The Hindu Business Line : Irrelevance of ownership

SECTION 32 of the Income-Tax Act, 1961 (Act) provides for allowance of depreciation in computation of business income liable to tax in accordance with the mandate contained in Section 29 of the Act. According to Section 32 of the Act, the assets on which depreciation is to be provided are: i) building; ii) machinery; iii) plant; iv) furniture; and v) intangible assets (w.e.f. 1999-2000)

There may be assets with different names but they are required to be categorised under these five broad heads.

Thus, as per the requirement of this provision, depreciation can be allowed only in respect of assets being building, machinery, plant or furniture, or intangible assets being knowhow, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of a similar nature if the same are owned wholly or partly by the assessee and is used for the purposes of his business or profession.

Thus, ownership, as per Section 32, is an essential condition for claiming depreciation.

What's ownership?

The Supreme Court, in the R. B. Jodha Mal Kuthiala vs CIT (1971 82 ITR 570 SC) case, observed that the real test to ascertain whether the asset is owned by the assessee or not, is to see whether the assessee is entitled to the income from the property. Therefore, the owner is the person who exercises the rights of the owner in his own right. Further, the question is: Who is the `owner' referred to in this section? Is it the person in whom the property vests or is it he who is entitled to some beneficial interest in the property?

It must be remembered that Section 9 brings to tax the income from the property and not the interest of a person in the property. A property cannot be owned by two persons, each one having independent and exclusive right over it. Hence, for the purpose of Section 9, the owner must be that person who can exercise the rights of the owner, not on behalf of the owner but in his own right.

It was held that the assessee will be considered to be an owner of the building under Section 32 if he is in a position to exercise the rights of the owner not on behalf of the person in whom the title vests but in his own right.

Thus, it is not necessary that the person who is claiming depreciation is the registered owner of the property. However, many courts have given contrary views. In CIT vs Tamil Nadu Small Industries Development Corpn. Ltd (1995 211 ITR 550 Madras), it was held that the words "owned by the assessee" means "the property of the assessee" and in the case of a transfer of immovable property, the assessee will not be the owner unless a registered deed has been executed in its favour.

The Mysore Minerals case

The issue concerning ownership was clarified by the Supreme Court in the Mysore Minerals Ltd vs CIT (1999 239 ITR 175 SC) case. In this decision, the apex court said that there cannot be two owners of the property simultaneously and in the same sense of the term.

The intention of the legislature in enacting Section 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time-being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession.

Assigning any different meaning would not subserve the legislative intent.

A similar view has been expressed in a number of other decisions pronounced by the High Courts [Deepak Nitrate Ltd (2001 247 ITR 362 Gujarat); CIT vs Pallavan Transport Corpn. Ltd (2001 247 ITR 607 Madras)].

In CIT vs Abrol Engg. Co. (P) Ltd (2001 251 ITR 830 P&H FB), it was held that the assessee was entitled to claim depreciation on building although transfer of building was not effected by means of a registered document.

When movable asset is not owned by assessee

Motor vehicles are movable property and in view of the Transfer of Property Act, it stands transferred by delivery and does not need a transfer in the records of the transport department. Recording in the department is a separate formality under a different Act and it has nothing to do with the transfer of titles to the property. In view of this, depreciation on transport and other auto vehicles is allowable even though there is no record of transfer in the records of the transport or registration departments.

In CIT vs Dilip Singh Sardarsingh Bagga (1993 201 ITR 995 Bombay), it was held that the assessee who had purchased the motor vehicle for valuable consideration and used the same for his business could not be denied the benefit of depreciation on the ground that the transfer was not recorded under the Motor Vehicles Act or that the vehicle stood in the name of the vendor in the records of the authorities under the Motor Vehicles Act.

In CIT vs Orient Longman (P) Ltd (1997 227 ITR 68 AP), it was held that for the purposes of claiming benefit under Section 32, the requirement of ownership by the assessee is that he has the dominion and control over the property in his own right and not in the right of others.

Where the assessee has paid full consideration and has been put in possession of the property and has been in exclusive possession and enjoyment of the property as absolute owner thereof, the mere fact that no title deed has been executed in his favour will not deprive him of the right to claim depreciation under Section 32.

For this reason, as the assessee was exercising the right of ownership in his own right as owner thereof, the Tribunal was justified in holding that the assessee was entitled to depreciation under Section 32 of the I-T Act.

There are other decisions on similar lines.

A beneficial owner can claim the benefit of depreciation, provided the following conditions are satisfied:

i) The assessee is in possession of property.

ii) The assessee is in a position to exercise the rights of ownership on his own and not on behalf of the person having legal title over that. This means that he can realise income from the property and appropriate the same for himself.

iii) The assessee is having control of the user of asset.

iv) Obtaining the legal ownership is only a question of time or requires fulfilment of mere technical formalities.

It, however, needs to be emphasised that depreciation cannot be claimed by a person without any real connection with the asset and mere casual connection is not enough.

(The author is a former chairman of CBDT.)