Income-lax---

----Depreciation---Conditions precedent for allowance---0ww:rship of property---- Transfer of property --- Registration---Assessee declared owner of property by Civil Court---Transfer of property did not require registration -- Assessee entitled to depreciation---Indian Income Tax Act, 1961, S.32-- lndian Registration Act, 1908, S.17.

Under the provisions of section 32 of the Income Tax Act, 1961, for claiming depreciation allowance, two conditions are to be satisfied, 7/.e., (1) that the depreciable asset is owned by the assessee; and (2) asset must have been used for the purpose of the assessee's business. Section 32 of the Act does not talk of a registered owner. One can become owner of movable or immovable property in more than one way. The modes provided in the Transfer of Property Act are not exhaustive. Section 17 of the Indian Registration Act, 1908, enumerates the documents of which registration is compulsory. A close scrutiny of clause (vi) of section 17(2) would indicate that broadly speaking all decrees and orders of the Court have been exempted from operation of clauses (b) and (c) of subsection (1) of section 17 of the Act. So, a decree which purports to assign immovable property of more than Rs.100 falling under clauses (b) and (c) of section 17(1) would not require registration unless it is based on a compromise and assigns property which does not form part of the subject-matter of the suit or proceeding.

The business of Hotel Skylark and Restaurant was being run under the sole proprietorship of N. Hotel Skylark (Private) Limited, the assessee, was incorporated in the year 1973 to take over the business of the sole proprietorship. The assessee took over the running business through an agreement, dated June 29, 1973. No registered transfer-deed was executed in favour of the assessee. The total consideration was Rs.12,28,923. All assets and liabilities of the proprietorship business were taken over by the assessee company. The assessee-company filed a civil suit in September, 1977, for declaration to the effect that the assessee was the owner in possession of the property known as Hotel Skylark and Restaurant including all assets, fittings, fixtures and machinery thereon. In response to the notice issued in the suit, the defendants put in appearance and filed a written statement. The claim of the assessee was admitted. The statements of the parties were recorded. In view of the admissions made. The suit was decreed as prayed for on October 17, 1977. The assessee claimed depreciation in respect of the building but the Income-tax Officer rejected the claim. The Tribunal upheld the order of the Income-tax Officer. On a reference:

Held, that it was not the case of either party that the declaration sought by the assessee from the Civil Court was used as a device to avoid payment of stamp duty and frustrate the law relating to registration. The assessee had become the owner of the property by a decree of the Court, which became final, the same having not been set aside by filing an appeal or by filing a separate suit. The decree dated October 17, 197/7, passed by the Sub-Judge, Jaiandhar, did not require registration. The assessee, which had used the asset for the purpose of its business was entitled to depreciation on it. The declaration was granted as prayed for and would be effective from the date of the agreement, 7/.e., July 1, 1973. The Civil Court decree would thus be applicable for the assessment years 1976-77 and 1977-78 as well.

Bhoop Singh v. Ram Singh Major AIR 1996 SC 196; Iv. Hindustan Cold Storage and Refrigeration (P.) Ltd. (1976) 103 ITR 455 (Delhi); CIT v. Sahney Steel and Press Works (P.) Ltd. (1987) 168 ITR 811 (AP); CIT v. Shahney Steel and Press Works (P.) Ltd. (1987) 165 ITR 399 (AP); CIT v. Tamil Nadu Agro Industries Corporation Ltd. (1987) 163 ITR 61 (Mad); CIT (Addl.) v. U.P. State Agro Industrial Corporation Ltd. (1981) 127 ITR 97 (All); Golcha Properties (P.) Ltd. v. CIT (1987) 166 ITR 259 (Raj); Glecha Properties (P.) Ltd. v. CIT (1988) 171 ITR 47 (Raj.); Gurdev Kaur v. Mehar Singh AIR 1989 (P & H) 324; Jodha Mal Kuthiala R.B. v. CIT (1971) 82 ITR 570 (SC); Kala Rani (Sint.) v. CIT (1981) 130 ITR 321 (P & H); Kalpaka Tourist Home (P.) Ltd. v. CIT (1988) 172 ITR 364 (Ker.); Madgul Udhyog v. CIT (1990) 184 ITR 484 (Cal.) and Parthas Trust v. CIT (1988) 169 ITR 334 (Ker.) ref.

