1985 (4) TMI 41 - HC - Income Tax

Depreciation denied for crankshaft machine under Income-tax Act.

The court held that the assessee-firm was not entitled to claim depreciation under section 32(1) of the Income-tax Act for the crankshaft regrinding ... Depreciation under section 32(1) of the Income-tax Act - owned by the assessee - hire purchase - option to purchase - passing of titleDepreciation under section 32(1) of the Income-tax Act - owned by the assessee - hire purchase - option to purchase - passing of title - Entitlement to depreciation in assessment year 1972-73 on the crankshaft regrinding machine acquired under the hire purchase agreement dated June 7, 1967. - HELD THAT: - The Court examined clause 6 of the hire purchase agreement and held that the parties intended title to pass only upon payment of the aggregate hirepurchase price (including taxes) and receipt from the owner admitting payment and fulfilment of obligations. The proviso prevented exercise of the option to purchase within three years, but the main clause expressly provided that until full payment and receipt, the machinery would remain the sole property of the owner and the hirer would be a bailee. Mere lapse of three years and regular payment of instalments did not effect transfer of ownership; the mode of exercising the option required payment of the remaining instalments and obtaining a clear receipt. Consequently, because the full hirepurchase price had not been paid by the end of the relevant period, title had not passed and the assessee was not the owner of the machine for the purposes of claiming depreciation under s. 32(1) for assessment year 1972-73.The assessee was not entitled to claim depreciation under s. 32(1) for the assessment year 1972-73 because the ownership of the machine had not passed to it during the relevant period.Final Conclusion: Reference answered in the affirmative in favour of the Revenue and against the assessee; the assessee was not entitled to depreciation for 1972-73 as it was not the owner of the machinery during that period; parties to bear their own costs. Issues Involved1. Entitlement to depreciation under section 32 of the Income-tax Act.2. Ownership status of the crankshaft regrinding machine under the hire purchase agreement.Detailed Analysis1. Entitlement to Depreciation under Section 32 of the Income-tax ActThe primary issue was whether the assessee was entitled to claim depreciation under section 32 of the Income-tax Act for a crankshaft regrinding machine acquired under a hire purchase agreement. According to section 32(1) of the Act, depreciation can be claimed on buildings, machinery, plant, or furniture 'owned by the assessee and used for the purposes of the business or profession.' The court emphasized that the crucial words in section 32 are 'owned by the assessee.'The Tribunal had previously rejected the assessee's claim for depreciation on the grounds that the ownership of the machine had not been transferred to the assessee-firm until September 17, 1974, as evidenced by a letter from the National Small Scale Industries Corporation Ltd. The Tribunal's decision was based on the interpretation that the machine did not become the property of the assessee merely because the instalments were regularly paid during the three-year hire period.2. Ownership Status of the Crankshaft Regrinding MachineThe court examined the nature of the hire purchase agreement dated June 7, 1967, under which the machine was acquired. The agreement stipulated that the Corporation would remain the owner of the machine until the entire hire purchase price was paid. Clause 6 of the agreement specified that the hirer could become the owner only after paying the full hire purchase price and obtaining a clear receipt from the owner. The hirer was also restricted from exercising the option to purchase within three years from the date of the agreement.The court referred to various legal precedents and authoritative texts to elucidate the nature of hire purchase agreements. It was noted that such agreements are a form of bailment with an element of sale, where the title to the goods passes only upon the fulfilment of certain conditions, including the payment of all instalments.In the case at hand, the assessee-firm had not paid the entire hire purchase price by the end of the three-year period. Therefore, the machine could not be considered 'owned' by the assessee for the purposes of claiming depreciation under section 32. The court also referred to similar cases, such as Sardar Tara Singh v. CIT and S. P. B. P. Srirangacharyulu v. CIT, which held that the asset must become the property of the assessee for depreciation to be claimed.The court rejected the argument that the assessee should be considered the owner merely because the instalments were paid regularly. It was emphasized that the ownership could not pass to the hirer until the full purchase price was paid. The court also distinguished this case from other cases involving the transfer of immovable property, where the payment of the full sale price and transfer of possession could suffice for claiming depreciation.ConclusionThe court concluded that the assessee-firm was not entitled to claim depreciation under section 32(1) of the Income-tax Act for the crankshaft regrinding machine during the assessment year 1972-73. The Tribunal's decision to disallow the depreciation claim was upheld, and the reference was answered in the affirmative, in favor of the Revenue and against the assessee-firm. The parties were left to bear their own costs.