Additional Commissioner of Income Tax Vs U.P. State Agro Industrial Corporation Ltd.

H.N. Seth, J.@mdashAt the instance of the revenue, the Income Tax Appellate Tribunal, Allahabad, has, in respect of assessment of the assessee, U.P. State Agro Industrial Corporation Ltd., Lucknow, for the assessment year 1972-73, stated the case and referred the following question for the opinion of this court:

"Whether, on the facts and in the circumstances of the case, the assessee was entitled to depreciation on building which it purchased from the Government of Uttar Pradesh ? "

2. The assessee, U.P. Agro Industrial Corporation Ltd., Lucknow (hereinafter referred to as "the Agro Corporation") was set up in the month of March, 1947, as a body registered under the Indian Companies Act. Capital of the Agro Corporation was subscribed equally by the Govt. of India and the Govt. of Uttar Pradesh. The State Govt. vide its order No. 1748/XII-J-246/67, dated April 27, 1968, transferred possession over the Agricultural Workshop, Lucknow, and Pilot Project, Karimganj to the Agro Corporation in consideration of Rs. 44,07,589 (Rs. 40,00,000 worth of equity shares and Rs. 4,07,589 paid in cash). During the assessment proceedings, the Agro Corporation, inter alia, claimed allowance by way of depreciation u/s 32 of the I.T. Act, in respect of the buildings taken over by it from the State Govt.

3. The ITO disallowed the aforesaid claim for depreciation on the ground that the properties in respect of which the claim had been made were immovable properties. Since no sale deed had been executed by the State Govt. till then, the Agro Corporation did not become its owner. It was accordingly not entitled to claim any depreciation allowance in respect of such property.

4. In appeal before the AAC, it was contended on behalf of the Agro Corporation that even though the U.P. Govt. had not transferred the immovable property by a registered deed, the properties for all practical purposes belonged to it. The Agro Corporation was the beneficial and equitable owner of the property and was in connection with its assessment entitled to claim depreciation on it. The AAC, held that in the absence of a registered sale deed, the properties in question which were immovable properties did not stand transferred to the Agro Corporation. As the properties were not owned by it, it was not entitled to claim depreciation in respect thereof.

5. In second appeal by the Agro Corporation, the Income Tax Appellate Tribunal observed that for claiming depreciation u/s 32 it was necessary for the assessee to fulfill the following two conditions :

(1) that the assets in respect of which the depreciation is claimed by the assessee must be owned by him ; and

(2) that those assets must have been used by the assessee for the purposes of his business.

6. So far as the second condition was concerned, it was not disputed that the property in respect of which depreciation had been claimed by the assessee was being used for its business purposes. With regard to the first condition, the Tribunal referred a decision of the Supreme Court in the case of R.B. Jodha Mal Kuthiala Vs. The Commissioner of Income Tax, Punjab, Jammu and Kashmir, Himachal Pradesh and Patiala, , and held that in view of the Government order dated April 27, 1968, the State of Uttar Pradesh ceased to be the owner of the properties as it could not exercise any rights in respect thereof. It observed that, viewed in the light of the Government order dated April 27, 1968, the capital structure of the Corporation, constitution of its board of directors and the fact that the Agro Corporation was in possession of the properties, the principles enunciated by the Supreme Court in the case of R.B. Jodha Mal Kuthiala Vs. The Commissioner of Income Tax, Punjab, Jammu and Kashmir, Himachal Pradesh and Patiala, , were fully applicable to the facts of the present case and it could, for purposes of Section 32 of the I.T. Act, be held that the properties were owned by the Agro Corporation which was entitled to claim depreciation in respect thereof. The Tribunal further pointed out that the property in respect of which the Agro Corporation had claimed allowance by way of depreciation consisted of land and buildings. It was entitled to claim depreciation only in respect of the building and was not entitled to lay such claim in respect of the land. As figures with regard to the value of the building and land were not separately available, it sent the case back to the ITO for ascertaining the value of the building on which alone the Agro Corporation was entitled to claim depreciation.

7. Being aggrieved, the revenue approached the Tribunal which has stated the case and has referred the aforementioned question for the opinion of this court. Section 32(1) of the I.T. Act, runs thus :

"In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of Section 34, be allowed--....."

