Kerala High Court
Commissioner Of Income Tax vs Mother Hospital (P) Ltd. on 15 February, 2005
Equivalent citations: (2005)195CTR(KER)269, [2005]275ITR563(KER), 2005(3)KLT14
Author: C.N. Ramachandran Nair
Bench: K.S. Radhakrishnan, C.N. Ramachandran Nair
JUDGMENT C.N. Ramachandran Nair, J.
1. The Revenue is the appellant in these two appeals filed under Section 260A of the IT Act against separate orders of the Tribunal for the asst. yrs. 1995-96 and 1996-97 on the very same question pertaining to the very same assessee. When appeal for the asst. yr. 1996-97 was admitted, this Court framed some questions of law arising from the order of the Tribunal. However, during hearing of appeals, we felt there is only one issue to be decided in both the cases and accordingly we framed the following question, the answer to which will be sufficient to dispose of the two connected appeals :
Whether, on the facts and in the circumstances of the case, was the Tribunal right in granting depreciation under Section 32 of the IT Act for the building occupied by the assessee-company by reversing the first appellate order confirming disallowance in assessment ?
2. The controversy arose because the assessee-company admittedly is not the owner of the building under general law of the land inasmuch as the firm which constructed the building on the land belonging to it has not transferred the title to the land or the building to the assessee-company but only allowed use of the building by the assessee under an agreement dt. 1st Feb., 1989. While the assessee's case is that the right conferred on it under the above agreement and the reimbursement of construction cost by it to the firm make it eligible for depreciation as owner under Section 32(1) of the Act, the Revenue's case is that the assessee, not being the owner of the building, cannot be granted depreciation, no matter it is allowed the use of the building by its owner, namely, the partnership firm. Large number of Court decisions are cited before us by both parties. Though judicial opinion expressed in various decisions is not uniform, the settled position is that depreciation should not be declined on the technical ground of want of registered document under Transfer of Property Act, if the assessee holds possession and uses the building as its owner. Before referring to the decisions cited before us, we feel we have to refer to factual position in this case because decisions referred by both sides are rendered with reference to facts of each particular case. Even though the agreement dt. 1st Feb., 1989, based on which the assessee claims depreciation, is not part of the paper book, we were furnished a copy at the time of hearing of the appeals. The agreement, for both parties is essentially signed by the same, person, one Dr. M. Ali. The party on the one side is a partnership firm by name, M/s Mother's Hospital, represented by Dr. M. Ali and his wife as partners, and Dr. M. Ali signing on behalf of their four minor children, who are beneficiaries of the firm and the other party is the assessee-company, namely, Mother Hospital (P) Ltd., represented by its managing partner, the same Dr. M. Ali. The object of the agreement, as narrated in the deed is as follows :
Whereas the partners of the abovesaid firm having found it expedient to form a company to run and manage the proposed hospital and accordingly got registered a company on 30th Dec., 1988 under the name style as 'Mother Hospital (P) Ltd.', with all the partners of the firm as members of the company. Whereas having formed the company as aforesaid, the firm and its partners decided to complete construction and hand over possession of the said hospital building on its completion thereof to the company on the condition that the entire cost of construction of the hospital building shall be borne by the firm, for which the company expressed its consent.
The terms pertaining to funding of construction, rights of parties over the building, though not clear or comprehensive, are given in Clauses 2, 3(a) and 4(a) (b), (c), (g) and (h) which are as follows :
"2. The firm hereby agrees to permit the company to take possession for its beneficial use of the hospital building being constructed in 4.36 acres of land in Survey Numbers 247/4, 251, 250/2, 3 and 4 at Olarikkara belonging to the firm as and when the construction is completed by the firm.
3. In consideration of the firm agreeing to give possession of the hospital building as stated in (1) above, the company hereby agrees :
(a) to advance to the firm such sum of money over and above the amounts, if any, already advanced for enabling the firm to complete construction of the said building and to carry out such other work as are found necessary.
(4) Both the parties to the agreement hereby convenant that...
