If the spend is capital in character, Explanation 1 to s.32(1) treats the structure or work as a building owned by you and you claim depreciation on it, even though the landlord owns the premises. If it is not capital, the route is s.30(a)(i) where you are a tenant who has undertaken to bear the cost of repairs, or s.37(1). What you cannot do is write off a capital fit-out because the lease is short and the asset reverts to the landlord.
Section 32(1) allows depreciation on buildings, machinery, plant or furniture, being tangible assets, and on specified intangibles, 'owned, wholly or partly, by the assessee and used for the purposes of the business or profession'. Ownership is a condition. On its face that excludes a tenant who improves premises belonging to someone else.
Explanation 1 to s.32(1) supplies the answer: 'Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.'
Read it carefully, because four things follow from the wording. First, it applies only to capital expenditure — it is not a way of capitalising something that was revenue, and it is not a bar on a genuine revenue claim. Second, it applies only where the assessee holds a lease or other right of occupancy; a licensee with no right of occupancy is outside it. Third, it deems the structure or work to be a building owned by the assessee, so the work itself goes into the building block and is depreciated at the building rate. But read the deeming against its own words: it reaches only the construction of a structure, or work done in or in relation to the landlord's building — the partitions, the false ceiling, the flooring, the rewiring that merge into the premises. Assets the tenant buys and owns outright, such as loose furniture, air-conditioning plant or standalone equipment, satisfy the ownership condition in s.32(1) on their own and keep their own prescribed rates; Explanation 1 is not engaged for them, and there is no warrant for driving a whole fit-out to the building rate. Fourth, it says nothing about the term of the lease. There is no rule in the Explanation that the cost is amortised over the lease period; the deeming provision puts the work into the depreciation machinery and it is written down at the prescribed rate on written down value.
So the real question is never 'do I own it'. It is 'is this spend capital'. That is decided on ordinary principles, and it is where most disputes are lost. A Mumbai Tribunal decision digested on itatonline.org held that spend on a false ceiling, tiling, flooring, glass, wooden partitions, electrical rewiring, plumbing and painting on leased premises was capital, on the reasoning that a repair by definition is directed to the maintenance and preservation of an existing asset, and premises taken over in a dysfunctional or dilapidated state and made functional are not being maintained but refurbished. The Tribunal also made the point that matters here: the ingredients of a capital expenditure do not change according to whether the premises are owned or leased. A Delhi Tribunal decision reported on taxscan.in in 2025 went the other way on its facts, upholding depreciation on leasehold improvements — plumbing, partitions, flooring, electrical fittings — on the footing that Explanation 1 satisfies the ownership test.
The outer limit of the Explanation was fixed by the Supreme Court in Mother Hospital (P) Ltd v. CIT. A company carried on its hospital in a building put up by the partnership firm that owned the land; the company bore the cost, but the construction was done by the firm and no registered conveyance passed the building to the company. Depreciation was refused. As the itatonline report of the decision puts it, "the lessee is entitled to depreciation on the cost of construction incurred by him but not on the cost incurred by the owner and reimbursed by the lessee", and on ownership, "Title in the said immovable property cannot pass when its value is more than Rs.100/- unless it is executed on a proper stamp paper and is also duly registered with the sub-Registrar." So Explanation 1 operates only on capital expenditure the tenant itself incurs on the structure or the work; reimbursing the landlord's construction cost falls outside it, and outside it the ownership condition in s.32(1) is unforgiving. The hosts fetched disagree on the date of that decision — itatonline gives 8 March 2017 and a KPMG note gives 27 March 2017 — so no date is stated here; the KPMG note gives the appeal number as Civil Appeal No. 3360 of 2006.
On the revenue side, the meaning of 'current repairs' is Ballimal Naval Kishore v. CIT, held in the corpus at ballimal-naval-kishore-v-cit-current-repairs: expenditure directed to preserving or maintaining an asset that already exists, and not to its renewal or restoration. Premises taken over dilapidated and made functional fail that test, which is why so much of a fit-out ends up capital.
If the expenditure is not capital, the tenant has a wider door than an owner-occupier. Section 30(a)(i) allows a tenant the rent paid 'and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs' — the cost of repairs, not merely current repairs. The Explanation to s.30 nonetheless excludes any expenditure in the nature of capital expenditure from that limb too. Where the spend is revenue but does not fit s.30, s.37(1) applies on its own terms, since it covers expenditure not being of a capital nature and not described in ss.30 to 36.
The practical consequence of getting this wrong in either direction is real. Claim a capital fit-out as revenue and you face a full disallowance with only a fall-back to depreciation. Capitalise a genuine revenue repair and you defer a deduction you were entitled to take at once, with no easy way back once the block of assets has absorbed it.
On exit, note what the Explanation does not do. It does not tell you what happens to the written down value when the lease ends and the work reverts to the landlord. The block-of-assets machinery in s.32 and s.43(6) governs that, and there is no separate write-off provision in the Explanation itself.
Under the Income-tax Act 2025, published mapping tables place old s.32 at new s.33 and old ss.30, 31 and 38 at new s.28. Verify against the bare Act before citing a new number.
Almost every office, clinic, showroom and back office in India operates from leased premises, and the fit-out is often the largest single item of capital spend a service business ever makes. Advisers routinely write it off on the assumption that you cannot depreciate what you do not own, or amortise it over the lease term on the assumption that the Explanation says so. Neither is what the statute says, and both produce an adjustment that is easy for an officer to make and hard for the assessee to defend.
I paid a foreign firm a lump sum for technical know-how that raised the yield of a product I was already making. The Assessing Officer says section 37(1) is shut because I bought an asset of enduring benefit. Is the payment capital?
Can a pharmaceutical company deduct the cost of gifts given to doctors?
I pay an annual fee to keep competitors out of my area. It recurs every year, so is it revenue expenditure?
My employee embezzled money from the business bank account. Can I write that off for tax?
I spent heavily doing up my premises and plant. Is that 'current repairs', or has the AO rightly called it capital?
My liability is certain but I cannot put a final figure on it yet and I will not pay it for years. Can I still deduct the provision?
I paid to have a railway station moved off my own mining lease so I could work the ground under it. Is that capital expenditure?
I bought the assets of my business and left part of the price outstanding on interest. Is that interest deductible as interest on borrowed capital?
Every page in this library links to what it was written from, so you can check it rather than take our word for it.
