Additional Commissioner Of Income-Tax, Bihar v. Lawlys Enterprises (P.) Ltd.

1. By an application filed under section 256(1) of the Income-tax Act, 1961 (hereinafter called “the Act”), the Income-tax Appellate Tribunal was asked by the Additional Commissioner of Income-tax, Bihar, to state a case and refer three questions of law to this court. The Tribunal has stated a case and referred only one question which is in the following terms:

“Whether, on the facts and in the circumstances of this case, it can be said that the building constructed by the assessee was owned by him and the assessee was entitled to depreciation under section 32 of the Income-tax Act, 1961”

2. The assessee is the lessee of the Ramakrishna Mission for the premises known as “Lawlys Buildings” situated on Exhibition Road, Patna. Hotel Republic, during the accounting year corresponding to the assessment year 1966-67, was being run by the assessee in the said building. It constructed the third floor in the building and claimed depreciation on account of additions and alterations made by it in the building under section 32 of the Act, claiming that it is the owner of that portion of the building which was constructed by it by additions and alterations. The Income-tax Officer disallowed the claim for the reasons stated in his earlier orders in relation to earlier assessment years. The Appellate Assistant Commissioner maintained the disallowance by referring to the reasons given in his earlier orders. It is not known what happened to the matter of disallowance of the depreciation allowance in respect of the earlier years in the Tribunal, whether any appeal was taken by the assessee or not and whether it was disposed of, if so, with what results For the year in question, when a further appeal was taken by the assessee to the Tribunal, the Tribunal held that the assessee was the owner of the third floor of the building. It did not accept its claim with regard, to any other alteration or addition. Accordingly, it directed the Income-tax Officer to determine the quantum of depreciation which could be allowed to the assessee in respect of the third floor.

3. The earlier order of the Income-tax Officer or of the Appellate Assistant Commissioner were neither asked by the Additional Commissioner of Income-tax to be appended to the statement of the case as annexures to enable the court to know the reasons given by those officers in their orders relating to the earlier periods, nor had they been annexed by the Tribunal. No other reason is to be found in the order of the Income-tax Officer passed in respect of the assessment year in question or in the order of the Appellate Assistant Commissioner disposing of the appeal of the assessee from the order of the Income-tax Officer. The department in the application under section 256(1) of the Act did not state in the statement of facts appended thereto that the Tribunal had misconstrued the terms of the deed of lease nor did it ask the Tribunal to make the indenture of lease as an annexure and as part of the statement of the case. Accordingly, the lease is also not before us. We have to decide this reference on the basis of what has been said by the Tribunal in its appellate order.

4. In paragraph 6 of the appellate order of the Tribunal it is clearly stated that the entire third floor had been constructed by the assessee and the same was being used for the purposes of the business of running the hotel. It was a capital expenditure incurred by the assessee on the construction of the third floor which was being used for the purpose of the business. The assessee was, therefore, entitled to depreciation allowance under section 32 of the Act, if it could be held that it was the owner of the third floor. The Tribunal has held it to be so by observing:

“There is no doubt that the assessee is the owner of the superstructures and hence that portion of the building which exists on the 3rd floor, at least during the period of lease, was under the ownership of the assessee. Even according to the terms of the lease the assessee has a right to make additions and alterations. The only liability of the assessee would be to restore the building to its original condition at the time he has to deliver back the possession to the lessor. During the term of the lease it would be the owner of the superstructure and hence it can be said that the building existing on the 3rd floor is owned by the assessee.”

5. The order of the Tribunal, therefore, shows that, according to the terms of the lease, the lessee, namely, the assessee, had a right to make additions and alterations and, on the expiry of the lease, it was under an obligation to restore the building to its original condition and deliver back possession of the same to the lessor. If, according to the terms of the lease, the lessor would have to become the owner of the third floor also, then it would not have been open to the lessee to remove the structures of the third floor and restore the building to its original condition. This was possible only if the assessee was the owner of the third floor.

6. The finding given by the Tribunal is very well within the concept of law. It is not foreign to it. A lessee of a land may construct a building, use it for business purposes and, if he is the owner of it, as were the facts of the case before the Mysore High Court in Y.V Srinivasamurthy v. Commissioner of Income-tax [1967] 64 ITR 292 Mys., then he remains the owner during the subsistence of the lease. Full ownership for a period does not militate against the concept of ownership in jurisprudence. It is not unknown that a lessee of a land may construct a building at his own expense but at the same time the ownership in it, according to the indenture of lease, may vest in the lessor. Since the time of construction the lessee merely may pay rent for it adjusting it towards the amount spent on the construction. In such a case, the lessee will not be the owner of the building even for a limited period. In the present commercial world it is not unknown, rather it is very well known, that there are owners of different portions of buildings in the form of flats in big cities like Bombay, Delhi, etc. It is not strange to find that the assessee in this case, on the terms of the lease, has been held to be the owner of the third floor only. If the additions made by the lessee were not the property of the lessor, as they do not seem to be in this case from the time of the making of the additions, then undoubtedly the lessee was the owner of the additions, namely, the third floor in this case, till the lease continued. In that view of the matter, on the interpretation of the terms of the lease as recorded by the Tribunal, there is no escape from the position that the case of the assessee in respect of the third floor of the building, known as Lawlys Buildings, was squarely covered by section 32 of the Act. The assessee was entitled to depreciation of the third floor which was owned by it and used by it for the purposes of the business.

7. For the reasons stated above, we would answer both the parts of the question referred to us in the affirmative, in favour of the assessee and against the revenue. We accordingly hold that, on the facts and in the circumstances of this case, it has been rightly said that the building constructed by the assessee, namely, the third floor, was owned by it, and it was entitled to depreciation under section 32 of the Act. In the circumstances, there will be no order as to costs.