Commissioner Of Income Tax Delhi-Ithrough: Mr. Rahul Chaudhary & Mr.raghvendra Singh, Advs v. M/S Bhushan Steels & Strips Ltd

$~12 *IN THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 01.12.2016 + ITA 314/2003 COMMISSIONER OF INCOME TAX DELHI-IThrough: Mr. Rahul Chaudhary & Mr.Raghvendra Singh, Advs. ..... Appellant versus M/S BHUSHAN STEELS & STRIPS LTD..... RespondentThrough: Ms. Kavita Jha, Ms. Roopali Gupta andMr. Bhuwan Dhoopar, Advs. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE NAJMI WAZIRI S. RAVINDRA BHAT, J (Oral) 1.The question of law framed in this appeal is as follows: "Whether the ITAT was correct in law in holding thatthe respondent-assessee is entitled to depreciationunder Section 32 of the Income Tax Act even when theassessee was not the owner of the property in questionand was in possession thereof as a lessee during theyear under consideration?” 2.The facts of the case are that the assessee for the AssessmentYear (AY) 1994-95 had reported that it had entered into a leaseagreement with M/s Nehru Place Hotels Limited on 16.04.1993. Italso stated that on the next day i.e. 17.04.1993 an agreement betweenthat owner/ vendor and the assessee was entered into. The lease deed, which is prior in point of time, stated that the tenure of the lease wasthree years, renewable at the option of the assessee by another threeyears.Concededly, the document was unregistered.The assesseepaid a security deposit of ` 3.16 crores, and in addition, agreed to payrent at ` 5 per sq. ft. of the premises leased.The subsequentagreement dated 17.04.1993 recorded that the parties had entered intoa lease arrangement, and that the assessee had the option to purchasethe leased property on expiry of three years from the commencementof the lease i.e. within three years from the date it entered intopossession of the premises upon payment of ` 3.36 crores.Theagreement expressly recorded that ` 3.16 crores paid as securitydeposit is adjustable and the balance alone would have to be paid bythe assessee in the event of it exercising option. In the event it chosenot to exercise the option that amount would become refundable. Theassessee claimed depreciation under Section 32(1) of the Income TaxAct, 1961 (in short the Act) contending that the improvements madeand the cost of acquisition is depreciable. 3.In the assessment the Assessing Officer (AO) rejected theassessee’s claim after noticing the relevant facts and held inter alia asfollows: “..... 4.2 This contention of the assessee is not legallycorrect. The term 'Owner' in the context of depreciationshall mean the full legal owner i.e. when the lawrecognises that the title has vested into such owner.Thus a mere possessor under the terms of agreement topurchase shall not be entitled to depreciation allowanceeven though he uses the asset for his business. This viewhas been taken in a number of judicial decisions like forexampleCITVs.HindustanColdStorageand Refrigeration Pvt. Ltd. (103 ITR 455 - Delhi), Addl. CITVs. Mercury General Corporation (P) Ltd. (133 ITR525-Delhi) CIT Vs. T.N.Agro Industries Ltd. (163 ITR61 - Madras). Thus, for recognising a transfer of title toan immovable property valuing Rs.l00/- and upward, adocument in writing and duly registered is needed. Intheabsenceofaregistereddeedconveyingtheownership of the property, an assessee cannot beregarded as owner of that property (Kalpana TouristPvt. Ltd. Vs. CIT-172 ITR-364 Kerala and Parthas TrustVs. CIT-169 ITR 334-Kerala Full Bench). The argumentof the appellant that the term transfer u/s 2(47) has beenamended to taken within its ambit even cases ofpossession u/s 53A of the Income-Tax Act is not of anyavail because the term 'Ownership' appearing in section32 has nothing to do with the definition of a 'Transfer'a/s 2 (47) which was introduced to rope in escapingcapital gains under these circumstances. Secondly theassessee in this case is only a lessee and not owner atall. 4.3 In view of this background, depreciation of officebuilding cannot be allowed. This position has beenaccepted by learned CIT(Appeals)-I, New Delhi vide hisorder dated 28-12-1995 in the case of M/s FreesiaInvestment Ltd. & Trading Co. Ltd. For the assessmentyear 1991-92....” 