2021 (9) TMI 1086 - AT - Income Tax

Claim of depreciation - AO added a sum being depreciation claimed on capitalisation being pre-commencement rent and other expenditure incurred under various heads which were capitalized to the building as the same is incurred before the commencement of the operation of the Assessee - plea of the Assessee was that since the hotel work was still under construction, the same ought to be capitalized - HELD THAT - Expenditure that was capitalized were incurred prior to commencement of business when the hotel was under construction - Assessee capitalized the costs incurred prior to commencement of business to the capital asset buildings as the expenses were incurred during the time of construction of building in the form of hotel which was yet to commence. Section 32 of the Act allows depreciation on actual cost of the asset, which means the actual cost to the assessee. This cost should be construed in ordinarily commercial manner. AS-10 regarding accounting for fixed assets issued by the ICAI specifies the components of cost of a fixed asset. Purchase price of an asset includes import duties, levies, non-refundable taxes and any other cost directly attributable to the asset for bringing it to the working condition. The examples given in AS-10 are site preparation, initially delivery and handling cost, installation cost, such as laying foundations, and professional fees for architects and engineers. Preliminary project expenditure, indirect expenditure relating to construction and other indirect expenditure not related to construction have been included in the cost of the asset - The expenses are required to be capitalised and that the allocation has been made by the assessee on a reasonable basis in the ratio of cost of the asset to the total cost. Section 43(1) of the Act defines actual cost to mean actual cost of the asset to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. We accordingly hold that the expenses incurred by the assessee are required to be capitalised in the light of the decision in the case of Food Specialities Limited and Lucas-TVS Limited 1981 (3) TMI 38 - DELHI HIGH COURT . We hold and direct accordingly and allow the appeal of the Assessee.

Summary

Issues:
- Disallowance of depreciation claim by revenue authorities on pre-commencement rent and other expenditure.

Analysis:
1. The only issue in this appeal was whether the revenue authorities were justified in disallowing the Assessee's claim for deduction of a sum towards depreciation on pre-commencement rent and other expenses. The Assessee argued that these expenses were essential for starting the business and were capitalized to the building as they were directly related to the asset coming into existence. The Assessee relied on Accounting Standard 10 and Income Computation and Disclosure Standards (ICDS) to support their claim for full depreciation allowance.

2. The CIT(A) upheld the AO's decision to disallow the depreciation claim, stating that expenses like rent, salary, and administrative costs incurred before the commencement of business cannot be capitalized as they do not increase the value of the asset. The CIT(A) reasoned that depreciation is an expense related to the cost of a capitalized asset over time, and since the expenses in question did not enhance the asset's value, depreciation could not be allowed on them.

3. The ITAT considered the AS-10 issued by the ICAI, which specifies components of the cost of a fixed asset, including expenses directly attributable to bringing the asset to a working condition. Referring to precedents like CIT Vs. Food Specialities Limited and Challapalli Sugars Limited Vs. CIT, the ITAT concluded that expenses incurred on essential activities like construction, renovation, and setting up a factory can be capitalized towards the cost of the asset. The ITAT held that the Assessee's expenses were required to be capitalized based on these principles and allowed the appeal, directing the full depreciation allowance.

4. The ITAT's decision was supported by the rationale that expenses necessary to bring fixed assets into existence and put them in working condition should be included in the cost of the assets. Drawing parallels from previous cases like Lucas-TVS Limited, the ITAT found that the expenses incurred by the Assessee were capital in nature and should be allowed for depreciation. Consequently, the ITAT allowed the appeal, emphasizing the applicability of established legal principles in determining the capitalization of expenses and eligibility for depreciation.

5. In conclusion, the ITAT allowed the appeal of the Assessee, emphasizing the need to capitalize expenses directly related to bringing fixed assets into existence and putting them in working condition. The decision was based on legal precedents and accounting standards, highlighting the importance of recognizing and allowing depreciation on capital expenditures incurred before the commencement of business operations.