1985 (11) TMI 98 - AT - Income Tax

Partly Allowed Departmental Appeals on Depreciation and Lease Rent

The departmental appeals were partly allowed, disallowing depreciation on the building due to the lack of a registered conveyance deed, but allowing ... Depreciation, Allowance Or Rate Of Issues Involved:1. Entitlement to depreciation on assets acquired through an agreement.2. Nature of the agreement (whether it is a financing agreement, hiring agreement, or sale agreement).3. Ownership and transfer of property without registration of the conveyance deed.4. Depreciation on plant and machinery, office equipment, and furniture.5. Deduction of lease rent.Detailed Analysis:1. Entitlement to Depreciation on Assets Acquired Through an Agreement:The main issue was whether the assessee is entitled to depreciation on assets acquired from Fitnut Products. The assessee entered into an agreement on 22-4-1974 to purchase the business, including its assets, for Rs. 2,25,000. The assessee took possession and was recognized as the lessee by the Government of Rajasthan. Initially, depreciation was allowed by the ITO in previous years, but for the assessment year 1980-81, the ITO disallowed the claim, stating that the conveyance deed was not registered, and thus, the assessee was not the owner.2. Nature of the Agreement:The department argued that the agreement should be considered a financing agreement rather than a sale agreement, citing clause 4, which allowed for forfeiture of Rs. 25,000 if the agreement fell through. However, the Tribunal rejected this view, stating that the agreement was clearly for the sale of assets, with full consideration paid, and the assessee had taken possession and used the properties. The Tribunal found no grounds to treat the agreement as a financing or hiring agreement.3. Ownership and Transfer of Property Without Registration:The Commissioner (Appeals) allowed the depreciation claim, relying on the Allahabad High Court decision in Addl. CIT v. U.P. State Agro Industrial Corpn. Ltd., which held that an assessee could be considered the owner for depreciation purposes if they exercised the rights of the owner, even without a registered sale deed. The Tribunal, however, noted that under general law, title to immovable property vests only upon registration of the conveyance deed. The Tribunal referred to the Andhra Pradesh High Court decision in CIT v. Nawab Mir Barkat Ali Khan, which held that ownership continues with the seller until the conveyance deed is registered. Therefore, the Tribunal concluded that the assessee could not be considered the owner of the building for depreciation purposes.4. Depreciation on Plant and Machinery, Office Equipment, and Furniture:The Tribunal distinguished between movable and immovable properties. For office equipment and furniture, which are movable, the assessee was entitled to depreciation as title passes upon possession. For plant and machinery, the Tribunal considered whether they were embedded in the earth. Since no finding was provided by the ITO and depreciation had been allowed in previous years without dispute, the Tribunal treated the plant and machinery as movable property, allowing the depreciation claim.5. Deduction of Lease Rent:The assessee's appeal included a claim for the deduction of lease rent amounting to Rs. 10,752. The assessee's representative acknowledged that this issue had been decided against them by the High Court in Reference Case No. 38 of 1980, leading to the rejection of this claim.Conclusion:The departmental appeals were partly allowed, disallowing depreciation on the building due to the lack of a registered conveyance deed, but allowing depreciation on plant and machinery, office equipment, and furniture. The assessee's appeal regarding the deduction of lease rent was dismissed.