Income-tax Reference No. 159 of 1976

Decided on September 7, 1982

The Judgment of the Court was delivered by

Suhas Chandra Sex, J.:— At the instance of the CIT the two following questions of law have been referred to this court u/s. 256(1) of the I.T Act, 1961:

“1. Whether, on the facts and in the circumstances of the case, and on a correct interpretation of the agency agreement dated March 29, 1963, and in particular cl. 10 thereof and having regard to the relevant provisions of the Motor Vehicles Act, the Tribunal was correct in holding that the assessee-flrm was the owner of the five new vehicles acquired at the cost of Rs. 1,88,464 and the assessee was entitled to depreciation in respect of the expenditure on the acquisition of those buses?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amounts received by the assessee from the persons to whom it sub-let the buses in the previous years relevant to the assessment years 1964-65,1965-66, 1967-68, 1968-69 and 1969-70 could be construed as premiums for parting with a capital asset and, in that view, holding that the said amounts were capital receipts and not revenue receipts in the assessee's hands?”

2. The facts relevant for the purpose of this case are as follows:

One group of Khannas, namely, Aminchand Khanna, Indra Kumar Khanna, M.R Khanna and Vijoy Kumar Khanna, took on hire 23 buses from M/s. Salkia Transport Agency Pvt. Ltd. (hereinafter described as “the company”) under an agreement dated March 29, 1963. The said Khannas formed themselves into a partnership styled as M/s. Salkia Transport Associates with the object of plying the aforesaid 23 buses. Salkia Transport Associates, the assessee herein, replaced five of the worn out buses with five new buses. Clause 10 of the agreement between the parties provided:

“The agents shall, during the continuance of the agency, keep the motor vehicles in good repaired running condition complete with all necessary accessories, tools and implements which they have received from the owners as clearly described in schedule C attached hereto and, if necessary, shall replace one or more or all of the said motor vehicles at their own cost. But they shall always keep the owners informed about all replacements. The vehicles so replaced will be the property of the agents.”

3. As part of the consideration the assessee paid to the company Rs. 1,76,172 representing the cost of the chassis and the cost of building bodies of the 23 buses. The assessee claimed deduction of this amount as revenue expenditure. The ITO rejected this claim holding that the payment of this sum represented capital expenditure. Alternatively, the assessee claimed depreciation in respect of the worn out buses and also the five new buses. The ITO disallowed the assessee's claim for depreciation in respect of all the buses on the ground that the assessee was not the owner of the vehicles in respect of which this depreciation was claimed. In this connection reliance was placed by the ITO on a judgment of this court wherein it was held that the buses belonged to the company, M/s. Salkia Transport Agency Pvt. Ltd. Another point also came up for consideration before the ITO. The assessee-firm had hired out the buses which were taken on hire from the company by the partners constituting the firm. The assessee had received sums of Rs. 68,652, Rs. 52,500, Rs. 14,706, Rs. 4,578 and Rs. 23,343 for the assessment years 1964-65, 1965-66, 1967-68, 1968-69 and 1969-70, respectively. The ITO treated the sum as revenue receipts and brought them to tax.

4. In the appeals preferred before the AAC against the assessments for the assessment years under reference, the assessee-firm challenged, inter alia, the action of the ITO in disallowing the claim for depreciation. As regards the claim for depreciation on the amount initially paid to the company towards the cost of one chassis and the cost of building bodies of 23 buses, the AAC did not disagree with the findings of the ITO that the expenditure was capital in character. He, however, held that it was the duty of the ITO to allow depreciation on the capital assets acquired even though the buses themselves were not owned by the assessee. He, therefore, directed the ITO to grant depreciation on the amount paid by the assessee to the company towards the cost of chassis and the cost of building bodies of the twenty-three buses.

5. As regards the depreciation claimed on the sum of Rs. 1,88,464 representing the cost of the five new buses, the AAC held that the assessee-firm became the owner thereof under the agreement dated March 29, 1963, and also by virtue of the assessee-firm bearing the entire cost of those five buses. The AAC further held that the fact that the assessee was not holding the permits to run the buses on any particular route would not detract from the assessee's ownership of those five buses. He directed the ITO to grant depreciation to the assessee-firm in respect of the five new buses replacing the five old buses of the fleet.

6. In the appeals for the assessment years 1964-65, 1965-66, 1967-68, 1968-69 and 1969-70, the assessee further challenged before the AAC the treatment of the sums of Rs. 68,652, Rs. 52,500, Rs. 14,706, Rs. 4,578 and Rs. 23,343, respectively, received from the persons to whom it sub-let some of the buses in the relevant previous years as revenue receipts. Confirming the finding of the ITO, the AAC held that the assessee could not of o-duce any evidence to show that the amounts in question were received by it from the sub-lessees towards the cost of the buses. He further held that these amounts were paid by the sub-lessees as consideration for allowing them to exploit those buses in the transport business and that the receipts were, therefore, revenue in character.

