Depreciation on capital expenditure by tenant
This query is : Resolved
11 April 2015
Sec 30 says tenant can claim cost of repairs to the premises,but cost of repairs shall not include any expenditure in the nature of capital expenditure.
Further, Explanation 1 to Sec 32, says capital expenditure incurred by an assessee in respect of a building occupied by way of lease or other right of occupancy,can be capitalised and depreciation claimed.
My Question is though my client is not under lease agreement,does the term " Right of occupancy "make him eligible to capitalise the expenditure and claim depreciation ?
If not, how this expenditure should be shown in financial statements ? My client is a PRIVATE LIMITED COMPANY.
Further, Explanation 1 to Sec 32, says capital expenditure incurred by an assessee in respect of a building occupied by way of lease or other right of occupancy,can be capitalised and depreciation claimed.
My Question is though my client is not under lease agreement,does the term " Right of occupancy "make him eligible to capitalise the expenditure and claim depreciation ?
If not, how this expenditure should be shown in financial statements ? My client is a PRIVATE LIMITED COMPANY.
11 April 2015
If the company can establish that it has an 'interest in the said property' on account of the 'other right of occupancy', then expenditure can be capitalized and depreciation also can be claimed because the words 'other right of occupancy' should be construed ejusdem generis with the word 'lease' appearing in explanation 1 to section 32 of the Income tax Act,1961.
11 April 2015
Sir,
My Client company cannot establish " interest in the said Property " as you say and it is not a lease agreement either. In that case, I cannot debit P&L as per sec 30, but capitalise the amount and not claim depreciation ?
Have I understood you correctly ?
My Client company cannot establish " interest in the said Property " as you say and it is not a lease agreement either. In that case, I cannot debit P&L as per sec 30, but capitalise the amount and not claim depreciation ?
Have I understood you correctly ?
11 April 2015
This query is still open
21 July 2024
Based on the provisions you've mentioned from the Income Tax Act and considering your client's situation as a Private Limited Company without a lease agreement or established interest in the property:
1. **Right of Occupancy and Capital Expenditure:**
- The term "right of occupancy" typically refers to legal arrangements such as lease agreements or licenses where an entity has the right to occupy and use a property. According to Explanation 1 to Section 32 of the Income Tax Act, capital expenditure on a building occupied by way of lease or other right of occupancy can be capitalized, and depreciation can be claimed.
- If your client does not have a lease agreement or any documented right that establishes its interest in the property (like a license), it may not meet the requirement under Explanation 1 to Section 32 to capitalize the expenditure and claim depreciation.
2. **Treatment in Financial Statements:**
- Since your client cannot establish an interest in the property through a lease or similar right, the capital expenditure incurred on repairs or improvements to the premises would typically be treated as revenue expenditure.
- Revenue expenditure is expensed in the year it is incurred and would be debited to the Profit and Loss Account (P&L Account) as per Section 30 of the Income Tax Act, which allows deduction of repairs costs but excludes capital expenditures.
### Practical Steps:
- **Debit to P&L Account:**
- In your client's case, where there is no lease or clear right of occupancy, the expenditure on repairs should be treated as revenue expenditure.
- Debit the amount spent on repairs directly to the Profit and Loss Account (P&L Account) during the year it is incurred. This ensures compliance with Section 30 of the Income Tax Act, which allows deduction for repairs but not for capital expenditures.
- **Consultation:**
- It's recommended to consult with a tax advisor or a chartered accountant who can review the specific circumstances of your client and provide tailored advice. They can offer guidance on the appropriate treatment of expenditures and ensure compliance with relevant tax laws.
By following these steps, your client can appropriately account for the repair expenditures in accordance with the Income Tax Act and financial reporting standards.
1. **Right of Occupancy and Capital Expenditure:**
- The term "right of occupancy" typically refers to legal arrangements such as lease agreements or licenses where an entity has the right to occupy and use a property. According to Explanation 1 to Section 32 of the Income Tax Act, capital expenditure on a building occupied by way of lease or other right of occupancy can be capitalized, and depreciation can be claimed.
- If your client does not have a lease agreement or any documented right that establishes its interest in the property (like a license), it may not meet the requirement under Explanation 1 to Section 32 to capitalize the expenditure and claim depreciation.
2. **Treatment in Financial Statements:**
- Since your client cannot establish an interest in the property through a lease or similar right, the capital expenditure incurred on repairs or improvements to the premises would typically be treated as revenue expenditure.
- Revenue expenditure is expensed in the year it is incurred and would be debited to the Profit and Loss Account (P&L Account) as per Section 30 of the Income Tax Act, which allows deduction of repairs costs but excludes capital expenditures.
### Practical Steps:
- **Debit to P&L Account:**
- In your client's case, where there is no lease or clear right of occupancy, the expenditure on repairs should be treated as revenue expenditure.
- Debit the amount spent on repairs directly to the Profit and Loss Account (P&L Account) during the year it is incurred. This ensures compliance with Section 30 of the Income Tax Act, which allows deduction for repairs but not for capital expenditures.
- **Consultation:**
- It's recommended to consult with a tax advisor or a chartered accountant who can review the specific circumstances of your client and provide tailored advice. They can offer guidance on the appropriate treatment of expenditures and ensure compliance with relevant tax laws.
By following these steps, your client can appropriately account for the repair expenditures in accordance with the Income Tax Act and financial reporting standards.
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