4.The Commissioner of Income Tax (Appeals) [CIT(A)], duringthe course of proceedings, was of the opinion that the assessee wasdisentitled to claim depreciation. The reasoning is as follows: 5.1 Meeting the decision relied upon by the Ld. counselas enumerated in the preceding para, I am of the viewthat in all the judgements relied upon by the Ld. counsel,it has been held that an assessee will be considered to bethe owner of the building u/s 32, if he is in position toexercise the rights of the owner on behalf of the persons in whom the title vests but not in his own right. In theinstant case, the appellant cannot exercise right ofownership such as (a) the power of enjoyment, i.e., thepower to deal with the produce as he pleases and thepower to destroy, (b) possession which includes the rightto exclude others, (c) power to alienate inter vivos or tocharge as security and (d) power to dispose off theproperty by Will. Thus I am of the view that one of themost important of these powers is the right to excludeothers and in the instant case the appellant doss not havethe right to exclude others because the appellant has notbecome the absolute owner of the property. Besides, theappellant also does not have the power to dispose off theproperty by will and is simply in the precious possessionof the property for the beneficial use and it has beencategorically stated by their Lordships in the judgmentenumerated in the preceding paras that mere possessor ofthe property without exercising right of ownership cannotbe termed as the owner of the property in the context ofthe phraseology used in Sec. 32(1) of the Act. Thus, thecase laws relied upon by the Ld. counsel, in my opinion,will not bailout the appellant in the instant case.instant case, the appellant cannot exercise right ofownership such as (a) the power of enjoyment, i.e., thepower to deal with the produce as he pleases and thepower to destroy, (b) possession which includes the rightto exclude others, (c) power to alienate inter vivos or tocharge as security and (d) power to dispose off theproperty by Will. Thus I am of the view that one of themost important of these powers is the right to excludeothers and in the instant case the appellant doss not havethe right to exclude others because the appellant has notbecome the absolute owner of the property. Besides, theappellant also does not have the power to dispose off theproperty by will and is simply in the precious possessionof the property for the beneficial use and it has beencategorically stated by their Lordships in the judgmentenumerated in the preceding paras that mere possessor ofthe property without exercising right of ownership cannotbe termed as the owner of the property in the context ofthe phraseology used in Sec. 32(1) of the Act. Thus, thecase laws relied upon by the Ld. counsel, in my opinion,will not bailout the appellant in the instant case. 5.2 Besides, it will not be out of place to refer to adecision of the Supreme Court in the case of Seth BanarsiDams Gupta vs. CIT, 166 ITR 787, wherein theirLordships, though in a different context, have held thatfor the allowance of depreciation, the appellant has to bethe absolute owner and the fractional ownership isbeyond the ambit of Sec. 32. Deriving strength from thesaid decision of the Supreme Court, I believe that if theApex court has ruled out the allowance of depreciationeven in the case of fractional owner, where is thequestion of its being allowed in a case, where theappellant is not even a fractional owner of the saidproperty. The appellant, on the other hand, in this casehas been paying rent to the transferor of the propertywhich has not been assigned to the appellant legally. Itwill not be out of place to make a mention of the case ofParthas Trust (supra) again wherein the full bench ofdecision of the Supreme Court in the case of Seth BanarsiDams Gupta vs. CIT, 166 ITR 787, wherein theirLordships, though in a different context, have held thatfor the allowance of depreciation, the appellant has to bethe absolute owner and the fractional ownership isbeyond the ambit of Sec. 32. Deriving strength from thesaid decision of the Supreme Court, I believe that if theApex court has ruled out the allowance of depreciationeven in the case of fractional owner, where is thequestion of its being allowed in a case, where theappellant is not even a fractional owner of the saidproperty. The appellant, on the other hand, in this casehas been paying rent to