The Judgment of the Court was delivered by
Ratnam, J.:— The assessee is a company. The Neyveli Lignite Corporation (a Government of India undertaking), a company registered under the Companies Act, 1956, and having its registered office at Neyveli, was allotted a developed plot measuring 7.33 acres in the Industrial Estate, Guindy, as per the layout scheme approved by the Joint Director of Town Planning, Madras. The allottee, Neyveli Lignite Corporation, took possession of the plot and constructed buildings and also equipped and furnished the buildings compendiously known as “Lignite House”. Some time thereafter, the Neyveli Lignite Corporation decided to dispose of the plot as well as the buildings and appurtenant works constructed by it with certain items of furniture and offered to sell the same to the assessee. By a resolution of the board of directors of the assessee-company passed at its meeting held on June 25, 1970, the assessee-company decided to purchase “Lignite House” with the buildings and appurtenant works, furniture, fittings, etc., on payment of its book value to the Neyveli Lignite Corporation. The Neyveli Lignite Corporation thereupon addressed the Government of Tamil Nadu for permission to sell the “Lignite House” to the assessee and by G.O Ms. No. 2345, Industries Department, dated November 11, 1970, permission was granted to the Neyveli lignite Corporation to sell “Lignite House” to the assessee, subject to certain conditions. The assessee-company as well as the Neyveli Lignite Corporation passed the necessary resolution at the meetings of their respective board of directors held on November 13, 1970, and January 28, 1971, agreeing to abide by the conditions imposed by the Government. It appeared that though the Neyveli Lignite Corporation was permitted by the Government of Tamil Nadu to dispose of the property allotted to it by the Government, the assignment deed from the Government of Tamil Nadu in favour of the Neyveli Lignite Corporation with reference to the plot allotted to them had not been issued or obtained. The assessee paid the full consideration of Rs. 7,58,940.45 on October 31, 1970, and possession of the buildings and constructions thereon was handed over to the assessee on November 1, 1970. Long thereafter, on March 22, 1975, a deed of sale in respect of the buildings and appurtenances thereon was executed by the Neyveli Lignite Corporation in favour of the assessee. In the return filed by the assessee for the assessment year 1973-74 (for the accounting period ending March 31, 1973,) the assessee claimed depreciation on the buildings secured by it from the Neyveli Lignite Corporation and since renamed as “Agro House”. The Income-tax Officer rejected the claim of the assessee for depreciation on the ground that there had been no legal transfer of the property to the assessee-company during the accounting period in question, that a similar claim by the assessee for the earlier assessment year 1972-73 had been rejected and confirmed on appeal by the Appellate Assistant Commissioner and, therefore, no depreciation was admissible on the buildings transferred to the assessee by the Neyveli Lignite Corporation, as the legal ownership thereof had not vested in the assessee. Dealing with the appeal preferred by the assessee, the Appellate Assistant Commissioner referred to the order passed for the assessment year 1972-73 and concluded that as the assessee was not the owner of the building during the relevant accounting period, it was not entitled to claim depreciation. The disallowance of depreciation on the buildings claimed by the assessee was thus confirmed. On further appeal by the assessee to the Tribunal reiterating its claim for depreciation, the Tribunal took the view that the sale deed executed by the Neyveli Lignite Corporation in favour of the assessee would, according to section 47 of the Registration Act, take effect according to its tenor and not according to the date of execution or registration and, therefore, the assessee was the owner of the building during the previous year relevant to the assessment year in question. In this view, the Income-tax Officer was directed to compute and grant depreciation to the assessee for the assessment year in question. Aggrieved by this, the Commissioner of Income-tax obtained a reference under section 256(1) of the Indian Income-tax Act, 1961 (hereinafter referred to as “the Act”), on the following question of law:
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that as per the provisions of section 47 of the Indian Registration Act, the title over the property passed to the assessee on November 1, 1970, and not on the date of registration in 1975 and accordingly the assessee was entitled to depreciation?”
2. Section 32 of the Act grants an allowance in respect of depreciation on the value of certain capital assets with a view to mitigate the rigour of the general scheme of the Act subjecting income to charge, regardless of the exhaustion of or diminution in the value of the capital asset.