7. Both the assessee-firm and the ITO preferred appeals before the Tribunal against the orders passed by the AAC. By a consolidated order dated June 23, 1975, the Tribunal disposed of the appeals of the assessee-firm and also of the Department. The action of the AAC in directing the ITO to allow depreciation to the assessee-firm in respect of the sum of Rs. 1,76,172 paid to the company towards the cost of the chassis and the cost of building bodies of twenty-three buses and also in respect of the sum of Rs. 1,88,464 representing the cost of five new buses by which five old buses of the fleet were replaced, was challenged by the Department in the appeals filed before the Tribunal. The Tribunal did not agree with the finding of the AAC that the assessee was entitled to depreciation on the amount paid by it to the company towards the cost of one chassis and the cost of building bodies of twenty-three vehicles which it was plying under the agency agreement. The Tribunal reversed the decision of the AAC and restored that of the ITO on the assessee's claim for depreciation in respect of the expenditure of Rs. 1,76,172. The claim of the assessee for depreciation in respect of Rs. 1,88,464 being the cost incurred by the assessee for replacing five old buses of the fleet by five new buses was accepted by the Tribunal. The Tribunal rejected the contention of the departmental representative that the registered owner of the five buses in question also was the company and not the assessee-firm and, therefore, the assessee-firm could not be regarded as the owner of those five buses. On this issue, the Tribunal held as follows:

“It may be that the five new buses stand registered in the name of the company under the Motor Vehicles Act. Certain rights and liabilities under the Motor Vehicles Act are attached to one who is registered as owner of the vehicle by the registering authority under the said Act. However, for the purpose of being entitled to depreciation under the Income-tax Act, what is required is ownership of the asset and not registered ownership under the Motor Vehicles Act. It is not in dispute that by virtue of clause 10 of the agency agreement the assessee is the owner of the five vehicles acquired at its cost for the purpose of replacing five worn out vehicles of the fleet. That being so, the assessee cannot be denied depreciation allowance on the cost of those five vehicles merely on the ground that those vehicles do not stand registered under the Motor Vehicles Act in the name of the assessee.”

8. The issue raised in the appeals of the assessee regarding the assess-ability of the amounts received by the assessee from the persons to whom it sub-let some of the buses was considered by the Tribunal in para. 23 of its order. It was contended before the Tribunal by the assessee's counsel, that these amounts received by the assessee-firm from its sub-lessees were of the same character as the sum of Rs. 1,76,172 paid by the assessee to the owner of the buses (company) and that when the latter payment was treated as capital expenditure by the departmental authorities, these amounts also must be treated, by a parity of reasoning, as capital receipts. It was further contended before the Tribunal that these amounts received from the sub-lessees were premiums (salami) and represented the price or consideration for the assessee parting with the assets and did not represent hire charges paid in advance. Accepting these contentions, the Tribunal held as follows:

“We find considerable force in these submissions. The Department has not brought on record any evidence to show that these lump sum payments represented advance payment of part of hire charges but not premiums for parting with the capital assets, namely, buses. When similar payments made by the assessee to the company were treated as of capital character, we do not see any reason why these receipts should be treated in a different manner. We, therefore, uphold the assessee's claim with regard to these receipts and direct the Income-tax Officer to modify the assessments accordingly.”

9. On the application of the CIT, the Tribunal has referred the two questions of law set out earlier to this court u/s. 256(1) of the I.T Act. The second question does not raise any difficulty. When lump sum paymerits were made by the assessee-firm for taking the buses on hire, the expenditure was held to be of capital nature and not deductible for the purpose of computing the assessee's business income. The assessee, in its turn, hired out the buses and received some lump sum payments. On a parity of reasoning these payments cannot also be regarded as of revenue character. Furthermore, the Tribunal found that the Department had not been able to bring on record any evidence to show that the lump sum payment represented advance payment of part of hire charges and not premium for parting with the capital assets. The finding of the Tribunal in this regard has also not been challenged as perverse. The second question, therefore, is answered in the affirmative and in favour of the assessee.

10. So far as the first question is concerned it has been argued that the assessee-firm was not the owner of the five new buses. It has been argued that the buses were not registered in the name of the assessee-firm under the Motor Vehicles Act, and, therefore, the assessee-firm was not entitled to claim depreciation on the new buses.

