TAMILNADU DAIRY DEVELOPMENT CORPORATION VS COMMISSIONER OF INCOME-TAX
2001 P T D 508
[239 I T R 142]
[Madras High Court (India)]
Before R. Jayasimha Babu and N.V. Balasubramanian, JJ
TAMILNADU DAIRY DEVELOPMENT CORPORATION LTD.
versus
COMMISSIONER OF INCOME‑TAX
Tax Case No.912 of 1984 (Reference No.808 of 1984), decided on 30/03/1998.
(a) Income‑tax‑‑‑
‑‑‑‑Depreciation‑‑‑"Owner", meaning of‑‑‑Person who receives income from asset in his own right entitled to allowance‑‑‑Legal ownership not condition in such a case‑‑‑Refusal to grant depreciation solely for failure to produce registered sale‑deed‑‑‑Not justified‑‑‑Matter remanded‑‑‑Indian Income Tax Act, 1961, S.32.
A person entitled to receive the income from property of which he is not a complete legal owner, but who receives the income in his own right is liable to tax on the income so received. It is but logical that such a person should also be entitled to claim depreciation in respect of the property of which he is not a complete owner but from which he receives the income in his own right. The meaning of the term "owner" in section 32 of the Income Tax Act, 1961, cannot be any different from what it is for the purpose of section 22. The object of the Act is to tax the income. The manner of computation of income is laid down in the Act. Under section 32 depreciation is one of the items to be considered in computing income. The allowance permitted under that provision is available to the person whose income is sought to be taxed. A person cannot be held to be an owner for the purpose of taxing his income under section 22 even when he is not the complete owner but be denied the benefit of depreciation under section 32 by restricting the meaning of the term "owner" in section 32 to persons who are complete legal owners:
Held, accordingly, that the Tribunal was not right in disallowing the depreciation claimed in respect of the building under the provisions of section 32 of the Income‑tax Act, on the sole ground that the assessee did not produce the registered sale‑deed. Matter remanded.
CIT v. Podar Cement (P.) Ltd. (1997) 226 ITR 625 (SC) explained and applied.
CIT v. Tamilnadu Agro Industries Corporation Ltd. (1987) 163 ITR 61 (Mad.) held no longer good law.
(b) Income‑tax‑‑‑
‑‑‑Capital or revenue expenditure‑‑‑Sum paid as compensation to vendor against undertaking not to market milk in Madras city‑‑‑Enduring benefit to assessee‑‑‑Capital expenditure‑‑‑Indian Income Tax Act, 1961.
The sum paid to the Madras Cooperative Milk Supply Union was compensation paid to avoid competition in trade and was clearly an expenditure of capital nature as the right acquired was of enduring benefit, the vend6r having undertaken not to market milk in Madras city:
Chelpark Co. Ltd. v. CIT (1991) 191 ITR 249 (Mad.) fol.
(c) Income‑tax‑‑‑
‑‑‑‑Business expenditure‑‑‑Provision for urban land tax‑‑‑No demand raised in year nor payment made‑‑‑Deduction not permissible‑‑‑Indian Income Tax Act, 1961, S.37.
The provision for urban land tax was not deductible as the assessee had merely made provision for the payment of urban land tax and in fact no payment was made, nor was there even a demand during the assessment year.
CIT v. Coal Shipments (P.) Ltd. (1971) 82 ITR 902 (SC); CIT v. General Marketing and Manufacturing Co. Ltd. (1996) 222 ITR 574 (Cal.); CIT (Addl.) v. Sahay Properties and Investment Co. (P.) Ltd.,(1983) 144 ITR 357 (Pat.); CIT (Addl.) v. U.P. State Agro Industrial Corporation Ltd. (1981) 127 ITR 97 (All.) and Jodha Mal Kuthiala (R.B.) v. CIT (1971) 82 ITR 570 (SC) ref:
P.P.S. Janarthana Raja for the Assessee.
C.V. Rajan for the Commissioner.
JUDGMENT
R. JAYASIMHA BABU, J.‑‑‑The questions of law referred to us for our decision at the instance of the assessee for the assessment year 1978‑79 are as under:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing the depreciation claimed in respect of building under the provisions of section 32 of the Income Tax Act, 1961?
(2) Whether, on the facts and ‑in the circumstances of the case, the Tribunal was right in holding that the compensation of Rs.1 lakh paid to MCMSU is a capital expenditure and hence not allowable as deduction under the provisions of the Act?
(3) Whether, on the facts, and in the circumstances of the case, the Tribunal was right in holding that the provisions for urban land tax was not an allowable deduction under the Income‑tax Act?"
Regarding question No. 1, the Tribunal and the authorities below rejected the assessee's claim or depreciation on the short ground that there was no registered sale‑deed of the building in respect of which the assessee caned depreciation. Though it was not disputed that the assessee had under any agreement taken the building alongwith other assets from the Madras Cooperative Milk Supply Union Limited. The assessee had claimed depreciation of Rs.12,868 in respect of one of those buildings which had been valued at Rs.2,57,348 and which sum, according to the assessee, had been paid to its vendors. The Tribunal, without examining any other aspect, held that the claim so made is unsustainable as the assessee was not in a position to produce a registered sale‑deed and in the absence of such document, the assessee could not be regarded as owner.
