Depreciation allowance and sales promotion expense disallowance in tax appeal: tribunal disallowance set aside, appeal allowed.

Depreciation entitlement rests with the person who has dominion over and is using the capital asset, as the depreciation benefit belongs to the investor suffering wear and tear; accordingly the deduction should be allowed to the person entitled to use the building. Sales promotion expenditure disallowance was unsupported by material; the Tribunals arbitrary confirmation of a Rs. 75,000 disallowance lacked basis and was set aside, resulting in allowance of the appeal and parties directed to bear their own costs.

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Issues: (i) Whether depreciation under section 32(1) of the Income-tax Act, 1961, is allowable to the assessee in respect of a factory taken over and used though legal title/registration remained with the vendor until payment of full consideration; (ii) Whether the Tribunal was justified in law in confirming a disallowance of Rs. 75,000 out of sales promotion expenses in the absence of any material to support such disallowance.

Issue (i): Whether depreciation under section 32(1) of the Income-tax Act, 1961, is allowable where the assessee has taken possession, used the asset in business and has paid consideration but the formal conveyance/registration remains with the vendor.

Analysis: The issue was examined in light of precedents interpreting "owner" for income-tax purposes and the purpose of section 32. Authorities establish that for tax purposes "owner" denotes the person in whom dominion or the right to enjoy and use the asset for business vests, not necessarily the holder of formal legal title. Depreciation is a tax benefit linked to economic investment and use of the asset; the test focuses on actual control, possession and entitlement to derive income or use rather than strict registration. Comparable factual situations where part payment and possession conferred practical ownership have been treated as entitling the assessee to depreciation.

Conclusion: Depreciation under section 32(1) is allowable to the assessee because dominion and the right to use the factory for business purposes vested in the assessee notwithstanding that formal transfer/registration was to follow on completion of payment. This conclusion is in favour of the assessee.

Issue (ii): Whether the Tribunal was justified in confirming a disallowance of Rs. 75,000 from sales promotion expenses without supporting material.

Analysis: The record contains no material demonstrating that any portion of the sales promotion expenditure was not for business purposes. The Tribunal confirmed a specific disallowance of Rs. 75,000 merely stating that such disallowance "would meet the ends of justice" without providing factual or legal basis. Absent evidence or reasoning to sustain the partial disallowance, the confirmation is unsupported.

Conclusion: The disallowance of Rs. 75,000 is unsustainable and is set aside. This conclusion is in favour of the assessee.

Final Conclusion: The appeal is allowed and disposed of; depreciation under section 32(1) is granted and the Tribunal's confirmation of the Rs. 75,000 disallowance is set aside.

Ratio Decidendi: For the purpose of section 32(1) of the Income-tax Act, 1961, depreciation is allowable to the person in whom dominion and the right to use the asset for business vests, even if formal legal title/registration remains with the vendor pending completion of payment.

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