3. In order to enable the assessee to claim the benefit of depreciation, the following conditions should be fulfilled: (i) the assets in respect of which the depreciation is claimed should be buildings, machinery, plant or furniture, (ii) the assets must have been used for purposes of the assessee's business the profits of which are being charged; (iii) the assessee must be the owner of the buildings, machinery, plant or furniture, as the case may be; (iv) the prescribed particulars relating to the buildings, machinery, plant or furniture must be duly made available by the assessee; and (v) the aggregate of such allowances, made year after year, should not in any case be in excess of the actual cost of the buildings, machinery, plant or furniture to the assessee, as if such allowance is equal to the actual cost of the asset, the benefit of such allowance cannot be given to the assessee with reference to that asset.
4. We now proceed to examine how far in the present case the aforesaid requirements have been fulfilled. There is no dispute that the asset in this case is a building and the assets had also been used during the relevant accounting period for the purposes of the business of the assessee. Equally, there is no dispute that all the required particulars with reference to the asset in respect of which depreciation is claimed have been furnished to the Income-tax Officer. It is also not anybody's case that such an allowance, if at all it can be granted, would equal or exceed the cost of the asset. On the facts of this case, the question is, whether the requirements as to the assessee's ownership of the building in respect of which depreciation is claimed, has been established. The document of sale in favour of the assessee was executed only on March 22, 1975, and was subsequently registered. Ordinarily, therefore, the document of sale in favour of the assessee took effect only on March 22, 1975, long subsequent to the accounting period relevant to the assessment year 1973-74. Prima facie, therefore, the assessee has not fulfilled the requirement as to the ownership of the building in respect of which depreciation has been claimed by it during the period of accounting relevant to the assessment year 1973-74 and, therefore, the assessee is not entitled to make a claim for depreciation on the ground that the building had been merely used during the relevant period.
5. We now embark on an examination whether the provisions of the Transfer of Property Act, 1882, or the Registration Act, 1908, would make matters any different. The sale in this casg was for a consideration of Rs. 7,58,940. Under section 54 of the Transfer of Property Act, 1882, a transfer of immovable property of the value of Rs. 100 and upwards can be made only by a registered instrument. Section 17(1)(b) of the Registration Act, 1908, provides that a document like a deed of sale, which at the same time purports to extinguish the right, title and interest of the vendor and create such right, title or interest in the purchaser with reference to immovable property of the value of Rs. 100 and upwards, is compulsorily registrable, as in this case. It remains only to notice section 47 of the Registration Act, which states that a registered document shall operate from the time from which it would have commenced to operate if no registration thereof had been required or made and not from the time of its registration. One thing is clear from section 47 of the Registration Act, 1908, i.e, that the registered document does not become operative only from the time of its registration. No doubt, title does not pass until registration of the document is effected. Also, section 47 does not purport to create a new title, but merely affirms the title created under the deed and completes the same rendering it unquestionable and absolute. The creation of title in favour of the purchaser is on the date when the document is executed and not only when it is registered. It is this that finds expression in section 47 of the Registration Act, In other words, if no registration of the document is required, the document would ordinarily take effect from the date of its execution. Also, if no registration of the document had been made, then also, the document becomes operative and effective from the date of its execution. Relying upon section 47 of the Registration Act, the Tribunal was inclined to hold that the sale deed in favour of the assessee should take effect according to its tenor and as it was recited in the sale deed that the consideration for the sale had been paid by the assessee on October 31, 1970, and the assessee had also been put in possession of the property on November 1, 1970, the sale should be regarded as having taken place, according to the tenor of the recitals, even on October 31, 1970, or November 1, 1970, thereby conferring title to the property on the assessee on and from October 31, 1970, or November 1, 1970, and not from the date of execution, i.e, March 22, 1975, and, therefore, during the previous year relevant to the assessment year in question, the assessee would be entitled to claim the benefit of depreciation, as if it was the legal owner of the property. We may observe that section 47 of the Registration Act does not anywhere state that a document shall take effect according to its tenor irrespective of the time from which it would commence to operate as provided therein. The terms of the sale deed also indicate that the parties intended the sale to be operative and effective only from March 22, 1975, and not from any anterior point of time. In this case, the Tribunal has erroneously assumed, purporting to place reliance on section 47 of the Registration Act, that though the sale deed in favour of the assessee was executed on March 22, 1975, and had been registered subsequently, it would nevertheless operate either from October 31, 1970, or November 1, 1970, merely because the document recited payment of consideration by the assessee for the purchase of the property on October 31, 1970, and that the vendor had also put the assessee in possession on November 1, 1970. We are of the view that section 47 of the Registration Act does not lend itself to that kind of interpretation put upon it by the Tribunal. Applying to the facts of this case section 47 of the Registration Act as interpreted earlier, the sale deed in favour of the assessee in respect of “Agro House” would operate only from March 22, 1975, and not earlier.