J.S. Narang, Senior Advocate with Baljinder Singh for the Assessee.

R.P. Sawhney, Senior Advocate with Sanjay Goyal for the Commissioner.

JUDGMENT

ASHOK BHAN, J.---Taking contradictory decisions on the same question of law arising out of the same set of facts in the alternate years in favour of the Revenue and the assessee, respectively, has led to the filing of references of the same question of law at the instance of the Revenue as well as the assessee for different years which are being disposed of by a common order. This order shall dispose of Income-tax Reference No.40 of 1982 relating to the assessment year 1976-77 filed at the instance of the Revenue, Income-tax Reference No.22 of 1981 for the next year 1977-78 at the instance of the assessee and Income-tax Reference No. 133 of 1990 for the assessment year 1983-84 again at the instance of the assessee. We were given to understand during the course of hearing that the Tribunal has changed its mind and has decided the question against the Revenue for the subsequent assessment years for which reference petitions at the instance of the Revenue are in the pipeline.

The relevant facts which are common to all the reference applications are taken from Income-tax Reference No.22 of 1981 for the assessment year 1977-78.

The business of Hotel Skylark and Restaurant was being run under the sole proprietorship of Shri Naranjan Singh. Hotel Skylark (Private) Limited hereinafter referred to as "the assessee" was incorporated in the year 1973 to take over the business of the sole proprietorship. The assessee took over the running business of the firm through an agreement, dated June 29, 1973 Annexure "A". No registered transfer deed was executed in favour of the assessee. The total consideration was Rs.12,28,923. All assets and liabilities of the firm were taken over by the limited company. Part of the consideration of Rs.2,28,923.68 was given as cash and shown as unsecured loan in the name of Naranjan Singh. It was to carry interest at the rate of 12 per cent. per annum. 10,000 shares worth Rs.10 each amounting to Rs.10,00,000 were given to Naranjan Singh and associate, thus, completing the total consideration of Rs.12,28,923.68. The assessee-company filed a Civil Suit No.50 of 1977, dated September 24, 1977, for declaration to the effect that the plaintiff (assessee) is the owner in possession of the property known as Hotel Skylark and Restaurant including all assets, fittings, fixtures and machinery thereon, situated on Circuit House Road, Jalandhar City. The allegations of the plaintiff-assessee were that the defendants, Naranjan Singh and others, were co-owners of the assets, fittings, furnitures and machinery, etc., of Hotel Skylark but thereafter, the private limited company in the name and style of Hotel Skylark and Restaurant (Pvt.) Ltd. was constituted and the defendants (Naranjan Singh and others) became the shareholders in the said company by purchasing shares of the company in lieu of their money which they had in the firm, Hotel Skylark and Restaurant; that plaintiff assessee became the owner and in possession of Skylark Hotel and Restaurant including all assets, fittings, fixtures and machinery, etc., and the defendants (Naranjan Singh and others) have now started proclaiming to be exclusive owners of the Hotel Skylark necessitating the filing of the suit for declaration.

In response to the notice issued in the suit, the defendants put in appearance and filed written statement. The claim of the plaintiff was admitted. The statements of the parties were recorded. In view of the admissions made, the suit was decreed as prayed for on October 17, 1977 copy of the judgment is Annexurc "B". After obtaining the decree from the Civil Court, the assessee riled an application with the Municipal Committee, Jalandhar, to get the Property Unit No.B IX/2-2460/A transferred in its name, which was done and a certificate to that effect Annexure "C" was issued.

The assesee filed its income-tax return and claimed depreciation under section 32 of the Income Tax Act, 1961 hereinafter referred to as "the Act", amounting to Rs.34,735 on written down value of the building amounting to Rs.6,94,701. An agreement of sale, the Civil Court decree as well as the change in ownership in the municipal committee record in the name of the assessee were placed on the record. The claim of the assessee was declined by the Assessing Officer holding that the assessee had not become the owner as registered sale-deed had not been executed in its favour of the immovable property which was more than Rs.100; that the assessee could not be deemed to be the owner of the property and, therefore, not entitled to the depreciation claimed for. The assessee filed an appeal before the Appellate Assistant Commissioner, which was accepted. It was held that under section 32 of the Act two conditions, i.e.

