High Court Of Delhi
National Industrial Corpn. Ltd. vs. CIT
Sections 32(1), 37(1)
Dalveer Bhandari & Vikramajit Sen, JJ.
IT Appeal No. 201 of 2001
8th August, 2002
Counsel Appeared
Gupta with R.K. Chaufla, for the Appellant : R.D. Jolly with Ajay Jha, for the Respondent
JUDGMENT
DALVEER BHANDARI, J. :
This appeal is directed against the order passed by the Income-tax Appellate Tribunal (for short “the Tribunal”), dt. 30th April, 2001. This Court admitted the appeal on 19th Dec., 2001, and framed the following substantial questions of law : Whether the Tribunal was justified in law in holding that depreciation allowance under s. 32 of the IT Act, 1961, was not allowable to the appellant-company in respect of property purchased from M/s Punjab Financial Corporation? Whether the Tribunal was justified in law in disallowing Rs. 75,000 out of sales promotion expenses in the absence of any material to support it? The relevant facts for deciding the controversy involved in the case are briefly stated as under. The appellant-assessee was engaged in the business of bottling and marketing of Indian-made foreign liquor. The appellant also started the business of manufacturing liquor by taking over the factory at Dera Basti from the Punjab Financial Corporation. By the agreement dt. 26th March, 1996, an amount of Rs. 7,25,000 was paid on that date and the remaining amount was to be paid in quarterly instalments starting from 15th June, 1996, and ending on 15th March, 1999. We are told by the learned counsel for the appellant, Mr. B. Gupta that the entire remaining amount has also been paid by the appellant. As per cl. I of the agreement the ownership of the factory would remain with the Punjab Financial Corporation till the full consideration was paid. It was also expressly provided in cl. V(i)of the agreement that the deed of transfer would be executed by the Punjab Financial Corporation after receipt of full consideration from the appellant assessee-company. The agreement further provided that the assessee will be holding the property as a trustee till 15th March, 1999, on which date the entire sale consideration would have been paid by the assessee. The AO, therefore, held that as the assessee was not the owner of the factory, no depreciation was allowable under s. 32 (1) of the IT Act, 1961 (for short “the Act”). The relevant portion of s. 32(1) of the Act reads as under : “32(1) In respect of depreciation of— (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how patents, copyrights trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April,1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed— (i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed; (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed;”
The CIT(A) affirmed the order of the AO. The appellant-assessee preferred an appeal before the Tribunal against the order of the CIT(A). The Tribunal after hearing the counsel for the parties held that the assessee was entitled to depreciation, if he was owner of the assets and such assets had been used in the business. Both these conditions had to be satisfied. Even if there is user of the assets; but ownership does not vest in the assessee, therefore, he is not entitled to depreciation. This finding of the Tribunal is based on the fact that the assessee did not make full payment to the Punjab Financial Corporation, therefore, did not acquire the ownership in the property in question. Mr. B. Gupta, learned counsel for the assessee, placed reliance on the judgment of the Supreme Court in CIT vs. Poddar Cements (P) Ltd. & Ors. (1997) 141 CTR (SC) 67 : (1997) 226 ITR 625 (SC) : TC S40.3564. In this case their Lordships examined a large number of cases decided by the Supreme Court and the High Courts. Their Lordships also had the occasion to decide the expression ‘owner’, in the light of the IT Act. The Supreme Court in this case held that though under the common law ‘owner’ means a person who has got valid title legally conveyed to him after complying with the requirements of law such as the Transfer of Property Act, the Registration Act, etc., in the context of s. 22 of the IT Act,1961, having regard to the ground realities and further having regard to the object of the IT Act, namely, to tax the income, ‘owner’ is a person who is entitled to receive income from the property in his own right. The requirement of registration of the sale deed in the context of s. 22 of the IT Act,
1961, is not warranted. In this case heavy reliance has been placed on earlier decided case of the Supreme Court in R.B. Jodha Mal Kuthiala vs. CIT (1971) 82 ITR 570 (SC) : TC 40R.279. The Supreme Court had occasion to consider the meaning of the words ‘of which he is the owner’. Hegde, J. speaking for the Bench, observed that it is true that equitable considerations are irrelevant in interpreting tax laws. But, those laws, like all other laws, have to be interpreted reasonably and in consonance with justice and for determining the person liable to pay tax, the test laid down by the Court was to find out the person entitled to that income. While dealing with the concept of possession and enumerating the illustrative cases and rules in this respect, G.W. Paton on Jurisprudence, 4th Edn., pp. 517-18 says that to acquire possession of a thing it is necessary to exercise such physical control over the thing as the thing is capable of, and to evince an intention to exclude others. In Tobentia Young, Hichens and Pierson vs. Post (1805) 3 Caines 175 the Supreme Court of New York observed that it would thus be seen that where the possession of a property is acquired, with a right to exercise such necessary control over the property acquired which it is capable of, it is the intention to exclude others which evinces an element of ownership. Dias on Jurisprudence (4th Edn. at p. 400) it is mentioned that the position, therefore, seems to be that the idea of ownership of land is essentially one of the ‘better right’ to be in possession and to obtain it, whereas with chattels the concept is a more absolute one. Actual possession implies a right to retain it until the contrary is proved, and to that extent a possessor is presumed to be owner.