6. We may now refer to some decisions dealing with the scope of section 47 of the Registration Act. In Ram Saran Lall v. Mst Domini Kuer, AIR 1961 SC 1747, on January 31, 1946, a sale was executed and the completion of the process of registration of document was done on February 9, 1946. The suit for pre-emption filed on September 9, 1946, was decreed by the courts below, but the High Court was persuaded to take a different view resulting in the dismissal of the suit. Reliance before the Supreme Court was placed on section 47 of the Registration Act to contend that once a document is registered, it begins to operate from the time it would have otherwise operated and, therefore, the sale became operative and completed on January 31, 1946. In pointing out the scope of section 47 of the Registration Act, the Supreme Court, by a majority, stated that section 47 of the Registration Act permits a document, when registered, to operate from a certain date which may be earlier than the date when it was registered, but that had nothing to do with the completion of sale when the instrument is one of sale. It was also further pointed out that a sale which is admittedly not complete until the registration of the instrument of sale is completed, cannot be said to have been completed earlier because by virtue of section 47 of the Registration Act, the instrument by which it is effected after it has been registered commences to operate from an earlier date and in that view, the Supreme Court held that the sale in that case could not be said to have been completed on January 31, 1946, but only on February 9, 1946. Again in Hiralal Agarwal v. Rampadarath Singh, AIR 1969 SC 244, the Supreme Court pointed out that registration is complete only when the certificate under section 60 of the Registration Act is given and the endorsement and copying out the said certificate under section 61 of the Registration Act are made and reiterated the decision of the majority in Ram Saran Lal v. Mst. Domini Kuer, AIR 1961 SC 1747. On the effect of section 47 of the Registration Act that the sale in that case was complete only when registration of the sale deed was completed as contemplated by section 61 of the Registration Act and, therefore, the Talab-i-mowasibat made before the date of completion of registration was premature and a suit based on such a demand of the right of pre-emption was premature and must, therefore, fail. Reference was also made to Radhakishan L. Toshniwal v. Shridhar, AIR 1960 SC 1368, to state that the right of pre-emption accrues only when transfer of property takes place and such transfer is not complete except through a registered deed and transfer became effective through a registered deed. Ultimately, the Supreme Court held that it cannot be argued that once registration is effected, the title relates back to the date of execution of the sale deed so as not to render the application under the Bihar Act, 1962 (12 of 1962), presented prior to completion of registration as premature. In Amarchand J. Agarwal v. Union of India, [1983] 142 ITR 402 (Bom), the court had to consider the question when a sale would be complete taking into account section 47 of the Registration Act. In that case, the sale deed was executed on November 7, 1972, and it was registered on September 21, 1977. The competent authority served a notice on June 26, 1978, on the vendor to show cause why proceedings under section 269C of the Act should not be initiated for the acquisition of the property. A writ petition was filed challenging the issue of the notice contending that the conveyance was executed on November 7, 1972, though it was completed by its registration on September 21, 1977, and in view of the provisions of section 47 of the Registration Act, 1908, the transfer would operate from the date of the execution of the document, viz., November 7, 1972, and the competent authority had, therefore, no jurisdiction to initiate proceedings under section 269C of the Act. In dealing with this question, the Bombay High Court pointed out that the mere fact that the transfer operates from the date of execution is not sufficient to conclude that the title itself passes on the date of execution and that there is no distinction between the transfer of title and the completion of the sale and title passes only when the document is registered under the provisions of the Registration Act. The right of the competent authority, it was pointed out, to initiate the proceedings under section 269C of the Act accrued on the registration of the document and, therefore, the proceedings initiated by the competent authority were not barred by limitation or lack of jurisdiction. This view was also affirmed on appeal in Amarchand Jainarain Agarwal v. Union of India, [1983] 142 ITR 410 (Bom).
