Claiming of building construction expenditure
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
04 August 2013
My query is an assessee constructed building and started business but land does not belongs to him now please clarify me how such asseessee must claim building expenditure is it at a time as revenue expenditure or by capitalizing claim expenditure as depreciation
Thanks in advance
Regards,
Shivateja
Thanks in advance
Regards,
Shivateja
04 August 2013
Please share the agreement entered in to with the land lord
19 July 2024
When an assessee constructs a building but does not own the land on which the building is constructed, the treatment of building construction expenditure depends on the nature of the ownership and the intended use of the building. Here’s a clarification on how such expenditures can be treated:
### 1. Ownership of the Building:
- **If the Building is Owned by the Assessee:**
- Even if the land does not belong to the assessee, if the building is owned by the assessee (constructed by them), the expenditure on construction is typically treated as a capital expenditure.
- Capital expenditure means the cost incurred to acquire or improve a long-term asset, which in this case is the building.
- As a capital expenditure, the cost of construction can be capitalized, meaning it is added to the cost of the building.
### 2. Treatment of Expenditure:
- **Capitalization of Expenditure:**
- The expenditure incurred on construction (such as materials, labor costs, etc.) should be capitalized as part of the cost of the building.
- This capitalized amount forms the basis for depreciation calculations over the useful life of the building.
- **Depreciation Deduction:**
- Once the building is ready and used for business purposes, depreciation can be claimed on the capitalized amount of construction expenditure.
- Depreciation is claimed as a deduction against the business income to reflect the wear and tear of the building over its useful life.
### 3. Revenue Expenditure Considerations:
- **Revenue Expenditure vs. Capital Expenditure:**
- Generally, revenue expenditure is incurred for day-to-day operational expenses (like repairs and maintenance) and is fully deductible in the year it is incurred.
- Capital expenditure, such as building construction costs, is not fully deductible in the year of expenditure but is capitalized and depreciated over time.
- **Exception for Revenue Recognition:**
- If the building is not owned by the assessee (perhaps it belongs to a lessor or is leased), and the assessee has incurred expenses under a leasehold improvement arrangement, the treatment may differ. In such cases, leasehold improvements might be treated as revenue expenditure.
### Conclusion:
For your case where the assessee constructs a building on land they do not own, the building construction expenditure should generally be capitalized. It becomes part of the cost of the building and is eligible for depreciation under the Income Tax Act. This approach aligns with the principle of treating capital expenditures separately from revenue expenditures, ensuring proper recognition of costs over the asset's useful life.
It’s advisable to consult with a tax advisor or chartered accountant to ensure compliance with specific tax laws and to determine the appropriate treatment of building construction expenditure based on the unique circumstances of the assessee's business and ownership arrangement.
### 1. Ownership of the Building:
- **If the Building is Owned by the Assessee:**
- Even if the land does not belong to the assessee, if the building is owned by the assessee (constructed by them), the expenditure on construction is typically treated as a capital expenditure.
- Capital expenditure means the cost incurred to acquire or improve a long-term asset, which in this case is the building.
- As a capital expenditure, the cost of construction can be capitalized, meaning it is added to the cost of the building.
### 2. Treatment of Expenditure:
- **Capitalization of Expenditure:**
- The expenditure incurred on construction (such as materials, labor costs, etc.) should be capitalized as part of the cost of the building.
- This capitalized amount forms the basis for depreciation calculations over the useful life of the building.
- **Depreciation Deduction:**
- Once the building is ready and used for business purposes, depreciation can be claimed on the capitalized amount of construction expenditure.
- Depreciation is claimed as a deduction against the business income to reflect the wear and tear of the building over its useful life.
### 3. Revenue Expenditure Considerations:
- **Revenue Expenditure vs. Capital Expenditure:**
- Generally, revenue expenditure is incurred for day-to-day operational expenses (like repairs and maintenance) and is fully deductible in the year it is incurred.
- Capital expenditure, such as building construction costs, is not fully deductible in the year of expenditure but is capitalized and depreciated over time.
- **Exception for Revenue Recognition:**
- If the building is not owned by the assessee (perhaps it belongs to a lessor or is leased), and the assessee has incurred expenses under a leasehold improvement arrangement, the treatment may differ. In such cases, leasehold improvements might be treated as revenue expenditure.
### Conclusion:
For your case where the assessee constructs a building on land they do not own, the building construction expenditure should generally be capitalized. It becomes part of the cost of the building and is eligible for depreciation under the Income Tax Act. This approach aligns with the principle of treating capital expenditures separately from revenue expenditures, ensuring proper recognition of costs over the asset's useful life.
It’s advisable to consult with a tax advisor or chartered accountant to ensure compliance with specific tax laws and to determine the appropriate treatment of building construction expenditure based on the unique circumstances of the assessee's business and ownership arrangement.
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