The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) disallowed the depreciation claim on any building, machinery, plant, or furniture not exclusively used for the purpose of business or profession.
The assessee company was engaged in the business of rendering information technology i.e. IT enabled services and business support services. The assessee vide two agreements dated 24/05/2005 and dated 30/10/2010 purchased floors of a building having carpet area of 62,000 sq. and 33 car parking in “Directi Plex Acme Tech Park” at a cost of Rs. 38,35,00,000/-
The Assessing Officer in assessment year 2013-14 rejected the claim of the assessee of depreciation and disallowed the same treating the assessee is liable to be assessed under the head income from house property’ and computed the Annual Lettable Value (ALV) of the property corresponding to the investment made by the lessee in the non- removable fixtures (Rs. 2,29,00,399/-) and computed the income under the head ‘income from house property’ amounting to Rs.1,28,24,223/- after allowing deduction under Section 24 of the Income Tax Act
In assessment year 2014-15, the assessee has shown rental income (Rs. 4, 95, 57,001/-) however treated the same as business income and claimed the depreciation on the building.
But the Assessing Officer however treated the said rental income as liable to be taxed under the head ‘income from house property’ and accordingly, disallowed the claim of the depreciation of the assessee on the building
Mr. Firoze B. Andhyarujina representing the assessee submitted that in the year under consideration, the assessee has not received any rental income. It was submitted that the company Media.net was also engaged in rendering service similar to that assessee and therefore, the assessee shared the various maintenance and administrative expenditure incurred, which benefited the assessee in reducing its liability and thus the building was put to use for the purpose of the business of the assessee.
It was further submitted that the building was a part of the block of assets and once it became a part of the block of assets, it was not feasible to compute separate depreciation and disallow the same. The total depreciation claimed on building during the year under consideration was of Rs.3, 97, 06,857/-
Mr. Mahita Nair on the other hand, representing the revenue submitted that main object of the assessee company was not letting out of the properties and it was engaged mainly in the services of information technology, therefore the income from letting out of property was liable to be assessed under the head ‘income from house property’. Further relied on the order of lower authorities.
The bench found that the issue of taxability of the rental income from the building in case a company has been decided by the Supreme Court in the case of Chennai Properties & Investments Ltd. v. CIT the Supreme Court (supra) held that wherein in terms of memorandum of association, main object of the assessee company was to acquire and hold properties and earn income by letting out, the said income is liable to tax as ‘business income’ and not as ‘income from house property’.
Further the two member bench of the tribunal comprising Sandeep Singh Karhail ( Judicial member) and OM Prakash Kanth ( Accountant member) concluded that the Section 38(2) of the Income Tax Act provided that where any building, machinery plant or furniture etc was not exclusively used for the purpose of business or profession, the depreciation claimed under Section 32 of the Income Tax Act shall be restricted to a fair proportionate part thereof which the Assessing Officer may determine having regard to the user of such building machinery, plant or furniture etc for the purpose of business or profession. Therefore, the disallowance of depreciation made by the Assessing Officer and sustained by the CIT (A) was accordingly upheld.
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