1. We find it convenient to dispose of the three appeals together. Both the assessee and the department have come on cross-appeals against the order of the Commissioner (Appeals) for the assessment year 1980-81 and the department has come on appeal against his order for the assessment year 1981-82. The main point to be considered in these appeals is whether the assessee is entitled to depreciation in respect of the assets which came into their possession by virtue of an agreement with another firm by name Fitnut Products, Bharatpur.
2. The assessee, a private limited company, had entered into an agreement on 22-4-1974 with a partnership concern Fitnut Products by which the assessee contracted to purchase their entire business of manufacturing rivets, screws, etc., with all its assets for a sum of Rs. 2,25,000. The factory is situated in the industrial estate in Bharatpur which was given on lease to that firm by the Government of Rajasthan. According to that agreement, the assessee has to pay Rs. 50,000 in cash, clear off a cash credit arrangement with the State Bank of Bikaner and Jaipur to the extent of Rs. 1 lakh and out of the balance amount 50 per cent should be paid within 2 months from the date of settlement of a civil suit in which the vendor firm was involved.
The second instalment will be paid at the time of registration of sale deed. The assessee had paid according to the stipulations. We were told that the civil suit mentioned in the agreement of sale had not yet been finalised and, therefore, that part of the instalment remains to be paid. No registration of the sale deed has been effected so far.
3. The assessee was given possession of the building, plant and machinery. The assessee had also written to the Government of Rajasthan with regard to their lease of the land on which the building is situated. The Government of Rajasthan by their order had recognised the assessee as the lessee in place of the Bharatpur firm.
4. From the assessment year 1975-76 onwards, the assessee claimed depreciation in respect of the factory buildings and other assets at Bharatpur. This had been allowed by the ITO for those years. However, for the assessment year 1980-81, the ITO went into the question once again. He gave a finding that the assessee is not entitled to depreciation. He pointed out that the conveyance deed has not been registered and, therefore, the title to these assets had not been transferred to the assessee. The assessee cannot be considered as the owner of these assets. Therefore, they are not entitled to depreciation. Thus, the claim for depreciation allowance in respect of the Bharatpur factory was completely disallowed.
5. The Commissioner (Appeals) found the assessee's claim to be in order. He pointed out that the mere fact that a mention was made in the sale agreement that the regular sale deed would be executed after the disposal of the civil suit will be no ground for holding that the assessee will not be entitled to depreciation on the assets purchased by it. He pointed out that possession has been taken by the assessee and the lease deed has also been executed by the Rajasthan Government in favour of the assessee. The Commissioner relied on the decision of the Allahabad High Court in the case of Addl. CIT v. U.P. State Agro Industrial Corporation. Ltd. [1981] 127 ITR 97 and held that an assessee will be considered to be owner of the building under Section 32 of the Income-tax Act, 1961 ('the Act') if he is in a position to exercise the right of the owner and not on behalf of the person in whom the title vests, but in his own rights. In that case, he pointed out, it was held that even though the registered sale deed was not executed in favour of the assessee, the assessee would be entitled to depreciation under Section 32. He also referred to the decision of the Calcutta High Court in the case of CIT v. Salkia Transport Associates [1983] 143 ITR 39. He allowed the assessee's claim.
6. The department is in appeal. Shri Radhakrishna Murthy, for the department, submitted that the agreement should be considered as a financing agreement only and not as one conveying property to the assessee. He pointed out that the agreement contemplates the possibility of both parties resiling from the conditions agreed on.
Referring to the provisions found in Clause 4 of the agreement, he pointed out that the Bharatpur firm had a right to forfeit Rs. 25,000 in case the agreement fell through. The assessee is not a loser even if this amount is forfeited. The assessee would have the benefit of using the assets and therefore, the amount forfeited would be in the nature of interest and rent paid for the assets.
7. We are unable to consider the agreement as a financing agreement or a hiring agreement. The agreement is clearly an agreement for sale. The assets to be transferred are mentioned therein in a Schedule. Full consideration had been paid. As stipulated therein, the Government of Rajasthan had been approached and they have recognised the assessee as the lessee. The assessee had taken possession and had used the properties for all these years. On these facts, it will be very difficult to say that the agreement was merely a financial accommodation. Too much cannot be read in Clause 4 of the agreement. It cannot in any way be treated as an agreement for rental of the premises and the assets. In all agreements, there would be certain conditions on the breach of which either party could resile from the contract. These are usual conditions found in any sale agreement and it has no further significance We, therefore, do not consider it in any other light as suggested by the department.
