Commissioner of Income-tax Vs. Draupadi Pvt. Ltd. - Court Judgment

G.B. Patnaik, J.

1. On an application being filed under Sub-section (2) of Section 256 of the Income-tax Act, 1961, at the instance of the Revenue, this court has formulated the following question and called upon the Revenue to make the statement of case. The question formulated was ;

'Whether the building has been validly transferred to the assessee and in case of invalidity of transfer whether the assessee is liable to be answered for the income derived from it ?'

2. But after hearing Mr. Ray, learned standing counsel for the Department and on a scrutiny of the order of the Tribunal, we think it appropriate to reframe the question which arises for consideration as the question formulated is not proper and the question reframed by us is :

'Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in allowing the claim of the assessee for grant of depreciation in respect of Draupadi Talkies and Draupadi Ice Factory?'

3. The two premises belong to one Prabhat Chandra Das. The owner entered into an agreement with the company which is the assessee to transfer both the premises and in lieu thereof certain shares were allotted in the assessee-company. The assessee thereafter claimed depreciation on the buildings of the Draupadi Talkies and Draupadi Ice Factory. The Income-tax Officer negatived the claim of the assessee on the ground that the assessee had not become the owner of the building as there had been no transfer by any registered deed and, therefore, he was not entitled to any depreciation. On an appeal being carried by the assessee, the Commissioner of Income-tax (Appeals) being of the opinion that the assessee had become the beneficial owner of the assets was entitled to the depreciation claimed and accordingly allowed the appeal.

4. The Revenue being dissatisfied with the appellate order carried the matter to the Tribunal in second appeal. The Tribunal agreed with the conclusion of the appellate authority relying upon the decision of the Allahabad High Court in CIT (Addl.) v. U. P. State Agro Industrial Corporation Ltd. : [1981]127ITR97(All) . The Tribunal came to hold that, since under the agreement between the assessee-company and the proprietor of the Draupadi Talkies and Draupadi Ice Factory, the assets and liabilities had been taken over by the company and the proprietor had relinquished his right, title and interest by executing an agreement, it would be appropriate and legitimate to presume that the assessee became the absolute owner of the buildings of Draupadi Talkies and Draupadi Ice Factory for all practical purposes and accordingly dismissed the appeal of the Revenue. The Revenue then made an application for making a reference under Section 256(1) and having failed in its attempt, approached this court under Sub-section (2) of Section 256, whereupon, under the direction of this court, the question of law has been formulated and a statement of case has been made.

5. Mr. Ray, appearing for the Revenue, contends that depreciation in respect of any building could be claimed by an assessee of which the assessee is the owner as provided in Section 32 of the Income-tax Act. The assessee cannot be held to be the owner of the building until and unless the buildings are transferred by way of a registered deed. In that view of the matter, the Tribunal wholly erred in law in allowing depreciation claimed on the finding that the assessee would be held to be the beneficial owner of the buildings in question. According to Mr. Ray, the decision of the Allahabad High Court does not lay down the correct position of law.

6. That the owner of the building has not executed any registered document and has not transferred by way of any registered deed is not disputed and at the same time it has been found that the owner had agreed to transfer the building and the assessee is exercising his right over the building in question. The decision of the Allahabad High Court in the case of CIT (Addl.) v. U. P. State Agro Industrial Corporation Ltd. : [1981]127ITR97(All) , fully supports the conclusion of the Tribunal in the present case. In the aforesaid case, the learned judges of the Allahabad High Court, on examining the provisions of Section 32 of the Income-tax Act, came to hold that even if the ultimate title had not vested in the assessee as there was no registered deed of sale, but the expression 'owner' in Section 32 of the Act has not been used in that sense and if the assessee has acquired possession of the building under a contract entered into with the owner and is entitled to deal with the building in any manner it liked and could realise the income from the property and appropriate the same for itself, then such dealing with the property by the assessee would be held to be as owner of the building and, therefore, the provisions of Section 32 of the Income-tax Act would be attracted. The aforesaid decision was taken notice of by a Full Bench decision of the Kerala High Court in the case of Parthas Trust v. CIT : [1988]169ITR334(Ker) . Disagreeing with the view expressed by the Allahabad High Court and agreeing with the view expressed by the Madras High Court in the case of CIT v. Tamil Nadu Agro Industries Corporation Ltd. : [1987]163ITR61(Mad) , the learned judges of the Kerala High Court came to hold that under Section 32 of the Income-tax Act depreciation could be claimed by an owner who used the assets in question and, therefore, both the conditions of ownership as well as use had to be satisfied. The learned judges further held that the use of the expression 'owned by the assessee and used for the purposes of business or profession' emphasised the fact that it was not mere user irrespective of ownership that was contemplated by Section 32 for claiming the depreciation in question. According to the learned judges, ownership must necessarily mean legal title to the asset in the assessee and the user thereof by the assessee while being such owner in the course of the business. The Supreme Court in the case of (Late) Nawab Sir Mir Osman Alt Khan v. CWT : [1986]162ITR888(SC) , while examining the provisions of Section 2(e)(iv) of the Wealth-tax Act, 1957, came to hold that even though the assessee had received full consideration for certain immovable properties from the purchasers but he had not executed any registered sale deeds in favour of the vendees, the value of the properties were to be included in the net wealth of the assessee for the purpose of assessment to wealth-tax as they were assets belonging to him within the meaning of Section 2(m) of the Wealth-tax Act, 1957. It was further held that for all legal purposes the properties had to be treated as belonging to the assessee. Their Lordships of the Supreme Court had observed in the aforesaid case that under Sections 22 to 24 of the Income-tax Act, the expression 'owner' in respect of house properties means the legal owner and not the equitable or beneficial owner. In view of the aforesaid position, we respectfully disagree with the view taken by the Allahabad High Court and agree with the law laid down by the Full Bench of the Kerala High Court. Consequently, our answer to the question formulated by us would be in favour of the Revenue and against the assessee and we hold that the Tribunal was not justified in allowing depreciation on the building of Draupadi Talkies and Draupadi Ice Factory on the assumption that the assessee was the beneficial owner thereof.

P.C. Naik, J.

7. I agree.