DEPRECIATION
JIGNESH P PARIKH
(Querist) 16 January 2010
This query is : Resolved
Sir,
Kindly advise.
A Limited wnts to acquire a plot of land from Mr. A (Director) on lease for a period of 15 years.The company proposes to construct a building on the same.
Issues
Can the company claim depreciation of the building constructed on leasehold land? If yes at the end of the lease tenure the company will be entitled to claim the amount standing to the debit of Building Account(wdv) as Business Expenses or it will be short term capital loss?Alternatively is it permissible for the comapny to amortise the cost of the building over lease tenure.?
If the entire lease rent for the 15 years is paid in advance whether the directors are liable to deemed dividend?
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Thanks and regards
CA. Jignesh Parikh
+91-9426501505
+99-9998943366
soumitra basu
(Expert) 16 January 2010
The Company shall be entitled to amortize the lease rent on land during the period of lease.
The Company shall be entitled to Deprciation at the prescribed as per rule.
Yes, in absence of renewal of lease, the amount shall be treated as short term capital gain in the hand of the company. The Company cannot amortise the expense of building during the tenure of lease.
JIGNESH P PARIKH
(Querist) 17 January 2010
Mam
Thanks for quick response
So far as depreciation on the building is concerned, once it enters in the block it will lose its identity and I believe that even on expiry of lease wen can claim depreciation. Please correct me if wrong?
If the entire lease amountis paid in advance then the same will be treated as deemded dividen in the hands of girector?
Vineet
(Expert) 19 January 2010
1. You are right Mr Jignesh. You can continue to claim depreciation on the buiding as the same gets merged in block of asset. You can fix a redemption value of property for transferring back the same to director which will be credited to the wdv of block on expiry of lease. This is to avoid some adventurous AO to add a notional income in the hand of director at the end of lease being value of the property.
2. If the director is benefitial shareholder in the company (more than 10% equity), deemed dividend provisions may be invoked by AO on advance lease amount as it is not a normal practice to pay lease rent for entire lease period.