(a) The hospital building shall belong to the company on the company taking possession thereof, but, however, that the firm has and will have a lien on the hospital building and on any improvements or additions thereto until the money owing by the company to the firm by virtue of this agreement is fully paid of.
(b) The land on which the hospital building situates shall always belong to the firm or its partners as the case may be and the company or any person claiming thereunder has no right whatsoever to sell, alienate, transfer, mortgage or hypothecate or otherwise dispose of the same to any person or persons; but however that the company is hereby permitted to do or construct such additional structures or building as it may find it necessary for its business, or to put up hoardings or other publicity materials to publicise its business.
(c) Notwithstanding the stipulation in (b) above the firm reserves its right to transfer the land to the company if it so desires at any time in future, but, however, that such transfer shall always be at cost so long as the partners of the firm above are the members of the company.............
(g) In consideration of the firm agreeing with the company to permit situation of the hospital building or any additions thereto belonging to the firm as aforesaid, the company shall pay to the firm a ground rent of Rs. 100 per month, but however that the liability to pay such ground rent shall be on and from the first day of April, 1993 only.
(h) No interest shall be claimed by any party nor is any interest payable to any party to this agreement for any amount advanced or any amount remaining unpaid. So much so the company shall not claim any interest on the amount it advanced to the firm and the firm shall not claim any interest for the amount due from the company until it is paid of."
So far as investment in building is concerned, it is found by the AO for the asst. yr. 1995-96 and admitted by the assessee that the firm had incurred a total cost of Rs. 1,37,83,149 and out of which Rs. 1,06,78,456 is paid as advance by the assessee-company to the firm, while the balance around Rs. 30 lakhs is shown in the books of accounts of the assessee-company as amounts due to the firm. On going through the above, and other terms of the agreement, we are unable to conclude that the above agreement confers any title in the building on the assessee-company. It cannot be even treated as an agreement for sale. The assessee-company's right is limited to possession because the firm is not bound to transfer its title to the assessee-company. All that is favourable to the assessee is that substantial portion of the cost of construction is reimbursed by it to the firm and it has possession and use of the building. Even though cost of construction is borne by the assessee substantially and possession is also with the assessee, the agreement does not provide for transfer of the title to the land and building to the assessee and there is no clause in the agreement operating against the firm as having forfeited title over the building in favour of the assessee-company. The building is admittedly constructed by the firm and the ' assessee has only advanced substantial amount to the firm. Under Clause 3(g) either party is not entitled to any interest from the other. Apart from accounting entries in the books of accounts of the assessee, there is nothing in the agreement to indicate that the assessee can claim title for the building as a matter of right by paying the balance amount spent by the firm and shown as liability in its accounts. There is neither any provision in the agreement for the firm to enforce recovery of the balance cost of construction at any point of time from the assessee nor any provision obliging the firm to transfer the title to the assessee on receipt of balance construction cost. In other words, the agreement appears to have been made only for the purpose of claiming depreciation and not intended to be acted upon nor is capable of enforcement as the same does not contain definite terms pertaining to transfer of title to the assessee. Probably the arrangement is informal as the beneficiary of both concerns is one and the same person and his family members. The question now to be considered is whether the right available to the assessee under the above agreement can be termed as "ownership" for the purpose of depreciation under Section 32(1) of the Act. Even though the Supreme Court and various High Courts in many cases held that registration of title deed is strictly not required for the purpose of granting depreciation for a building under Section 32(1) of the Act, it has been held that the benefit will be available to the assessee only if the assessee uses the building as its owner. It is pertinent to note that Expln. 1 to Section 32(1) specifically deals with depreciation in respect of buildings held by the assessee as a lessee or under any other right of occupancy. The provision contained in Expln. 1 to Section 32(1) of the Act is as follows :
"32(1) In respect of depreciation of--....................
Explanation 1.--Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee."
