Rent, Rates, Taxes, Repairs and Insurance

Introduction

All revenue expenses incurred in respect of a premise, machinery, plant or furniture, used for business, are allowed as a deduction in accordance with this provision. These expenditures include rent, rates, taxes, repairs, and insurance. In respect of repair expenses, only current repair expenses shall be allowed as deduction.

1. Deductible Expenditure

1.1. With respect to the premises

1.1-1. Rented Premise

If a premise is taken on rent for business or profession, the tenant is allowed to claim deduction for the following expenditures:

(a) Rent of building. It can be a residential house, guest house, office premise, warehouse, etc.

(b) Current repairs undertaken by the tenant under the terms of tenancy.

(c) Payment of land revenue, local rates, or municipal taxes. These expenses shall be allowed on payment basis under Section 37.

(d) Any premium paid in respect of insurance of the business premises.

If tenant has not undertaken to bear the cost of repairs, but he pays for the current repairs of the let-out premises, the expenditure may be allowed under general provision of Section 34(1). The deduction is allowed if the repair expenditure has been incurred wholly and exclusively for the purposes of the business

1.1-2. Owned premise

If assessee occupies the business premises other than as a tenant (i.e., as an owner or mortgagee in possession) deduction is allowed for the following expenditures:

(a) Current repairs. The ‘current repairs’ are necessary repairs, which are needed for the maintenance of an asset.

Example, Expenditure incurred to replace the old doors with fire-proof doors as per factory rules is allowable as expenditure on current repair. However, expenditure incurred on new doors as a part of extension and improvement of the building is not a current repair. Hence, no deduction shall be allowed for such repair expenditure.

(b) Payment of land revenue, local rates, or municipal taxes. These expenses shall be allowed on payment basis under Section 37.

(c) Any premium paid in respect of insurance of the business premises.

1.2. With respect to the machinery, plant or furniture

If the assessee incurs expenses in respect of a plant, machinery or furniture used for the business or profession, the following deductions are allowed:

(a) Current Repairs (not being capital expenditure).

(b) Insurance premium.

1.2-1. Who can claim deduction?

Current repairs and insurance premiums paid in respect of machinery, plant and furniture are allowed as a deduction if these assets are used for purposes of business or profession. If the owner himself uses these assets for his own business, the deduction for such expenditure is allowed under this provision. If, however, the owner lets out these assets, the lessee would be entitled to a deduction in respect of these expenditures under this provision. The lessor, in such a case, shall claim the deduction for such expenses, if incurred by him, under Section 93, if the rental income is taxable as "Income from other sources".

1.2-2. How much deduction is allowed?

To claim deduction for current repairs and insurance premium, it is necessary to use the asset for the purpose of business. It is, however, not necessary that these assets should be used throughout the previous year. Even if the assets have been used for part of the year, the assessee shall be granted full allowance permissible under this section, and not merely an amount proportionate to the period of use

Similarly, if machinery is kept ready for use at any moment, the machinery can be said to be "used" for the purpose of business, thus, all expenditure incurred on current repair and insurance premium shall be allowed as deduction

1.2-3. Which repair is allowed as deduction?

The deduction, under this provision, shall be allowed only for the current repairs. The very simple test to identify the "current repairs" - it doesn"t bring into existence any new asset. These repairs are done to preserve and maintain an already existing asset

If repair expenditure brings into existence any new asset, such expenditure is deemed as capital in nature and is not deductible under this provision. Any increase in the life of an existing asset beyond its original estimated economic life by repairs and maintenance, cannot be taken as the sole ground for treating any expenditure as capital in nature

For example, replacing old machinery parts with new parts is in the nature of current repairs or revenue expenditure

1.2-4. When deduction is allowed?

Deduction for these expenditures is allowed in accordance with the method of accounting followed by the assessee. In the case of the mercantile system of accounting, these expenses are allowed as a deduction in the previous year itself in which they are incurred. If books of accounts are maintained on a cash basis, the deduction is allowed on a payment basis, even for all those expenditures which are paid in advance.

1.3. Premises, machinery, plant or furniture not exclusively used for business

When premises, building, machinery, plant or furniture are not exclusively used for the purpose of business and profession, the deduction shall be restricted to a fair proportion attributable to such business or professional use, as determined by the Assessing Officer.

References

CIT v. Goyal Oil Mills (1970) 78 ITR 414 (Pun.)

National Syndicate [1961] 41 ITR 225 (SC)

Whittle Anderson Ltd. v. CIT (1971) 79 ITR 613 (Bom.)

CIT v. Saravana Spg. Mills (P.) Ltd. [2007] 163 Taxman 196 (SC)

National Syndicate [1961] 41 ITR 225 (SC)

CIT v. Mahalakshmi 66 ITR 710 (SC)

CIT v. STN Textile 257 ITR 161

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.