1998 (3) TMI 61 - HC - Income Tax

Depreciation on building used without full title and co-op compensation to block competition: depreciation allowed, payment treated capital

Depreciation under s.32 was denied on the ground that the assessee was not the full legal owner of the building. The HC held that 'owner' in s.32 includes ... Depreciation claimed in respect of building under the provisions of section 32 - Nature of compensation payment - Capital expenditure Or Not - Whether, the Tribunal was right in holding that the provision for urban land tax was not an allowable deduction under the Income-tax Act ? - HELD THAT:- 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 the meaning of the term 'owner' in section 32 to 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 exercised 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. 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. Compensation paid to Madras Cooperative Milk Supply Union - capital expenditure - A similar question was considered by another Bench of this court in the case of Chelpark Co. Ltd. [1990 (12) TMI 292 - MADRAS HIGH COURT] 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. 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. 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 their respective costs. Issues Involved:1. Disallowance of depreciation claimed on building.2. Treatment of compensation paid as capital expenditure.3. Allowability of provision for urban land tax deduction.Disallowance of Depreciation:The Tribunal rejected the assessee's claim for depreciation on the building due to the absence of a registered sale deed, stating that ownership is a necessary condition for claiming depreciation u/s 32 of the Income-tax Act. The High Court clarified that legal ownership is essential for claiming depreciation, emphasizing that ownership must include legal title to the asset and actual user by the assessee. The court referred to previous decisions and dissented from views that mere possession without legal title could qualify for depreciation. It was concluded that the assessee, despite not having a registered sale deed, could still be considered an owner entitled to claim depreciation if certain ownership characteristics were present.Treatment of Compensation as Capital Expenditure:The Tribunal held that the compensation paid to a third party was a capital expenditure and not deductible under the Act. The High Court agreed with this decision, stating that the payment was part of acquiring assets and goodwill, providing enduring benefits to the assessee. Citing previous cases, the court affirmed that such payments to avoid competition and secure business advantages constitute capital expenditures, not revenue expenses.Allowability of Provision for Urban Land Tax Deduction:The High Court ruled against the assessee regarding the provision made for urban land tax deduction, as no actual payment was made during the assessment year. The court emphasized that a mere provision without actual payment or demand does not qualify for deduction under the Income-tax Act.In conclusion, the High Court directed the matter back to the Tribunal for reconsideration based on the legal principles outlined, with costs to be borne by the respective parties.