Category Archives: Depreciation

Depreciation on leasehold improvements

‘Leasehold improvements’ are considered as depreciable asset vide Explanation 1 to section 32 (1) of the Act which read as under:

“ Explanation 1.–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 of the 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, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.”

Further the following clarification in Note 3 of Appendix I under rule 5 of the Income-tax Rules, 1962, is made with a view to determine the percentage to be applied in respect of any structure or work effected by way of renovation or improvement in or in relation to a building referred to in Explanation 1 to clause (ii) of sub-section (1) of section 32 of the Act:

“ 3. In respect of any structure or work by way of renovation or improvement in or in relation to a building referred to in Explanation 1 of clause (ii) of sub-section (1) of section 32, the percentage to be applied will be the percentage specified against sub-item (1) or (2) of item I as may be appropriate to the class of building in or in relation to which the renovation or improvement is affected. Where the structure is constructed or the work is done by way of extension of any such building, the percentage to be applied would be such percentage as would be appropriate, as if the structure or work constituted a separate building.”

Thus leasehold improvements for the purpose of depreciation entitlement u/s 32 would be restrictive to the structured alteration or improvement to the leased premises. In other words if there is no structural alteration and the works carried out are limited to routine improvements or alterations or repairs then the expenditure would not be regarded as capital in nature for the purpose of allowance of depreciation. Further any structural change or alteration or improvements would necessitate approval of state town planning authority and further more the lease agreement must so provide or authorize for it. In case the works carried out do not require any approval of town planning authority then the entire expenditure would not come under the purview of Explanation 1 (supra) and in the consequence the lessee may classify it as revenue expenditure.

In Commissioner of Income-tax v. Shri Ram Refrigeration Industries Ltd. (2002) 253ITR783 the assessee incurred an expenditure of Rs. 1,48,492 on the following heads :
1. Cable work/telephone points
2. Wooden partitions
3. Wall tiles and