8. As pointed out by the Tribunal, in order to qualify for a claim of depreciation u/s 32 of the Act, the property should not only be used by the assessee in connection with his business or profession but it should also be owned by the assessee. As mentioned above, the only controversy before us is whether in the circumstances of this case it can be said that the properties which the Agro Corporation obtained from the State Govt. in consideration of the equity shares of the Corporation worth Rs. 40,00,000 and payment of Rs. 4,07,589 in cash, but without execution of a formal registered sale deed were, within the meaning of Section 32 of the I.T. Act, properties owned by the Agro Corporation.

9. Section 9(1) of the Indian I.T. Act, 1922, which corresponds to Section 22 of the I.T. Act, 1961, laid down that Income Tax shall be payable by an assessee under the head "Income from property" in respect of the bona fide annual property consisting of any building or land appurtenant thereto of which he is the owner. Section 32 of the I.T. Act, 1961, provides for a deduction or allowance being made in respect of depreciation of building, machinery, plant, or furniture owned by the assessee used for the purposes of his business or profession. In the case of R.B. Jodha Mal Kuthiala Vs. The Commissioner of Income Tax, Punjab, Jammu and Kashmir, Himachal Pradesh and Patiala, , the learned judges of the Supreme Court observed thus:

"In Stroud''s Judicial Dictionary, 3rd edition (p. 2059), various meanings of the word ''owner'' are given. It is not necessary for our present purpose to examine what the word ''owner'' means in different contexts. The meaning that we give to the word ''owner'' in Section 9 must not be such as to make that provision capable of being made an instrument of oppression. It must be in consonance with the principles underlying the Act."

10. In our opinion, the scope of the expressions "property of which the assessee is owner ", used in Section 9 of the 1922 Act and "the property owned by the assessee" used in Section 32 of the 1961 Act, is the same. Whereas u/s 9 of the Indian I.T. Act, 1922, Income Tax is payable by an assessee in respect of the annual value of the property consisting of any building or land of which he is the owner, the assessee has been, u/s 32 of the 1961 Act, enabled to claim depreciation if he uses a building owned by him for the purposes of his business or profession. It appears to us that, in the context, the scope and the ambit of the expression "building owned by the assessee" used in Section 32 of the Act is the same as the expression "building of which the assessee is the owner" as used in Section 22 of the 1961 Act which corresponds to Section 9 of the 1922 Act.

11. In R.B. Jodha Mal Kuthiala Vs. The Commissioner of Income Tax, Punjab, Jammu and Kashmir, Himachal Pradesh and Patiala, , the Supreme Court while considering the question whether an evacuee--whose property had under the Pakistan Administration of Evacuee Property Ordinance, 1946, vested in the custodian--could, having regard to the provisions contained in the Ordinance, be said to be the person owning the said property for purposes of Section 9(1) of the Indian I.T. Act, 1922. In that connection, the Supreme Court observed at p. 575 thus :

"The question is, who is the ''owner'' referred 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 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."

12. It, therefore, follows that the expression "building owned by the assessee" in Section 32 of the I.T. Act, 1961, has not been used in the sense of the property, complete title in which vests in the assessee. The assessee will be considered to be an owner of the building u/s 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 rights.

13. We will now proceed to examine the question referred to us in the light of what has been stated by us above. The Transfer of Property Act, 1882, concerns itself with the question as to how title is conveyed in an immovable property by way of sale, mortgage, lease, exchange or gift. It is in that connection that it lays down in Section 54 that sale which is the transfer of ownership in exchange for a price paid or promised or part paid and part promised of an immovable property of the value of Rs. 100 and upwards can be made only by means of a registered instrument. The section further defines a contract for sale of immovable property as a contract which provides for the sale of such property to take place on terms settled between the parties and that such a contract does not by itself create any interest in or charge on such property. Accordingly, where there is a contract of sale of an immovable property valued at Rs. 100 or more the transfer of title in the property does not take place merely by delivery of possession of the property to the purchaser. In order to convey such title to the purchaser, execution of a registered sale deed by the transferee is a must. In the instant case it is not disputed that no registered sale deed, whereby the State Govt. has transferred title in the property, in respect of which depreciation had been claimed by the Agro Corporation, has been executed so far. The State Govt. had agreed to sell and the Agro Corporation had agreed to purchase the said property in exchange for a sum of Rs. 44,07,589. It was thus a contract for sale of immovable property, valued at more than Rs. 100 within the meaning of Section 54 of the Transfer of Property Act, and the ultimate title in the property did not pass from the State Govt. to the Agro Corporation.

