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Commissioner Of Income-Tax v. Sahney Steel And Press Works (P.) Ltd.
Factual and Procedural Background
The Revenue referred the following question under section 256(1) of the Income-tax Act, 1961: “Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to depreciation in respect of the land and building at Bombay for the assessment year 1973-74?” The assessee, a private limited company carrying on business in armatures, laminations and stampings, purchased a building in Bombay on March 13, 1971, for its Bombay office; the conveyance deed was not registered in the relevant previous year. The assessee claimed depreciation for AY 1972-73 and AY 1973-74; the Income-tax Officer rejected the claims on the ground that the sale deed was not registered and the assessee was not the owner in the relevant previous years. On appeal the Appellate Assistant Commissioner allowed the claim for AY 1973-74 following his decision for AY 1972-73. The Department appealed to the Income-tax Appellate Tribunal, which, following its earlier order for the preceding year, rejected the Revenue’s contentions and held the assessee entitled to depreciation, relying inter alia on R.B Jodha Mai Kuthiala v. CIT and Commissioner Of Income-Tax v. The Bijli Cotton Mills Limited.
Legal Issues Presented
- Whether the Tribunal was correct in holding that the assessee was entitled to claim depreciation in respect of the land and building at Bombay for the assessment year 1973-74.
Arguments of the Parties
Revenue's Arguments
- The Income-tax Officer denied depreciation because the conveyance deed was not registered and, therefore, the assessee was not the owner in the relevant previous years.
- Learned standing counsel for the Revenue relied on Nawab Sir Mir Osman Ali Khan v. CWT ([1986] 162 ITR 888) to contend that to claim depreciation under section 32(1) the assessee must be the owner enjoying the full rights of the owner; without a formal deed of conveyance, possession does not constitute legal ownership.
Assessee / Tribunal Position
- The assessee claimed depreciation on the basis that it owned and used the building for business purposes despite the conveyance deed not being registered in the relevant previous year.
- The Appellate Assistant Commissioner and the Tribunal upheld the assessee’s claim, relying on precedent (including R.B Jodha Mai Kuthiala v. CIT and an Allahabad High Court decision) to conclude that the assessee was the owner in the relevant previous year though legal title was incomplete, and thus entitled to depreciation.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| R.B Jodha Mai Kuthiala v. CIT, [1971] 82 ITR 570 | Held that for the purpose of section 9 (Income-tax Act, 1922) the “owner” is the person who can exercise the rights of the owner in his own right; the real test is whether the assessee is entitled to the income from the property. | The court treated the principles stated in this decision as authoritative for interpreting “owner” in section 22 (pari materia with section 9) and for determining entitlement to depreciation under section 32(1); it followed these principles in reaching its conclusion. |
| Commissioner Of Income-Tax…(Applicant); v. The Bijli Cotton Mills Limited…(Opposite-Party)., [1953] 23 ITR 278 | Applied by the Tribunal to support the proposition that an assessee may be the owner for tax purposes even though the legal title was not complete. | The Tribunal relied on this decision (along with R.B Jodha Mai Kuthiala) to find that the assessee was undoubtedly the owner in the relevant previous year despite lack of a registered conveyance deed, and therefore entitled to depreciation. |
| CIT v. Shahney Steel & Press Works (P.) Ltd., [1987] 165 ITR 399 (AP) | Earlier decision of this court answering an identical question in favour of the assessee. | The present court noted and accepted its earlier decision in R.C No. 91 of 1978 (dated August 23, 1984) as supporting the conclusion for the assessee. |
| CIT v. Steelcrete P. Ltd., [1983] 142 ITR 45 | Calcutta High Court view relied upon in prior decisions supporting the assessee’s position. | The court recorded that it accepted the view of the Calcutta High Court as adopted in its earlier decision in favour of the assessee. |
| Addl. CIT v. U.P State Agro Industrial Corporation, [1981] 127 ITR 97 | Allahabad High Court view supporting the assessee’s entitlement to depreciation despite incomplete legal title. | The decision was cited as one of the authorities the court and earlier Division Bench had relied upon when answering the identical question for the assessee in prior proceedings. |