According to Stroud’s Judicial Dictionary, 3rd Edn., Vol.3, p. 2060, “Owner” applies to every person in possession or receipt either of the whole, or of any part, of the rents or profits of any land or tenement, or in the occupation of such land or tenement, other than as a tenant from year to year or for any less term or as a tenant at will. The juristic principle from the viewpoint of each one is to determine the true connotation of the term ‘owner’ within the meaning of s. 22 of the Act in its practical sense, leaving the husk of the legal title beyond the domain of ownership for the purpose of this statutory provision. The reason is obvious. After all , who is to be taxed or assessed to be taxed more accurately —- a person in receipt of money having actual control over the property with no person having better right to defeat his claim of possession or a person in legal parlance who may remain a remainderman. Mr. B. Gupta, learned counsel appearing for the assessee, placed heavy reliance on the judgment of the Supreme Court in Mysore Minerals Ltd. vs. CIT (1999) 156 CTR (SC) 1 : (1999) 239 ITR 775 (SC). In this judgment their Lordships of the Supreme Court had an occasion to examine the expressions ‘owner ” and ‘depreciation’. The Court also relied on the judgment of, the Supreme Court in CIT vs. Poddar Cements (P) Ltd. & Ors. (supra) and agreed with the definition and the meaning given to the expression ‘owner’ in that case. In Black’s Law Dictionary (6th Edn.) ‘owner’ has been defined as the person in whom is vested the ownership, dominion, or title of property. Parks in Principles and Practice of Valuation (fifth Edn., at p. 323) states that as for building, depreciation is the measurement of wearing out through consumption, or use, or effluxion of time. Paton has in his Account’s Handbook (third Edn.) observed that the depreciation is an out of pocket cost as any other costs. He has further observed that depreciation charge is merely the periodic operating aspect of fixed asset costs. Their Lordships of the Supreme Court in P.K. Badiani vs. CIT 1976 CTR (SC) 466 : (1976) 105 ITR 642 (SC) : TC 41R.268 observed that allowance for depreciation is to replace the value of an asset to the extent it has depreciated during the period of accounting relevant to the assessment year and as the value has, to that extent, been lost, the corresponding allowance for depreciation takes place.
17. The concept of depreciation suggests that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset, is utilising the capital asset and thereby losing gradually investment caused by wear and tear and would need to replace the same by having lost its value fully over a period of time. There cannot be two owners of the property simultaneously and in the same sense of the term.
18. The intention of the legislature in enacting s. 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purpose of his business or profession. Assigning any different meaning would not subserve the legislative intent. Mr. B. Gupta, the learned counsel for the appellant submitted that the Tribunal was not justified in holding that the appellant was not entitled for depreciation allowance under s. 32 of the Act. He submitted that the impugned order of the Tribunal is against the settled position of law which has been crystallised by the catena of judgments of the apex Court. In Mysore Minerals Ltd. vs. CIT (supra) their Lordships of the Supreme Court observed that the intention of the legislature in enacting s. 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vest the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession. Assigning any different meaning would not subserve the legislative intent . The facts of this case are more or less similar to the facts of the case in hand. The assessee had made part-payments to the Housing Board in the case of Mysore Minerals (supra). In this case also the appellant-assessee paid part of the consideration. The Court in the case of Mysore Minerals held that the assessee was entitled to depreciation on seven houses in respect of which the assessee had not obtained the conveyance deeds from the vendor though it had taken possession and made part-payment of the consideration. Mr B. Gupta, the learned counsel for the appellant submitted that this case squarely applies to the present case . In this case also the appellant had taken possession and made part-payment of the consideration on 26th March, 1996, but subsequently paid the entire amount and the assessee is entitled to get the depreciation.
