Income Tax: ITAT Says Leasehold Improvements Eligible for Depreciation

The assessee was assessed for AY 2012-13. The Assessing Officer disallowed depreciation of Rs. 53.42 lakh, which was claimed for leasehold improvements made by the company on a rented commercial property. The AO held that since the assessee was not the owner of the premises, depreciation was not allowable.

In a second issue, the AO made an addition of Rs. 4 crores in respect of a share sale transaction with another company for the sale of 24 lakh shares. While the assessee had offered Rs. 12 crores as a sale consideration, the AO held that the agreement reflected a consideration of Rs. 16 crores and brought the balance of Rs. 4 crores to tax. The CIT(A) allowed both claims, prompting a Revenue appeal before the ITAT.

Main Issue: Whether the assessee was eligible for depreciation on leasehold improvements, and whether the Rs. 4 crore addition based on the share sale agreement was rightly deleted.

ITAT’s Decision: The ITAT partly allowed the Revenue’s appeal. On the issue of depreciation, the Tribunal affirmed the CIT(A)’s order. It held that leasehold improvements, such as partitions, flooring, and electrical fittings, qualify as tangible assets eligible for depreciation under Section 32, as per Explanation 1. It relied on its own prior ruling in the assessee’s case, stating that ownership and usage tests were satisfied.

However, regarding the Rs. 4 crore addition, the ITAT reversed the CIT(A)’s relief. It held that the share sale agreement recorded a total consideration of ₹16 crore, and there was no evidence of a revised or conditional agreement. The assessee’s claim that Rs. 4 crore was contingent on payment by a third party was rejected, as the entire amount formed part of the contracted price. The Tribunal emphasized that for tax purposes, income under a binding contract accrues on the basis of legal enforceability, not actual receipt.

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