(a) the depreciable asset is owned by the assessee; and

(b) it is used for the purposes of the assessee's business or profession;

are required to be satisfied for allowing depreciation. Relying upon the agreement entered between the parties (Annexure "A"), the Civil Court decree, dated October 17, 1977 (Annexure "B"), and the entries made in the record of the Municipal Committee, Jalandhar, it was held that the assessee was the owner and, therefore, entitled to the depreciation as claimed for. The Revenue being aggrieved against the order of the appellate authority filed a second appeal before the Tribunal. The Tribunal accepted the appeal filed by the Revenue, set aside the order of the appellate authority and restored that of the Income-tax Officer holding that the assessee is not entitled to claim depreciation on the building under section 32 of the Act as the immovable property which was worth more than Rs.100 had not been transferred by a registered sale-deed. The effect of the decree passed by the Civil Court declaring the assessee to be the owner and the subsequent change made in the municipal records regarding ownership was not considered. The Tribunal simply held that the assessee had not become the legal owner as the property had not been transferred to it by a registered sale-deed and, therefore, not entitled to the depreciation under section 32 of the Act.

Under section 54 of the Transfer of Property Act, "sale" has been defined as the "transfer of ownership in exchange for a price paid or promised or part-paid and part-promised". Such transfer, in the case of tangible immovable property of the value of one hundred rupees and upwards can be made only be a registered instrument. Section 17 of the Indian Registration Act, 1908 hereinafter referred to as "the Registration Act", enumerates the documents of which registration is compulsory section 17(1) and relevant portions of subsection (2) of section 17 are reproduced below:

"17. Documents of which registration is compulsory.---(1) The following documents shall be registered, if the property to which they relate is situate in a District in which, and if they have been executed on or after the date on which, Act No.XVI of 1864, or the Indian Registration Act, 1866 (20 of 1866), or the Indian Registration Act, 1871 (8 of 1871), or the Indian Registration Act, 1877 (3 of 1877), or this Act came or comes into force, namely,---

(a) instruments of gift of immovable property;

(b) other non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immovable property;

(c) non-testamentary instruments which acknowledge the receipt or payment of any consideration on account of the creation, declaration, assignment, limitation or extinction of any such right, title or interest; and

(d) leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent;

(e) non-testamentary instruments transferring or assigning any decree or order of a Court or any award when such decree or order or award purports or operates to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immovable property:

Provided that the State Government may, by order published in the Official Gazette, exempt from the operation of this subsection any leases executed in any District, or part of a District, the terms granted by which do not exceed and the annual rents reserved by which do not exceed fifty rupees.

(2) Nothing in clauses (b) and (c) of subsection (1) applies to--- .....

(vi) any decree or order of a Court except a decree or order expressed to be made on a compromise and comprising immovable property other than that which is the subject-matter of the suit or proceeding; or ...."

