1967 (8) TMI 7 - HC - Income Tax

Lease rent not part of building cost for depreciation allowance under section 10(2)(vi)

The court held that the lease rent paid for the site cannot be added to the building's construction cost for depreciation. The question was answered in ... Amount paid by the company to the Delhi Improvement Trust by way of rent for the site for the earlier years cannot be taken to be a part of the cost of construction of the cinema theatre for the purpose of the company claiming depreciation thereon Issues Involved:1. Whether the expenditure of Rs. 1,40,780 paid as lease rent enhanced the value of the buildings constructed on the leasehold land and was, therefore, entitled to depreciation.Detailed Analysis:1. Expenditure and Depreciation Claim:- The assessee-company entered into an agreement with the Delhi Improvement Trust for leasing a plot to construct a cinema theatre, with an annual rent of Rs. 40,000 for 30 years.- The construction was completed in June 1956, and the company claimed Rs. 40,000 as rent paid for the previous year in their return for the assessment year 1957-58, which was ignored by the Income-tax Officer due to late filing.- For the assessment year 1958-59, the company showed a total payment of Rs. 1,80,780 debited to the profit and loss account towards rent. The Income-tax Officer allowed Rs. 40,000 as a deduction and disallowed Rs. 1,40,780, which related to earlier years.- The company's appeal to the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal failed, leading to this reference.2. Company's Contentions:- The company contended that since Rs. 1,80,780 was debited in the profit and loss account in the relevant previous year, the entire amount should be allowed.- Alternatively, the company argued that the rent for earlier years should be added to the capital cost of the cinema building and proper depreciation should be allowed.3. Tribunal's Findings:- The Tribunal recognized that expenditure before production in a manufacturing concern should be capitalized but clarified that depreciation is admissible only on certain fixed assets listed in the Schedule to the Act.- It concluded that the lease rent did not create any asset or enhance the building's value and thus was not entitled to depreciation.4. Supreme Court Reference:- The Supreme Court in Commissioner of Income-tax v. Alps Theatre ruled that the cost of land is not entitled to depreciation along with the cost of the building.- The company's counsel argued that the rent paid should be capitalized and added to the building's cost for depreciation, distinguishing their case from the Supreme Court's scenario where the assessee owned both the building and the site.5. Court's Analysis:- The court held that the relevant provisions of the Indian Income-tax Act make a distinction between land and the building constructed on it, allowing depreciation only on the building.- It emphasized that any expenditure directly referable to the land cannot be part of the building's construction cost for depreciation purposes.6. Calcutta High Court Decision:- The company relied on Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd., where interest on borrowed funds during construction was capitalized and depreciation allowed.- The court found this decision inapplicable as it dealt with expenses directly related to the construction of a depreciable asset, unlike the lease rent in the present case.7. Other References:- The company cited Commissioner of Income-tax v. Buckingham and Carnatic Co. Ltd. and Kalooram Govindram v. Commissioner of Income-tax, where the cost of assets to the assessee was considered for depreciation.- The court found these cases irrelevant as they did not address the distinction between land and building for depreciation purposes.8. Conclusion:- The court concluded that the lease rent paid for the site cannot be added to the building's construction cost for depreciation.- The question was reframed and answered in the negative, against the assessee, stating that the rent paid for earlier years cannot be added to the cost of the building for depreciation allowance under section 10(2)(vi) of the Indian Income-tax Act, 1922.9. Costs:- The Commissioner was entitled to costs of the reference, with counsel's fee fixed at Rs. 250.Final Judgment:Question reframed and answered in the negative.