Holding

The amount paid for the additional construction is part of the cost of the building and is includable for depreciation.

Summary

Hindustan Times Ltd purchased a residential building and later demolished it to erect a multi‑storeyed commercial building. The company paid Rs 36,96,516 as an additional premium for the commercial use of the extra built‑up area and added this amount to the cost of the new building, claiming depreciation under Sections 32(1) and 256(2) of the Income‑Tax Act, 1961. The Commissioner (Appeals) and the Tribunal allowed the depreciation, a decision upheld by the Delhi High Court. The Revenue appealed, contending that the sum should be treated as part of the land cost and not eligible for depreciation, relying on the Alps Theatre case. The Supreme Court held that the amount was incurred for constructing additional business space, thus forming part of the building’s cost and permissible for depreciation. Consequently, the appeals were dismissed with costs.

Issues considered

Whether the sum of Rs 36,96,516 paid for additional commercial space can be added to the cost of the building for the purpose of claiming depreciation under the Income‑Tax Act.
Whether the amount in question relates to the cost of land or the cost of the building.
Whether the decision in Commissioner of Income‑Tax v. Alps Theatre is applicable to the present facts.

Legislation cited

Income Tax Act, 1961s. 256(2), s. 32(1)

Subjects

depreciationcost of buildingincome taxcommercialisation chargescapital expenditureassessmentSection 32Section 256building vs landSupreme Court

Judgment

'

THE COMMISSIONER OF INCOME TAX, DELHI A
v.
M/S HINDUSTAN TIMES LTD. NEW DELHI

MAY 6, 1998

[MRS. SUJATA V. MANOHAR AND M. JAGANNADHA RAO, JJ.] B

Income Tax Act, I961 : Sections 32(1) and 256 (2).
-...,
Income Tax-Depreciation-Purchase of existing residential building
hy assessee-Wanted to use that building for commercial purposes-Assessee c
paid commercialisation charges in addition to ground rent-Original building
demolished and a new multi-storeyed building constructed by assessee-
Assessee paid Rs. 36,96,516 for using the multi-storeyed building for
commercial purposes containing an area in excess of original built up
" , area-Assesse added this amount to the cost of building constructed by it
and claimed depreciation on the same-Claim allowed by Commissioner
D
(Appeals) as well as by the Tribunal-View upheld by High Court on the
ground that the sum of Rs, 36,96,516 has been laid out by the assessee in
order to construct the additional space for office purposes-The payment has.
been made for construction of a business asset and forms a part of the cost
incurred by the assessee in putting up that building-Appeal by Revenue- E
Held the view taken by the High Court was correct-The amount claimed by
the assessee was includible in the cost of building for claiming depreciation.

Commissioner of Income-tax, Punjab, Jammu & Kashmir and Himachal
Pradesh v. Alps Theatre, (1967) 65 ITR 377, held inapplicable.
e F
~ CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 1225-30
of 1990.

From the Judgment and Order dated 20.2.87 of the Delhi High Court in
LT. C. Nos. 72-73, 84, 191, 193-194of1986. G
Dr. V. Gauri Shankar, S. Rajappa and B.K. Prasad for the Appellant.

Santosh K. Aggarwal and B.V. Desai for the Respondent.

The following Order Qf the Court was delivered : H
197
198 SUPREME COURT REPORTS [ 1998] 3 S.C.R.

A These appeals pertain to one of the questions considered by the High
Court under Section 256(2) of the Income Tax Act, 1961 at the instance of the
Revenue. The appeals pertain to assessment years 1973-74, 1974-75 and 1977-
78 to 1980-81.The question as framed for the assessment years 1973-74, 1974-
75 and 1977-78 was as follows:-

B "Whether, on the facts and in the circumstances of the case, the
ITAT was justified in law in upholding the order of the CIT(A) on the
ground that no injustice was caused to the revenue by the order
passed by the CIT(A) in directing that the assessee was entitled to ......
add a sum of Rs. 36,96,516 to the cost of building and claim
C depreciation thereon?"

The question is not very happily worded. A similar question was also
raised in respect of the other assessment years. The question basically is :
Whether the assessee is entitled to depreciation in respect of a sum of
Rs.36,96,516 which it claimed as part of the actual cost of construction of a
D building constructed by it for business purposes.

