Rent, rates, taxes, repairs and insurance.

28(1)

The following amounts shall be allowed as deduction in respect of premises, machinery, plant or furniture, wholly and exclusively, used for the purposes of the business or profession:––

• (a) any premium paid in respect of insurance against risk of damage or destruction thereof;
• (b) land revenue, local rates or municipal taxes paid;
• (c) rent paid, when the premises are occupied by the assessee as a tenant;
• (d) amount paid on account of current repairs, not being capital expenditure, when the premises are occupied by the assessee otherwise than as a tenant; and
• (e) cost of repairs, not being capital expenditure, when the premises occupied by the premises occupied by the assessee as a tenant.

28(2)

In case where the premises, building, machinery, plant or furniture is partly used or not wholly and exclusively used for the purposes of the business or profession, the deduction allowable under sub-section (1) shall be restricted to the fair proportionate part thereof as determined by the Assessing Officer, having regard to the usage for the purposes of the business or profession.

Explanation

Section Summary:

This section outlines the deductions allowed for expenses related to premises, machinery, plant, or furniture used for business or professional purposes. It covers expenses such as insurance premiums, land revenue, municipal taxes, rent, and repairs, provided these are incurred wholly and exclusively for business or profession. If the assets are only partially used for business, the deduction is proportionately restricted.

Key Changes:

• No major changes: This section largely retains the provisions from the prior income tax law. However, it clarifies that deductions are only allowed for expenses incurred "wholly and exclusively" for business or profession, and proportionate deductions apply for partial usage.
• Clarification on repairs: The section distinguishes between repairs (deductible) and capital expenditure (not deductible), ensuring taxpayers understand the difference.

Practical Implications:

• For businesses and professionals: This section allows taxpayers to claim deductions for expenses like rent, insurance, taxes, and repairs, reducing taxable income. However, they must ensure these expenses are directly related to their business or profession.
• Partial usage: If assets (e.g., premises or machinery) are used partly for personal purposes, only a proportionate deduction is allowed. This requires accurate record-keeping to justify the business-use percentage.
• Repairs vs. capital expenditure: Taxpayers must distinguish between deductible repair costs and non-deductible capital expenditures (e.g., improvements or upgrades).

Critical Concepts:

• Wholly and exclusively: Expenses must be incurred entirely for business or professional purposes. Personal or mixed-use expenses are not deductible.
• Capital expenditure: Costs that improve or extend the life of an asset (e.g., renovations) are not deductible as repairs. Only current repairs (maintenance) are deductible.
• Proportionate deduction: If an asset is used partly for business, the deduction is limited to the business-use percentage, as determined by the Assessing Officer.

Compliance Steps:

1. Maintain records: Keep detailed records of expenses like rent, insurance premiums, municipal taxes, and repair costs.
2. Separate business and personal use: If assets are used for both business and personal purposes, calculate and document the business-use percentage.
3. Distinguish repairs from capital expenditure: Ensure repair costs claimed are for maintenance, not improvements or upgrades.
4. File accurate returns: Report deductible expenses in the appropriate sections of the income tax return.

Examples:

1. Rent deduction: A business owner rents office space for ₹1,00,000 per month. The entire ₹12,00,000 annual rent is deductible since the space is used exclusively for business.
2. Partial usage: A professional uses a room in their home as an office (20% of total space). If they pay ₹50,000 in municipal taxes for the entire property, only 20% (₹10,000) is deductible as a business expense.
3. Repairs vs. capital expenditure: A business spends ₹50,000 on fixing a leaky roof (repair) and ₹2,00,000 on installing a new air conditioning system (capital expenditure). Only the ₹50,000 repair cost is deductible.

This section ensures taxpayers can reduce their taxable income by claiming legitimate business expenses while preventing misuse of deductions for personal or capital-related costs.