Author: Arjun Namdev, II Year of B.Com.,LL.B(Hons.) from University Institute of Legal Studies Panjab University Chandigarh. Essentials for claiming deduction u/s 31 of the Income Tax Act 1961 The Plant, Machinery, or Furniture in respect of which deduction is claimed must be used for the purposes of business. The amount must be paid on account of current repairs and it should not be in the nature of capital expenditure. The amount of Insurance premium must be paid in respect of insurance risk or damage. The Plant, Machinery, or Furniture in respect of which deduction is claimed must be used for the purposes of business. It is necessary for claiming deduction u/s 31 that the asset in respect of whose deduction is claimed must be used for the purposes of a business in the previous year. It should be kept in mind that the expression used for the purposes of business does not connote that the asset must be used throughout the previous year but even if it is used for part of the year also then the deduction can be claimed. However, if the owner leases out the Plant, Machinery, or Furniture then he cannot claim the deduction in respect of the expenditure incurred on repairs or insurance premium on that asset and now it would be tenant who can claim deduction in respect of expenses incurred in respect of current repairs or any insurance premium paid. What will happen if the Asset is partly used for business and partly for personal purposes? In case the Plant, Machinery, or Furniture is partly used for business and partly for business purposes then the deductions in respect of expenditures incurred on account of current repairs or insurance premiums paid shall be restricted to a fair proportionate which may be determined by the assessing officer with regards to the usage of such assets. The amount must be paid on account of current repairs and it should not be in the nature of capital expenditure. It is necessary for claiming deduction u/s 31 that the expenditure must be incurred on account of current repairs of Plant, Machinery, or Furniture, The expression current repairs has not been provided expressly under the Act. Therefore, it has to be construed in its popular or commercial sense: The simple test that must be kept in mind is that the expenditure claimed as a deduction in respect of repairs must be made only to preserve and maintain an already existing asset and no new or different advantage must be derived from such expenditure. The object of the expenditure should not be to bring a new asset into existence nor to obtain a new or different advantage and the quantum of expenditure incurred on the repairs is not relevant for determining whether it is an expenditure on current repairs or not, because the extent of repairs and the amount spent would depend upon various factors. For an expenditure to be ascertained as current repairs it should not be for the purpose of renewal or restoration but should be only for the purpose of preserving or maintaining an already existing asset which does not give the assessee a new or different advantage. It was observed that the nature of expenditure on any repairs claimed to have been effected has to be viewed as a whole and in the proper perspective, in order to determine whether such repairs have only had the effect of restoring the machinery to its original condition or whether they have introduced any additional advantage or features which have improved its income earning capacity. It was also observed that merely because a large sum is expended on repairs, it cannot be taken as a matter of assumption that it must necessarily amount to reconstruction. Expenditure incurred for renovating a hotel or office where the beautification is an essential part of the business of the assessee then such expenditure shall be construed as in the nature of revenue expenditure i.e. allowed as a deduction even if it involves the replacement of existing components of the building, furniture, carpets, flooring, upholstery, wallpapers, partitioning, etc. The amount of Insurance premium must be paid in respect of insurance risk or damage. Section 31(2) provides for deduction in respect of insurance premium paid in respect of insurance risk or damage. Sum paid in respect of insurance premium in respect of machinery shall be allowed as a deduction if it is necessary for the purposes of business and is not a capital expenditure. Sum paid in respect of insurance premium on the loss of property shall be allowed as a deduction if it is incurred for the purposes of business and is not in the nature of capital expenditure. However, The accepted accounting rule for determining the cost of fixed assets is that all expenses directly attributable to the acquisition of the asset including insurance premium paid for bringing the asset into existence or into use for the purpose of business shall be capitalized as the cost of the asset and hence not allowed as a deduction u/s 31. Eg. The Amount paid as a first-time third-party insurance premium shall be capitalized as the value of the cost of the asset as it is necessary for bringing the asset into use for the purposes of business. ‘
Author: Arjun Namdev, II Year of B.Com.,LL.B(Hons.) from University Institute of Legal Studies Panjab University Chandigarh.