the transferor of the propertywhich has not been assigned to the appellant legally. Itwill not be out of place to make a mention of the case ofParthas Trust (supra) again wherein the full bench of Kerala High Court have exacted the complete look intoall the decisions even that of Supreme Court in the caseof R.B. Jodha Mal Kuthiala vs. CIT, 82 ITR 570 and havecome to a finding that the depreciation would beallowable only to the legal owner of the property and notto the fractional or beneficial owner. Their Lordships inthe said case of Kerala High Court also observed thatSupreme Court in the case of R.B. Jodha Mal Kuthiala(supra) essentially dealt with the effect and impact of thePakistan Evacuee Property Vesting Act and hence thesaid decision has to be understood in that context only. 5.3 I would be failing in my duty if do not make a mentionof the recent decision of the I.T.A.T., Delhi Bench 'A'decided on March 11, 1996 in the case of ACIT vsChadha Wine Store Pvt. Ltd., reported in 57 lTD 567, inwhichtheywereconsideringtheallowabilityofdepreciation U/S 32(1) of the Act in respect of a minitruck and a car. The Revenue had disallowed thedepreciation on the ground that the car was notregistered in the name of the said assessee and for thesame the Revenue had placed reliance on the decision ofKerala High Court in Parthas Trust (supra) and KalpagaTourist Pvt. Ltd. (supra). Distinguishing the said caselaws relied upon by the Revenue the Hon'ble Members ofthe Delhi Tribunal in the said case held that the issue ofproperty being registered in the name for imparting theconcept of ownership is relevant in the case of immovableproperty only because in the case of transfer ofimmovable property, a registered deed is must if thevaluation exceeds more than Rs.I00/-, both u/s 17 and 49of the Indian Registration Act. In my opinion, the Hon'blebench impliedly concluded that in the case of immovableproperty for becoming the owner for the purpose of Sec.32(1) of the Act, legal right to the property was a mustand the claimant of the depreciation must be one withmuch more than more threads of rights....” 5.The Income Tax Appellate Tribunal (in short the Tribunal), 5.The Income Tax Appellate Tribunal (in short the Tribunal), which delivered the impugned judgment, reversed the reasoning ofthe authorities below taking note of the Supreme Court judgment inCIT vs. Podar Cement (P) Ltd. (1997) 226 ITR 625.Apart fromnoticing the ratio in Podar Cement (supra), the Tribunal also held thatnon-registration of the agreement did not imply that the benefitotherwise available under Section 53A of the Transfer of PropertyAct, 1882 (in short TP Act) of being entitled to continue in possessionin part performance of an agreement to sell, had to be denied. 6.Mr. Rahul Chaudhury, the learned counsel arguing on behalf ofthe Revenue, stated that the Tribunal fell into error in concluding thatthe lease deed in fact amounted to an agreement to sell. He reliedextensively on the recital of the lease deed dated 16.04.1993 as wellas its contents to say that the Tribunal should not have considered anyanother material since from the tenor of the document, the parties’intention was apparent.The learned counsel also relied upon theplain text of Explanation (1) to Section 32 to say that only capitalexpenditure incurred by the lessee in the improvement to theconstruction upon the premises leased would qualify for depreciationand nothing else. The learned counsel also relied upon the ruling ofthis Court in Commissioner of Income Tax vs Hindustan ColdStorage and Refrigeration P. Ltd. (1976) 103 ITR 455. It was urgedthat the decision also took note of Section 53A of the TP Act and itslegal effect, and relied upon previous rulings of the Supreme Courtand Privy Council. 