2015 (3) TMI 1120 - AT - Income Tax

Depreciation towards temporary structures in leased premises - CIT(A) restricted claim to 10% as against 100% claimed by the assessee - Held that - The assessee has incurred an expenditure towards refurbishing the leased out premises by incurring expenditure on wooden partitions, false ceiling, ESD tiled floorings, electrical network cabling and interior decoration etc. There is no doubt that the assessee would derive benefit from these structures year after year and therefore, the benefit derived is of enduring nature. From the lease deed of the assessee with its landlord, it is evident that the lease is for a period of nine years which can be further extended by mutual consultation. It is also evident that the asset leased out by the assessee is of commercial nature and intention of the landlord is to let out the premises on long term basis. Therefore, from the facts and circumstances of the case, it is evident that the assessee would derive benefit from these structures at least for a period of nine years or even more. These structures also remains as the property of the assessee and on vacating the premises, the assessee is entitled to either remove these structures, or sell it to the new tenant. As pointed out by the Ld. CIT (A), Explanation-1 to Section 32 clearly clarifies the issue, though it has been inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 01.04.1988. In the present case before us, it is not the repair work that was carried on but creation of an asset itself by incurring an whooping expenditure of. Considering the facts of the present case before us, and based on our above discussions, we do not find it necessary to interfere with the elaborate and speaking decision rendered by the Ld. CIT (A). Accordingly, the issued is decided in favour of the Revenue. Needless to mention, that all the decisions cited by the Ld. A.R, are distinguishable from the facts of the present case before us. - Decided against assessee

Summary

Issues:
1. Disallowance of excess claim of depreciation on temporary structures in leased premises.
2. Interpretation of Explanation 1 to Section 32 regarding depreciation on leasehold buildings.
3. Distinguishing between revenue and capital expenditure on improvements in leased premises.

Issue 1: Disallowance of excess claim of depreciation on temporary structures in leased premises
The appellant, engaged in servicing and trading of computer and telecommunication products, filed an appeal against the order of the Commissioner of Income Tax disallowing the excess claim of depreciation on furniture and fittings in leased premises. The Assessing Officer restricted the depreciation to 10% based on the number of days the asset was put to use, contrary to the 100% claimed by the appellant. The Commissioner upheld the decision, citing the nature of the expenditure as capital in light of relevant case laws.

Issue 2: Interpretation of Explanation 1 to Section 32 regarding depreciation on leasehold buildings
The Commissioner noted that there is no distinction between depreciation on leasehold and owned buildings as per Explanation 1 to Section 32. The appellant's expenses on partitions and improvements in leased premises were considered capital in nature, falling under the purview of Explanation 1. The Commissioner emphasized that improvements on leasehold buildings are eligible for depreciation, and the nature of the expenditure does not change based on ownership status.

Issue 3: Distinguishing between revenue and capital expenditure on improvements in leased premises
The Tribunal analyzed the expenditure incurred by the appellant on refurbishing leased premises, including wooden partitions, false ceiling, and other interior works. The Tribunal observed that the structures provided enduring benefits and were the property of the appellant, indicating a capital nature. The Tribunal differentiated between temporary structures eligible for 100% depreciation and enduring improvements, affirming the Commissioner's decision to disallow the claim of revenue expenditure. The Tribunal found no need to interfere with the Commissioner's decision, emphasizing the distinction from previous case laws cited by the appellant.

In conclusion, the Tribunal dismissed the appellant's appeal, upholding the disallowance of excess depreciation claim on temporary structures in leased premises and affirming the capital nature of the improvements made by the appellant. The decision was based on the interpretation of relevant tax laws and case laws, emphasizing the enduring benefits derived from the improvements in leased premises.