8. We also reject Shri Radhakrishna Murthy's suggestion that the agreement should be considered as a usufructory mortgage. None of the conditions required for such a mortgage is present.
9. We also reject another submission of Shri Radhakrishna Murthy that ownership cannot be recognised unless the assessee would be coming under the provisions of Section 32(1)(iii) or 41(2) of the Act in case of sale. This argument is putting the cart before the horse. What we have to see is whether any transfer of property has taken place. If it has taken place, then, the provisions of these two Sections would be automatically invoked in case of any sale effected by the assessee.
10. Shri Radhakrishna Murthy then relied on the finding of the ITO that there was no registration of the conveyance deed and, therefore, no property passed. Shri Swamy, for the assessee, submitted placing strong reliance on the Allahabad High Court decision cited by the Commissioner that the assets have become the property of the assessee. He pointed out that as per agreement all that the assessee has to do has already been done by it and land has been transferred in the name of the assessee. It is the vendor who had been dragging his feet on the registration of the conveyance and because of the vendor's lethargy the assessee should not suffer. He also submitted that in the earlier years, depreciation has been allowed and the department should not be allowed to reagitate this point after so many years. He further submitted that the ratio laid down by the Allahabad High Court in the case cited has been followed by the Benches of the Tribunal in many other cases.
11. We have considered the facts of the case. Section 32 allows depreciation in respect of assets owned by an assessee. The expression 'owned by the assessee' is common both in Sections 32 and 22 of the Act. It is fairly well settled in law what title to immovable property vests only on the registration of the conveyance deed. In this case, it is an admitted position that the conveyance deed is not registered. So, under general law, the assessee has not become owner of the building.
12. Now, the position we have to consider firstly is whether under Section 32 it will in any way be different from the position under Section 22. Secondly, we must consider how far the decision of the Allahabad High Court has altered this position. Taking the first point, the authorities are unanimous that the interpretation in respect of the expression 'ownership' appearing in Sections 22 and 32 should be identical. It is interesting to note that the two decisions relied on by the assessee on the one hand and the department on the other start from this common premise that for the purpose of Sections 32 and 22 ownership of properties is vital. In the case of CIT v. Hindustan Cold Storage & Refrigeration (P.) Ltd. [1976] 103 ITR 455, a case relied on by the department, the Delhi High Court, proceeding on the footing that there is no difference, held that where conveyance deed has not been registered, there is no transfer of ownership in the case of immovable properties. The Allahabad High Court in the case relied on by the assessee observed at page 101 : "In our opinion, the scope of the expressions 'property of which the assessee is owner', used in Section 9 of the 1922 Act and 'the property owned by the assessee' used in Section 32 of the 1961 Act, is the same." It will be seen from the above that the case laws applicable in respect of ownership of property under the head 'Income from house property' would be equally applicable in considering the provisions of Section 32.
13. In the case referred to above, the Allahabad High Court had held that the assessee would be entitled to depreciation under Section 32 in respect of immovable properties even without the registration of the conveyance deed. In arriving at this decision, the High Court has relied heavily on the decision of the Supreme Court in the case of R.B.Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570. In that case, the assessee was the owner of a building situated in Lahore. This building was acquired by him by borrowals from banks. After partition, the building fell within Pakistan and under an Ordinance passed by the Pakistan Government, the property vested in the Custodian of Evacuee properties.
The annual letting value of such a property in the hands of the assessee was nil. However, the assessee was continuing to pay interest and claimed this as a deduction. According to the assessee, he was the owner of the property although it was situated in Pakistan and vested in the Custodian because there was no conveyance deed, and further, he had residual interest in the property even under the Ordinance. This claim was rejected by all authorities including the Supreme Court.