| Smt. Kala Rani v. Commissioner Of Income-Tax, Patiala-I, [1981] 130 ITR 321 | Punjab and Haryana High Court decision taking the same view as other High Courts cited. | Referenced as additional supporting authority for the approach adopted by the tribunal and by the court in its earlier decision. |
| Nawab Sir Mir Osman Ali Khan v. CWT, [1986] 162 ITR 888 | Decision concerning wealth-tax; cited by Revenue to support that without a formal deed of conveyance possession cannot be treated as legal ownership for tax purposes and equitable considerations are normally irrelevant in wealth-tax. | The court observed this decision concerned wealth-tax and that the statement in R.B Jodha Mai Kuthiala was neither disapproved nor departed from; the court did not treat this decision as permitting departure from the principles in R.B Jodha Mai Kuthiala when interpreting “owner” for section 22 / section 32(1) purposes. |
Court's Reasoning and Analysis
The court examined section 22 (income from house property) and section 32(1) (depreciation for buildings “owned by the assessee and used for the purposes of the business”), noting section 22 is in pari materia with section 9 of the Indian Income-tax Act, 1922. The court reviewed the Supreme Court’s test in R.B Jodha Mai Kuthiala v. CIT that the “owner” for tax purposes is the person who can exercise the rights of the owner in his own right and that the real test is whether the assessee is entitled to the income from the property. The court recorded that the Tribunal had relied on R.B Jodha Mai Kuthiala and an Allahabad High Court decision to find that the assessee was the owner in the relevant previous year despite the registered conveyance not being executed. The court considered the Revenue’s reliance on Nawab Sir Mir Osman Ali Khan v. CWT but noted that that decision concerned wealth-tax and did not disapprove the R.B Jodha Mai Kuthiala statement of law. Accordingly, the court concluded it could not depart from the Supreme Court’s principles in R.B Jodha Mai Kuthiala and followed its earlier Division Bench decision in R.C No. 91 of 1978 (CIT v. Shahney Steel & Press Works) in answering the reference.
Holding and Implications
Answered in favour of the assessee and against the Revenue.
Direct effect: the assessee is entitled to claim depreciation in respect of the Bombay land and building for the assessment year 1973-74. The court followed existing authorities and an earlier Division Bench decision; no departure from the Supreme Court principle in R.B Jodha Mai Kuthiala was made. There shall be no order as to costs.
M.N Rao, J.:— At the instance of the Revenue, the following question was referred to this court under section 256(1) of the Income-tax Act, 1961 (Act 43 of 1961) (for short “the Act”):
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to depreciation in respect of the land and building at Bombay for the assessment year 1973-74?”
2. The assessment year in question is 1973-74. The assessee is a private limited company carrying on business in armatures, laminations and stampings. For the purpose of this business, for its Bombay office, it purchased a building in Bombay on March 13, 1971. The conveyance deed in respect of that property was, however, not registered in the relevant previous year.
3. The assessee claimed depreciation in respect of the building in the assessment proceedings for the assessment year 1973-74 and also in the assessment proceedings for the preceding assessment year 1972-73. The claim for depreciation was rejected by the Income-tax Officer for both the assessment years on the ground that the sale deed was not registered and so the assessee did not become the owner of the property in the relevant previous years. On appeal, the Appellate Assistant Commissioner, following his decision on the same issue in the appeal for the preceding assessment year 1972-73 (obviously by then the appeal for the previous year by the same assessee was decided), upheld the claim of the assessee for depreciation for the assessment year 1973-74 also. The Department appealed to the Income-tax Appellate Tribunal. The Tribunal, following its earlier order for the preceding assessment year, rejected the contentions of the Revenue. It relied upon the decision of the Supreme Court rendered in R.B Jodha Mai Kuthiala v. CIT, [1971] 82 ITR 570 and of the Allahabad High Court in Commissioner Of Income-Tax…(Applicant); v. The Bijli Cotton Mills Limited…(Opposite-Party)., [1953] 23 ITR 278, to arrive at the finding that the assessee was undoubtedly the owner of the property in the relevant previous year though the legal title was not complete for want of a registered conveyance deed and that the assessee was entitled to depreciation since the building was owned and used by it for the purpose of its business.