Clause (a) of section 17(1) talks of instruments of gift of immovable property; clause (d) speaks of leases of immovable property from year to year and clause (e) provides for registration of non-testamentary instruments transferring or assigning any order or decree of the Court. We are not concerned with either of these clauses. In this case, we are concerned with clauses (b) and (c) of section 17(1) which provide for registration of non testamentary instruments which purport or operate to create, declare, assign, limit or extinguish any right, title or interest of the value of Rs.100 and upwards in immovable property and in non-testamentary instruments which acknowledge the receipt or payment of any consideration on account of creation, declaration, assignment, limitation or extinction of any such right, title or interest. Subsection (2) of section 17 creates an exception and provides that nothing in clauses (b) and (c) of section 17(1) applies to any decree or order of the Court. The words "except a decree or order expressed to be made on a comprise and comprising immovable property other than that which is the subject-matter of the suit or proceeding" occurring in clause (vi) of section 17(2) of the Act were added to the said clause by amendment by section 10 of the Transfer of Property (Amendment) Supplementary Act, 1929, which came into operation on April 1, 1930. Before the said amendment, every decree or order of the Court was exempt from registration. A close scrutiny of clause (vi) of section 17(2) would indicate that broadly speaking all decrees and orders of the Court have been exempted from operation of clauses (b) and (c) of subsection (1) of section 17. By the amendment of 1929, an exception has been created to the exception. Thus decrees or- orders which deal with the subject-matter of the suit or proceedings would not require registration but in the case of a compromise decree which does not relate or does not form part of a subject-matter of the suit or proceedings it would require registration as in that case the exception to the exception created by the Amending Act, 1929, would come into operation. It will thus be plain that where the compromise deals with the property in the suit and the Court passes a decree in accordance therewith, such a case will squarely fall within the exception of such a decree and would not require registration. So, a decree which purports to assign immovable property of more than Rs.100 falling under clauses (b) and (c) of section 17(I) would not require registration unless it is based on a compromise and assigns property which does not form part of the subject matter of the suit of proceeding. In the present case immovable property of more than Rs.100 was purportedly transferred on the basis of an admission which would be covered by Order 12, Rule 6 of the Civil Procedure Code, and not by Order 23, Rule 3, which deals with compromise of a suit and comprised property which was the subject-matter of the suit and, therefore, such a decree would not require registration. For the sake of clarity, we may add here that section 17(2) of the Registration Act exempts those decrees and awards which fall under clauses (b) and (c) of subsection (1) of section 17. If the decree or award falls under any other clause such as (a) and (d) then such a decree or award would require registration. It is not the case of either of the parties that the assessee s case falls under clause (a) or (d) of section 17.ni The consistent case of the parties is that the assessee's case falls under clauses (b) and (o of section 17(1). Such a decree shall not require registration in view of the exception created by clause (vi) of section 17(2) of the Registration Act.

For the foregoing reasons it is held that decree, dated October 17, 1977, passed ily the Sub-Judge, Jalandhar, did not require registration.

The question whether a compromise or a consent decree regarding immovable property of the value of Rs.100 or more which is the subject- matter of the suit would require registration or not was exhaustively considered by a Division Bench of this Court in Gurdev Kaur v. Mehar Singh, AIR 1989 P & H 324. The Hon'ble Judges of the Division Bench after noticing the conflict between several Single Bench judgments settled the proposition in the following words headnote:

"For the first time title can be created under a consent or compromise decree. For example, title is created in plaintiff's favour under a compromise decree which before the date of compromise decree vested in defendant and no consideration is mentioned for passing the title in compromise. This would be nothing but creation of a title for the first time in the plaintiff but it would be wrong to say that consent decree is an instrument of gift. Such a decree would not be an instrument of gift of immovable property within the meaning of section 17(1)(a) of the Act, so as to require registration. The title in the immovable property can be created by a non-testamentary instrument also and that would be covered by clause (b) of section 17(1) of the Act and since the applicability of clause (b) has been excluded in regard to certain documents enumerated in clauses (i) to (xii) of section 17(2) of the Act by virtue of clause (vi), a compromise decree comprising of immovable property, which is subject-matter of the suit stands exempted from registration, whereas a compromise decree relating to immovable property other than which is subject-matter of the suit is not exempted from registration."

