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Since the beginning of articleship after entering the CA final level, each and every passing day one would come across different situations which are completely new to that person and sometimes even to his seniors. These new situations provide everyone the room to enhance his knowledge and also to explore his knowledge in the more analytical way. Whenever anyone faces any new situation he applies all his knowledge and do all the permutation and combination possible with that. And there is nothing new in it. But in such situations, there could not be any common result because many would succeed to get the way out while many do not get any solution. But one result is common in such situations i.e. it would enhance one’s knowledge. In the same line, I would like to share with you a situation which I faced:

Situation - The assessee has taken a showroom on lease. Thereafter he incurred an expenditure of Rs.10 lakh on the construction of a room to be used as office on 31.05.2016. And we need to tell the effect of transaction in respect of Income Tax Act on the behalf of the assessee.

Things that comes to the mind after coming across the situation:-

  • It is a capital expenditure not a revenue one. So we should go for depreciation and capitalization.
  • But the asset on which we have made expenditure does not belong to us. So how could we capitalize it in our books?
  • So now we need to think it as revenue expenditure. But it is not possible as it is adding value to a kind of asset.

We have applied all permutation and combination here and tried to reach the solution. While doing this exercise we realize that the solution does not seem to be very near and gradually all the doors for solution start closing. But to find the solution we decide to open the new one. And here the new door is Income Tax Act. For this case, the act provides the clarification which was completely new to me. The clarification was so interesting which is described in Sec 32 (1) i.e regarding deemed building of the Income Tax Act 1961. Sec 32 (1) states the following conclusion-

“Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which he holds a lease or any other right of occupancy and any capital expenditure is incurred by the assessee for the purpose of the business or profession on the construction of any structure or by way of renovation or extension or improvement to the building then such capital expenditure will be treated as the building owned by the assessee. Further Sec 30 also provides for the cases where tenant bears the capital expenditure on repairs, such capital expenditure is deemed as building owned by the tenant as per Sec 32(1) and depreciation is allowed to the tenant on such building.”

Solution for the situation as per Income Tax Act 1961:

The expenditure that would be capitalized = Rs.10 lakh
Depreciation would be claimed as on 31.03.2017 @10% = Rs.1 lakh

Further for better explanation i.e. only understanding point of view-

If the leasehold period comes to an end on 31.05.2018 and at that time assessee is required to vacate the building on the same condition as it is on the given date without asking for any compensation then the following treatment would be taken place in the AY 2019-20.


Value remaining in the block= 0 (Since asset ceases to exist)
Opening WDV as on 01.04.2018= Rs. 8.1 lakh
Short term capital gain/(loss)= Rs.(8.1) lakh

As explained above all the related treatment would remain similar in the case of deemed building as well. The only new thing is the assessee is even allowed to utilize the depreciation for the expense made by him on the building which is not owned by him due to Sec 32(1).

The author can also be reached at ajayagrawal19191@gmail.com


Published by

Ajay Agrawal
(Article Assistant)
Category Income Tax   Report

51 Likes   14 Shares   16059 Views


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