AS-10 Vs Income Tax

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CA Ysil Karunai (Querist)
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26 January 2011 Dear Sir,
Please consider this issue:
A company enter into Agreement for taking premises for a Rent of 5 Years. During second year, the company made Renovation and Extention, Partition of Card boards, fixing of Electrical fittings, build a floor, tiles etc., After end of 5 years the Rental Agreement will be proposed for Renewal also.
Query:
1. Whether this Renovation expenses are qualified for Capitalisation as Per AS-10? Since, if Agreement is terminated, the company does not own any part of the Premises.
2. According to Income Tax Act, whether this Renovation expenses are should be capitalised and can claim Depreciation or it should be write off in the year in which it is incurred?

Kumar

Kumar (Expert)
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26 January 2011

1.Since the building is not owned by this Company, there is no existing asset in the books of the Company to which these Expenses can be capitalized.

2.However, if the following conditions are satisfied then you can charge this expenditure over the remaining lease period (4years)
a)The Company has a right to use the Building for the next 5 years as per the agreement
b)Termination as referred by you is at the option of the Company
c)The Company does not have an intention to terminate the agreement during the next 4 years.

CA Shailesh Kumar Bhagat

CA Shailesh Kumar Bhagat (Expert)
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26 January 2011 I am agree with Rajesh reply.

Vivek Raju P

Vivek Raju P (Expert)
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27 January 2011 Yes if the lease term is non cancellable or cancellable at the option of the lessee. You can capitalise them as leasehold improvements and depreciate them over the lease term say in this case 4 years. If the company can prove that a renewal of the lease is certain after the expiry of the lease term for say another 5 years and can prove beyond doubt that lease will infact be extended then the depreciation may be done including the expected period also into consideration. However the useful life of the lease hold improvements should also be considered

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