I am a tenant of part of a building and I paid to replace the whole roof. The Assessing Officer has allowed me only the proportion of the area I occupy. Is that right?
Yes, on this decision. The Bombay High Court held that where the expenditure relates to a building that is not exclusively used for the business, s.38 vests a discretion in the Assessing Officer to grant a proportionate deduction, and it upheld a deduction computed on the ratio of the area occupied — 3,700 square feet out of about 30,000.
Decided by the High Court (V.C. Daga J and R.M. Savant J) on 2010-08-30, reported as Income Tax Appeal No. 513 of 2005 (Bombay High Court); assessment year 1998-99. It bears on section 38, section 38(2), section 30, section 31 of the Income Tax Act 1961, in Deductions & Disallowances and Assessment & Scrutiny matters.
This is the counterpart on premises to the s.38(2) restriction on plant, and it is the answer an Assessing Officer gives to the argument that the expenditure was wholly and exclusively for business because the assessee alone paid it. The judgment accepts the assessee's law — Sassoon J. David, that expenditure need not be necessary and is not disallowable merely because someone else is also benefited — but holds that s.38 is a separate and specific provision that survives it. Practically: on a repair or renovation of shared or partly occupied premises, expect the allowance to be cut to the occupied proportion, and argue about the proportion rather than the principle. The point cuts across s.30 (repairs to premises), s.31 (repairs to plant) and s.32 (depreciation), all of which s.38(2) reaches.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The appellant carried on business as a tenant occupying about 3,700 square feet of a building of about 30,000 square feet. The mangalore tile roof of the building had deteriorated and water ingress was affecting the business, and the appellant spent Rs. 17,63,280 in replacing it with a concrete roof. The Tribunal accepted that the expenditure was revenue in nature but, applying s.38, upheld the Assessing Officer's allowance of only a proportionate part computed on the ratio of the area occupied by the appellant to the total area of the building. The appellant argued before the High Court, on Tata Sons and on Sassoon J. David and Co. P. Ltd. v. CIT, that expenditure incurred voluntarily for the purposes of the business is deductible in full even though someone else is incidentally benefited.
The question of law was answered against the assessee and the appeal was dismissed. In the light of s.38, the order of the Assessing Officer and of the Tribunal allowing a proportionate deduction could not be faulted.
The Court accepted the proposition in Sassoon J. David that expenditure may be voluntary and need not be necessary, and that a benefit to someone else does not by itself bar a deduction (para 10, recording the submission). Against that it set the Revenue's answer that s.38 itself vests a discretion in the Assessing Officer to grant a proportionate deduction on the facts, the appellant being a tenant of only 3,700 square feet out of 30,000 (para 11). Examining the question independently, the Court found that the weight of authority leaned in favour of the view the Tribunal had taken, that is the grant of a proportionate deduction, citing Buland Sugar Co. Ltd. v. CIT [1980] 130 ITR 434 and Atlas Cycle Industries Ltd. v. CIT [1981] 128 ITR 60 (para 13), and confirmed the Tribunal's order.
In our view in the light of Section 38 of the said Act, the order of the Assessing Officer as well as the Tribunal allowing proportionate deduction cannot be faulted with.
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Handle my notice → Ask a CA on WhatsAppYes, on this decision. The Bombay High Court held that where the expenditure relates to a building that is not exclusively used for the business, s.38 vests a discretion in the Assessing Officer to grant a proportionate deduction, and it upheld a deduction computed on the ratio of the area occupied — 3,700 square feet out of about 30,000. This was decided by the High Court (V.C. Daga J and R.M. Savant J) and bears on section 38, section 38(2), section 30, section 31 of the Income Tax Act 1961. It is reported as Income Tax Appeal No. 513 of 2005 (Bombay High Court); assessment year 1998-99. This is the counterpart on premises to the s.38(2) restriction on plant, and it is the answer an Assessing Officer gives to the argument that the expenditure was wholly and exclusively for business because the assessee alone paid it. The judgment accepts the assessee's law — Sassoon J. David, that expenditure need not be necessary and is not disallowable merely because someone else is also benefited — but holds that s.38 is a separate and specific provision that survives it. Practically: on a repair or renovation of shared or partly occupied premises, expect the allowance to be cut to the occupied proportion, and argue about the proportion rather than the principle. The point cuts across s.30 (repairs to premises), s.31 (repairs to plant) and s.32 (depreciation), all of which s.38(2) reaches. If it applies to you, the first step is this: Work out the occupied proportion yourself, on a defensible measure (carpet area, leased area, metered use) and put it in the reply before the officer fixes his own figure.
