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Capitalisation of expenditure

anonymous (Accounts) (101 Points)

05 July 2014

Dear friend,

I have a serious issue regarding capitalisation of renovation expenditure

One of my client has incurred 23 lakhs of expenses on Renovation of a showroom which is opersted in a rented Building. While going through the accounts i found that such renovation expense is shown in the Building A/c.

bt i think it should not shown as Building as such building is hold by another person .Please give me the answer considering tax laws also if any affecting the issue and answer only if u r sure and having a case law or provision about it as it is a sensitive issue

Thanks in advance

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10 Replies

Tribhuvan Aditya Singh (Student as well as Self-employed) (3710 Points)
Replied 05 July 2014

there is a case law where it was decided that any capital exp. incurred by tenant can be capitalised by them and dep. can be claimed on such amt. capitalised. same is the case as given by you. it is correct that renovation exp. has been capitalised and dep. can be claimed in future on such exp.

anonymous (Accounts) (101 Points)
Replied 05 July 2014

can you send link for such case law

Tribhuvan Aditya Singh (Student as well as Self-employed) (3710 Points)
Replied 05 July 2014

you can also refer to sec. 30

VIKASH KUMAR JAIN (Audit Executive) (711 Points)
Replied 06 July 2014

Agree with Tribhuvan.Capitalize and claim depreciation, irrespective of the fact that original asset is owned by another person.But for claiming depreciation, you should prove your ownership for asset, you capitalize.Tribhuvan, please clear on ownership condition for depreciation.Thanks

Ashok Kumar Sharma (Student) (319 Points)
Replied 06 July 2014

The renovation expenses can be capitalized as Building and depreciation can be claimed thereon. Provided you have to prove to the AO that you have incurred expenditure and the bill should be on your client's name.

vishwas (student) (83 Points)
Replied 06 July 2014

Hi. In terms of accounting treatment in books of accounts, the expenditure should be capitalized as leasehold expenditure ( subject to the client has lock in petiod of lease for atlest more than a year. The depreciation should be charged on the primary lease period (lock in period) only. For tax matters I do agree with the views as given above.

Minesh Rawat (Article) (199 Points)
Replied 06 July 2014

treated as deemed building and depreciation is allowed as per sec 30

mohit kumar (article) (33 Points)
Replied 06 July 2014

Yes, if client holds a lease or any other right if occupancy then such capital expenditure incurred by the assessee for the purpose of business or profession on construction of any structure or by way of renovation or extension or improvement to the building, then such capital expenditure is treated as building owned by assessee and depriciation can be claimed. As per explanation 1 to Section 32(1).Also known as deemed building.

pawan tewari ( ) (544 Points)
Replied 06 July 2014

Its termed as deemed building and dep can b claimed on it as per sec 32 itself...

Yatik Shah (Manager) (31 Points)
Replied 03 September 2015

Dear Professional Friends,

Yes we all agree that it can be capitalised, but at present we do not have any handy documentation to that part and hence we are having our opinion on the base of experience. Even we are facing the same issue, some clients who has more risk bearing capacity use to capitalise and soom expenses it out as they dont want any litigations.

One thing was :

Guidance note on expenditure during construction period –

In the para of assets not owned by company – “……….If anyone incurs expenses on capital nature for which he is not owner, can capitalise the same and it would be appropriate to charge it over a period of 5 years…….”

This was a docuemnt, however not towards lease hold land but a sort of. But as a matter of fact this has also been withdrawn by the institute, however surely we can refer to.

Kindly share if we have any reference to any documents either by our institute or any legal body, or reference to any judgements.

Have a good Day !!!!!!!!!

Warm Regards

CA Yatik Shah