7.The learned counsel for the respondent/ assessee urged that thelease deed of 16.04.1993 cannot be read in isolation and has to be conjointly considered with the agreement to sell dated 17.04.1993.So considered, the parties intention clearly was to show thetransaction as a lease but with condition that the property would beultimately purchased by the assessee. To that end, substantial part ofthe consideration agreed, for the sale itself had been paid when thelease deed was entered into – by way of a security deposit. Clause (1)and (2) of the agreement dated 17.04.1993 in fact recognized that thesecurity deposit would be adjusted towards the total consideration anda small balance of ` 20 lacs was payable when the sale deed wasexecuted.Given these factors and the important circumstance thatpossession was handed over immediately to the lessee/ assessee, infact the transfer in terms of Section 53A of the TP Act wascompleted.The learned counsel emphasized, therefore, that thedecision in Podar Cement (supra) was correctly applied havingregard to the overall circumstances of the case. The learned counselalso relied upon the judgement of the Supreme Court in MysoreMinerals Ltd. vs CIT (1999) 239 ITR 775 (SC). 7.1The relevant part of Section 32 of the Act reads as follows: “..... Depreciation. 32. (1) In respect of depreciation of— (i)buildings,machinery,plantorfurniture,beingtangible assets; (ii) know-how, patents, copyrights, trade marks, licences,franchises or any other business or commercial rights ofsimilar nature, being intangible assets acquired on orafter the 1st day of April, 1998, owned, wholly or partly,by the assessee and used for the purposes of the businessor profession, the following deductions shall be allowed—xxxx xxxx Explanation 1.—Where the business or profession of theassessee is carried on in a building not owned by him butin respect of which the assessee holds a lease or otherright of occupancy and any capital expenditure isincurred by the assessee for the purposes of the businessor profession on the construction of any structure ordoing of any work in or in relation to, and by way ofrenovation or extension of, or improvement to, thebuilding, then, the provisions of this clause shall apply asif the said structure or work is a building owned by theassessee.....” xxxx Explanation 1.—Where the business or profession of theassessee is carried on in a building not owned by him butin respect of which the assessee holds a lease or otherright of occupancy and any capital expenditure isincurred by the assessee for the purposes of the businessor profession on the construction of any structure ordoing of any work in or in relation to, and by way ofrenovation or extension of, or improvement to, thebuilding, then, the provisions of this clause shall apply asif the said structure or work is a building owned by theassessee.....” 8.In the present case the assessee claimed depreciation for AY1994-95 urging that it had paid a sum of ` 3.16 crores.The AOrejected the claim as is evident from the preceding discussion and areading of his order would reveal that he confined his scrutiny to thelease agreement of 16.04.1993. The AO’s order is forthright with thesubsequent agreement of 17.04.1993 which was in fact shown in thecourse of the proceeding and the assessee had made submissionsbased on its effect. Nevertheless, the AO’s order is singularly silenton the effect of this document. The order was premised and almostentirely on the basis that the lease agreement conferred the rights of alessee/ occupant and in the circumstances the benefit of depreciationfor the sum of ` 3.16 crores could not have been derived. The CIT(A)too proceeded on a similar tangent. At the same time we also noticethat the AO did consider the effect of the ruling of this Court inHindustan Cold Storage (supra) which appears to have somebackgroundonwhatwasthenperceivedtobethecorrectinterpretation of Section 53A. The Tribunal, however, had the benefit of the ruling of the Supreme Court in Podar Cement (supra).9.To rewind a bit, the AO’s order was made on 30.08.1996. Thedecision in Podar Cement (supra) was delivered on 27.05.1997.Podar Cement (supra) examined various decisions of the HighCourts; one set of High Courts holding that the benefits under Section53A of the TP Act could be considered for the purposes of income taxand permissibility of depreciation, whereas the other set of HighCourts had held otherwise. The relevant discussion in Podar Cement(supra) is as follows: “....23 We have noticed the reliance placed by the bar onthe decision of this Court in Jodha Mal's case which wasconcerned with the old Section 9(i) of the Act. In thatcase, this Court had occasioned to consider the meaningto be given to the words 'of which he is the owner'. Ofcourse, on facts the Court was called upon to decidewhether the erstwhile admitted owner of the property isliable to pay income-tax on