11. We are, however, unable to accept this contention. Section 32(1) provides for deductions “in respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purpose of the business or profession”. There is no dispute in this case that the buses were used in the assessee's business. The only dispute is whether the buses were owned by the assessee. It appears from the agreement that the assessee was under an obligation to keep the motor vehicles taken on hire in good running condition. The assessee was also under an obligation to replace one or more or all of the said motor vehicles at their own cost, if necessary. It was provided in the agreement that the assessee had to keep the owners informed about the replacements. It was also categorically provided that “the vehicles so replaced will be the property of the agents”. In view of the agreement, it is very difficult to accept the contention made on behalf of the Revenue that the assessee did not become the owner of the new vehicles that were purchased in replacement of the old and worn out vehicles.

12. The argument that the assessee was not the registered owner of the vehicles under the Motor Vehicles Act is also of no consequence. It is well settled that an assessee will not be entitled to depreciation allowance if he is not the owner of the buildings, machinery, plant or furniture unless he is the owner of the same. Sub-section (1A) of s. 32 which came into effect from April 1, 1971, provides an exception to this rule but this sub-section is confined to buildings only and does not extend to plant machinery or furniture. But there is no provision under the Motor Vehicles Act which requires registration of a motor vehicle in the name of a person for the purpose of acquisition of ownership of the vehicle. Section 22(1) of the Motor Vehicles Act, which requires registration of motor vehicles, is in the following terms:

“22. (1) No person shall drive any motor vehicle and no owner of a motor vehicle shall cause or permit the vehicle to be driven in any public place or in any other place for the purpose of carrying passengers or goods unless the vehicle is registered in accordance with this Chapter and the certificate of registration of the vehicle has not been suspended or cancelled and the vehicle carries a registration mark displayed in the prescribed manner.”

13. The provision of this section does not prevent a person from becoming an owner of a motor vehicle without registration. On the contrary, the section makes it obligatory for an owner of a motor vehicle to get the vehicle registered and to display the certificate of registration before the vehicle is driven in any public place. Registration is not an essential pre-requisite for acquisition of ownership of a motor vehicle but is an obligation cast upon the owner of a vehicle for the purpose of running the vehicle in any public place. Therefore, in our opinion, whether the buses were registered in the assessee's name or not is not very material for the purpose of this case. This may be a factor that has to be taken into consideration. But, when, under the agreement, the new buses that were acquired by the assessee in replacement of the old buses became the property of the asses-see-firm, there is no reason to hold that the assessee was not the owner of the buses because the buses were not registered in the name of the assessee.

14. Section 22(1) of the Motor Vehicles Act does not lay down that a person cannot be the owner of a motor vehicle unless the motor vehicle is registered in his name.

15. The Supreme Court had also an occasion to consider this question in the case of K.L Johar & Co. v. Dy. CTO, [1965] 16 STC 213 (SC) and observed as follows (p. 223):

“So far as the dealer is concerned the whole price is paid by the appellant. The agreement also shows that the appellant is the owner of the vehicle and the intending purchaser is merely a hirer thereunder. The vehicle has to be registered in the name of the appellant, though the fact of registration by itself in one name or another may not be determinative of the ownership of the vehicle.”

16. The question of ownership is essentially a question of fact. In this case the agreement clearly provides that the new vehicles acquired in replacement of the old and worn out vehicles will be the property of the assessee. That the assessee has purchased five new buses is not disputed. The only argument is that the vehicles were not registered in the name of the assessee under the Motor Vehicles Act. But that is one of the factors that has to be taken into consideration for deciding the question of ownership of the buses. It cannot be said as a matter of law that unless the buses are registered in the name of the assessee, the assessee cannot be regarded as the owner of the buses. On the contrary, the essential pre-requisite for registration u/s. 22(1) of the Motor Vehicles Act is ownership of a motor vehicle. Unless a person is the owner of a motor vehicle he is not entitled to get it registered in his name u/s. 22(1) of the Motor Vehicles Act. The Tribunal in this case has come to the conclusion on a review of the facts and also of the agreement that the assessee was the owner of the five new buses and as such was entitled to claim depreciation allowance on these buses. The Tribunal has not committed any error of law in coming to this conclusion. The requirement of s. 32 of the I.T Act is that the vehicles must be “owned by the assessee”. This section does not require that the assessee must be a registered owner of the vehicles in order to claim depreciation allowance in respect of them. We are of the view that, in the facts of this case, the new buses were owned by the assessee within the meaning of s. 32 of the I.T Act and the assessee was entitled to claim depreciation allowance on these vehicles.

17. In the premises, both the questions are answered in the affirmative and in favour of the assessee. The parties will pay and bear their own costs.

Sabyasachi Mukharji, J.:— I agree.