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of <h1>Legal ownership crucial for depreciation allowance on leasehold properties.</h1> <h3>Bharath Earth Movers Ltd. Versus Commissioner Of Income-Tax</h3> Bharath Earth Movers Ltd. Versus Commissioner Of Income-Tax - [2000] 244 ITR 547, 111 TAXMANN 727 Issues Involved:1. Depreciation admissibility for leasehold properties.2. Deductibility of payments made to landlords, including stamp and registration costs, as advance rent or capital expenditure.Issue-Wise Detailed Analysis:1. Depreciation Admissibility for Leasehold Properties:The Tribunal found that the assessee was not the owner of the three flats in Calcutta but held leasehold rights. Consequently, the Tribunal ruled that depreciation was not admissible. The Commissioner had earlier withdrawn depreciation allowed by the Assessing Officer, citing lack of legal ownership, referencing the Supreme Court decision in Nawab Sir Mir Osman Ali Khan (Late) v. CWT [1986] 162 ITR 888, which emphasized that ownership passes on the execution of a registered sale deed. The Tribunal upheld this view, stating that ownership of the asset is a condition precedent to the allowance of depreciation, and mere possession without title does not qualify for depreciation.2. Deductibility of Payments Made to Landlords:The Tribunal held that the aggregate cost of Rs. 26,82,462, including stamp and registration costs, was not admissible as a deduction. The payment was considered as rent paid in advance by way of security, not as advance rent. The Tribunal directed the Assessing Officer to allow deduction only for the rent payable for the year of account, rejecting the assessee's claim to treat the entire payment as revenue expenditure. The Tribunal relied on precedents such as Member for the Board of Agrl. I. T. v. Sindhurani Chaudhurani [1957] 32 ITR 169 (SC) and CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 (SC), which distinguished between capital and revenue receipts, emphasizing that payments for acquiring a capital asset are capital expenditures.Legal Precedents and Analysis:The judgment extensively referenced various legal precedents to elucidate the principles governing depreciation and capital vs. revenue expenditure. Notable cases included:- Mysore Minerals Ltd. v. CIT [1999] 239 ITR 775 (SC): Held that the claimant need not be the owner in the legal sense to claim depreciation, but must have dominion over the asset.- CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625 (SC): Stated that for Section 22 purposes, the owner is the person entitled to receive income from the property, and registration of the sale deed is not a prerequisite.The High Court concluded that the Tribunal was justified in its findings. The assessee was not entitled to depreciation due to the lack of legal ownership but could claim deduction for the rent payable for the year. The question referred was answered in the affirmative, favoring the Revenue, with the Tribunal instructed to consider the observations made regarding legal ownership and entitlement to depreciation.
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