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East Coast Packaging Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Hyderabad
Decided On
Judge
Reported in(1984)10ITD333(Hyd.)
AppellantEast Coast Packaging Ltd.
Respondentincome-tax Officer
Excerpt:
.....and the depreciation allowance had therefore to be allowed or disallowed with respect to the assessee-firm ....(p. 1260) in the case of cit v. bordubi rice, flour & oil mills [1976] 105 itr 739, the gauhati high court has pointed out that where the firm owned the property the depreciation had to be allowed with respect to the assessee-firm. in each case, therefore, the question as to who is the owner has to be gone into, i.e., whether the firm or aop or partners or members, etc., and, in the light of the subsequent clarification of law, the reference to the aspect of confusion in the grant of depreciation which their lordships of the allahabad high court had envisaged disappears. we have, therefore, to find out who is the owner of the asset. even, according to their lord-ships.....
Judgment:
1. This appeal is directed against the order of the Commissioner (Appeals) dated 21-1-1982 passed in Appeal No. VSP 209 of 1979-80. The assessee manufactures jute bags, polythene bags, etc. For the assessment year 1979-80, a return of income was filed admitting the total income at Rs. 4,07,890. The ITO computed the total income at Rs. 4,11,430. By way of additional ground, the appellant claimed before the Commissioner (Appeals) depreciation admissible on plant and machinery.

2. According to the facts, the assessee had purchased certain plant and machinery jointly with Extrusions at a total cost of Rs. 3 lakhs. In the balance sheet of the assessee the half share of the assessee in the asset is shown at a value of Rs. 3 lakhs. This plant and machinery has been hired out by the assessee and Extrusions to Laminated Packings (P.) Ltd., Visakhapatnam. The hire charges received by the assessee on this account are being duly subjected to tax. The claim of the assessee was that the depreciation should be allowed on this asset. It is no doubt that this point was not raised before the ITO. It is for the first time that the assessee raised this ground before the Commissioner (Appeals). Before the Commissioner (Appeals), the assessee contended that under the Income-tax Act, 1961 ('the Act') depreciation is allowable in respect of an asset which is owned by the assessee. The attention of the learned counsel appearing for the assessee was drawn to a decision of the Allahabad High Court in the case of Seth Banarsi Das Gupta v. CIT [1971] 81 ITR 170. In that case it was held that no depreciation is allowable in respect of an asset if the same is owned by more than one person. The learned counsel appearing for the assessee submitted that the term 'owner' is of wider significance and, therefore, the decision of the High Court should not be followed. But, however, the Commissioner (Appeals) was of the view that there is distinction between the user of the word 'owner' in the 1961 Act and the words 'being the property of the assessee' used in the Indian Income-tax Act, 1922 ('the 1922 Act'). Accordingly, the Commissioner (Appeals), by following the decision of the Allahabad High Court, came to the conclusion that no depreciation can be allowable under Section 32 of the Act where an asset is jointly owned by two or more persons.

Accordingly, he disallowed the claim made by the assessee.

3. Aggrieved, the assessee filed the present appeal before the Tribunal. The learned counsel appearing for the assessee submitted before us that the Commissioner (Appeals) was not justified in disallowing the claim on the ground that no depreciation is admissible where the asset is owned by more than one person and for this purpose the learned Commissioner (Appeals) relied on the decision of the Allahabad High Court in the case of Seth Banarsi Das Gupta (supra), which is not applicable to the facts of this case. It was further submitted that the said decision rendered under the 1922 Act is not applicable since the wording used in the 1961 Act is different from that used in the 1922 Act. The learned counsel also submitted that since the asset to the extent owned by the assessee is earning income and such income is subjected to tax, the appellant is entitled to the depreciation in respect of the cost to him. Lastly, the learned counsel submitted that the use of the word 'owner' has a wider meaning in that it includes a partial ownership also.

4. On the other hand, the learned departmental representative supported the order passed by the Commissioner (Appeals).

5. We have heard the rival submissions made by the parties. The fact remains that the appellant purchased certain plant and machinery jointly with Extrusions at a total cost of Rs. 3 lakhs. In the balance sheet of the appellant half share in the asset is shown at a value of Rs. 3 lakhs. The abovesaid plant and machinery has been hired out by the appellant and Extrusions to Laminated Packings (P.) Ltd. It was stated that hire charges received by the appellant are being duly subjected to tax. The appellant claimed depreciation on this asset.

According to the Commissioner (Appeals), in view of the Judgment of the Allahabad High Court in the case of Seth Banarsi Das Gupta (supra), no depreciation is allowable in respect of an asset if the same is owned by more than one person. This decision was rendered under the 1922 Act.