7. We have already noticed how the sale in this case became effective and operative only from March 22, 1975. The mere use or possession of a building or other property pursuant to an agreement to sell or even in part performance thereof or otherwise would not enable the assessee to claim the benefit of depreciation allowance, unless there is a completed transfer operating to convey title to such an asset in favour of the assessee. In CIT v. Hindustan Cold Storage and Refrigeration (P.) Ltd., [1976] 103 ITR 455 (Delhi), the question arose whether a company which had taken over possession of a flour-mill without the actual execution of a sale deed, as contemplated by the agreement of sale, was entitled to claim depreciation. The Delhi High Court pointed out that the interest of a person under section 53A of the Transfer of Property Act did not amount to ownership of the property and as the flour-mill constituted immovable property of the value of more than Rs. 100 and title thereto did not pass in the absence of a registered sale deed, the flour-mill was not the property of the company during the assessment year, and, therefore, one of the conditions prescribed under section 10(2)(vi) of the Indian Income-tax Act, 1922, was not satisfied and the assessee-company was not entitled to claim depreciation in respect thereof. In Commissioner Of Income-Tax, Bombay City-Iv v. Sultan Brothers Pvt. Ltd., [1983] 142 ITR 249 (Bom), the court had to consider the question whether a person in possession of the property pursuant to an agreement of sale in his favour and who had received rents could be assessed to tax thereon or whether the vendor who still continued to be the legal owner of the property was liable. The Bombay High Court held that in the absence of a registered sale deed where the value of the property exceeds Rs. 100 the purchaser cannot be regarded as the “owner” of the property and section 53A of the Transfer of Property Act cannot be availed of, and, the vendor who continued to be the owner of the property, was liable to be assessed on the income from the house property. The Supreme Court in Commissioner Of Income Tax v. Bhurangya Coal Co. , [1958] 34 ITR 802 (SC) dealt with the question of the assessability to capital gains of certain movable as well as immovable properties, possession of which was given pursuant to an agreement for sale entered into between the firm and a colliery on March 16, 1946. There were two schedules to the agreement. The first schedule consisted of land, buildings and structures, while the second included movables like machinery, etc. Possession was given on March 30, 1946, with reference to movable as well as immovable properties, but on May 17, 1946, the sale was executed in respect of the immovable properties. The Supreme Court held, on the construction of the agreement as well as the sale deed, that what was intended to be sold and actually sold under the deed dated May 17, 1946, were only the properties mentioned in the first schedule to the agreement and not the items included in the second schedule and that the intention was to sell the fixtures on the immovable properties as movable and, therefore, only the profits arising out of the sale of the properties described in the first schedule to the agreement were liable to capital gains under section 12B of the Indian Income-tax Act, 1922. In Dr. Rajah Sir MA. Muthiah Chettiar v. CIT, [1984] 148 ITR 532 (Mad), the ownership in a property was not transferred from the founder of the trust to the trust but the trust was in enjoyment of the income from that property as per the directions given by the founder and the question arose whether the income should be assessed in the hands of the founder or in the hands of the trust. In dealing with this question, it was pointed out that what was relevant for purposes of assessment to income-tax was the ownership of the property and not who was in actual receipt of the income or possession of the property and that in the absence of the execution and registration of a document, the transfer of title from the donor to the trust would not be complete, so that the income received by the trust cannot be taken as its income, but that it should be treated as the income received by the founder. This decision also emphasises the need for the execution of a document of sale and the registration thereof in order that the transferee may claim title to the property and also make a claim for the allowance of depreciation as the owner of the property. In CIT v. Ganga Properties Ltd., [1970] 77 ITR 637 (Cal), there was an oral agreement by which the assessee agreed to sell a property to another person and pursuant to that, delivery of possession was given to the purchaser and the purchaser had also paid the bulk of the consideration. An agreement for sale was also drawn up but the actual deed of conveyance was executed on March 17, 1958, and registered on July 8, 1958. The Income-tax Officer, during the relevant accounting year, found that the ownership had remained with the assessee and included the property's bona fide annual value in the assessee's total income. This view was confirmed by the Appellate Assistant Commissioner. However, on further appeal, the Tribunal was of the view that though the assessee remained the legal owner, the beneficial ownership passed to the purchaser on March 29, 1956, when delivery of possession was given to the purchaser and that the income from the property was assessable in the hands of the beneficial owner and not the assessee. On a further reference, the Calcutta High Court held that in the case of a sale of immovable property, a registered document is necessary to give effect to the sale and the sale takes effect only from the date of execution of the document and the concept of beneficial ownership is unknown and that there is only the legal owner and the expression “income from property” refers to the income of the legal owner of the property who is the only person assessable to tax.
