Depreciation – Section 32 – Rate of depreciation – Assessee running a hotel – Additional floor space index granted – Not an intangible right – Consideration for additional floor space index payable in instalments – One instalment paid and entire amount debited in accounts – Assessee entitled to depreciation on entire amount at rate applicable to buildings

28. Principal CIT vs. V. Hotels Ltd. [2020]
429 ITR 54 (Bom.) Date
of order: 21^st September, 2020 A.Y.: 2006-07

Depreciation
– Section 32 – Rate of depreciation – Assessee running a hotel – Additional
floor space index granted – Not an intangible right – Consideration for additional
floor space index payable in instalments – One instalment paid and entire
amount debited in accounts – Assessee entitled to depreciation on entire amount
at rate applicable to buildings

The
assessee was running a hotel. For the A.Y. 2006-07 the assessee claimed
depreciation of Rs. 63,90,248 on floor space index; on an opening written down
value of Rs. 2,55,60,990 depreciation at 25% was claimed. The A.O. rejected the
claim of the assessee and added back the sum to the total income of the
assessee. He took the view that grant of floor space index was not in the
nature of any asset but only a payment made to the Government for increasing
the size of the building.

The
Commissioner (Appeals) held that the amount spent was for the purpose of
business and being of enduring nature, it would add value to the existing
building as additional floor space index would enable the company to add more
floors over and above the existing structure. Since it related to the building
block of assets, the overall cost of the building block would increase by this
amount. Accordingly, the A.O. was directed to add the amount spent during the
year, i. e., Rs. 68,16,264, to the building block of assets and allow
depreciation as per law. The Tribunal held that on payment of the first
instalment, rights in the form of additional floor space index were capitalised
in the books of accounts. The Tribunal held that the assessee would be entitled
to depreciation at 10% on the whole of the consideration towards floor space
index and not at 25%.

On appeal
by the Revenue, the Bombay High Court upheld the decision of the Tribunal and
held as under:

‘Floor
space index relates to the right to construct additional floor to the assessee
which enhances the value or cost of the existing building. It strictly pertains
to addition to the building and therefore depreciation allowable would be at
the rate applicable to buildings and not to intangible rights u/s 32(1)(ii).’