After analysing the provisions of the Pakistan Ordinance, the Supreme Court posed a question as follows : The question is, who is the 'owner' referred to in this Section Is it the person in whom the property vests or is it he who is entitled to some beneficial interest in the property It must be remembered that Section 9 of the 1922 Act brings to tax the income from property and not the interest of a person in the property. A property cannot be owned by two persons, each one having independent and exclusive right over it. Hence, for the purpose of Section 9 of the 1922 Act, the owner must be that person who can exercise the rights of the owner, not on behalf of the owner but in his own right. (p. 575) The Allahabad High Court considered the position in the light of this quotation. They then pointed out that what has to be seen is whether the assessee came into the position of exercising the rights of the owner in respect of the property on its own behalf and not on behalf of the vendor. Pointing out that there was no dispute that full consideration was paid and possession was given to the assessee and that there was no right reserved by the vendor for itself, the High Court held that the assessee had exercised all the rights of an owner and, therefore, was entitled to be considered as an owner for the purpose of Section 32.
14. In the course of the judgment, they had referred to the decision of the Delhi High Court in the case of Hindustan Cold Storage & Refrigeration (P.) Ltd. (supra). They distinguished that case by stating that the attention of the Delhi High Court had not been invited to the decision of the Supreme Court in R.B. Jodha Mal Kuthiala's case (supra).
15. It would, therefore, appear that the decision of the Allahabad High Court has eroded into the concept that title to immovable property vests only on registration of the conveyance deed. So, the question is whether we have to consider that in respect of an immovable property registration of the deed is necessary before depreciation under Section 32 can be allowed. In other words, the question is whether the law as laid down by the Supreme Court that such registration is necessary in the case of CIT v. Bhurangya Coal Co. [1958] 34 ITR 802, the Calcutta High Court decision in the case of CIT v. Ganga Properties Ltd. [1970] 77 ITR 637 and Ram Gopal Reddy v. Addl. Custodian Evacuee Property AIR 1966 SC 1438, have been overruled. This identical point, viz., whether the earlier decisions of the Supreme Court need be followed or not, has been considered by the Bombay High Court in the case of CIT v.Zorostrian Building Society Ltd. [1976] 102 ITR 499. They came to a finding that the earlier Supreme Court decisions have not been overruled in any way by the later decision in R.B Jodha Mal Kuthiala's case (supra). The following passage occur : ...The Supreme Court referred to the decision of the Calcutta High Court in In the matter of the Official Assignee for Bengal (Estate of Jnanendra Nath Pramanik [1937] 5 ITR 233 (Cal.). In that case the Calcutta High Court has taken the view that the official assignee was the owner of the property of the insolvent which vested in him within the meaning of Section 9 and after referring to the cases considered by the Calcutta High Court, the Supreme Court points out that for determining the person liable to pay tax, the test laid down by the Court was to find out the person entitled to that income. It is upon this passage that great reliance is placed by Mr. Kolah. Mr. Kolah has also emphasised that the Supreme Court has also pointed out at page 578 that the meaning of the word 'owner' in Section 9 must not be such as to make that provision capable of being made an instrument of oppression. It must be in consonance with the principles underlying the Act. If regard be had to the facts of the case before the Supreme Court it is quite evident that there is nothing in the ratio of the decision of the Supreme Court to indicate that the view taken by the Calcutta High Court in Ganga Properties Ltd.'s case [1970] 77 ITR 637 (Cal.) or by the Bombay High Court in Union Land & Building Society (P.) Ltd.'s case [1972] 83 ITR 794 (Bom.) or by the Delhi High Court in S. Kartar Singh's case [1969] 73 ITR 438 (Delhi) should be regarded as impliedly overruled . . . The property having vested in the Custodian, who had all the powers of the owner, he was the legal owner of the property. In the eye of the law, the Custodian was the owner of that property. It was upon scrutiny of the effect of the Ordinance that the Supreme Court first took the view that the Custodian should be not regarded as the owner and it was in that light the test was considered whether the assessee was the person entitled to the income of that property. It will not be possible for us to divorce a test of mere receipt of income apart from vesting of the property under the Evacuee Ordinance. None of the decisions en which reliance is placed by Mr. Joshi was cited before the Supreme Court and there is nothing in the findings of the Supreme Court which will persuade us to take the view that the said decisions should be treated as impliedly overruled. The case before the Supreme Court has not been decided upon the mere fact of having possession and the right to receive income. The entire provisions of the Evacuee Ordinance have been considered and it is after scrutiny of the provisions of the said Ordinance that the view has been taken that an evacuee assessee cannot be regarded as 'owner' within the meaning of Section 9." (p. 514) It will be seen from the above that the Bombay High Court is of a very firm opinion that the earlier rulings on this point still hold the field.16. It may be argued that there is a difference in the approach of the Allahabad High Court and the Bombay High Court and it is not necessary for us to follow the Bombay High Court's views. In this connection, we would refer to the decision of the Andhra Pradesh High Court, because their decision is binding on us. We will refer to the decision in CIT v. Nawab Mir Barkat AH Khan 1974 Tax. LR 90. That was a case coming under Section 22. The assessee had sold certain properties, received the full consideration, but had not drawn up a conveyance deed. The question was whether on those facts the assessee would still be considered owner of the properties. The High Court held that the assessee would still be considered as the owner of the property.
