Legal ownership governs depreciation, while actual scientific research expenditure remains deductible under the income-tax rules.

Depreciation under section 32 of the Income-tax Act, 1961 requires legal ownership of the asset in the relevant year, not mere possession or user, so the assessee could not claim depreciation or development rebate for the thirteen rice mills because title had not passed in the assessment years concerned. Section 53A of the Transfer of Property Act did not confer title, and later conveyances could not operate retrospectively. On the scientific research claim, only actual expenditure under section 35 was allowable, and the full contribution of Rs. 55,000 to the Paddy Processing Research Centre was accepted because the evidence supported that amount.

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Issues: (i) Whether the assessee was the legal owner of the thirteen rice mills in the assessment years 1973-74 and 1974-75 so as to qualify for depreciation and development rebate; (ii) Whether the assessee was entitled to deduction of the full contribution of Rs. 55,000 towards the Paddy Processing Research Centre.

Issue (i): Whether the assessee was the legal owner of the thirteen rice mills in the assessment years 1973-74 and 1974-75 so as to qualify for depreciation and development rebate.

Analysis: Depreciation under section 32 of the Income-tax Act, 1961 requires legal ownership of the asset, not mere possession or user. The assessee relied on government orders issued in 1972 and later conveyances executed in 1978, but the mills were owned by the co-operative societies in 1972 and the Government acquired title only later before conveying them to the assessee. The transfer documents could not operate retrospectively from 1972, and section 53A of the Transfer of Property Act did not confer title. The definition of transfer in section 2(47) of the Income-tax Act, 1961 was not decisive for depreciation purposes.

Conclusion: The assessee was not the legal owner in the relevant assessment years and was not entitled to depreciation or development rebate; the issue was decided against the assessee.

Issue (ii): Whether the assessee was entitled to deduction of the full contribution of Rs. 55,000 towards the Paddy Processing Research Centre.

Analysis: The contribution related to scientific research expenditure governed by section 35 of the Income-tax Act, 1961. After the research centre was taken over by the assessee, the actual expenditure incurred was shown as Rs. 55,000. The division of the expenditure into one-third shares was not supported by evidence, and only actual expenditure could be allowed.

Conclusion: The assessee was entitled to deduction of the full Rs. 55,000; the issue was decided in favour of the assessee.

Final Conclusion: The reference was answered partly against the assessee on ownership and depreciation, and partly in favour of the assessee on the scientific research expenditure claim.

Ratio Decidendi: For depreciation under section 32 of the Income-tax Act, 1961, the assessee must have legal title to the asset in the relevant year, and only actual scientific research expenditure is allowable under section 35.

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