Building, etc., partly used for business — proportional disallowance.
Historical context / FA amendment trail
Substantively stable / sunset by Finance Act; see source-block FA-amendment trail (where applicable).
Operative consequences
• Operates within the Chapter IV-D PGBP computational framework.
• Cross-references operative companion sections.
Case Laws & Commentary
SECTION 38 — Building, etc., partly used for business, etc., or not exclusively so used
Important Case Laws — 1961 Treatise (FA 2026)
Provision in brief: Section 38(1): where building/machinery/plant/furniture is partly used for business and partly for other purposes, allowances under ss. 30, 31, 32 are restricted to a fair proportion attributable to business use. Section 38(2): where the asset is not exclusively used for business, the AO may apportion the deduction reasonably having regard to the user.
Section Commentary
Apportionment for dual-use assets
Section 38 is an apportionment rule rather than a substantive deduction. Sub-s. (1) restricts allowances under ss. 30, 31 and 32 to a 'fair proportion' attributable to business use where the building / plant / machinery / furniture is partly used for business and partly for other purposes. Sub-s. (2) gives the AO power to apportion reasonably having regard to the user where the asset is not exclusively used for business. It is the section most often invoked against professionals, family businesses and SMEs where premises / vehicles / equipment serve mixed personal-business purposes.
Methodology of apportionment
Vir Bhan Bansal (Del) and L.G. Ramamurthi (Mad) establish that apportionment must be based on actual use — typically by area / time / user-count metrics. Arbitrary or formulaic apportionment without facts is impermissible. The AO bears the burden of arriving at a 'fair proportion'; the assessee bears the burden of producing facts supporting its claim.
Idle vs non-business use
Refrigeration & Allied Industries (Del) draws an important distinction: an asset that is IDLE but READY-FOR-USE is still treated as in business use — s. 38 is not invoked for mere idleness. The 'kept ready for use' doctrine of s. 32 applies in parallel. Section 38 bites only when the asset is actually deployed for a non-business purpose (e.g., residential use, leasing to family for non-arm's-length consideration).
Seasonal-use scenarios
Sarabhai Sons (Guj) holds that seasonal-use assets (e.g., agri-processing plants used only in harvest months) retain full business character if the off-season is mere downtime. Mere off-season letting to others does not automatically attract s. 38 unless the letting is substantial and independent.
CA practical pointers
(i) For professional / SME clients with home offices — document area apportionment carefully. (ii) For vehicles used by promoter-directors — apportion via fuel-log / mileage diary. (iii) For shared business + personal assets, prepare a written apportionment basis at year-start. (iv) Tax-audit Form 3CD Cl. 21 captures dual-use disclosures. (v) The Revenue often invokes s. 38 in survey / search proceedings against family-owned businesses — defensive documentation is the best response.
FA 2026 impact: No FA 2026 amendment. Section continues — applies to dual-use scenarios across rent, repairs, depreciation, etc.
Leading Decisions
1. CIT v. Vir Bhan Bansal
Citation: (1994) 209 ITR 90 (Del)
Forum: Delhi High Court
Facts & Issue: Premises used 60% for business and 40% as residence. Assessee claimed full deduction for repairs and depreciation; Revenue applied s. 38 and restricted.
Held / Ratio: Held that s. 38 mandates apportionment based on actual use. The AO must determine a 'fair proportion' on facts; arbitrary apportionment is impermissible. The decision sets out the methodology — area/time/user-based — for such apportionment.
Section relevance: Defines methodology of apportionment under s. 38(1)/(2).
2. L.G. Ramamurthi v. CIT
Citation: (1977) 110 ITR 453 (Mad)
Forum: Madras High Court
Facts & Issue: Professional's premises used partly for residence; question whether depreciation/repairs are to be restricted, and on what basis.
Held / Ratio: Held that where part of the premises is used for residence, depreciation and repairs are restricted under s. 38. Area-based apportionment was upheld as a reasonable methodology in absence of dedicated metering.
Section relevance: Practical authority on apportionment for professionals' premises.
3. Sarabhai Sons Pvt. Ltd. v. CIT
Citation: (1973) 90 ITR 318 (Guj)
Forum: Gujarat High Court
Facts & Issue: Plant used for business in busy season and let out off-season — Revenue applied s. 38 to restrict depreciation.
Held / Ratio: Held that 'used for purposes of business' is satisfied if asset is in business use during the year, even seasonally; mere off-season letting does not automatically attract s. 38 unless the letting is independent and substantial.
Section relevance: Important on seasonal-use scenarios.
4. CIT v. Refrigeration & Allied Industries Ltd.
Citation: (2000) 247 ITR 12 (Del)
Forum: Delhi High Court
Facts & Issue: Machinery used for business in PY but partly idle; whether 'idle period' attracts s. 38 restriction.
Held / Ratio: Held that 'idle but ready-for-use' is treated as business use — s. 38 is invoked only where the asset is actually used for non-business purpose, not where it is merely idle. The 'kept ready for use' doctrine for depreciation u/s 32 was applied.
Section relevance: Defines boundary — idle vs non-business use under s. 38.
5. Tata Sons Ltd. v. CIT
Citation: (1984) 18 Taxman 56 (Bom) — principles
Forum: Bombay High Court
Facts & Issue: Composite use of premises by holding company — head office of group enterprises. Question of s. 38 apportionment among related entities.
Held / Ratio: Held that where premises are used by the assessee AND by group entities sharing space, s. 38 calls for apportionment on a rational basis — e.g., area or head-count. The Court emphasised consistency of methodology over years.
Section relevance: Authority on group-shared-premises apportionment under s. 38.
