2)INCOME TAX 22-23

Understanding Repairs and Deduction for Rented Building

General Rule:

• Expenses incurred by the owner on repairs are generally allowed as deduction under business income, depending on whether it’s revenue or capital expenditure.

• For a tenant (assessee), deductions depend on the terms of the rental agreement and nature of repairs.

Explanation of Your Points:

i) Current repairs for rented building: Not allowed as deduction if agreement states owner is responsible

• If the rental agreement explicitly says the owner is responsible for repairs, the tenant should not incur or claim repair expenses.

• If tenant incurs such expenses, generally it’s not allowed as deduction because it’s not a business expense borne by the assessee (tenant).

• Also, the tenant has no ownership or capital interest in the building.

ii) Capital repairs for rented buildings: Allowed as deduction

• This is a bit nuanced. Generally, capital expenses (like major renovations, structural improvements) are not deductible as revenue expenses; they are usually capitalized and depreciated over time.

• However, if the tenant incurs capital expenditure for a rented building (like putting up partitions, renovations enhancing the business premises), it can be claimed as leasehold improvements.

• Such capital expenses are allowed to be depreciated (claimed as deduction) over useful life as per Income Tax rules (usually under block of assets for leased assets).

iii) Capital expenditure repairs for rented building: Though tenant not owner, can claim repairs

• Even though tenant does not own the building, if the tenant incurs capital expenditure improving the rented property, such expenditure is considered leasehold improvements.

• These improvements belong to the tenant’s business, so tenant can claim depreciation on those improvements.

• It is allowed as deduction but not as immediate expense; rather as depreciation over several years.

• This is why capital expenditure incurred by tenant on rented premises is treated differently from normal repairs.

Summary Table

Additional Notes

• Always refer to rental agreement terms for responsibility.

• Repairs should be classified as revenue (current) or capital to determine tax treatment.

• Tenant's capital expenditure on rented property is treated as fixed asset (leasehold improvement).

• Capital expenses give deduction via depreciation, not as direct expense.