Essentials for claiming deduction u/s 31 of the Income Tax Act 1961
The Plant, Machinery, or Furniture in respect of which deduction is claimed must be used for the purposes of business.
The amount must be paid on account of current repairs and it should not be in the nature of capital expenditure.
The amount of Insurance premium must be paid in respect of insurance risk or damage.
The Plant, Machinery, or Furniture in respect of which deduction is claimed must be used for the purposes of business.
It is necessary for claiming deduction u/s 31 that the asset in respect of whose deduction is claimed must be used for the purposes of a business in the previous year. It should be kept in mind that the expression used for the purposes of business does not connote that the asset must be used throughout the previous year but even if it is used for part of the year also then the deduction can be claimed. However, if the owner leases out the Plant, Machinery, or Furniture then he cannot claim the deduction in respect of the expenditure incurred on repairs or insurance premium on that asset and now it would be tenant who can claim deduction in respect of expenses incurred in respect of current repairs or any insurance premium paid.
What will happen if the Asset is partly used for business and partly for personal purposes?
In case the Plant, Machinery, or Furniture is partly used for business and partly for business purposes then the deductions in respect of expenditures incurred on account of current repairs or insurance premiums paid shall be restricted to a fair proportionate which may be determined by the assessing officer with regards to the usage of such assets.
The amount must be paid on account of current repairs and it should not be in the nature of capital expenditure.
It is necessary for claiming deduction u/s 31 that the expenditure must be incurred on account of current repairs of Plant, Machinery, or Furniture, The expression current repairs has not been provided expressly under the Act. Therefore, it has to be construed in its popular or commercial sense:
The simple test that must be kept in mind is that the expenditure claimed as a deduction in respect of repairs must be made only to preserve and maintain an already existing asset and no new or different advantage must be derived from such expenditure. The object of the expenditure should not be to bring a new asset into existence nor to obtain a new or different advantage and the quantum of expenditure incurred on the repairs is not relevant for determining whether it is an expenditure on current repairs or not, because the extent of repairs and the amount spent would depend upon various factors.
For an expenditure to be ascertained as current repairs it should not be for the purpose of renewal or restoration but should be only for the purpose of preserving or maintaining an already existing asset which does not give the assessee a new or different advantage.
It was observed that the nature of expenditure on any repairs claimed to have been effected has to be viewed as a whole and in the proper perspective, in order to determine whether such repairs have only had the effect of restoring the machinery to its original condition or whether they have introduced any additional advantage or features which have improved its income earning capacity. It was also observed that merely because a large sum is expended on repairs, it cannot be taken as a matter of assumption that it must necessarily amount to reconstruction.
Expenditure incurred for renovating a hotel or office where the beautification is an essential part of the business of the assessee then such expenditure shall be construed as in the nature of revenue expenditure i.e. allowed as a deduction even if it involves the replacement of existing components of the building, furniture, carpets, flooring, upholstery, wallpapers, partitioning, etc.
The amount of Insurance premium must be paid in respect of insurance risk or damage.
Section 31(2) provides for deduction in respect of insurance premium paid in respect of insurance risk or damage.
Sum paid in respect of insurance premium in respect of machinery shall be allowed as a deduction if it is necessary for the purposes of business and is not a capital expenditure.
Sum paid in respect of insurance premium on the loss of property shall be allowed as a deduction if it is incurred for the purposes of business and is not in the nature of capital expenditure.
However, The accepted accounting rule for determining the cost of fixed assets is that all expenses directly attributable to the acquisition of the asset including insurance premium paid for bringing the asset into existence or into use for the purpose of business shall be capitalized as the cost of the asset and hence not allowed as a deduction u/s 31. Eg. The Amount paid as a first-time third-party insurance premium shall be capitalized as the value of the cost of the asset as it is necessary for bringing the asset into use for the purposes of business.