Paragraph 19 of the order is reproduced below : In regard to these properties, the position of law is clear. In order to constitute a sale within the meaning of Section 54 of the Transfer of Property Act, there must be a transfer of ownership from one person to another. 'A transfer of ownership' by a person means a transfer by such person of his rights and interests in the property in full and permanently. It is also not in doubt that a transfer of immovable property of the value of Rs. 100 and upwards can be made only by a registered instrument. It is also equally plain that a contract for a sale of immovable property does not, of itself, create any interest in or charge on such property. Section 54 of the Transfer of Property Act is emphatic in that behalf. What must therefore necessarily follow is that merely because the Nizam has received the consideration in pursuance of an agreement to sell, oral or in writing, it would not amount to transfer of ownership of the properties. Nor such agreements create any interest in or even a charge on such properties for the benefit of the purchasers. There can be no such thing in law as a title by estoppel. We are therefore satisfied that the Tribunal was right in agreeing with the view of the Income-tax Officer and the Appellate Assistant Commissioner that under Section 54 of the Transfer of property Act the ownership still continues with the Nizam and it has not been transferred so far to any purchaser of the properties in question.
It will be seen from this extract that the Andhra Pradesh High Court view is in agreement with the Bombay High Court's view. Therefore, it is binding on us. Under these circumstances, we are of opinion that the ratio laid down by the Allahabad High Court in U.P. State Agro Industrial Corpn. Ltd.'s case (supra) will not be applicable. To this extent we will allow the departmental appeal.
17. The above does not fully dispose of the matters. We can only give a finding that the title to the building has not been transferred to the assessee and so depreciation in respect of the building cannot be allowed. But, still, the question would be whether the assessee would be entitled to depreciation in respect of plant and machinery, office equipment and furniture. In respect of these assets, we are of opinion that the assessee would be entitled to depreciation. There could be no difficulty with regard to office equipment and furniture. They are movable properties. In movable properties, title passes on possession being given. It is not disputed that the assessee was given possession.
So, the assessee is entitled to depreciation in respect of these two assets.
18. In respect of plant and machinery, there are two possibilities. If the plant and machinery are such that they have necessarily to be embedded in the earth, then they will take the character of immovable property. If they are not embedded in the earth, they will be considered as movable property. Since possession has been given, the assessee would be considered as the owner. For this purpose, a finding has to be given whether the plant and machinery are embedded in earth or not. No such finding has been given by the ITO. It is of course open for us to send the matter back to the ITO to ascertain the facts. But we are of opinion that, considering the circumstances of the case, it is not feasible to send it back. The assessee had been granted depreciation all these years in respect of this property. At no stage has the department made out any case that it is embedded in the earth.
Considering these facts, we are of opinion that it is not necessary to send the matter back, and the assessee will be entitled to treat the plant and machinery as movable property and claim depreciation thereon.
19. In the light of our above finding, we are not much persuaded by the decisions of certain Benches of the Tribunal including our own Bench, in respect of buildings and claim for depreciation thereon. In none of the cases cited before us, the decision of the Andhra Pradesh High Court in the case of Nawab Mir Barkat All Khan (supra) was considered.
20. The above will dispose of the departmental appeals for both the years.
21. We will now consider the assessee's appeal. The only point raised is whether the assessee would be entitled to the deduction of the lease rent amounting to Rs. 10,752. Shri Swamy for the assessee fairly stated that the point has been decided against him by the High Court in Reference Case No. 38 of 1980 dated 4-12-1984. So, this point raised by the assessee stands rejected.
22. In the result, the departmental appeals are partly allowed and the assessee's appeal is dismissed.