The assessee had purchased an existing residential building bearing
Nos. 18-20, Kasturba Gandhi Marg, New Delhi, in the year 1961. The assessee
wanted to use that building for commercial purposes. For this purpose, it paid
certain additional charges to the Development officer of the Government of
E India and also extra ground rent in respect of the land. The built-up area then
existing on that plot was 51, 198 square feet. A formal agreement was executed
on 21. l 0.1962 in this connection. Under the said agreement, the assessee had
inter alia paid a sum of Rs. 3,65,875 to the Land Development Officer,
Government of India, as commercialisation charges in addition to the ground
rent.
F
In the year 1965-66, the original building was demolished and the assessee
constructed a new multi-storeyed building on the said land. The construction
was completed some time in the year 1973. The assessee applied to the Land
& Development Officer, Government of India for using the building for
G commercial purposes. An indenture was executed between the President of
India and the assessee on 5.3.1973. Clause (1) of the indenture is as follows:-

"In pursuance of the said agreement and in consideration of the sum
ofRs. 36,96,516 (Rupees thirty six lakhs, ninety six thousand and five
hundred sixteen only) paid by the lessee to the lessor as additional
H premium before the execution of these presents (the receipt thereof
C.I.T. v. HINDUSTAN TIMES LTD. 199

the lessor doth hereby admit and acknowledge) and of the additional A
ground rent reserved and of tlie convenants on the part of the lessee
contained in the Principal Indenture, Supplemental Indenture and herein,
the lessor doth hereby grant his consent to the lessee using the
multi-storeyed building under erection and construction on a part
of the demised premises, according to the plans sanctioned by New B
Delhi Municipal Committee vi.(!e its Resolution No. 30 dated 20th
January, 1967, save and except the built-up area of5 I 198 square feet
therein, for commercial purposes and the built-up area of 51198 square
feet in the said multi-storeyed building only for the purpose mentioned
in the Supplemental Indenture."

(underlining ours)
c
The assessee thus paid a sum of Rs. 36,96,516 for using the multi-
storeyed building for commercial purposes containing an area in excess of
51198 square feet.
D
The assessee added this amount of Rs.36,96,516 to the cost of the
building constructed by it and claimed depreciatior. on the same for the
assessment years in question. For the assessment years 1973-74 and 1974-75,
the depreciation was duly allowed. However, the same has been re-opened
and the depreciation so granted has been disallowed. Disallowance is for the
relevant assessment years set out earlier. However, for the assessment years E
1975-76 and I 976-77, depreciation has been granted as claimed by the assessee
and no appeals have been filed from the orders so allowing depreciation.

In respect of the present assessment years, however, it is the contention
of the Department that the amount ofRs.36,96,516 has been paid for commercial
use of the land and hence it should be added to the cost of the land. The F
Department contends that adding this amount to the cost of the building for
the purposes of depreciation, is not justified. The Commissioner (Appeals) as
also the Tribunal, however, have come to the conclusion that the sum of Rs.
36,96,5 I 6 has been correctly added to the cost of the building constructed by
the assessee because the amount has been paid in respect of the commercial G
use of the additional area constructed as a result of the multi-storeyed
building being put up by the assessee. It, therefore, pertains to the building
and not to land. The High Court has also come to a similar conclusion. The
High Court has pointed out that the use of the land had already been
converted to commercial use in I 962 when the assessee had paid an additional
amount of Rs. 3,65,875 There was no question, therefore, of any additional H
200 SUPREME COURT REPORTS [1998] 3 S.C.R

A commercialisation of the said plot. The amount has, however, been paid for
the additional construction which has been put up by the assessee and hence
forms a part of the cost of the building. For the land, the assessee has paid
additional ground rent under the said agreement of 5.3.1973, which is a
separate amount. The High Court has, therefore, upheld the view taken by the
B Tribunal that the sum of Rs. 36,96,516 has been laid out by the assessee in
order to construct the additional space of 345144 square feet for office
purposes. The pa)ment has been made for construction of a business asset
and forms a part of the cost incurred by the assessee in putting up that
building. We agree with the view so taken by the High Court.

c of Income-tax,
The Department has relied upon a decision of this Court in Commissioner
Punjab, Jammu & Kashmir and Himachal Pradesh v. Alps
Theatre, (1967) 65 ITR 377, which makes a distinction between the cost of the
land and the cost of the building and holds that depreciation can be allowed
only on the cost of the building. The question before us, however, is different.
It is whether, in the cost of the building, the amount in question should have
D been included or not. Therefore, the decision in the above case has no
bearing on the question which is before us.

The appeals are, therefore, dismissed with costs.
T.N.A. Appeals dismissed.