Function in the statutory architecture
Building, etc., partly used for business — proportional disallowance.
Historical context / FA amendment trail
Substantively stable / sunset by Finance Act; see source-block FA-amendment trail (where applicable).
Operative consequences
• Operates within the Chapter IV-D PGBP computational framework.
• Cross-references operative companion sections.
Case Laws & Commentary
SECTION 38 — Building, etc., partly used for business, etc., or not exclusively so used
Important Case Laws — 1961 Treatise (FA 2026)
Provision in brief: Section 38(1): where building/machinery/plant/furniture is partly used for business and partly for other purposes, allowances under ss. 30, 31, 32 are restricted to a fair proportion attributable to business use. Section 38(2): where the asset is not exclusively used for business, the AO may apportion the deduction reasonably having regard to the user.
Section Commentary
Apportionment for dual-use assets
Section 38 is an apportionment rule rather than a substantive deduction. Sub-s. (1) restricts allowances under ss. 30, 31 and 32 to a 'fair proportion' attributable to business use where the building / plant / machinery / furniture is partly used for business and partly for other purposes. Sub-s. (2) gives the AO power to apportion reasonably having regard to the user where the asset is not exclusively used for business. It is the section most often invoked against professionals, family businesses and SMEs where premises / vehicles / equipment serve mixed personal-business purposes.
Methodology of apportionment
Vir Bhan Bansal (Del) and L.G. Ramamurthi (Mad) establish that apportionment must be based on actual use — typically by area / time / user-count metrics. Arbitrary or formulaic apportionment without facts is impermissible. The AO bears the burden of arriving at a 'fair proportion'; the assessee bears the burden of producing facts supporting its claim.
Idle vs non-business use
Refrigeration & Allied Industries (Del) draws an important distinction: an asset that is IDLE but READY-FOR-USE is still treated as in business use — s. 38 is not invoked for mere idleness. The 'kept ready for use' doctrine of s. 32 applies in parallel. Section 38 bites only when the asset is actually deployed for a non-business purpose (e.g., residential use, leasing to family for non-arm's-length consideration).
Seasonal-use scenarios
Sarabhai Sons (Guj) holds that seasonal-use assets (e.g., agri-processing plants used only in harvest months) retain full business character if the off-season is mere downtime. Mere off-season letting to others does not automatically attract s. 38 unless the letting is substantial and independent.
CA practical pointers
(i) For professional / SME clients with home offices — document area apportionment carefully. (ii) For vehicles used by promoter-directors — apportion via fuel-log / mileage diary. (iii) For shared business + personal assets, prepare a written apportionment basis at year-start. (iv) Tax-audit Form 3CD Cl. 21 captures dual-use disclosures. (v) The Revenue often invokes s. 38 in survey / search proceedings against family-owned businesses — defensive documentation is the best response.
FA 2026 impact: No FA 2026 amendment. Section continues — applies to dual-use scenarios across rent, repairs, depreciation, etc.
Leading Decisions
1. CIT v. Vir Bhan Bansal
Citation: (1994) 209 ITR 90 (Del)
Forum: Delhi High Court
Facts & Issue: Premises used 60% for business and 40% as residence. Assessee claimed full deduction for repairs and depreciation; Revenue applied s. 38 and restricted.
Held / Ratio: Held that s. 38 mandates apportionment based on actual use. The AO must determine a 'fair proportion' on facts; arbitrary apportionment is impermissible. The decision sets out the methodology — area/time/user-based — for such apportionment.
Section relevance: Defines methodology of apportionment under s. 38(1)/(2).
2. L.G. Ramamurthi v. CIT
Citation: (1977) 110 ITR 453 (Mad)
Forum: Madras High Court
Facts & Issue: Professional's premises used partly for residence; question whether depreciation/repairs are to be restricted, and on what basis.
Held / Ratio: Held that where part of the premises is used for residence, depreciation and repairs are restricted under s. 38. Area-based apportionment was upheld as a reasonable methodology in absence of dedicated metering.
Section relevance: Practical authority on apportionment for professionals' premises.
3. Sarabhai Sons Pvt. Ltd. v. CIT
Citation: (1973) 90 ITR 318 (Guj)
Forum: Gujarat High Court
Facts & Issue: Plant used for business in busy season and let out off-season — Revenue applied s. 38 to restrict depreciation.
Held / Ratio: Held that 'used for purposes of business' is satisfied if asset is in business use during the year, even seasonally; mere off-season letting does not automatically attract s. 38 unless the letting is independent and substantial.
Section relevance: Important on seasonal-use scenarios.
4. CIT v. Refrigeration & Allied Industries Ltd.
Citation: (2000) 247 ITR 12 (Del)
Forum: Delhi High Court
Facts & Issue: Machinery used for business in PY but partly idle; whether 'idle period' attracts s. 38 restriction.
Held / Ratio: Held that 'idle but ready-for-use' is treated as business use — s. 38 is invoked only where the asset is actually used for non-business purpose, not where it is merely idle. The 'kept ready for use' doctrine for depreciation u/s 32 was applied.
Section relevance: Defines boundary — idle vs non-business use under s. 38.
5. Tata Sons Ltd. v. CIT
Citation: (1984) 18 Taxman 56 (Bom) — principles
Forum: Bombay High Court
Facts & Issue: Composite use of premises by holding company — head office of group enterprises. Question of s. 38 apportionment among related entities.
Held / Ratio: Held that where premises are used by the assessee AND by group entities sharing space, s. 38 calls for apportionment on a rational basis — e.g., area or head-count. The Court emphasised consistency of methodology over years.
Section relevance: Authority on group-shared-premises apportionment under s. 38.
— End of Section 38 Case-Law Note —