ITC Eligibility on Lease Hold Improvements

In the mall culture and capital light model, generally it happens that Big Corporates, Organisation do take property on long term lease and then develop them as per their business requirements. They Capitalise these expenses in their books in the name of Lease Hold Improvements and depreciate them over the period of lease.

In this article, we will discuss the Provisions of law regarding blocked credit and examine whether ITC will be eligible on Lease Hold Improvements or not.

Area Covered in the Article

1. Meaning of Lease Hold Improvements & its Accounting

2. Legal Provisions regarding Blocking of Credit in terms of Section 17.

3. Examination and Opinion Regarding Lease Hold Improvements

Meaning of Lease Hold Improvements & its Accounting

Lease hold improvements are defined as the enhancements/customisations to the leased space by the tenant. Examples of leasehold improvements are interior walls and ceilings, electrical and plumbing additions, carpeting and tiles etc. Leasehold improvements generally revert to the ownership of the landlord upon termination of the lease (immovable), unless the tenant can remove them without damaging the leased property. An example of leasehold improvements is offices constructed in unfinished office space.

Tenant capitalise the leasehold improvements in his books of account and then depreciate it over the shorter of the useful life of the assets or the remaining term of the lease.

Legal Provisions regarding Blocking of Credit in terms of Section 17(5)(c) & 17(5)(d)

As per Section 17(5)(c) & (d), ITC is not available on following :

Section 17(5)(c)

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

Section 17(5)(d)

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Accordingly, it can be inferred from above provisions that in case following conditions are satisfied, ITC will not be available:

1. There should be Construction of Immovable Property

As per Explanation to the Section 17(5)(c) & (d), "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

Here Key words are

a. Capitalisation in Books of Account

b. Asset should be Immovable Property

2. It should not be Plant & Machinery

As per explanation, "plant and machinery" means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises.

Accordingly, Land, Building and other civil structures will not be termed as Plant & Machinery.

Examination and Opinion Regarding Lease Hold Improvements

Now, we will discuss whether ITC is blocked on Lease Hold Improvements considering the above parameters

a. Construction: As discussed above, Leasehold improvements have been capitalises in the books of account, the same will satisfy the definition of Construction.

b. Immovable Property: Generally, Leasehold improvements are in the nature of immovable property like interior walls and ceilings, electrical fittings etc. Further, movable assets like furniture etc. will generally be capitalised as separate asset.

c. It should not be Plant & Machinery: Generally, Leasehold improvements will be in the nature of addition to the civil structure or building. Therefore, Leasehold improvements will not be covered in the definition of Plant & Machinery.

Accordingly, in our opinion, ITC will not be available on Leasehold Improvements unless it is movable in nature which is unlikely as explained above..

Please connect with us @Linkedinfor regular updates.

Disclaimer: We have taken due care to the best of our knowledge while explaining the provisions surrounding the issue purely for informational/academic purpose. It should not be considered as professional advice or consultancy to be relied upon. Further, Fab Gyan and its Team will not be responsible for any mistake.