the house property underSection 9 even after the said property has been vested inthe Custodian of Evacuee Property by virtue of Section6(1)ofthePakistan(AdministrationofEvacueeProperty)Ordinance,1949.ThecontentionoftheRevenue in that was that notwithstanding the vesting ofthe house property in the Custodian the legal ownershipremained with the assessee therein and, therefore,Section 9(1) of the old Act was attracted. This contentionwas repelled by this Court. Hegde, J. speaking for theBench observed at page 575 : "The question is who is the "owner" referred to inthis Section? Is it the person in whom the propertyvests or is it he who is entitled to some beneficialinterest in the property? It must be rememberedthat Section 9 brings to tax the income fromproperty and not the interest of a person in theproperty. A property cannot be owned by two persons,eachonehavingindependentandexclusive right over it. Hence, for the purpose ofSection 9, the owner must be that person who canexercise the rights of the owner, not on behalf ofthe owner but in his own right." "The question is who is the "owner" referred to inthis Section? Is it the person in whom the propertyvests or is it he who is entitled to some beneficialinterest in the property? It must be rememberedthat Section 9 brings to tax the income fromproperty and not the interest of a person in theproperty. A property cannot be owned by two persons,eachonehavingindependentandexclusive right over it. Hence, for the purpose ofSection 9, the owner must be that person who canexercise the rights of the owner, not on behalf ofthe owner but in his own right." 24.The learned Judge observed that "it is true thatequitable considerations are irrelevant in interpreting taxlaws. But, those laws, like all other laws, have to beinterpreted reasonably and in consonance with justice".Again at page 577, it was held that "for determining theperson liable to pay tax, the test laid down by the Courtwas to find out the person entitled to that income". Againat page 578 it was observed: "No one denies that anevacuee from Pakistan has a residual right in theproperty that he left in Pakistan. But the real question is,can that right be considered as ownership within themeaning of Section 9 of the Act. As mentioned earlier thatSection seeks to bring to tax income of the property in thehands of the owner. Hence, the focus of that Section is onthe receipt of the income. The meaning that we give to theword "owner" in Section 9 must not be such as to makethat provision capable of being made an instrument ofoppression. It must be in consonance with the principlesunderlying the Act." 25.In our opinion, the above observations of this Courtclearly fixes the liability on a person who receives - or isentitled to receive the income from the property in hisown right. In spite of this, the assessing officers ofvarious circles instead of uniformally following the ratiolaid down in this case have taken different diametricallyopposite views depending upon the pronouncements ofthe concerned High Courts in the circles on the scope ofSection 22 of the Act. The High Courts of Allahabad.Punjab and Haryana, Rajasthan, Calcutta and Patnahave taken the view by correctly understanding the ratiolaid down in Jodha Mal's case and the High Courts ofBombay, Delhi and Andhra Pradesh have taken adifferent view wrongly distinguishing on facts in Jodha Mal's case. 26.In the Kala Rani's case (supra), the Punjab andHaryana High Court after referring to the judgment ofthis Court in Jodha Mal's case observed as follows: "Thus, it cannot be accepted that before aperson can be assessed under Section 22 of theAct, he must be the owner by virtue of a saledeed in his favour. As a matter of fact, what isbeing taxed under Section 22 of the Act is theincome from house property or the annualvalue of the property of which the assessee isthe owner." 27. The High Court rejected the contention that the merepossession of the property in pursuance of an agreementto sell was not sufficient to burden the assessee with taxon any income under Section 22...” 