4. section 9 of the Indian Income-tax Act, 1922, is in pari materia with section 22 of the Income-tax Act, 1961, which deals with income from house property. Section 22 of the Act, inter alia, says that the annual value of the property consisting of any buildings or lands of which the assessee is the owner shall be chargeable to income-tax under the head “Income from house property”. Section 32(1) of the Act deals with depreciation in respect of buildings “owned by the assessee and used for the purposes of the business.” In R.B Jodha Mal Kuthiala v. CIT, [1971] 82 ITR 570 (SC), the question for decision before the Supreme Court was whether for the purposes of section 9 of the Indian Income-tax Act, 1922, the owner must be the person who can exercise the rights of the owner, ‘not on behalf of the owner but in his own right. The property in that case consisted of a hotel in Lahore. After the creation of Pakistan, the property vested in the Custodian of Evacuee Property, but technically the assessee continued to be the owner although he had no dominion over, or possession of, the same. The Supreme Court held that the real test was to ascertain whether the assessee was entitled to the income from property. In that view, it held that the assessee was not the owner of the hotel in Lahore during the relevant assessment year. The following observations of the Supreme Court are apposite (p. 575):
“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 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, 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.
For a minute, let us look at things from the practical point of view. If the thousands of evacuees who left practically all their properties as well as businesses in Pakistan had been considered as the owners of those properties and businesses as long as the ‘ordinance’ was in force, then those unfortunate persons would have had to pay income-tax on the basis of the annual letting value of their properties and on the income, gains and profits of the businesses left by them in Pakistan though they did not get a paisa out of those properties and businesses. Fortunately, no one in the past interpreted the law in the manner Mr. Mahajan wants us to interpret.”
5. In respect of the very same assessee for the previous assessment year, this court in R.C No. 91 of 1978 answered an identical question on August 23, 1984, in favour of the assessee (CIT v. Shahney Steel & Press Works (P.) Ltd., [1987] 165 ITR 399 (AP)). This court accepted the view of the Calcutta High Court in CIT v. Steelcrete P. Ltd., [1983] 142 ITR 45 and of the Allahabad High Court in Addl. CIT v. U.P State Agro Industrial Corporation, [1981] 127 ITR 97. The same view was taken by the Punjab and Haryana High Court in Smt. Kala Rani v. Commissioner Of Income-Tax, Patiala-I, [1981] 130 ITR 321.
6. Sri M.S.N Murthy, learned standing counsel for the Revenue, cited to us a decision of the Supreme Court in Nawab Sir Mir Osman Ali Khan v. CWT, [1986] 162 ITR 888, in support of his contention, that in order to claim depreciation under section 32(1) of the Act, the assessee must be the owner enjoying the full rights of the owner. Without a formal deed of conveyance, although a person is in possession of the property, he cannot be treated as a legal owner. The decision in Nawab Sir Mir Osman Ali Khan v. CWT, [1986] 162 ITR 888 (SC) concerns the question of liability to wealth-tax of certain properties belonging to the late Nizam of Hyderabad. Under section 3 of the Wealth-tax Act, 1957, net wealth is taxable. Section 2(m) of the Wealth-tax Act, 1957, defines “net wealth” as meaning the assets “belonging to the assessee on the valuation date”. The earlier ruling of the Supreme Court in R.B Jodha Mai Kuthiala v. CIT, [1971] 82 ITR 570 was also referred to in Nawab Sir Mir Osman Ali Khan v. CWT, [1986] 162 ITR 888 (SC), but the statement of law contained therein was neither disapproved nor departed from. After referring to R.B Jodha Mal Kuthiala v. CIT, [1971] 82 ITR 570 (SC), his Lordship Sabyasachi Mukharji J., speaking for the court, observed at page 895:
“We are, however, not concerned with this controversy at the present moment. It has to be borne in mind that in interpreting the liability for wealth-tax, normally equitable considerations are irrelevant.”
7. Therefore, it is not possible for us to depart from the principles laid down by the Supreme Court in R.B Jodha Mal Kuthiala v. CIT, [1971] 82 ITR 570 (SC), while interpreting the meaning of the expression “owner” occurring in section 22 of the Act which is in pari materia with section 9 of the Indian Income-tax Act, 1922, for the purpose of determining the question whether the assessee is entitled to claim depreciation under section 32(1) of the Act.
8. For the foregoing reasons, following R.B Jodha Mal Kuthiala v. CIT, [1971] 82 ITR 570 (SC) and expressing our respectful agreement with the view taken by another Division Bench of this court in R.C No. 91 of 1978 dated August 23, 1984 [1987] 165 ITR 399, we answer the question in favour of the assessee and against the Revenue. There shall be no order as to costs.
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