1998 (5) TMI 3 - SC - Income Tax

Residential building purchased was used as commercial building after construction and after paying sum of RS. 36,96,516 - assessee added that amount to the cost of the building constructed by it and claimed depreciation - held that assessee is entitled to depreciation in respect of that sum which it claimed as part of the actual cost of construction of a building constructed by it for business purposes

Summary

Issues:
- Entitlement to claim depreciation on a sum paid for construction of a building.
- Distinction between cost of land and cost of building for depreciation purposes.

Entitlement to claim depreciation on a sum paid for construction of a building:
The case involved the question of whether the assessee was entitled to claim depreciation on a sum of Rs. 36,96,516 paid for constructing a new multi-storeyed building for business purposes. The assessee had purchased an existing residential building and later demolished it to construct a new building. The High Court, Commissioner (Appeals), and Tribunal all concluded that the amount paid for additional construction was rightly added to the cost of the building for claiming depreciation. The High Court emphasized that the payment was made for the additional space constructed by the assessee, which formed part of the cost of the building. The court held that the amount was expended to create a business asset and, therefore, was a legitimate part of the construction cost, allowing the assessee to claim depreciation on it.

Distinction between cost of land and cost of building for depreciation purposes:
The Department contended that the amount paid for commercial use of the land should be added to the cost of the land, not the building, for depreciation calculation purposes. However, the High Court rejected this argument, stating that the payment was made for additional construction and not for the land itself. The court highlighted that the land had already been converted for commercial use in 1962, and the subsequent payment was specifically for the construction of the building. The High Court upheld the view that the sum paid was part of the cost incurred by the assessee in constructing the building and, therefore, eligible for depreciation. The court distinguished this case from previous judgments that focused on the distinction between the cost of land and building for depreciation purposes, emphasizing that the key issue was whether the amount in question should be included in the cost of the building, not the land.

In conclusion, the Supreme Court dismissed the appeals and upheld the decision that the sum paid for additional construction was rightly included in the cost of the building for claiming depreciation. The court clarified that the payment was for creating a business asset and, therefore, formed part of the construction cost eligible for depreciation, distinct from the cost of the land.