As against this, Shri, R.P. Sawliney, Senior Advocate, appearing for the Revenue, pressed into service Bhoop Singh v. Ram Singh Major, AIR 1.996 SC 1.96, to contend that if a compromise decree were to create for the first time right, title or interest in immovable property of the value of Rs.100 or upwards in favour of any party to the suit then such a decree or order would require registration. We do not find any substance in this submission. In paragraph 11 of Bhoop Singh's case. AIR 1996 SC 196, their Lordships approved the view taken by this Court in Gurdev Kaur's case, AIR 1989 P & H 324. In Bhoop Singh's case, AIR 1996 SC 196, the facts were "A" filed a suit which was decreed and "A" was declared to be the owner in possession of the property detailed in the plaint of the basis of an admission made by the opposite party. After some time "B" filed a suit claiming a one third share in the suit land contending that the decree passed in the earlier suit did not survive and "B" was alone entitled to be in possession of the suit land. The trial Court held that the aforesaid decree was against law and facts. The appeal filed by "A" (defendants in that suit) was dismissed by the District Judge and so was the appeal by the learned Single Judge of the High Court whose judgment had been impugned in the Supreme Court. One of the grounds on which the earlier decree was set aside was that the aforesaid decree required registration and the same having not been registered could not have conferred any right on "A". It was held by the learned Single Judge that the decree has to be treated "to create a gift" which would take the case out of the purview of clause (vi) of section 17(2) of the Registration Act because that is to apply only to clauses (b) and (c) of section 17(1 ) whereas clause (a) of section 17(1) was attracted iii that case. This view of the learned Single Judge was assailed before the Supreme Court. Their Lordships upheld the view taken by the learned Single Judge. The view expressed by this Court in Gurdev Kaur's case, AIR 1989 P & H 324, was specifically approved in paragraph 11 of the judgment. While approving the view taken by this Court in Gurdev Kaur's case AIR 1989 P & H 324, it was held that Gurdev Kaur's case AIR 1989 P & H 324, does not cover the whole ground and their Lordships proceeded to enumerate further. It was held that if the compromise decree was bona fide in the sense that the compromise is not a device to obviate payment of stamp duty and frustrate the law relating to registration it would not require registration. In a converse situation, it would require Registration. From the facts presented before us, it is not the case of either party that the declaration sought by the assessee from the Civil Court was used as a device to avoid payment of stamp duty and frustrate the law relating to registration. That is not the case argued or substantiated. It was further held that if the compromise decree was to create for the first time right, title or interest in immovable property of the value of Rs.100 or upwards in favour of any party to the suit, decree or order it would require registration. These observations are in the context of clause (a) of section 17(1) which deals with creation of a gift. These observations would not be applicable to cases covered under clauses (b) and (c) of section 17(1) as the same have been exempted under clause (vi) of section 17(2) from registration. The decree or order falling under clause (a) of section 17(1) would require registration as the same is not exempt from registration. The present case which falls under clauses (b) and (c) of section 17(1) regarding which exception has been created in clause (vi) of section 17(2) would be exempt from registration. In the present case the decree is on an admission made by the defendants relating to the immovable property which forms part of the subject-matter of the suit and, therefore, did not require registration. In Bhoop Singh's case, AIR 1996 SC 196, the distinction between a compromise decree under Order 23, rule 3, and the decree based on admission under Order 12, rule 6 of the Civil Procedure Code, has been noticed in paragraph 19 of the judgment. Reliance placed by counsel appearing.1or the Revenue on Bhoop Singh's case, AIR 1996 SC 196, that the decree in the present case required registration is misplaced. Bhoop Singh's case, AIR 1996 SC 196, is clearly distinguishable as it falls under clause' (a) of section 17(1) whereas the present case falls under clauses (b) and (c) of section 17(1) for which an exception has been created in clause (vi) of section 17(2) of the Registration Act.

The relevant portion of section 32 of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), reads as under:

"32. Depreciation. ---(l) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed--- ...."

Under this section or claiming depreciation allowance, two conditions are to be satisfied, i.e., (1) that the depreciable asset is owned by the assessee; and (2) asset must have been used for the purpose of the assessee's business. There is no dispute on the facts that the asset was used by the assessee for its business. The only dispute is with regard to the ownership. The case of the assessee is that he had become the owner of the property by the declaration granted by the Court whereas the case of the Revenue is that immovable property of the value of Rs.100 could not be transferred except by a registered sale-deed and even if the same had been transferred by the declaration granted by the Court the decree given by the Court was required to be registered.

Relying upon R.B. Jodha Mal Kuthiala v. CIT (1971) 82 ITR 570 (SC); Sint. Kala Rani v. CIT (1981) 130 ITR 321 P & H; CIT v. Shahney Steel and Press Works (P.) Ltd. (1987) 165 ITR 399 (AP); CIT v. Sahney Steel and Press Works (P.) Ltd. (1987) 168 ITR 811 (AP); Addl. CIT v. U.P. State Agro Industrial Corporation Ltd. (1981) 127 ITR 97 (All) and the judgment of the Calcutta High Court in Madgul Udyog v. CIT (1990) 184 ITR 484, Mr. J. S. Narang, Senior Advocate, appearing for the assessee, argued that an assessee who has been put in possession of an asset for all intents and purposes on payment of the entire consideration without executing a registered sale-deed because of one reason or the other was entitled to claim depreciation as the assessee was in full enjoyment and dominion over the property vesting all legal rights in him.

