2023 (7) TMI 1490 - HC - Income Tax

Depreciation @ 50% on a building claiming it to be a temporary structure -Nature of expenditure - AO found that the impugned structure has been standing for 20 years and that it was renovated and beautified for use as a conference hall. The asset was found to be a building existing for more than an year, thus, limiting the claim of depreciation to 10% as against the returned claim of 50% - HELD THAT - Madras Auto Service P. Ltd. 1998 (8) TMI 1 - SUPREME COURT was a case in which the Assessee had obtained lease of premises over a period of 39 years in which there was a old building which was demolished and a new building constructed, to suit the business of the Assessee.The Hon ble Supreme Court held that an expenditure has to be looked at from a commercial point of view. The advantage obtained by the Assessee by constructing a building, the ownership of which was on somebody else, for the purpose of obtaining a long lease of a new building, suitable to it s business needs, that too at a concessional rate, was found to be a revenue expenditure. In fact, the saving in expenditure by reason of the low rent made also a revenue expenditure and not a capital expenditure. Ayesha Hospitals 2006 (10) TMI 117 - MADRAS HIGH COURT held that though the building belonged to the Directors, the owners were separate entities returning the rental income and also paying tax on the profits arising out of the hospital. Following Madras Auto Service (P) Ltd., it was held that expenditure incurred on construction of a leased premises by the Assessee was deductible as revenue expenditure. Assessee had claimed depreciation at the rate of 50% on the ground that the building was a temporary structure. In fact, as per Rule 5 read with appendix 1 of the Income Tax Rules, 1962. Purely temporary erections such as wooden structures are entitled to 100% depreciation and as has been found in the aforesaid judgment, if it is a temporary structure, there could even be a claim raised as a revenue expenditure, however, in the present case the claim was of 50% depreciation, which cannot be allowed. In fact, appendix 1 provides for only 10% depreciation for buildings other than used for residential purpose and not covered by subitems 1 and 3. In the above circumstances, there is absolutely no valid claim for the assessee to obtain a 50% depreciation. We find absolutely no reason to interfere with the order of the Assessing Officer especially in a petition under Article 226.

Summary

Issues:
Challenge to assessment order for depreciation claim under Section 147 read with Section 148 of the Income Tax Act, 1961. Claim of 50% depreciation on a building as a temporary structure. Interpretation of previous judgments regarding depreciation claims. Validity of depreciation claim under Rule 5 of the Income Tax Rules, 1962. Bar on appeal under Article 226 due to limitation.

Analysis:
The High Court judgment pertains to a writ petition challenging an assessment order concerning the rejection and reduction of depreciation claimed by the Assessee for the assessment year 2011-12 under Section 147 read with Section 148 of the Income Tax Act, 1961. The court noted that the petition was time-barred for appeal, given the delay in filing and the date of the order being 30.12.2017.

Upon examining the merits, it was found that the Assessee had claimed 50% depreciation on a building, asserting it to be a temporary structure. However, the Assessing Officer, during the assessment under Section 143(3), did not address this claim, leading to its scrutiny under Section 147 read with Section 148. The Assessee relied on precedents like Madras Auto Service (P) Ltd. and Ayesha Hospital P. Ltd. to support the temporary structure argument.

The Assessing Officer determined that the structure had been in existence for over 20 years and had been renovated for use as a conference hall, thereby limiting the depreciation claim to 10% instead of the claimed 50%. The court referenced Rule 5 of the Income Tax Rules, 1962, which allows 100% depreciation for purely temporary erections and only 10% for non-residential buildings not covered by specific subitems.

The judgment discussed the Madras Auto Service (P) Ltd. case, emphasizing the commercial viewpoint in assessing expenditure and the distinction between revenue and capital expenditure. It also cited the Ayesha Hospital P. Ltd. case to illustrate the treatment of construction expenses on leased premises as revenue expenditure based on ownership and rental income considerations.

Ultimately, the court upheld the Assessing Officer's decision, emphasizing the lack of grounds for interference in an Article 226 petition. The writ petition was dismissed, affirming the rejection of the Assessee's depreciation claim and highlighting the inapplicability of a 50% depreciation rate for the building in question.