6. The fact that the property could be owned by more than one person jointly is settled law. In joint ownership the shares may be defined or undefined. Section 26 of the Act states that where property owned is in the shape of building or buildings or lands appurtenant thereto and the ownership vests in two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an AOP and the share of each such person is to be computed in accordance with the provisions relating to the computation of income from property. There is no such statutory statement of how income from exploiting other assets owned jointly should be assessed. How much income is to be assessed, i.e., whether as an AOP or in the hands of each of the owners separately, has, thus, to be decided on the facts of each case. In the present case it would appear from the facts as detailed in the order of the Commissioner (Appeals) that the asset has been jointly exploited by the assessee and Extrusions by hiring out the same to Laminated Packings (P.) Ltd. The possibility of income from this source being assessable in the hands of the assessee and Extrusions jointly as an AOP is definitely there. But the ITO did not proceed to assess the income under the head 'AOP'. He chose to assess their respective shares separately in the hands of the assessee and Extrusions. The position under the 1922 Act was that once an option was exercised to assess a member of association without assessing the association, the association could not be assessed later-the decision of the Supreme Court in CIT v. Murlidhar Jhawar & Puma Ginning & Pressing Factory [1966] 60 ITR 95. One school of thought was that the position continues to be the same under the Act and such is the view of the Andhra Pradesh High Court in the case of Deccan Bharat Khandsari Sugar Factory v. CIT [1980] 123 ITR 802, as far as the assessment of income in the hands of members of an AOP was concerned.

This being the view of the Andhra Pradesh High Court, which is binding on us, it is not necessary to refer to the contrary view which has been expressed by some High Courts. The fact, therefore, is that in the present case income from exploitation of the asset has been assessed in the hands of the members separately, one of which is the assessee. The question that survives is whether the assessee can be denied depreciation. In this background we set out the observations of the Allahabad High Court in the case of Seth Banarsi Das Gupta (supra) which is as under : In order to qualify for an allowance under Clause (vi), the assessee has to make out that the building, machinery, plant or furniture is the property of the assessee. Mr. Shanti Bhushan appearing for the assessee urged that Clause (vi) is attracted even where an assessee owns a fractional share in the machinery. On the other hand, Mr.

Brij Lal Gupta appearing for the department urged that ownership of a fractional share in machinery does not attract Clause (vi). The point is not free from difficulty. But if the interpretation suggested by Mr. Shanti Bhushan is accepted, the result would be that several individuals would claim depreciation separately on the short ground that they have specified shares in buildings, machinery, plant or furniture. A firm or association of persons would also claim depreciation on the ground that the building, machinery, plant or furniture is the property of the firm or association of persons. Such separate claims for depreciation with respect to the same item of machinery are likely to create confusion. Clause (vi) should, therefore, be construed strictly. In order to qualify for an allowance under Clause (vi), the claimant must make out that the machinery is the property of the assessee.

That test is not satisfied by the present assessee. The assessee does not claim to be the full owner of the machinery in question.

All that is claimed for the assessee is l/6th share in the machinery. Such a fractional share will not suffice for granting an allowance for depreciation under Section 10(2)(vi) of the Act.(p.

177) Their Lordships in the abovesaid observations have stated that the point whether depreciation is admissible where an assessee is only a part owner is not free from difficulty. They have also mentioned that if depreciation is allowed where an assessee is only a part owner, confusion may arise because the firm or AOP would claim depreciation on the ground that the building, etc., is the property of the firm or AOP or separate claims for depreciation could also be made with respect to the same item of machinery in the hands of the particular individuals concerned. There is the following observation in Sampath Iyengar's Law of Income-tax, Vol. 2, Seventh edn. : 12. Firm and partner separate entities - In the context of depreciation allowance, the firm and its partners have to be treated as separate assessable entities. Where the assessee was a partnership firm, but the ownership of the machinery, etc. of the mill vested in two of its partners, who had, however, allowed the use of machinery, etc. of the mill to the assessee, it was held that the assessee-flrm was not entitled to depreciation allowance in respect of machinery, etc. and, further, that the question of distributing the depreciation allowance equally between the two partners could not also arise. It was pointed out that it was the firm which was the assessee and the depreciation allowance had therefore to be allowed or disallowed with respect to the assessee-firm ....(p. 1260) In the case of CIT v. Bordubi Rice, Flour & Oil Mills [1976] 105 ITR 739, the Gauhati High Court has pointed out that where the firm owned the property the depreciation had to be allowed with respect to the assessee-firm. In each case, therefore, the question as to who is the owner has to be gone into, i.e., whether the firm or AOP or partners or members, etc., and, in the light of the subsequent clarification of law, the reference to the aspect of confusion in the grant of depreciation which their Lordships of the Allahabad High Court had envisaged disappears. We have, therefore, to find out who is the owner of the asset. Even, according to their Lord-ships of the Allahabad High Court in the case of Seth Banarsi Das Gupta (supra), the test that the claimant must make out that the machinery is the property of the assessee was not satisfied by the assessee. Further, according to their Lordships, the assessee does not claim to be the full owner of the machinery in question. On the contrary, in the present appeal the facts are entirely different. The appellant in the present appeal has categorically shown that the appellant is the full owner of half of the property. Further, in the present case income from letting out of an asset has been assessed to the extent of half share in the hands of the assessee. It also cannot be denied that the assessee is the full owner of half share which was used for earning half share of income. We, therefore, hold in the present case that the entire income assessed in the hands of the assessee is attributable to full extent of ownership in that proportionate part of the asset which yielded income though such extent was only a half share with reference to the total asset.

We, therefore, hold that the assessee is entitled to grant of depreciation on the facts of the present case.


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