Expenditure Incurred on Leasehold Premises Satisfies Test of Ownership: ITAT Upholds Depreciation Deduction as Capital Expenditure [Read Order]
The Tribunal upheld the assessee’s claim for depreciation on leasehold improvements and ruled that expenditure incurred on leased premises satisfies the ownership test and qualifies as capital expenditure under the Income Tax Act.
![Expenditure Incurred on Leasehold Premises Satisfies Test of Ownership: ITAT Upholds Depreciation Deduction as Capital Expenditure [Read Order]](https://images.taxscan.in/h-upload/2025/07/19/2065722-itat-itat-upholds-rd-expenses-capital-expenditure-citing-consistency-with-prior-years-citing-consistency-taxscan.webp "Expenditure Incurred on Leasehold Premises Satisfies Test of Ownership: ITAT Upholds Depreciation Deduction as Capital Expenditure [Read Order]")
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has upheld the depreciation deduction for improvements made to leasehold premises, dismissing the revenue’s appeal against the deletion of an addition of Rs. 53,42,103/- for the Assessment Year 2012-13.
Add Lounge Service Pvt. Ltd. (assessee), formerly known as Skylark Hospitality India (P) Ltd., claimed depreciation on the cost of improvements made to a leased property used for its business operations.
The Assessing Officer (AO) disallowed the depreciation and treated the expenditure as non-qualifying for depreciation under Section 32 of the Income Tax Act, 1961, and made an addition of Rs. 53,42,103/-.
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Aggrieved by the AO’s order, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) deleted the addition, relying on a prior ITAT decision in the assessee’s own case.
The CIT(A) held that the assessee was entitled to claim depreciation on leasehold improvements, as such expenditure satisfied the ownership test under Explanation 1 to Section 32 of the Income Tax Act.
Aggrieved by the CIT(A)’s order, the revenue appealed to the ITAT. The Counsel for the Revenue argued that the AO’s disallowance was justified. The Revenue’s counsel relied on the AO’s order for disallowance of the depreciation.
On the other hand, the Counsel for the assessee reiterated that the CIT(A)’s decision was consistent with the Tribunal’s earlier ruling, which confirmed the eligibility of depreciation on leasehold improvements.
The two-member bench comprising Mahavir Singh (Vice President) and Amitabh Shukla (Accountant Member), observed that the facts of the present case were identical to those in the assessee’s prior case.
The Tribunal noted that the earlier ruling held that capital expenditure on leasehold premises, such as plumbing, partitions, flooring, and electrical fittings, qualified as improvements to a building used for business purposes.
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The bench further highlighted that Explanation 1 to Section 32 of the Income Tax Act, effective from 01/04/1988, explicitly allows depreciation on such expenditure as if the assessee owned the building.
The Tribunal noted that the revenue failed to distinguish the facts of the present case from the prior ruling. It confirmed the CIT(A)’s order and directed the AO to delete the addition of Rs. 53,42,103/-. The appeal of the Revenue was dismissed.
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