Section 32 of the Income‑tax Act, deals with depreciation. Subsection (1) provides for depreciation of buildings, machinery, plant and furniture owned by the assessee and used for the purposes of the business or profession. This Court in the case of CIT v. Tamil Nadu Agro Industries Corporation Ltd. (1987) 163 ITR 61 held that it is not mere user irrespective of ownership that is contemplated by section 32 as a necessary condition for claiming the allowance of depreciation. Such ownership must necessarily mean legal title to the asset in the assessee, and the user thereof by the assessee while being such owner in the course of the business of the assessee. . Persons who are merely in possession without any title to the property cannot claim depreciation. While so holding this Court dissented from the contrary view taken by the Allahabad High Court in the case of Addl.. CIT v. U.P. State Agro Industrial Corporation Ltd. (1981) 127 ITR 97 and the Patna High Court in Addl. CIT v. Sahay Properties and Investment Co. (P.) Ltd. (1983) 144 ITR 357.
The decisions so dissented from, inter alia, placed reliance upon the decision of the Supreme Court in the case of R.B. Jodha Mal Kuthiala v. CIT (1971) 82 ITR 570, wherein the Supreme Court considered the concept of ownership in the context of section 9 of the Indian Income‑tax Act, 1922. In that decision, the Court held that the owner must be a person who can exercise rights of the owner and not on behalf of the owner but i:! his own right. The assessee in that case was the owner of a property which was situated at Pakistan and which property had vested in the custodian of the properties, by the relevant ordinance passed in Pakistan in the year 1949 and under which the assessee could not exercise any right in the property except with the consent of the custodian, though the assessee had some residuary benefit in that property. The Court held that the residuary beneficial right so vested in the assessee could not be considered as sufficient to regard him as owner for the purpose of section 9. It was also held by the Court that though equitable considerations are irrelevant in interpreting tax laws, like all other laws, for laws are to be interpreted reasonably and in consequence with justice. The Court also observed that (page 578): "the word 'owner' has different meanings in different contexts, under certain circumstances the lessee must be considered as the owner of the property leased to him". After considering the meaning given in Stroud's Judicial Dictionary, third edition, volume 3, page 2060, to the term "owner" the Court held that the meaning that we give to the word "owner" under section 9 must not be such as to make that provision capable of being made an instrument of oppression but it must be in consonance with the principles underlying the Act.
That decision of the apex Court was affirmed by a larger Bench of the Court in the case, of CIT v. Podar Cement (Pvt.) Ltd. (1997) 226 ITR 625. The apex Court in the course of its judgment referred with approval to the decision of the Allahabad High Court as also the decision of the Patna High Court which decisions had been dissented from by a Division Bench of this Court in the case of Tamil Nadu Agro Industries Corporation Ltd. (1987) 163 ITR 61. From pages 639 to 644 of the decision, the apex Court set out with approval the relevant portions of the judgment of the Patna High Court in the case of Sahay Properties and Investment Co. (P.) Ltd. (1983) 144 ITR 357 wherein the Patna High Court, inter alia, observed that one cannot reasonably and logically visualise as to when a person in actual physical control of the property reaslising the entire income and usufructs of the property for his own use and not for the use of any other person, having the absolute power of disposal of the income so received, should be held not liable to tax merely because a vestige of legal ownership or a husk of title in the long run may yet clothe another person with the power of a residual ownership when contingency arises which is not the case here. The Patna High Court also adverted to the fact that when consideration had been paid in full and the assessee had been put in exclusive and absolute possession of the property, and has been empowered to deal with the income as he likes, and the vendor could not have dispossessed the assessee having regard to section 53A of the Transfer of Property Act, the assessee therein could not be regarded as owner for the purpose of section 22 of the Act.
The decision of the Allahabad High Court in, the case of U.P. State Agro Industrial Corporation Ltd. (1981) 127 ITR 97, which case dealt with a claim for depreciation under section 32 of the Act was also approved by the Supreme Court. The apex Court observed at page 634 of the report that the view taken by the High Courts of Allahabad, Patna, Rajasthan, Punjab and Calcutta were good law. The decision of the High Court of Calcutta referred to by the Supreme Court is in the case of CIT v. General Marketing and Mfg. Co. Ltd. (1996) 222 ITR 574: That was again a case arising under section 32 of the Act. The High Court relied upon the decision of the apex Court in the case of R.B. Jodha Mal Kuthiala v. CIT (1971) 82 ITR 570 and held that in order to claim the benefit of section 32 of the Income Tax Act, 1961, it is not necessary that the assessee should be a complete owner.
