Land and building – composite price – depreciation on entire cost allowed – though favorable to assessee but decisions seems wrong and need reconsideration. Composite costs should be allocated.

[DEV KUMAR KOTHARI]

Earlier article on related subject:

Accounting and income-tax practice - OWNERSHIP APARTMENTS- DEPRECIATION- segregate cost of share in land and common facilities a general discussion with a decision of ITAT. An Article By: - C.A. DEV KUMAR KOTHARI  April 29, 2009

In above article author had discussed matter in context of  ‘Ownership Apartments in multistoried buildings’  wherein generally composite consideration is mentioned. Author had expressed views that from the accounting point of view ( for assets and depreciation thereon) and tax computation purposes, cost of construction should be ascertained/ estimated and balance amount can be considered as cost of land. Depreciation , if allowable depending on use, should only  be claimed on cost of construction for computing correct income and to avoid additions and  proceedings by way of rectification, revision, reassessment etc. in case by mistake depreciation has been  claimed and allowed.  

Not claiming depreciation on cost of land can also be preferable to avoid its inclusion in ‘block of depreciable assets’ and treatment as short-term capital gain in case of sale of such land. 

In that article judgment of ITAT  2007 (1) TMI 73 - ITAT, DELHI ,DEPUTY COMMISSIONER OF INCOME-TAX VERSUS CAPITAL CARS P. LTD Was discussed along with judgments referred and relied on in that judgments.

Some recent and related judgments considered.

2021 (10) TMI 964 - ITAT DELHI   NATIONAL HOUSING BANK VERSUS ACIT, CIRCLE-26 (2) , NEW DELHI  ITA No. 4358/Del/2018  Dated: - 21 October 2021  ( IN SHORT NHB CASE)

2015 (2) TMI 280 - ITAT DELHI  ITO, WARD-6(4), NEW DELHI VERSUS MILLENNIUM SPIRE INDIA MANAGEMENT (P) LTD. ITA No. 3297/Del/2013 Dated: - 23 December 2014   ( IN SHORT MSIM or millenium CASE)

2005 (11) TMI 362 - ITAT BANGALORE  JOINT COMMISSIONER OF INCOME-TAX, SPL. RANGE 4 VERSUS RAJESH EXPORTS LTD.   ITA NO. 17 (BANG.) OF 2001  Dated: - 30 November 2005  ( IN SHORT Rajesh Exports case)

1967 (3) TMI 6 - SUPREME COURT COMMISSIONER OF INCOME-TAX, PUNJAB, JAMMU AND KASHMIR AND HIMACHAL PRADESH VERSUS ALPS THEATRE  26 of 1966  Dated: - 15 March 1967  ( In short Alps Theatre case)

In the cases of Rajesh Exports, Millennium , and recent one case of NHB depreciation on entire cost has been allowed by Tribunal for the reason that  segregate amount of cost of land and structure are not separately provided in purchase agreement  / deed and even otherwise it has not been ascertained.

With due respect author feels that this approach is not correct. If such approach is followed, then the assesse who correctly segregate amount of cost of land and building separately will be at loss because on cost of land he will not be allowed depreciation.

There are provisions to segregate amount of actual cost as per S.43.1 and  practice of allocation of cost is in vogue in accounting and taxation both.  Amount of composite costs of various assets purchased or acquired in a case of slum sale by vendor are allocated by buyer for various assets and depreciation is claimed as per different block of assets.

In case of land and building also a fair estimate can be made by allocating estimated cost of construction adjusted for depreciation of outlived life on date of acquisition. Portion of cost of land and building out of composite cost can be reasonably estimated and ascertained for the purpose of account and tax matters.

In case of NHB ,other reason given by Tribunal is found in paragraph 11 of the order which is reproduced below:

            “11. The Revenue has not brought to our notice any other contrary binding precedents to our notice. Therefore, respectfully following the decision of the Co-ordinate Bench in ITA No.6888/Del/2014 (supra), we hereby direct the Assessing Officer to delete the addition.

Un quote:

The decision of the ITAT, discussed in earlier article, in case reported as ITAT 2007 (1) TMI 73 - ITAT, DELHI, DEPUTY COMMISSIONER OF INCOME-TAX VERSUS CAPITAL CARS P. LTD was not referred to by the Departmental Representatives in cases of NHB and Millennium both. Therefore, it seems that a decision of ITAT Delhi has been missed or ignored by the ITAT, Delhi in subsequent cases.

 Furthermore, author feels that honorable Tribunal can itself consider precedence even if it is not pointed out by representatives of parties.

Readers may refer to earlier article for a detailed discussion on these aspects.