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Capital or revenue.

tirthesh shah (student) (125 Points)

18 May 2012

what should be the treatment for Expenses for painting of wall & ceiling at the time of renovation of estate.

is it revenue or capital ?

does paint job bring any improvement to the estate(building) so as to qualify it for the capital expenditure?

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8 Replies

Arvind Sharma (ACA) (1432 Points)
Replied 18 May 2012

It should be considered as REVENUE expenditure as painting does not Improve normal capacity of building...

1 Like

Z (Tax Consultation (US and India)) (2970 Points)
Replied 18 May 2012

But if its done for the firsrt time then caitalized

Like you purchased it and you feel the need of painting or do some work like marbles etc then all such expenses shall be capitalized

Assumed that its not the property which is taken on lease/rent

tirthesh shah (student) (125 Points)
Replied 18 May 2012

it is undertaken on the estate which has been covered under long term lease agreement.

renovation is undertaken first time after many years(possibly ten yrs).

and also the point of contention is benefit of painting expenses is expected to be realised over a period of time.

tirthesh shah (student) (125 Points)
Replied 18 May 2012

the claim of the management is that Renovation is expenditure that can add value to a business property and prolong the property's life.

they hold view that renovation is carried out not only to maintin the existing condition of building but also brings improvement over it.

tirthesh shah (student) (125 Points)
Replied 18 May 2012

painting of walls and ceiling as contended by them will help to maintain and improve the life of the building from exterior wear and tear.

Z (Tax Consultation (US and India)) (2970 Points)
Replied 18 May 2012

"Painting of walls and ceiling as contended by them will help to maintain and improve the life of the building from exterior wear and tear."

Most buildings do have expected life span and if it is evident that painting it can INCREASE the life span then in books of accounts you should capitalize

Since its a rented premises management should hold opinion (if possible) that because of rennovation future economic benefits are expected and that way they could take all the expense to the cost of building

For eg. more customers are expected due to rennovation, and depending upon the facts of the case expense may or may not be capitalized

If building is used like warehouse then more money can be expected from customer as now rennovated so less chances of damage to goods lying in warehouse

Alternatively or in combination the management may hold opinion that painting WILL EXTEND the life span of the building, there are some paints which do extend the life for eg Neosilica 21C is claimed to have capability of extending life span or other using other products providing high grime resistance etc which WILL extend the life

First time rennovation is added in cost but time period in this case is substantially long, this point needs consideration

IF for maintaining the life, economic future benefits of the property then its usually considered as revenue but if future economic benefits are expected then it can be capitalized.

For income tax purpose this expense or any other expense it shall be treated as revenue ONLY whether it brings fututre economic benefits or not

Do not want to bring in the concept of deffered revenue exp. ( "expenses is expected to be realised over a period of time.")

tirthesh shah (student) (125 Points)
Replied 21 May 2012

sir can u please provide a detailed explanation in context of the following quote by you .

"First time renovation is added in cost but time period in this case is substantially long, this point needs consideration"

It would be really helpful if u would offer what consequences will the consideration of this point will lead to deciding it ?

Z (Tax Consultation (US and India)) (2970 Points)
Replied 21 May 2012

First time paint etc. is allowed to be capitalized because it can be said that such expense was NECESSARY (to be decided by the assesse) for proper usage of the building . AS-10 also allows all those directly attributable expenses for the purpose of bringing the asset in put to use condition

Such becomes relevant specially in case of purchasing second hand (unfurbished) asset. In this case I don't think that repairs can be capitalized (including painting etc) except in case where there is expected future economic benefits, this would also include new advantage, new asset (if stuff beyond repair and was replaced then it should be treated as capital expenditure (specially mentioned because you used the word RENOVATION which includes capital expenditure)

(new advantage,new asset test - landmak in supreme court decisions for Income tax purpose)

read Capital or Revenue Expenditure - General Principles from

https://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxActs/2005ITAct/casesec37%281%29.htm

(refrence of test from this source)

For previous post regarding treating any exepense as revenue for tax purpose , I have read a good case law on this forum and unfortunately am unable to find it so to be on safe side ignore that (capitalize the capital expenditure part) (if happens to get your hands on that then please send me)