T N Pandey: Depreciation on addition made to leased property

CHAT ROOM

Is the interest paid on money borrowed from a bank to pay dividend allowable as business expenditure in the computation of company's income?

There is no difference in judicial opinion on this issue. The view is that the scope of expression "for the purpose of business" is wide and it may include other matters in addition to the day-to-day running of the business.

Capital borrowed for the payment of dividend has been held to be for the purpose of business and hence interest thereon has been held to be allowed in the Commissioner of Income Tax vs Shree Changdeo Sugar Mills Ltd, (1983) 143 ITR 469 (Bom).

Similar view was expressed in the Commissioner of Income Tax vs Tingri Tea Co Ltd, (1971) 79 ITR 294 (Cal). In the Kesar Sugar Works Ltd. vs Commissioner of Income Tax, (1997) 140 CTR (Bom) 431, it was observed that the tribunal was not justified in holding that interest pertaining to the borrowings taken by the assessee direct for making payment of dividend was not allowable under Section 36(1)(iii). (Also see the Commissioner of Income Tax vs Kirloskar Electric Co Ltd, (1997) 228 ITR 676 (Karn)).

We are required to purchase machinery for our business for which we propose to take a loan from a bank. Will the interest payable be allowable deduction?

Yes. But a proviso has been inserted in Section 36(iii) by the Finance Act, 2003 with effect from April 1, 2004, which stipulates that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such as set was first put to use, shall not be allowed as deduction.

In our business, there are two units, which are inter-related and form part of the same business. For the second unit, we took a loan for expansion but the business did not succeed. Hence, it had to be closed. The liability of interest persists. Can it be claimed against the income of the remaining business?

Yes. If more than one business carried on by an assessee are found to constitute one and the same business due to inter-lacing and inter-connection, and one of them is closed, the expenditure related to such closed business is deductible from the profits of the continuing business or businesses. (See the Commissioner of Income Tax vs TS Srinivasa Iyer, (1991) 192 ITR 50 (Madras)).

I took a building on lease for 50 years. Consequent to increase in the business activities, I have added two rooms to this building at my cost with the permission of the lessor. Am I entitled to depreciation on the investment made for constructing these rooms?

Yes. The Explanation (1) to Section 32(1)(ii), which took effect from April 1, 1988, provides that where the business is carried on in a building in respect of which assessee holds a leaser or other right of occupancy and any capital expenditure is incurred by the assessee for the purpose of business on construction of any structure or doing of any work in relation to renovation and extension, then it shall be assumed that the structure is owned by the assessee.

Prior to the introduction of this Explanation, there was a controversy as to the allowance of depreciation on assets of this nature. Now, there is no doubt that the queriest can claim depreciation on the addition made to leased property.

Is a taxpayer bound to claim depreciation in submitting the return of income?

Yes. The Finance Act, 2001, has inserted a new Explanation 5 to Section 32(1)(ii) so as to provide that the depreciation shall be allowed even if not claimed by the assessee.

The new Explanation reads: "For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income".

Is money spent on getting a project reports prepared allowable as a business deduction? Can it be claimed as deduction from the interest earned on deposit of share capital in the bank during the pre-production period?

Expenditure incurred on project report and other pre-operative expenses would be eligible for deduction under Section 35D but the same could not be adjusted from the interest income received during the pre-production period [see Saraf Textile Industries Ltd vs Commissioner of Income Tax case, (1996) 217 ITR 527 (Raj)].

Our business would be completing 50 years of successful working. On this occasion, we want to pay our workers a special bonus, equal to 3 months' pay. Can such bonus be claimed as deduction in computing the taxable income of the company?

Yes. In ITAT v. Jananmandal Ltd. (1983) 143 ITR 228 (All), where special bonus was paid on the occasion of golden jubilee, the deduction thereof was rejected by the AO on the ground that the celebration of the golden jubilee had nothing to do with the services rendered by the employees.

The Tribunal, however, allowed the claim on the ground that the consideration was recognition of the past services of the employees.

The assessee had kept in view the length of service put in by the different employees and the payment of bonus had been according to the length of service put in by the employees and had varied in the case of employees of different standing. The view of Tribunal was upheld by the High Court.

Hence, special bonus paid on golden jubilee celebration can be considered to be in recognition of the services rendered in the past.