Friday, March 31, 2017

Lessee can’t claim depreciation on reimbursement of construction cost to lessor: Apex Court


a) Mother Hospital Private Ltd. (Assessee)entered into an agreement with a partnership firm for construction of hospital building on land belonged to the firm.

b) It wasagreed that the firm will complete the construction of the building on the condition that the entire cost of construction should be borne bythe assessee. Since the ownership of the land had to remain with the firm, it was also agreed that the land would be given on lease.

c) Assessee filed its return in which it claimed depreciation on the building portion on the ground that it was deemed owner of building as per Explanation 1 to section 32. 

d) Assessing Officer (AO) rejected claim of depreciation which was upheld by the CIT(A) and High Court on further appeals.

e) Aggrieved by the order of High Court, assessee filed the instant appeal before the Supreme Court.

Supreme Court held in favour of revenue as under:

1) As per explanation 1 to section 32:

“Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes ofthe business or profession on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension of or improvement to the building, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee."

2) As is clear from the plain language of the aforesaid Explanation, it is only when the assessee holds a lease right and any capital expenditure on the construction to the building is incurred by the assessee, that assessee would be entitled to depreciation to the extent of any such expenditure incurred.

3) If construction is carried out by lessor and expenditure is reimbursed by lessee, Explanation 1 would not come to the aid of the lessee.

4) In the instant case, construction was made by the firm and not by the assessee. It was a different thing that the assessee had reimbursed the amount to the lessor.

5) Since construction was not carried out by the assessee himself, therefore Explanation 1 to section 32 could not be applied and, accordingly, assessee couldn’t claim deprecation on building. [2017] 79 375 (SC) 

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