14. However, as stated above we are in this case not so much concerned with the transfer of the ultimate title in the property to the Agro Corporation. All that we have to see is as to whether as a result of the transaction entered into between the State Govt. and the Agro Corporation, the latter came into the position of exercising the rights of the owner in respect of that property on its own behalf and not on behalf of the State Govt.

15. In this connection, it will be relevant to refer to Section 53A of the Transfer of Property Act, which runs thus :

"Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty,

and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract,

and the transferee has, performed or is willing to perform his part of the contract,

then, notwithstanding that the contract, though required to be registered, has not been registered, or, where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefore by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract:

Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof."

16. In this case, it is not controverted that there was correspondence, on record, entered into between the State of Uttar Pradesh and the Agro Corporation according to which the former had agreed to transfer the properties in question to the latter in consideration of a sum of Rs. 44,07,589. The State Govt. had received the said amount of consideration in the form of equity shares amounting to Rs. 40,00,000 and cash amounting to Rs. 4,07,589. Further, in pursuance of that agreement, the State Govt. had put the Agro Corporation in possession over the properties in dispute. The Agro Corporation had performed its part of the contract and it was for the State Govt. only to execute a registered sale deed and convey the entire title in the property to the Agro Corporation.

17. Further, there is nothing on the record to indicate that under the agreement the State Govt. had reserved to itself certain rights over the property which it had agreed to convey to the Agro Corporation. The State Govt. is, as provided in Section 53A of the Transfer of Property Act, debarred from enforcing against the Agro Corporation and the persons claiming under the Agro Corporation any right in respect of such property. The persons claiming under the Agro Corporation can also be such persons to whom the Agro Corporation chooses to transfer the property over which it has acquired possession under the contract entered into with the State Govt. The section, therefore, contemplates that the Agro Corporation, which has been put in possession of the property in part performance of the contract of sale, can even dispose of the property in the same way as if it was owned by it and the State Govt. cannot object to it. After- the Agro Corporation has been put in possession of the property, it has become open to it to deal with it in any manner it likes without objection from the State Govt. It can realise the income from the property and appropriate the same for itself. The dealing with the property by the Agro Corporation in such circumstances would have to be on its own behalf and not on behalf of the State Govt., which u/s 53A of the Transfer of Property Act stands debarred from enforcing any rights in respect thereof against the Agro Corporation. It, therefore, appears to us that the Agro Corporation has, even though the ultimate title in the properties has not yet vested in it, become the owner thereof in the sense in which the expression has been used in Section 32 of the I.T. Act.

18. It is true that the proviso to Section 53A of the Transfer of Property Act lays it down that nothing contained in the section shall affect the rights of a transferee for consideration who has no notice of the contract of the part performance thereof. Accordingly, if the State Govt., after entering into the contract with the Agro Corporation and putting it into possession of the properties, should transfer the same to a person who has no notice either of the contract or of the part performance, the title in the property would pass to such a person and he would be in a position to enforce his rights against the Agro Corporation. This proviso has been added with a view to protect a bona fide transferee of the property who has no notice either of the earlier contract or part performance thereof. It may be that after a transfer of the nature mentioned in the proviso to Section 53A of the Transfer of Property Act takes place, the Agro Corporation may cease to be the owner of the property within the meaning of Section 32 of the I.T. Act, 1961, but then so long as such a transfer has not taken place, the Agro Corporation will continue to be the owner of the property within the meaning of the expression as used in Section 32 of the Act.

19. As stated above, after putting the Agro Corporation into possession of the properties in pursuance of the agreement to convey title therein the State Govt. is, u/s 53A of the Transfer of Property Act, debarred from exercising the rights of an owner in respect thereof and as laid down by the Supreme Court, it cannot, any more, be considered to be an owner of those properties within the meaning of Section 9 of the Indian I.T. Act, 1922, even though real title in the property continued to be vested in it. In such circumstances, the only person who can be said to own the properties is the Agro Corporation which, as a result of agreement to sell, has been put in possession of the properties.

