Is Civil and Interior Works expense eligible for Depreciation at 10%(rate on Building) or 15% (rate on Furniture)?

Introduction

Depreciation under the Income Tax Act is a deduction allowed for the reduction in the real value of a tangible or intangible asset used by a taxpayer. The concept of depreciation is used for the purpose of writing off the cost of an asset over its useful life.

While computing one’s income, the depreciation as per Income Tax Act, 1961 is allowed while the book depreciation is disallowed. This is because the Income Tax Act prescribes its own rate of depreciation.The Income Tax Act allows depreciation on the Written down Value of the assets. The depreciation is computed on ‘Block of assets’ at the prescribed rates provided in the Income Tax Rules, 1962.

As per section 32 of Income Tax Act, 1961, an assessee is entitled to claim depreciation on fixed assets only if the following conditions are satisfied:

1. Assessee must be owner of the asset – registered owner need not be necessary.
2. The asset must be used for the purposes of business or profession.
3. The asset must be used during the previous year.

The Income Tax Law prescribes varied rates of depreciation with  different blocks of assets. This also leads to several issues regarding classification of assets under the specified block and their subsequent classification. Some cases where issues have been raised pertaining to classification of assets are as follows:-

1. In the case of S. T. Reddiar & Sons vs. Dy. CIT, assessee was engaged in printing business and had used certain hardware for execution of printing process. It was ruled that the said hardware could not be categorized as ‘computer’ and would not be eligible for higher depreciation. It is only where machine is being used essentially and predominantly for computing capability and where it is not being harnessed for other specialized industrial uses, be it mechanical, electric or electronic (or a composite thereof) activity that it could be called as a computer.
2. In CIT v P Glass Works it was ruled that generator is to be depreciated @ 15% not 20%.
3. In S T Reddia & Sons v DCIT it was ruled that hardware like danippon screen, electronic plate processor  & K rite 510 involved in execution of printing Processing by assessee does not qualify to be categorized as computers and thus not eligible for a higher rate of depreciation.
4. In the case of Asst CIT v Eskay Agencies (2010) it was ruled that designs and interior decoration work carried out in its office by the assessee carrying on the business of interior designing for the purpose of demonstrating its work to the prospective clients and exhibition purpose cannot partake the character of “furniture and fittings” but is “Plant” and is entitled to depreciation applicable to plant.
5. In DCIT v Datacraft India Limited it was ruled that routers & switches are to be included in Block of Computer entitled to depreciation @ 60%.
6. In S.C. Thakur & Brosit was ruled that higher rate of depreciation is also admissible when motor lorry is used by assessee in his own business of transportation of goods on hire.

As seen above there are several issues pertaining to the rate of depreciation and its applicability. 

Whether expenditure on account of civil work coupled with interior works liable for depreciation at 10% or at 15%?

Let us now refer to the case of M/s Microsoft Corporation (India) Pvt Ltd vs Dy. C.I.T where the above issue was taken under consideration.

Facts of the Case

1. The assessee is a wholly owned subsidiary of Microsoft Corporation, US.
2. The assessee creates awareness of Microsoft products in India in general through seminars, conferences, advertisement in public media, promotional campaigns.
3. During the course of assessment proceedings, the assessee was asked to furnish details of the additions to fixed assets made during the year.
4. On studying the same, the Assessing Officer (AO) found that the assessee has made addition in the nature of lease hold improvement to its fixed assets and has claimed depreciation @ 15% under the block furniture and fixtures.
5. The AO was of the firm belief that the assessee has claimed depreciation under a wrong block i.e. furniture and fittings @ 15%.
6. According to the AO in view of Explanation 1 to section 32, any capital expenditure incurred by the assessee on the construction of any structure or by way of renovation or extension or improvement to the building in respect of which the assessee holds a lease or other right of occupancy for the purposes of  its business, then depreciation shall apply as if the said structure or work is a building owned by the assessee.
7. Accordingly the AO allowed depreciation @ 10%.

Appeal to Commissioner of Income Tax (Appeals) [CIT(A)]

1.Aggrieved with the order of the AO, assessee appealed before the CIT(A)

2. The CIT(A), observed that:-

i. Majority of the expenditure of the assessee on account of Civil and interior works were paid to M/s M. S. Decorators Pvt. Ltd.

ii. Similarly interior designing payment and other main expenditure were pertaining to electric fitting and air-conditioning work.

3. From pattern of expenditure it was clear to the CIT(A) that there was improvement of civil supply in the expending/altering the building by civil work, interior design coupled with electric fitting and air-conditioning work.

4. Pattern of expenditure reveled that though they were lease hold assets, there was improvement in the building which would enhance its life.

5. Therefore, CIT(A) confirmed the decision of the AO of deducting depreciation @ 10% treating them as part of building instead of furniture and fixture.

6. In the view of the CIT(A), the expenditure showed that there was addition of civil work, such addition of civil work even on long lease was to be treated a building for providing depreciation.

Appeal to Income Tax Appellate Tribunal (ITAT)

1. Aggrieved with the order of the CIT(A), assessee appealed before the ITAT
2. Before the ITAT, assessee stated that expenditure incurred by the assessee was towards furniture and fixtures and, therefore, rate of depreciation applied for block of furniture and fixtures should be allowed.
3. However, the Departmental Representative strongly supported the findings of the CIT(A).
4. According to the ITAT, it was no dispute that, expenditure on account of civil and interior works and payment was been made only to one M/s Decorator Pvt Ltd.
5. Considering the nature of expenditure, it could be safely concluded that the entire expenditure was made for improvement of the building by civil work.
6. Such civil work definitely gave a benefit of stability.
7. Therefore, ITAT did not find any error in the findings of the CIT(A) and AO.

Therefore, Civil and Interior Works expense is eligible for Depreciation at 10% and not 15% which is charged on furniture.

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