8. As against these decisions referred to above, our attention was drawn to the decisions in Addl. CIT v. U.P State Agro Industrial Corporation, [1981] 127 ITR 97 (All) and Addl. CIT v. Sahay Properties and Investment Co. (P.) Ltd., [1983] 144 ITR 357 (Pat). In the first of these cases, the Allahabad High Court took the view that a person can be considered to be an owner of the building for purposes of section 32 of the Act if he is in a position to exercise rights of ownership not on behalf of the person in whom the title vests, but, in his own right and that the transfer of possession in favour of U.P State Agro Industrial Corporation Ltd. by the State Government would enable the Corporarion to claim depreciation, though no sale deed had been executed and registered. This decision proceeded on the footing that after U.P State Agro Industrial Corporation Ltd. was put in possession of the property, it was open to it to deal with it in any manner it liked without objection from the State Government and it could realise the income from the property and appropriate the same for itself and that the corporation became the owner of the property in the sense used in section 32 of the Act and could claim depreciation under section 32 of the Act. We are unable to agree with the view expressed in the above decision having regard to the series of decisions we have referred to earlier holding that the mere parting with possession of the property by the vendor would not enable the purchaser to claim that he is the owner of the property and claim depreciation on that footing. Besides, the decision in Addl. CIT v. U.P State Agro Industrial Corporation Limited, [1981] 127 ITR 97 (All) would also enable non-owners and others who merely manage to get into possession of the properties of others, not having a valid title thereto, to claim the benefit of depreciation under section 32 of the Act; which is neither the spirit nor the intendment of section 32 of the Act. To recognise a claim for depreciation at the instance of persons who are not owners of the property would be to do away with the requirement regarding the ownership, which is one of the essential requirements under section 32 of the Act to be fulfilled before the claim for an allowance of depreciation can be made. We are not prepared to construe section 32 of the Act in the manner done by the Allahabad High Court as to include persons who are merely in possession without any title to the property, as being eligible to claim the benefit of allowance for depreciation under section 32 of the Act. Addl. CIT v. Sahay Properties & Investment Co. (P.) Ltd., [1983] 144 ITR 357 (Pat) was decided on the basis that the ownership in the property was in the nature of a right to exclude others from possession and that the person in possession cannot take advantage of his own default in not having a deed registered and must be deemed to be the owner of the property and assessable as such on the income from the property. This decision runs counter to the other decisions we have earlier referred to Besides, before an assessee can claim the benefit of depreciation allowance, it has to be established that under section 32 of the Act, the assessee is not only the owner of the asset, but has also used such an asset in the course of the business the profits of which are subject to tax. The use of the expression “owned by the assessee and used for the purpose of business or profession” emphasises that it is not mere user irrespective of ownership that is contemplated by section 32 as a necessary condition for claiming the allowance of depreciation. Such 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 of the assessee. Otherwise, as pointed out earlier, any person inclusive of a person who is not, in any manner, entitled to be in possession of the property, can get into possession and then claim that he is in possession of the property in his own right to the exclusion of others and, therefore, he should be deemed to be the “owner” for all purposes, inclusive of section 32 of the Act. We are unable to subscribe to such an interpretation of section 32 of the Act, as in our view, that would strike at the root of and negate the very notion of and the basis for the allowance of depreciation claimed by an assessee in respect of the assets used by him in his business. This also accords with the scheme of the Act in providing for the allowance of depreciation. Under the provisions of the Act, income is subject to tax without any reference to the exhaustion, or diminution or even the destruction of the value of capital which includes building, machinery, etc. If the income is so subjected to tax without reference to the exhaustion or erosion of the value of the capital, it would no doubt work a great hardship to, assessees engaged in business using the building, machinery, plant or furniture, etc. It is only with a view to provide relief to the assessees in such cases, the grant of allowance in respect of depreciation had been thought of and provision therefor had also been made in section 32 of the Act. It is difficult to envisage the availability of the benefit of such an allowance to a person who has merely made an advance for the purpose of acquiring a capital asset as a building, machinery, plant, etc., but had not actually acquired legal title to it. In other words, in cases where the assessee had not secured legal title to the buildings, plant or machinery, it is difficult to extend the benefit of the granting of the allowance of depreciation to those assessees, as that would amount to recogni’ tion of mere possession of the assets without anything more, as the fulfilment of one of the requirements under section 32 of the Act to be eligible for the grant of an allowance by way of depreciation. On the ratio of the decisions earlier referred to and also on an interpretation of the language employed in section 32 of the Act, we are unable to subscribe to the views taken by the Allahabad and Patna High Courts in the decisions referred to above and relied on by the learned counsel for the assessee. Having carefully considered the matter, we are of the view that the Tribunal was in error when it made available to the assessee in this case the benefit of depreciation allowance as claimed by it in respect of the building which was not owned by the assessee, though used by it, during the relevant accounting period. We, therefore, answer the question referred to us in the negative and in favour of the Revenue. The assessee will pay the costs of this reference. Counsel's fee Rs. 500.