Depreciation on Capital expenditure on building not owned by assessee/ Concept of deemed building-Expl.1 to Section 32
Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.
It is also to be mentioned here that as per Explanation to Section 30 (w.e.f. AY 2004-05) cost of repairs shall not include expenditure in the nature of capital expenditure.
Therefore on combined reading of Explanation to section 30 and Explanation 1 to section 32, assessee shall not be allowed deduction u/s 30 in respect of renovation work in the nature of capital expenditure incurred on building not owned by him. However he may claim depreciation on it.
Some case laws
Current Repairs- CIT v Modi Industries Ltd. (2011) 339 ITR 467 (Delhi)It is well-settled that if a part of the structure becomes dilapidated and repairs/reinforcement of some parts of the said structure is required, it would be treated as ‘current repairs’. However, on the other hand, if a part of the building is demolished and new structure is erected in its place, it has to be treated as a capital expenditure, as in that case totally new asset is created even if it may be a part of the building.
Repairs of leased premises CIT v Hi Line Pens (P.) Ltd. (2008) 306 ITR 182 (Delhi) Expenses incurred by assessee-company towards repairing of premises taken on lease so as to make it more conducive to its business activity could be allowed as a deduction under section 30(a)(i). The Legislature has made a distinction between expenses incurred by a tenant for repairs of the premises and expenses incurred by a person who is not a tenant towards current repairs to the premises. This distinction has to be given meaning.
Capital expenditure not allowable-RPG Enterprises Ltd. v DCIT (2016) 240 Taxman 614, 386 ITR 401 (Bombay)
In this case, tenancy agreement provided that the cost of repairs and renovation i.e. civil, electrical, plumbing, polishing etc. would be carried out by the appellant at its own expenses after taking prior permission from the landlord.
All the Authorities under the Act have rendered a finding of fact that the so-called “repairs and maintenance” were in fact extensive renovation involving civil work. This expense resulted in an advantage/benefit of enduring nature inasmuch as it inter alia resulted in the appellant being able to accommodate more number of employees and facilitate improving its trading operations.
Thus, it was held that, the benefit obtained by the appellant, according to the Authorities was substantially in the capital field and could not be entirely allowed as revenue expenditure.