10.The view of the Patna High Court in Addl. CIT vs SahayProperties & Investment Co. (P) Ltd. (1983) 144 ITR 357 andRajasthan High Court in Saiffuddin vs CIT (1985) 156 ITR 127 andMaharani Yogeshwari Kumari vs. CIT (1995) 213 ITR 541 was approved: “...33. We do not think that it is necessary to set outextracts from the judgments of other High Courts takingsimilar view. 34. The contrary view taken by the other High Courts wasmainly based on the facts that unless there is a registereddeedconveyingtheproperty,thepersoninpossession/enjoymentofthepropertycannotbeconsidered as legal owner and, therefore, he cannot becalled upon to pay the tax under Section 22 of the Act. 35. The law laid down by this Court in Jodha Mal's caseaccording to us, has been rightly understood by the HighCourts of Punjab and Haryana, Patna, Rajasthan, etc. The requirement of registration of the sale-deed in thecontext of the Section 22is not warranted....” approved: “...33. We do not think that it is necessary to set outextracts from the judgments of other High Courts takingsimilar view. 34. The contrary view taken by the other High Courts wasmainly based on the facts that unless there is a registereddeedconveyingtheproperty,thepersoninpossession/enjoymentofthepropertycannotbeconsidered as legal owner and, therefore, he cannot becalled upon to pay the tax under Section 22 of the Act. 35. The law laid down by this Court in Jodha Mal's caseaccording to us, has been rightly understood by the HighCourts of Punjab and Haryana, Patna, Rajasthan, etc. The requirement of registration of the sale-deed in thecontext of the Section 22is not warranted....” 11.The effect of the ruling in Podar Cement (supra) wasconsidered again in Mysore Minerals Ltd. vs CIT (1999) 239 ITR775 (SC) in the context of Section 32 of the Act itself. The Courtdeclared the law as follows: “....14. It is well-settled that there cannot be twoowners of the property simultaneously and in the samesense of the term. The intention of the Legislature inenacting Section 32 of the Act would be best fulfilled byallowing deduction in respect of depreciation to theperson in whom for the time being vests the dominionover the building and who is entitled to use it in hisown right and is using the same for the purposes of hisbusinessorprofession.Assigninganydifferentmeaning would not subserve the legislative intent. Totake the case at hand it is the appellant-assessee whohaving paid part of the price, has been placed inpossession of the houses as an owner and is using thebuildings, for the purpose of its business in its ownright. Still the assessee has been denied the benefit ofSection 32. On the other hand, the Housing Boardwould be denied the benefit of Section 32 because inspite of its being the legal owner it was not using thebuilding for its business or profession. We do not thinksuch a benefit-to-none situation could have beenintended by the Legislature. The finding of fact arrivedat in the case at hand' is that though a document of titlewas not executed by the Housing Board in favour of theassessee, but the houses were allotted to the assesseeby the Housing Board, part payment received andpossession delivered so as to confer dominion over theproperty on the assessee whereafter the assessee had inits own right allotted the quarters to the staff and theywere being actually used by the staff of the assessee. It is common knowledge, under the various schemesfloated by bodies like housing boards, houses areconstructed on a large scale and allotted on partpayment to those who have booked. Possession is alsodelivered to the allottee so as to enable enjoyment ofthe property. Execution of documents transferring titlenecessarily follows if the schedule of payment isobserved by the allottee. If only the allottee may defaultthe property may revert back to the Board. That is amatter only between the Housing Board and theallottee. No third person intervenes. The part paymentsmade by allottee are with the intention of acquiringtitle. The delivery of possession by the Housing Boardto the allottee is also a step towards conferringownership. Documentation is delayed only with theidea of compelling the allottee to observe the scheduleof payment....” 12.Having regard to the clear declaration of law by the SupremeCourt in the two judgments discussed above, we are of the opinionthat the view expressed by the Tribunal in favour of the assessee doesnot call for any disturbance.Consequently, the question of lawframed is answered against the Revenue. The appeal is dismissed. S. RAVINDRA BHAT, J DECEMBER 01, 2016/kk NAJMI WAZIRI, J