20. Sri R. K. Gulati, learned counsel appearing for the department, strongly relied upon a decision of the Delhi High Court in the case of Commissioner of Income Tax Vs. Hindustan Cold Storage and Refrigeration P. Ltd., , wherein the learned judges observed that the words "being the property of the assessee" appearing in Section 10(2)(vi) of the 1922 Act had the same meaning as the words "owned by the assessee" appearing in Section 32(1) of the 1961 Act and that these words merely clarified the position that already existed u/s 10(2)(vi) of the 1922 Act. They also ruled that interest which a person had in a property by virtue of Section 53A of the Transfer of Property Act did not amount to ownership of the property. Since in that case the flour mill constituted immovable property of more than Rs. 100 and title thereto could not pass to the assessee in the absence of a registered sale deed, and as admittedly no sale deed had been executed in favour of the assessee during the relevant previous year, the title in the flour mill did not pass to the assessee, and the assessee-company could not be said to be the owner of the property. This decision of the Delhi High Court does tend to support the contention of the revenue that a person getting possession of a property as a result of part performance of a contract for sale of that property does not become the owner of the property for the purposes of Section 32 of the I.T. Act, 1961. We, however, find that, in this case, the attention of the learned judges was not invited to the decision of the Supreme Court in the case of R.B. Jodha Mal Kuthiala Vs. The Commissioner of Income Tax, Punjab, Jammu and Kashmir, Himachal Pradesh and Patiala, , wherein the Supreme Court had clearly observed that for the purposes of sections like Section 32 of the I.T. Act, the ownership of the property is not to be equated with title in the property. The following observations made by the learned judges at page 467 (of 103 ITR):

"From the above discussion, we hold that the words ''being the property of the assessee'' appearing in Section 10(2)(vi) of the Act have the same meaning as the words ''owned by the assessee'' appearing in Section 32(1) of the new Act and that these words merely clarify the position that already existed u/s 10(2)(vi) of the Act. The interest which a person has in a property by virtue of Section 53A of the Transfer of Property Act does not amount to ownership of the property. In the present case/the Crown Flour Mills constituted immovable property of the value of. more than Rs. 100 and the title in the said property would not pass to the assessee in the absence of a registered sale deed. As admittedly no sale deed was executed by M/s. Meatles Ltd. in favour of the assessee-company during the assessment year under reference, the title in the Crown Flour Mills did not pass to the assessee-company. The Crown Flour Mills, therefore, was not the property of the assessee-company during the assessment year under reference and, as such, one of the conditions prescribed u/s 10(2)(vi) of the Act was not satisfied and the assessee-company could not claim depreciation in respect of the Crown Flour Mills."

21. clearly show that the learned judges proceeded to decide the issue on the basis that ownership contemplated by Section 32 of the 1961 Act had to be equated with the title to the property and as such Section 53A of the Transfer of Property Act could not help the assessee in that case. However, as explained above, this view does not appear to be in consonance with the views expressed by the Supreme Court in R.B. Jodha Mal Kuthiala Vs. The Commissioner of Income Tax, Punjab, Jammu and Kashmir, Himachal Pradesh and Patiala, .

22. Learned counsel appearing for the revenue also cited the decisions in the cases of Commissioner of Income Tax Vs. Bhurangya Coal Co., , SARDAR TARA SINGH Vs. COMMISSIONER OF Income Tax, M. P., and Seth Banarsi Das Gupta Vs. Commissioner of Income Tax, . However, we do not think it necessary to deal with these cases in detail inasmuch as the ratio laid down in none of these cases has any bearing on the aspect of the case discussed by us above. Before parting with the case we may also point out that Sri. Jagdish Swarup, learned counsel appearing for the assessee, also made a submission that the provisions of the Transfer of Property Act especially those contained in Section 54 of the T.P. Act do not apply to transfer of property made by the State to a corporation owned and controlled by it. Accordingly, the requirement of Section 54 of the Transfer of Property Act that sale of an immovable property over the value of Rs. 100 can only be effected by means of a registered sale deed, does not apply to a transfer made by the State Govt. and that the State Govt. is capable of conveying title in the property sold by it even without executing a registered sale deed. This submission made by the learned counsel appears to be of doubtful validity. But then in the view which we had taken, it is not necessary for us to express any concluded opinion on it.

23. In the result, we answer the question referred to us by the Tribunal in the affirmative and in favour of the assessee. The assessee will be entitled to its costs which are assessed at Rs. 250.