1. The two questions which have been referred to this court under s. 256(1) of the I.T. Act, 1961, are as follows;
'(1) Whether, on the facts and in the circumstances of the case, and on the true construction of lease deeds of November 21, 1960 and March 4, 1965, the Tribunal is justified in law in holding that the assessee is the owner of the building, fixtures and fittings of 'Shirin'/'Alpana' Talkies within the meaning of section 32 of the Income-tax Act, 1961, for the relevant year 1964-65 to 1969-70 ?
(2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to depreciation under section 32 of the Income-tax Act, 1961 on the above items ?'
2. The assessee carries on business as an exhibitor of films at Poona. The theatre in which the assessee exhibits films was originally leased out by M/s. Ismail and Babumiyan, both sons of Rasulbhai, to one Homi Meher Mistry, for 20 years with effect from January 1, 1948, by lease deed dated May 30, 1949, at a rental of Rs. 800 per month. Homi Mistry assigned his interest in the said theatre to one Maganlal L. Desai, by assignment deed dated June 8, 1949, for the residue of the lease period of 20 years. In their turn Maganlal Desai and the other parties assigned their right, title and interest to one Tayabali K. Mehta by an assignment deed dated September 24, 1952. There was a further assignment deed dated August 25, 1960, between Tayabali and Kalibuddin on the one side and K. C. Thakore on the other by which the theatre became vested in K. C. Thakore for the residue of the said period of 20 years. Then there was another document between Ismail and Babumiyan on the one hand and K. C. Thakore on the other modifying the terms of the original lease dated May 30, 1949, and the lease was for a period of 20 years commencing from November 1, 1960. Under this lease, the lessee was to keep the theatre in good condition and make all repairs and the premises were to be surrendered with the fittings and fixtures and additions and alternations on the expiry of the lease period.
3. There was a subsequent agreement dated March 4, 1965, on the same lines as the agreement dated November 21, 1960, but the period of lease was 31 years from March 1, 1965. It was be pointed out that this document, dated March 4, 1963, recites the fact that the lessee, K. C. Thakore, 'has constructed a new building with the consent and concurrence of the lessors, after having obtained permission permission No. 212 of the May 11, 1962, from the Poona Municipal Corporation, on the premises demised and leased out to him under the said indenture of lease dated November 21, 1960. 'As it was felt by us that the two lease deeds dated, November 21, 1960, and March 4, 1965, should be part of the record and were necessary for a proper appreciation of the facts of the case, we have taken on record a compilation filed by the assessee but the only two documents which are now treated as a part of the record are the two lease deeds dated November 21, 1960 and March 4, 1965, annexs. D and E, respectively.
4. The New Shirin Talkies, which was the name of the cinema theatre, was thus completely demolished and a new theatre was constructed during the period January-July, 1962. In respect for the assessment for the assessment years 1964-65 to 1969-70, the assessee-firm claimed depreciation in respect of the theatre building, furniture and fixtures as well as plant and machinery and electric fitting, etc. This claim was rejected by the ITO on the ground that the lessor had not divested himself of the ownership of the land and the building.
5. In appeal, the AAC allowed the claim of the assessee on the ground that the assessee was the owner of the theatre during the period of lease. The Revenue had challenged the decision before the Tribunal which upheld the view taken by the AAC. The correctness of that view is now challenged by raising the questions reproduced above.
6. A bare reading of the terms of the lease dated November 21, 1960, will show that if any alternation or construction is made, the property was to become the property of the lessors only on the expiry of the lease. Admittedly, the new theatre has been construed by the assessee-firm. In view of the positive stipulation in the lease that the theatre will become the property of the lessor only on the expiry of the lease, it is obvious that during the period of the lease the ownership of the new theatre was to vest i the assessee. After the original theatre was demolished, all that remained was the land on which the original theatre stood, that land continued to belong to the lessors but after the new theatre was constructed at the cost of the assessee-firm, in view of the agreement between the parties, the ownership of the theatre would clearly belong to the assessee-firm though it did stand on the land owned by the original lessors. The only person who, therefore, could claim depreciation would be the assessee-firm. Apart from the fact that the position appears to us to be beyond any doubt, we may mention that a similar view has been taken by the Mysore High Court in Y. V. Srinivasamurthy v. CIT : 64ITR292(KAR) . This was the decision on which the Tribunal had relied in coming to the conclusion that the assessee was entitled to claim depreciation in respect of the theatre and the fittings. In the case before the Mysore High Court, the assessee's brother had taken a vacant site on lease for a period of 20 years for the purpose of contracting a building thereon. On the expiry of the lease period of 20 years, the building was to become the property of the lessor. The assessee's brother constructed a theatre and sold his leasehold rights to a third person from whom the assessee purchased it in 1950 for a sum of Rs. 1,50,000 out of which Rs. 1,00,000 was the price of the building. In the assessment year 1955-56, the assessee had claimed Rs. 10,000 as lease amount paid to his transferor. This claim was rejected put the ITO allowed depreciation at 2 1/2% on the building on the original cost of Rs. 1,00,000 as on March 31, 1951, on the ground that the assessee was the owner of the building. On the expiry of 20 years, that is, on March 31, 1959, the assessee wrote off the written down value of the building which was computed at Rs. 85,907 and he claimed this sum of Rs. 85,907 as a loss or balancing charge under s. 10(2)(vii) of the Indian I.T. Act. The officer disallowed the claim for deduction but allowed depreciation. The Tribunal had disallowed both the claims.
7. On a reference, the High Court had held that the assessee was the owner of the building during the period of lease and was, therefore, entitled to claim depreciation but as he continued to be in possession even after the expiry of the lease, he could not be deemed to have 'sold or discarded or demolished or destroyed' the building within the meaning of s. 10(2)(vii) of the Indian I.T. Act. Though the claim under s. 10(2)(vii) was rejected, what is relevant for the purposes of the present case is that during the period of the lease the assessee was held to be the owner of the building. The Tribunal, in our view, was justified in holding that the assessee was the owner of the building, fixtures and fittings of Alpana talkies within the meaning of s. 32 of the I.T. Act. Consequently, the assessee would be entitled to depreciation under s. 32 of the I.T. Act, 1961, on the above items.
8. Thus, both the questions will have to be answered in favour of the assessee. Accordingly question No. 1 is answered in the affirmative and in favour of the assessee. Question No. 2 is also answered in the affirmative and in favour of the assessee. The assessee to get the costs of the reference.