A change of use does not create a fresh market-value basis
For FY 2025–26 / AY 2026–27, section 43(1), Explanation 5 of the Income-tax Act, 1961 addresses a building previously the assessee’s property that is brought into business or professional use after 28 February 1946. Its actual cost is reduced by the depreciation described in that Explanation, calculated as if the building had been used for that purpose since acquisition. A current valuation or a book reclassification does not independently establish the tax starting cost.
Read the applicable text: Income-tax Act, 1961: section 43(1), Explanation 5.
Separate ownership, acquisition and use
Identify the legal owner, original acquisition date, building identity and date of entry into business use. Preserve acquisition documents and the chronology of previous and subsequent use. A newly acquired building, a leased property and an existing owned building are different factual cases; do not apply this specific rule merely because a building appears in an office-location register.
Reconstruct the prescribed reduction
The provision uses a hypothetical depreciation calculation, with its rate-in-force wording, rather than simply deducting whatever book depreciation was posted. Build the period-wise working, verify the applicable rate and conditions, and record how the statutory wording was applied. The illustrations use stated historical reductions as fictional assumptions, not independently verified acquisition dates, rates or allowance histories. In an actual case, establish those inputs before finalising the reduction. The illustrations do not prescribe a depreciation percentage or a shortcut for every building.
Keep the measures distinct
Retain original tax actual cost, the statutory reduction, resulting cost, book carrying amount and any valuation as separate columns. Use only supported building-cost inputs; a combined property figure needs its own allocation analysis before this bridge. A valuation increase is a reconciliation item and does not by itself restore depreciation already reflected in the statutory reduction.
Cost is not the annual allowance
After determining the starting cost, complete the separate block, business-use and section 32 analysis. Do not describe the resulting figure as an immediate deduction. Mixed-use facts, additions, special cost adjustments and uncertain historical records require separate support rather than mechanical extrapolation from these illustrations.
Close with evidence rather than an unsupported opening balance
Tie the asset register to the acquisition and use records and preserve versions of the historical working. Resolve any material cost or period uncertainty before using the figure in a return. These section references apply to the stated 1961 Act return period; they do not mechanically substitute the Income-tax Act, 2025 tax-year numbering.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Basic bridge
Established building tax cost is ₹60 lakh. The assumed Explanation 5 reduction is ₹18 lakh. The resulting cost is ₹42 lakh. A current valuation of ₹90 lakh is ₹48 lakh higher than that bridge; valuation alone does not establish a ₹90 lakh depreciation starting point.
Illustrative example 2: Book value differs
Original tax cost is ₹80 lakh and the supported reduction is ₹24 lakh, giving ₹56 lakh. The book carrying amount is ₹65 lakh. Keep the ₹9 lakh difference in the book-to-tax reconciliation rather than silently importing the accounting figure.
Illustrative example 3: Two buildings
Building A has cost ₹50 lakh and reduction ₹15 lakh, leaving ₹35 lakh. Building B has cost ₹30 lakh and reduction ₹6 lakh, leaving ₹24 lakh. Total reconstructed cost is ₹59 lakh. Retain separate histories even where the final tax computation groups eligible assets in a block.
Illustrative example 4: Correct a missing historical component
A draft uses cost ₹100 lakh less ₹20 lakh, or ₹80 lakh. A supported review identifies another ₹5 lakh within the prescribed historical reduction. The revised cost is ₹75 lakh, ₹5 lakh below the draft. Retain the period and rate evidence for that change.
Illustrative example 5: Prevent a repeated subtraction
Original cost ₹40 lakh less the assumed reduction ₹12 lakh gives ₹28 lakh. The imported schedule already labels ₹28 lakh as net reconstructed cost. Deducting ₹12 lakh again would give ₹16 lakh and understate the bridge by ₹12 lakh. Preserve gross and net column definitions.
Illustrative example 6: Keep a combined property input out until supported
A ₹120 lakh acquisition allocation is assumed independently supported as ₹75 lakh building and ₹45 lakh land. This building-only bridge starts at ₹75 lakh. With the assumed building reduction ₹15 lakh, the result is ₹60 lakh. Applying that same ₹15 lakh to the combined figure would produce ₹105 lakh, incorporating the separate ₹45 lakh land component into this working.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the same owned building | Title and asset identifiers. |
| 2 | Verify original acquisition | Date and cost documents. |
| 3 | Establish entry into business use | Operational-use chronology. |
| 4 | Separate cost components | Supported building-only allocation. |
| 5 | Read the applicable provision | Section 43(1), Explanation 5. |
| 6 | Reconstruct the reduction | Period, rate and condition evidence. |
| 7 | Calculate the net cost once | Gross-to-net bridge. |
| 8 | Reconcile accounting figures | Book amount and valuation differences. |
| 9 | Compute the annual allowance separately | Block and section 32 working. |
| 10 | Approve the return input | Evidence and retained calculation versions. |
Sixteen practitioner FAQs
1. Does a current valuation automatically set tax cost?
No. Apply the statutory reconstruction to the established facts.
2. Which provision governs this use case?
Section 43(1), Explanation 5 of the 1961 Act.
3. Must the building already belong to the assessee?
That is part of the specific factual scope.
4. Does an office lease automatically fall within it?
No. Establish the legal ownership and actual arrangement.
5. What date evidence is needed?
Acquisition and the date the owned building enters business use.
6. Is the reduction simply book depreciation?
No. Reconstruct the depreciation described by the provision.
7. Do these examples prescribe a rate?
No. They use fictional assumed historical reductions; an actual case requires separate verification of the underlying dates, rates and history.
8. Can an unexplained opening balance replace that working?
No. Retain the underlying periods, rate and cost evidence.
9. Does net reconstructed cost equal the annual deduction?
No. The annual allowance requires separate analysis.
10. Can a valuation uplift erase the reduction?
Not merely by recording the uplift.
11. Why preserve gross and net columns?
To prevent deducting the historical reduction twice.
12. Can combined property cost be used without analysis?
Separate the supported building input before this building-cost bridge.
13. Does the example establish a statutory land-allocation percentage?
No. Its allocation is an explicit supported-facts assumption.
14. Do two buildings need separate histories?
Yes. Their acquisition and reduction inputs can differ.
15. What if use is mixed or changes again?
Analyse the actual facts and remaining applicable provisions separately.
16. Which period uses these section references?
FY 2025–26 / AY 2026–27 under the Income-tax Act, 1961.
Official sources
Income-tax Act, 1961: section 43(1), Explanation 5
Income-tax Department: actual section43 text, including Explanation5