Though in the case of R.B. Jodha Mal Kuthiala (1971) 82 ITR 570, the apex Court was directly concerned with the concept. of ownership for the purpose of section 22 of the. Act, it is clear from the approval given by it to the decisions of the Allahabad, Patna and Calcutta High Courts, already referred to, that the principle enunciated in the case of Podar Cement (Pvt.) Ltd. (1997) 226 ITR 625 is applicable to the interpretation of the term "owner" under section 32 of the Act. The apex Court on the larger question of the meaning of "owner" has observed in the case of Podar Cement (Pvt.) Ltd. (1997) 226 ITR 625, that the Court was conscious of the settled position under the common law, that the term "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., but in the context of section 22 of the Income Tax Act, 1961, having regard to the ground realities and further having regard to the object of the Income‑tax Act, to tax the income, the Court was of the view that "owner" is a person who is entitled to receive the income from the property in his own right.
A person entitled to receive the income from the property of which he is not a complete legal owner but who receives the income in his own right is liable to tax on the income so received. It is but logical that such a person should also be entitled to claim depreciation in respect of the property of which he is not a complete owner but from which he receives the income in his own right. The meaning of the term "owner" in section 32 cannot be any different from what it is for the purpose of section 22.
The object of the Act is to tax the income. The manner of computation of income is laid down in the Act. Under section 32, depreciation is one of the items to be considered in computing income. The allowance permitted under that provision is available to the person whose income is sought to be taxed and the person cannot be held to be an owner for the purpose of taxing his income under section 22 even when he is not the complete owner and deny to him the benefit of depreciation under section 32 by restricting meaning of the term "owner" in section 32 of the persons who are complete legal owners. It is for this reason that the apex Court, though seized of a matter arising under section 22 of the Act, considered it appropriate to approve the decisions of the High Courts interpreting the term "owner" in section 32 of the Act. The decisions so approved by the apex Court are to the effect that "owner" for the purpose of section 32 of the Act, is not confined to those who have full legal ownership, but extends to persons who are entitled to exercise rights of an owner without having to claim, that such rights are being exercises on behalf of the owner. Exclusive possession, the right to exclude others from enjoyment of the assets, full control, over the assets, the right to retain possession and defend the same are but some of the characteristics of ownership which would entitle a person to claim the benefit of depreciation allowance under section 32 of the Act.
The decision of this Court in the case of Tamil Nadu Agro Industries Corporation Ltd. (1987) 163 ITR 61 must, therefore, be held to have been impliedly overruled by the apex Court in the case of CIT v. Podar Cement (Pvt.) Ltd. (1997) 226 ITR 625. The Tribunal has rejected the claim of the assessee on the sole ground that the assessee did not produce the registered sale‑deed. This approach of the Tribunal is not in conformity with the law laid down by the apex Court. We have, therefore, no alternative except to remit the matter to the Tribunal for fresh consideration after applying the tests laid down by the Supreme Court in the case of CIT v. Podar Cement (Pvt.) Ltd. (1997) 226 ITR 625. Subject to the direction so given, our answer to the first question is that the Tribunal is not right in disallowing the depreciation claimed in respect of the building under the provisions of section 32 of the Income‑tax Act.
The second question referred to us is as to whether the Tribunal was right in holding that the compensation of Rs.1 lakh paid to Madras Co?operative Milk Supply Union is a capital expenditure and, hence, not allowable as deduction under the provisions of the Act, must be answered against the assessee and in favour of the Revenue as the amount so deposited was but a part of the money paid by it for acquiring assets and goodwill as also to avoid competition in trade by the vendor. The payment made as compensation was clearly an expenditure of capital nature as the right acquired was of enduring benefit, the vendor having undertaken not to market the milk in Madras city. A similar question was considered by another Bench of this Court in the case of Chelpark Co. Ltd. v. CIT (1991) 191 ITR 249 wherein it was held that the amount paid to ward off competition from a potential competitor resulting in the acquisition by the assessee of a right as well as protection to carry on its business activities as a whole so long as the assessee carried on such business was in the nature of capital expenditure and not revenue expenditure.
The view taken by us which is the view which is taken by the apex Court in the case of CIT v. Coal Shipments (P.) Ltd. (1971) 82 ITR 902 and in the case of Podar Cement (P.) Ltd. (1997) 226 ITR 625 (SC) is not very different from the view adopted by the Revenue itself. It had been clearly recognised by the Revenue that the term "owner" in section 32 is not confined to persons who are legal owners as long back as in year 1942. The department had issued a Circular No.9, dated March 23, 1943, and it was reiterated by another Circular No.1079, dated September 19, 1977, the former having been issued under the Act 14 of 1992 (sic) and the latter under the present Act under which depreciation was allowed subject to certain condition, to the assessee acquiring equipment under hire purchase agreements although in any transaction of hire purchase, the legal ownership rests with the person who provides the equipment to the hirer until the hirer exercises the option of purchase and pays the amount agreed to be paid under the agreement. That depreciation is to be allowed to the person who has the control including the right to use in accordance with the requirements of such person that the right exercised is not on behalf of the owner though such person is not the legal owner has, thus, been recognised by the Revenue for long and in our view rightly.
The third question also is required to be answered against the assessee as the assessee had merely made provision for the payment of urban land tax and in fact no payment was made, and there was not even a demand during the assessment year.
As the assessee has succeeded in part, we direct the parties to bear the respective costs.
M.B.A./203/FC?????????????????????????????????????????????????????????????????????????????????? Reference answered.