As against this, counsel appearing for the Revenue relied upon CIT v. Hindustan Cold Storage and Refrigeration (P.) Ltd. (1976) 103 ITR 455 Delhi; CIT v. Tamil Nadu Agro Industries Corporation Ltd. (1987) 163 ITR 61 (Mad); Parthas Trust v. CIT (1988) 169 ITR 334 (Ker) (1713); Golecha Properties (P.) Ltd. v. CIT (1988) 171 ITR 47 (Raj.); Golcha Properties (P.) Ltd. v. CIT (1987) 166 ITR 259 (Raj) and Kalpaka Tourist Home (P.) Ltd. v. CIT (1988) 172 ITR 364 (Ker.) to contend that until and unless a registered sale-deed was executed, the assessee does not become a legal owner and, therefore, is not entitled to claim depreciation under section 32 of the Act. We need not examine these rival contentions of counsel for the parties in view of our finding that the decree passed in favour of the assessee did not require registration and the assessee became the owner of the property by virtue of the declaration granted by the Civil Court. The authorities cited by counsel for the assessee or counsel for the Revenue under these circumstances shall have no relevance. The points discussed in those cases do not arise for consideration in the present case.

Section 32 of the Act does not talk of a registered owner. One can become the owner of movable or immovable property in more than one way. The modes provided in the Transfer of Property Act are not exhaustive. There are modes other than those mentioned in the Transfer of Property Act by which ownership can be transferred from one person to another. Section 54 of the Transfer of Property Act provides one of the modes of transfer of ownership of the immovable property of value of Rs.100 and upwards by a registered deed whereas the ownership of immovable property can also be transferred by inheritance, succession, adverse possession, Court decree, partition, throwing of coparcenary property by a coparcener in the hotchpotch and contribution by a partner of his separate immovable property by throwing the same into the stock of partnership firm. Except in the case of sale-deed and gift-deed of immovable property exceeding Rs.100, the instrument of transfer does not require registration. In the present case, the assessee had become the owner of the property by a decree of the Court, which became final, the same having not been set aside by filing appeal or by filing a separate suit. The assessee thus became the legal owner who used the asset for the purpose of its business thus entitled it to claim depreciation under section 32 of the Act.

In the alternate, it was argued by counsel appearing for the Revenue that the decree passed by the Civil Court on October 17, 1977, would apply to the assessment year subsequent to the passing of the decree and not to the assessment years 1976-77 and 1977-78. The argument was rebutted by counsel, appearing for the assessee by raising the arguments that the rights of the parties to determine the agreement which was executed on July 1, 1973, and the Court granted the declaration regarding ownership with effect from the date of agreement between the parties. Another contention raised by counsel for the assessee was that contribution by a partner of his separate immovable property by throwing the same into the stock of the partnership firm had the effect of transferring the partener's share therein to that of the firm. We find substance in the argument raised by counsel for the assessee. In the present case, the assessee-company was formed to take over the business of the sole proprietorship of Hotel Skylark Private Limited which was being run under the sole proprietorship of Naranjan Singh. Naranjan Singh in lieu of the shares received by him contributed his immovable property towards the capital. In this case, the assessee took over the business of the sole proprietorship and the sole proprietor in order to get shares contributed his immovable property towards the capital which was accepted by the Court and a declaration was granted as prayed for which would be effective from the date of the agreement, i.e., July 1, 1973. The Civil Court decree would thus be applicable for the assessment years 1976-77 and 1977-78 as well.

For the reasons stated above, we answer the following question referred to us by the Tribunal:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee-company was not entitled to claim depreciation on the building under section 32 of the Income Tax Act, 1961?"

in favour of the assessee and against the Revenue. It is held that the assessee had become a lawful owner of the property thus satisfying the ingredient of section 32 of the Act entitling it to the depreciation claimed. No costs.

M.B.A./1254/FCOrder accordingly.