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.

[C.A. DEV KUMAR KOTHARI]

Apartments in multistoried buildings:

Apartments may be purchased for use of personal residence or for the purpose of business or profession as office, staff residence, godowns, show rooms etc. in multi-storied building or joint ownership buildings. In such cases pattern of ownership depends on various factors like type of land on which building is constructed, type of ownership in apartment, rights of apartment owners in case of demolition etc. For sake of brevity it is assumed that the owner is owner of construction exclusively for his apartment and has interest in land and common areas on proportionate basis. 

Depreciation:

In case of use of ownership apartments for business or profession, depreciation may be claimed and is allowed as per section 32 of the Income tax Act, 1961 read with rules 5, 5A  and Appendix (depreciation tables) in the I.T. Rules, 1962. However, depreciation can only be allowed on the cost of construction and not on the cost of land or proportionate share in land.

For the purpose of claiming depreciation a care is necessary that depreciation is not claimed on the proportionate cost of the land because depreciation can be claimed only in respect of the construction cost of building, land being non depreciable asset - CIT V Alps Theatre [2008 -TMI - 5013 - SUPREME Court] its cost cannot be included in the cost of building for the purpose of claiming depreciation.

General Mistake:

Generally depreciation is provided in accounts and claimed in Income Tax on the entire cost of ownership apartments including the cost of   proportionate share in the land. In fact in Income tax assessment also in many cases depreciation has been allowed on entire amount. The department may also take action to rectify the mistake under section 154 or by way of proceedings of reassessment or revision etc.

Generally in the conveyance deed the cost of construction and cost of proportionate share of land is not separately mentioned. Therefore, entire cost is capitalized under the head buildings and depreciation is provided in accounts and claimed in the computation of income also.

Voluntary rectification of mistake is desirable:

To avoid action by the Assessing Officer by way of rectification and/or, reassessment and revision by the CIT for correcting depreciation allowed, and also possibility of levy of penalty, it is desirable that wherever wrongly higher depreciation has been claimed in respect of apartments used for the purpose of business and profession a remedial measures for rectification should be taken  by the assessee as soon as possible to establish bona fides of the assessee. The reason for mistake may be mentioned as absence of details of separate cost, and mistake by concerned persons so as to avoid penalty.

This can be taken by ascertaining proportionate cost of share in land, construction cost and then reworking depreciation allowable. Wherever possible revised return of income may be submitted and in any case from the current year the mistake can be rectified. For this purpose cost of construction minus depreciation so far allowed (on total cost) may be taken as corrected WDV for depreciation in initial year of rectification and future.

Capital Gain:

The land is not a depreciable asset and depreciation cannot be allowed. Therefore, if the land is a long term capital assets, it will be eligible for benefit of tax on long term capital gain including inter-alia indexation of cost (or fair market value as on 01.04.1981 where applicable) by cost inflation index and lower rate of tax under section 112 in case of long-term land.

So far as cost of construction is concerned, if depreciation has been allowed it will be covered by the depreciation method for the block of assets read with Section 50.  Therefore, if the opening WDV and the cost of new building (cost of construction) acquired is less than the sale value of construction, then the excess of sale value will be considered as short term capital gain.

Cost of land may be substantial in posh localities/business localities:

Cost of ownership apartments vary widely from area to area. This is not because the type of construction or cost of construction varies very much but because the cost of land varies very widely from area to area. For example, let us take 3 cases of similar flats in size and quality but in different localities - A, B, C.                                   

	A. Locality	B. Locality	C. Locality
Cost of land per sqr. Meter	Rs. 50,000	Rs. 15,000	Rs. 5,000
Cost of ownership apartment   per sqr. Ft.	Rs.  5,000	Rs. 1500	Rs. 1000

The cost of construction comes to about say Rs.500/- per sqr. Ft. and contractor's profit margin of 20%, gives cost of construction @ Rs.600/- per sqr.ft. Therefore, the proportionate share in land can be valued at Rs.4400/-, Rs.900/- and Rs.400/- per sqr. Ft. of ownership apartment in A, B, C, respectively. As the construction cost is equal, the depreciation claim in respect of all the 3 apartments will be similar. However, if depreciation is claimed on total cost it will be wrong.

Depreciation per square feet:	A	B	C
@ 5% on total cost  Rs.	250	75	50
@ 5% on construction  cost	30	30	30

In case there is some variation in quality of construction in the 3 areas that can be taken into account for ascertaining the cost of construction.

Depreciation may not be claimed:

In many cases it may be advisable not to claim depreciation because the cost of land is substantial. Furthermore, by not claiming depreciation one can take advantages of LTCG. If at any time it is found that claiming depreciation is more favourable, depreciation can be claimed from any year. But once depreciation is claimed and allowed the asset shall always be subject to the provisions of section 50. Therefore, where, cost of land and construction is not available depreciation may not be claimed or may be withdrawn, if already claimed.

The following notes may be given in accounts and computation of income:

As the amount of cost of construction and proportionate share in land is not separately available, depreciation has not been provided in accounts and has not been claimed in the computation of income.

DCIT  Vs CAPITAL CARS P. LTD. 2007 -TMI - 2393 - ITAT, DELHI BENCH

The matter for depreciation arose before Tribunal. Revenue contended that assessee is not entitle to deduction of depreciation on the component of the value of land contained in the purchase consideration and accordingly disallowed depreciation one third of total consideration. Tribunal  held that revenues contention was correct and allowed appeal of the revenue following the decision in the case of  - CIT V Alps Theatre [2008 -TMI - 5013 - SUPREME Court]. Other decision  namely CIT v. Hindustan Times Ltd. [2008 -TMI - 5665 - SUPREME Court] was  also considered, but this  did not relate to the cost of land but cost of improvement of building  for conversion from residential to commercial building, therefore that decision was not applicable. Some other decisions on rule of interpretation were also considered but those are not of much relevance in the context of this article. The Tribunal in para 18 observed and held on the following lines:

In a nutshell, it is held that on a complete reading of the documents, it is found that the subject-matter of agreement was land and building

fixation of rate on the basis of built-up area and the clause in the agreement between seller and the GDA cannot alter the  aforesaid conclusion in any manner.

The land was very much useful for enjoyment of the built-up area and in any case that issue is irrelevant in determining that the proportionate land had any cost or not.

The issue is regarding the subject-matter of the agreement and the consideration paid, which is against the assessee.

The determination of the value of land and depreciation claimed thereon involve finding of new facts, which is beyond the ambit of this appeal even after taking into consideration the decision in the case of B. R. Bamasi [1972] 1970 -TMI - 8216 - )BOMBAY High Court).