In 1962, my friends purchased a plot of land in Delhi measuring 2,500 sq as a residential property for Rs 30 lakh. Since the laws governing the development of property in post-Independence Delhi have undergone a sea-change, they approached the Land and Development Officer (L&DO) in the Ministry of Works, Housing & Supply to not only have the plot mutated in their names, but also seeking his approval to additional construction on the plot in keeping with the subsisting bye-laws applicable to Delhi at that time.The L&DO accorded this approval after charging development charges aggregating some Rs 10 lakh. It however needs to be comprehended that the end user of the property did not change and it continued to be `residential'. However, by the time the building was ready in 1968, the demand for commercial properties had emerged and my friends approached the L&DO once again to have the use of the property changed from residential to commercial. The L&DO also agreed to this after levying and receiving acommercialisation charge of Rs 1 crore and, thereafter, a highrise building was constructed on the plot.
When my friends filed their IT returns in 1974, they claimed depreciation on the entire cost of the land and buildings at the appropriate rate. But this was disallowed by the IT authorities and has been the subject of numerous appeals and court cases. Meanwhile, the original purchasers have passed away and their heirs are wondering if there is any settled case of law at the High Court and/or the Supreme Court. Could you please advise. Also, armed with this information, can they approach the IT Authorities for an out-of-court settlement and thus put an end to this prolonged and unproductive litigation, which has been going on for the past 20 years?
-- Mahesh Bhat, Delhi
Clearly, the Land and Development Officer in the Ministry of Urban Affairs (successors of the erstwhile Ministry of Works, Housing & Supplies) made two levies -- the first one of Rs 10 lakh to permit additional residentialconstruction on the land and the second one of Rs 1 crore to change the use of land from residential to commercial. It appears that the Income Tax Department, while rejecting your friends' contention has relied upon the decision in the Commissioner of Income Tax, Punjab, Jammu & Kashmir and Himachal Pradesh vs Alpha Traders (1967) case, which makes a distinction between the cost of land and the cost of the building and holds that depreciation can be allowed only on the cost of building. As the land itself does not depreciate, even though its market value may fluctuate, there is no question of either allowing or claiming depreciation on this component of the cost of acquisition. As far as the second levy is concerned, it is specifically related to the change of use from residential to commercial. The Supreme Court of India, in a recent judgement in the case of Hindustan Times vs the Union of India, has held that it should be treated as a part and parcel of the building cost that is being put to commercial use.In other words, depreciation is to be allowed on the entire cost of construction of the building and the sum total of commercialisation charges levied by the L&DO, without taking into consideration the land cost as clarified herein before.
Your friends would be well advised to seek competent legal advice in the matter and move the Income Tax Department for an out-of-court settlement if so advised.
I am an NRI who is planning to return to India and establish a `serviced apartment' complex at New Delhi to specifically cater to NRI/PIO clients as also other corporate clients of Eurasian origin, who visit India on short-term assignments involving stays ranging between one to 10 weeks. I am wondering whether the Indian tax laws acknowledge such a service and also whether such an activity would need operation licenses and if so, from what authorities?
-- Raghunandan Prasad Singh, Delhi
There are no specific laws in India to regulate income derived from the business of serviced apartments. Suchfacilities are governed by the provisions of Rent Act or the Easement Act. If the serviced apartment is leased out for a very short time (as contemplated by you), that is for a duration of less than six months at a time to any single occupant, then the arrangement can be treated as a licence and the amount received therefrom treated as licence fees, provided the same is let out on a weekly basis. However, if the premises are let out on a monthly basis, then the income derived therefrom is likely to be treated as a `rent' receipt.
If the enterprise proposed to be floated by you is primarily in the serviced apartment business, then the income derived from such an enterprise is apt to be treated as income from business and not income from house property.The entrepreneur will be entitled to claim expenses incurred by him as a deduction in so far as they are directly related to his business activity. These include housekeeping costs, electricity, water and telephone bills, advertising expenses and expensesincurred in employing and maintaining staff to provide the desired level of services, etc. In addition, you would also be entitled to claim depreciation on building, furniture, fixtures, plant and equipment, etc, as the properties in question will be treated as business properties.
G P Khungar is a real estate consultant and a former director (corporate affairs) of Ansals Ltd.
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