In a significant ruling, the Income Tax Appellate Tribunal (ITAT) has held that depreciation under section 32 of the Income Tax Act, 1961 cannot be allowed on an undivided share of land.
The assessee, in its income tax return, shown addition to building amounting to R.1,36,67,500/-. After verifying the documents, the Assessing Officer noticed that the assessee had purchased Flats numbered 1A and 1B, Royal Cronet and the payment for an undivided share of land was Rs.6,30,000/- and Rs.10,10,000/- respectively. The officer noted that the assessee had claimed depreciation on these amounts by treating them as the cost paid towards the building. The amount of such depreciation works out to Rs.1,64,000/-. The officer disallowed the depreciation claim.
However, on appeal, the Commissioner of Income Tax (Appeals) has allowed the claim.
The department approached the Tribunal against the first appellate authority’s order relying on the decision in the case of Burgmann India Pvt. Ltd, wherein the Mumbai Bench of the ITAT has held that merging of land and building for this purpose could possibly lead to the creation of a loophole, whereby purchase agreements are deliberately made on a composite value, so as to enable assesses to claim depreciation on an enhanced amount. Based on the decision, the department contended that in the present scenario, it is clear that there is no definitive answer as yet on the subject of depreciation on land in cases involving unsegregated value between land and building.
The assessee contended that the company had acquired an apartment along with an undivided share of land and the depreciation was charged on the entire asset as per the rates specified in the Income Tax Act. It was further submitted that unlike other residential properties such as houses, in the case of apartments, the undivided share of land cannot be sold separately from the apartment itself. Further, it was separately identifiable. It was also submitted that the undivided share of land was registered in the name of the assessee only for the purpose of compliance from the point of view of the local registrar’s office and further, building tax was paid based on the built-up sq. ft. of an apartment and not based on the undivided share of land.
Allowing the departmental appeal, the Tribunal held that “we have heard the rival submissions and perused the material on record. The assessee has shown the land as an undivided share of land separately in the block of assets which is not entitled to depreciation. The CIT(A) is not justified in granting depreciation on the undivided share of land. Accordingly, we vacate the findings of the CIT(A) on this issue. Thus, this ground of appeals of the Revenue for both the assessment years is allowed.”
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