The appellant carried on business as a tenant occupying about 3,700 square feet of a building of about 30,000 square feet. The mangalore tile roof of the building had deteriorated and water ingress was affecting the business, and the appellant spent Rs. 17,63,280 in replacing it with a concrete roof. The Tribunal accepted that the expenditure was revenue in nature but, applying s.38, upheld the Assessing Officer's allowance of only a proportionate part computed on the ratio of the area occupied by the appellant to the total area of the building. The appellant argued before the High Court, on Tata Sons and on Sassoon J. David and Co. P. Ltd. v. CIT, that expenditure incurred voluntarily for the purposes of the business is deductible in full even though someone else is incidentally benefited. The matter was decided on 2010-08-30 by the High Court (V.C. Daga J and R.M. Savant J). On those facts the High Court held as follows. The question of law was answered against the assessee and the appeal was dismissed. In the light of s.38, the order of the Assessing Officer and of the Tribunal allowing a proportionate deduction could not be faulted.
The Court accepted the proposition in Sassoon J. David that expenditure may be voluntary and need not be necessary, and that a benefit to someone else does not by itself bar a deduction (para 10, recording the submission). Against that it set the Revenue's answer that s.38 itself vests a discretion in the Assessing Officer to grant a proportionate deduction on the facts, the appellant being a tenant of only 3,700 square feet out of 30,000 (para 11). Examining the question independently, the Court found that the weight of authority leaned in favour of the view the Tribunal had taken, that is the grant of a proportionate deduction, citing Buland Sugar Co. Ltd. v. CIT [1980] 130 ITR 434 and Atlas Cycle Industries Ltd. v. CIT [1981] 128 ITR 60 (para 13), and confirmed the Tribunal's order. In the words reproduced by the source cited on this page: "In our view in the light of Section 38 of the said Act, the order of the Assessing Officer as well as the Tribunal allowing proportionate deduction cannot be faulted with." The decision followed or applied Buland Sugar Co. Ltd. v. CIT [1980] 130 ITR 434 — relied on; Atlas Cycle Industries Ltd. v. CIT [1981] 128 ITR 60 — relied on; Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261 (SC) — accepted but held not to answer s.38.
It was decided by the High Court on 2010-08-30 and is reported as Income Tax Appeal No. 513 of 2005 (Bombay High Court); assessment year 1998-99. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 38, section 38(2), section 30, section 31, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The question of law was answered against the assessee and the appeal was dismissed. In the light of s.38, the order of the Assessing Officer and of the Tribunal allowing a proportionate deduction could not be faulted. It arises in Deductions & Disallowances and Assessment & Scrutiny matters, on section 38, section 38(2), section 30, section 31 of the Income Tax Act 1961, and was decided by V.C. Daga J and R.M. Savant J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not rest on Sassoon J. David alone — it answers the wholly and exclusively test, not s.38. If the expenditure related only to the part you occupy, prove it with the contractor's scope of work and photographs; the pro rata cut is defensible only where the work benefited the whole building. Check whether the expenditure is revenue at all before arguing about proportion; if it is capital in a tenant's hands, Explanation 1 to s.32(1) and the block treatment come into play instead. Where the landlord or the co-occupants reimbursed nothing, say so — it goes to the fairness of the proportion, though on this decision it does not defeat s.38.
Validity check could not be completed. Later treatment was not checked. The Court invokes "Section 38" without identifying a sub-section. On the text of s.38 — as reproduced inside Punjab Bone Mills for AY 2000-01 and on the department's archived (Year 2009) section 38 page — sub-section (1) applies only where a part of the premises is used as a dwelling house by the assessee, which is not this case; the sub-section that fits these facts is s.38(2), which restricts the deductions under s.30(a)(ii) and (c), s.31 and s.32(1)(ii) where the building is not exclusively used for the business. No live departmental page for s.38 could be opened to confirm the current text. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The paragraph structure was established on verification: the judgment has fourteen numbered paragraphs, paragraph 12 reproduces the Tribunal's order inside it (that extract carries its own numbering 16 to 18, which must not be cited as this judgment's), and the operative sentence quoted here is the closing sentence of paragraph 12. Paragraphs 10 and 11 are the Court recording counsel's submissions, not its own reasoning. Paragraphs 13 and 14 were read verbatim on the verification pass and are the Court's independent examination and its answer to the question of law. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question of law was answered against the assessee and the appeal was dismissed. In the light of s.38, the order of the Assessing Officer and of the Tribunal allowing a proportionate deduction could not be faulted.
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