From the above it is clear, depreciation in respect of buildings held by the assessee not as owner but under any right of occupancy is only for any capital expenditure incurred by the assessee by way of construction of any structure by way of renovation, extension, improvement, etc. In the absence of any specific provision in the agreement entitling the assessee to get title over the building, which can, only be an agreement for sale, enforceable under the Specific Relief Act, the assessee's occupation of the building is not as its owner but by virtue of the grant by the firm and the claim of depreciation can be limited to additional investment made by it. Therefore, we feel the assessee's case falls under Expln. 1 to Section 32(1) of the Act, because during the relevant years, the assessee was not the owner of the building. Even though strictly not relevant for decision of this case, we verified with counsel for the assessee as to whether the building was ever transferred in the course of last eight years to the assessee-company by the firm, the answer is in the negative, which only shows that the agreement abovereferred is only entered into for claiming depreciation and not intended ever to convey title of the building to the assessee-company, which is a necessary precondition for granting depreciation. Even though large number of decisions are referred to by both sides, we feel all those decisions need not be gone into, but reference to some of those decisions will be sufficient for the purpose of disposal of these appeals. The assessee has heavily relied on the decision of this Court in CIT v. Parthas Trust (2001) 249 ITR 120 (Ker). However, we find this Court approved the grant of depreciation because though land was not owned by the assessee, the building was constructed by the assessee at its own cost. However, in this case, it has to be noted that building is constructed by the partnership firm and not by the assessee and the assessee has only reimbursed substantial amount of construction cost to the firm with no commitment from the firm that it will ever transfer the title in favour of the assessee-company. Therefore decision of " this Court does not apply to the facts of this case. In the case reported in CIT v. Abrol Engineering Co. (2001) 251 ITR 830 (P&H)(FB), a Full Bench of the Punjab & Haryana High Court upheld the claim of depreciation without registered sale deed executed in favour of the assessee because the building admittedly belonged to a firm which was taken over by the assesses on payment of full consideration and mutation of the land standing in the name of the vendor was effected in the records in favour of the assessee-company. Similarly in the decision of the Delhi High Court in CIT v. General Electronics of Haryana (P) Ltd. (2002) 254 ITR 76 (Del), the Delhi High Court upheld the claim of depreciation without any registered deed because the asset came to the assessee on the dissolution of a partnership firm, of which the assessee was a partner. The position in the case reported in Gowersons Publishers (P) Ltd. v. CIT (1999) 240 ITR 191 (Del)(FB) is that the assessee purchased the factory and used it as its own, though sale deed was not executed. The Delhi High Court held that the real basis to grant the benefit is to see whether the assessee enjoyed the use as its owner, which is not satisfied in this case. In CIT v. Podar Cement (P) Ltd. (1997) 226 ITR 625 (SC) and in CIT v. Sirehmal Nawalakha (2001) 251 ITR 108 (SC), the Supreme Court held that requirement of general law of land on transfer such as registration of document is mandatory in tax matters also. Even though the Supreme Court in Mysore Minerals Ltd. v. CIT (1999) 239 ITR 775 (SC), held that interpretation beneficial to the assessee should be given on Section 32, the depreciation allowed in that case pertains to allotment of flats by the housing board to the assessee against part payment with delivery of possession though actual deed of conveyance was not executed. It has to be noted that the Supreme Court in Tamil Nadu Civil Supplies Corporation Ltd. v. CIT (2001) 249 ITR 214 (SC) held that without registration of sale deed conveying title to the assessee, the assessee cannot claim depreciation and development rebate.
3. Even though we agree in principle with the contention of the assessee that a liberal interpretation should be given on Section 32, and relief should not be denied on technical grounds, such as want of registration of sale deed, we are unable, to sustain the order of the Tribunal for the reason that the agreement based on which the assessee claims right over the building does not confer any title on the assessee because the use of the building by it cannot be said to be use as its owner as held by the decisions abovereferred based on which depreciation was allowed in those cases. So long as the assessee has no enforceable right of title over the building against its actual owner, the partnership firm, the assessee's claim of depreciation as its owner is untenable and was rightly rejected by the AO and confirmed in first appeal. We find that the Tribunal has without reference to facts disclosed in the terms of agreement between the assessee and the partnership firm allowed the claim by mechanically following some decisions.
We therefore answer the question referred above in favour of the Revenue and against the assessee and consequently, allow the appeals, by setting aside the order of the Tribunal and restoring that of the CIT(A).