenue. The assessee contended that the premium was essential for constructing the factory building, thus forming part of the cost of construction eligible for depreciation. However, the Commissioner held that the premium paid did not directly relate to the building's construction and directed the Income-tax Officer to recompute depreciation excluding the premium. The Tribunal upheld the Commissioner's decision, emphasizing that depreciation is allowable only on the structure, not on the land or leasehold rights.Issue 2: Inclusion of premium in the cost of construction for depreciationThe Tribunal clarified that depreciation allowance under section 32 of the Income-tax Act pertains solely to the building's cost, excluding the land value. Citing the Supreme Court's decision, it reiterated that depreciation is not admissible on land or leasehold rights but only on the building's superstructure. The Tribunal rejected the assessee's argument that the premium should be part of the construction cost, reaffirming the distinction between land and building for depreciation purposes.Issue 3: Applicability of Supreme Court and High Court decisions on depreciation claimsThe Tribunal compared the current case with past decisions, emphasizing that expenses directly related to land, such as premiums for leasehold rights, cannot be considered part of the building's construction cost for depreciation purposes. It dismissed the alternate claim that sought to attribute a portion of the premium to the building's area, citing established legal principles from the Supreme Court and High Court regarding depreciation on buildings distinct from land.Issue 4: Alternate claim for allowance of certain charges as revenue deductionThe Tribunal rejected an alternate claim by the assessee to allow certain charges as revenue deductions, noting that the claim was not raised in the original assessment or before the Commissioner of Income-tax. The Tribunal maintained that such claims, unrelated to the Commissioner's order under section 263, could not be entertained on appeal. Additionally, the Tribunal upheld the Commissioner's decision based on the arguments presented and dismissed the appeal.In conclusion, the Tribunal affirmed the Commissioner's order, emphasizing the legal principles governing depreciation allowances on buildings and the exclusion of land-related expenses from the cost of construction for depreciation purposes. The judgment highlights the importance of distinguishing between land and building costs in determining depreciation eligibility under the Income-tax Act.