19. The learned counsel for the appellant also placed reliance on a Full Bench judgment of this Court in Gowersons Publishers (P) Ltd vs. CIT (1999) 156 CTR (Del)(FB) 409 : (1999) 240 ITR 191 (Del)(FB). In this case Goverdhan Kapoor & Sons, a partnership firm, owned certain assets including immovable property. The firm entered into an agreement, of sale with the assesseecompany on 1st Oct.,1972, whereby the running business of the vendors was sold to the assesseecompany. The assets of the company included the building. During the assessment proceedings, the assessee claimed depreciation under s. 32 of the Act on the building which was disallowed by the ITO on the ground that the property did not stand in the name of the assessee. The Tribunal held that the assessee was not entitled to depreciation. The Court held that an assessee who has right to enjoy the property for all practical purposes can be treated as its ‘owner” for the purposes of the provisions of the IT Act.
20. In Dalmia Cement (Bharat) Ltd. vs. CIT (2000) 162 CTR (SC) 256 : (2001) 247 ITR 267 (SC), while following the ratio of Mysore Minerals (supra) their Lordships of the Supreme Court observed that the assessee was entitled to depreciation and the reference was decided in favour of the assessee and against the Revenue.
21. Reliance has also been placed on a Division Bench judgment of this Court in CIT vs. General Electronic Haryana (P) Ltd. (2002) 174 CTR (Del) 187 : (2002) 254 ITR 76(Del). In this case also the Delhi High Court relied on the decision in the Mysore Minerals and held that the assessee was entitled to depreciation.
22. In CIT vs. National Co-operative Consumers’ Federation Ltd. (2002) 254 ITR 599 (Del) the question No. 1 which fell for the consideration of the Court reads as under :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in allowing depreciation on the amount invested in the purchase of godown-cum-showroom situated at No. 95, Nehru Place, New Delhi, in spite of the fact that it was not registered in the name of the assessee-company?”
23. In reply to the aforesaid question the Court observed that the issue is no longer res integra in view of the decision in Gowersons Publishers (P) Ltd. vs. CIT (supra).
24. Therefore, on consideration of the clear enunciation of law in a catena of cases the appellantassessee is clearly entitled to depreciation under s. 32 of the IT Act, 1961.
25. The second question of law which was framed by this Court is whether the Tribunal was justified in law in disallowing Rs. 75,000 out of sales promotion expenses in the absence of any material to support it.
26. Regarding the sale promotion expenses, according to the assessee-company it spent Rs. 23,75,170 on giving major gift items. The AO held that keeping in view the nature of the business of the assessee-company and the reasonableness of such expenditure he deemed it fit to disallow 50 per cent of the expenditure on gift items as detailed in the table being of a non-business nature and thus disallowable as per provisions of s. 37(1) of the IT Act and initiated penalty proceedings under s. 271(1)(c) of the Act separately on this issue.
27. The CIT(A) mentioned about the disallowance of sale promotion expenses of Rs. 11,83,585 and allowed Rs. 10 lakhs, which according to her was related to business and a part of Rs. 1,83,585 was confirmed as used in personal gifts and personal expenditure.
28. The Tribunal has observed that the CIT(A) has allowed bulk of the relief by observing that the expenditure was related to business expenditure. The CIT(A) has sustained the disallowance which accounts for about 5 per cent of the total claim. The Tribunal observed that “In our opinion, the disallowance of Rs. 75,000 under this head will meet the end of justice. Thus, we confirm the disallowance to the extent of Rs. 75,000 under this head and delete the balance amount”.
29. It may be pertinent to mention that Mr. Gupta argued that there was no material on record to show that any part of the said expenditure was not for the sale promotion and the Tribunal was, therefore, in error in law in sustaining the disallowance of Rs. 75,000 without any basis. He submitted that the order of the Tribunal regarding sale promotion expenses is based on no material and that is how this becomes a substantial question of law.
30. We have carefully examined the judgment of the Tribunal and there is no material on record to show that any part of the sale promotion expenditure was incurred for non-business purposes. The Tribunal has not given any basis whatsoever while confirming the disallowance to the extent of Rs. 75,000. All that the Tribunal observed was that the disallowance of Rs. 75,000 under this head will meet the ends of justice. The approach of the Tribunal in dealing with this aspect of the matter was erroneous and cannot be sustained. We set aside this part of the order. On the basis of our aforesaid findings, the appeal is accordingly allowed and disposed of. In the facts and circumstances of this case we direct the parties to bear their own costs.
[Citation : 258 ITR 575]
