Interest on loan, even lost, is a business deduction

TAXING MATTERS

I have started doing business from the property I was using for residential purposes. How the valuation of such a building is to be done for claiming depreciation in business?

The computation of depreciation in respect of a building, previously the property of the assessee being used as residence or as dwelling unit or for any other purpose other than business, but now has been brought into use for his business or profession, is to be based on the Explanation 5 to Section 43, which provides for allowance of a notional depreciation up to the year immediately preceding the year in which such asset is put to use for business.

The Explanation 5 uses the phraseology "previously the property of the assessee", which means when the property was brought in as business asset, it should belong to the assessee.

If a person when he brings the asset into business is not an assessee, the Explanation 5 may not be attracted.

For example, if A starts his business as sole-proprietor and brings into the business his residential house or part thereof, its value to the business will be the fair market value as on the date of bringing to the business and not the written down value as arrived at by reducing the notionally calculated amount of depreciation from the date of acquisition to the date of introduction in the business.

Can the interest payable on deferred payment basis be capitalised in full for claiming depreciation?

No. In the Commissioner of Income Tax vs LG Balakrishnan & Bros Ltd case (and vice versa), (2001) 247 ITR 131 (Madras), the court said interest paid under deferred payment schemes for the purchase of plant and machinery should not be treated as part of the actual cost of assets for allowing depreciation and investment allowance and additional depreciation.

How assets received as gifts or inheritance are to be valued for claiming depreciation, if such assets are used in business?

The Explanation 2 to Section 43(1) provides for the determination of actual cost of such assets in the hands of assessee receiving gift.

Accordingly, the actual cost of such an asset to the assessee shall be the actual cost to the previous owner, as reduced by:

• the amount of depreciation actually allowed under the law and the corresponding provisions of the Income Tax Act, 1922, in respect of any previous year relevant to the assessment year starting before April 1, 1998; and
• The amount of depreciation that would have been allowable to assessee for any assessment year starting on or after April 1, 1988, as if the asset was the only asset in the relevant block of assets.

We plan to take health insurance for our employees. Will the payment of premium for such insurance qualify as business deduction?

Yes. Clause (ib) has been inserted in sub-section (1) of Section 36 of the Income Tax Act to allow a deduction to an employer in respect of premium paid by him by cheque for insurance on the health of his employees in accordance with a scheme framed in this behalf by the General Insurance Corporation of India and approved by the central government. This deduction does not have any monetary ceiling.

Clause (ib) thus provides for allowance of any premium paid by cheque by the assessee as an employer to effect or to keep in force an insurance on the health of his employees under a scheme framed in this behalf by the General Insurance Corporation of India formed under Section 9 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972), and approved by the central government.

We borrowed Rs 1 lakh in 2001 on interest for business. But next year the amount was lost in a theft. The assessing officer says since the loan amount has been lost, no interest attributable to it can be allowed as a business deduction. Is he correct?

No. If the money is borrowed for business in a particular year, and the money is lost in succeeding years, then the interest paid on such borrowing cannot be disallowed as was held in the Milapchand R Shah vs Commissioner of Income Tax, (1965) 58 ITR 525 (Madras).

The tribunal passed an order granting relief to my assessee, on the basis of which, my assessee became entitled to refund. But in the order, no specific directions were given for granting refund. The income tax office has not granted interest on the refund due on the ground that there is no direction from the tribunal to grant refund. Is the ITO correct in refusing interest?

No. Simply because the tribunal did not give any direction with regard to payment of interest, it cannot be said the assessee is not entitled to the amount of interest because the Section 244(1A) says whenever an additional amount of refund becomes payable to the assessee or when the order of penalty is quashed and set aside, the assessee becomes entitled to interest on the amount, which becomes payable to the assessee. See the Commissioner of Income Tax vs Bombay Conductors & Electrical (P) Ltd, (2003) 131 Taxman 204 (Gujarat).

Against the tribunal's order, an appeal can now be filed before the high court under Section 260A. Is it necessary for the high court to hear the respondent before admitting an appeal or before framing a substantial question of law?

No. In terms of Section 260A, the court has to be satisfied that a question of law arises from the tribunal's decision and therefore, such a question needs to be formulated.

There is no mandatory requirement of issuing a notice before the admission of a appeal or before framing a substantial question of law in terms of Section 260A of the Income Tax Act, 1961.