Dwarka Prasad, J.
1. The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, by its order dated September 14, 1977, referred the following question of law arising out of its order dated September 26, 1973, to this court for its opinion :
' Whether in view of the agreement dated June 7, 1967, with National Small Scale Industries Corporation Ltd., New Delhi, the assessee was entitled to depreciation under Section 32 of the Income-tax Act '
2. The assessee is a partnership firm engaged in the business of reconditioning of automobile engines. In the year 1967, the assessee imported a crankshaft regrinding machine from U.S.S.R., for which finance was provided by M/s. National Small Scale Industries Corporation Ltd., New Delhi, (hereinafter referred to as ' the Corporation '). The crankshaft machine was purchased under a hire purchase agreement dated June 7,1967. wherein the Corporation became the owner of the said machine and it agreed that the assessee would use the machine for a period of 3 years as the hirer thereof. The total price of the machine was settled at Rs. 1,00,767.08 out of which a sum of Rs. 16,957 was paid by the assessee before the execution of the hire purchase agreement, while the remaining amount of Rs. 89,810.08 was made payable in 13 equal instalments due on 1st September and 1st March of every year, beginning from September 1,1968. The agreement provided that if the hire charges were regularlypaid by the hirer during the period of three years, the hirer could exercise his option for the purchase of the said machine ; but if during the period of payment of hire charges, the hirer failed to make payment of any of the instalments, the Corporation being the owner could terminate the hiring without any prior notice and take possession of the machine in question. Thus, the hirer could exercise the option to purchase the machine only after the expiry of 3 years of the hiring of the machine in case the hire charges were paid regularly and the remaining amount towards the purchase price of the machine was paid at the end of the third year or thereafter.
3. In the return filed by the assessee-firm in respect of the assessment years 1970-71 and 1971-72, the assessee claimed depreciation under Section 32 of the I.T. Act, 1961 (in short ' the Act'), on the crankshaft machine purchased under the hire purchase agreement, but the claim was rejected by the ITO and that order was ultimately affirmed on appeal by the Income-tax Appellate Tribunal. In the return filed by the assessee in respect of the subsequent assessment year 1972-73, again a claim for depreciation on the crankshaft machine was made by the assessee under Section 32 of the Act in respect of the amount of instalments paid during the previous year corresponding to the assessment year 1972-73. It was asserted by the assessee-firm that it exercised its option in accordance with the hire purchase agreement dated June 7, 1967, at the end of the third year of the hiring of the machine in question and that the hire charges were paid regularly during the year. The ITO, by his order dated November 30, 1974, rejected the claim for depreciation under Section 32 on the ground that the letter of the Corporation dated September 17, 1974, showed that the ownership of the machine was transferred to the assessee-firm only on September 17, 1974, and in view of the fact that the assessee-firm was not the owner of the said machine during the relevant period, the depreciation could not be allowed. The assessee filed an appeal before the AAC of Income-tax, Jodhpur Range, Jodhpur, who, by his order dated July 19, 1975, held that, after the expiry of three years from the date of the agreement, namely June 7, 1967, the assessee having exercised its option, had become the owner of the machine on June 7, 1970, and after that date, the assessee-firm continued to pay the instalment amount of the hire which fell due in September, 1970, and as such the amount of instalments of hire charges paid by the assessee-firm should be considered to be the cost of the machine and the assessee was entitled to depreciation on the amount of hire charges paid as cost of the machine. Thus, the claim for depreciation was allowed.
4. The Department went up in appeal against the aforesaid order passed by the AAC of Income-tax before the Income-tax Appellate Tribunal,Jaipur Bench, Jaipur (hereinafter called ' the Tribunal '). Since the asses-see did not appear, the appeal was heard ex parte by the Tribunal and by its order dated November 30, 1976, the Tribunal held that the crankshaft machine had not become the property of the assessee-firm merely because of the lapse of three years and on account of the fact that the instalments of hire-purchase amount were regularly paid by the assessee during that period. The Tribunal relied upon the letter of the Corporation dated September 17, 1974, stating that the ownership of the machinery in question was passed on by them to the assessee-firm on September 17, 1974. The Tribunal held that in view of the fact that the assessee-firm became the owner of the crankshaft machine only on September 17, 1974, it was entitled to depreciation on the cost of the aforesaid machine only after September 17, 1974. The Tribunal did not agree with the AAC that as soon as the period of three years had expired since the machine was begun to be used by the assessee-firm and instalments thereof were regularly paid, the presumption of ownership would arise in favour of the assessee-firm. The Tribunal set aside the order passed by the AAC of Income-tax and restored the order passed by the ITO disallowing depreciation to the assessee-firm under Section 32 of the Act on the amount of instalments of hire purchase paid by the assessee, considering the same as cost of the machinery.
5. Thereafter, the assessee-firm filed an application for making a reference before the Tribunal for stating the case and making a reference to this court and the question mentioned above was referred by the Tribunal to this court for its opinion, by the order dated September 14, 1977.
6. Mr. H. M. Parekh, appearing for the assessee firm, urged before us that, according to the terms of the hire purchase agreement, the assessee-firm was entitled to exercise the option on the expiry of three years subject to the condition that it continued to pay the instalments of hire charges regularly. According to the learned counsel, three years' period expired on June 7, 1970, and as the hire charges were regularly paid by the assessee-firm and as it had also exercised the option for purchase of the said machine, the assessee-firm became the owner of the said machine on the expiry of the period of three years and the Tribunal was not justified in holding that the ownership of the machinery in question was transferred to the assessee-firm only on September 17, 1974, after the payment of the entire sale price was made by way of hire purchase instalments. Learned counsel relied upon the instructions issued by the Central Board of Direct Taxes in its circular dated March 23, 1943, for dealing with cases in which an asset is acquired under a hire purchase agreement. According to the learned counsel for the assessee, after the assessee-firm had exercised its option for the purchase of the machineryin question on the expiry of the period of three years, the assessee-firm-should be considered to have become the owner of the crankshaft machine and was entitled to claim depreciation in respect of the cost thereof. Learned counsel relied upon the expression 'owned by the assessee' occurring in Section 32 of the Act and submitted that once the option was exercised by the assessee-firm at the end of the period of three years as stipulated in the hire purchase agreement, the machine must be deemed to be owned by the assessee-firm.
7. On the other hand, learned counsel for the Revenue submitted that even in accordance with the terms of the hire purchase agreement, the assessee-firm had not become the owner of the machinery until September 17, 1974, when the ownership was transferred to the assessee-firm by the Corporation after the payment of the entire sale price thereof, by way of hire purchase instalments. It was submitted that the title to the property should have passed to the person who claims the ownership of the machinery, plant or furniture, for the purposes of claiming depreciation under Section 32 of the Act.
8. Before proceeding to deal with the rival contentions, it would be proper to read Section 32(1) of the Act and also to consider the nature of hire purchase transactions. Section 32(1) of the Act runs as under :
' 32(1) 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. '
9. The crucial words in Section 32 are undoubtedly ' owned by the assessee '. If the building, machinery, plant or furniture is owned by the assessee and used for the purposes of business or profession, then only the assessee is entitled to a deduction by way of depreciation in the manner provided in Section 32.
10. Halsbury's Laws of England (fourth edition), vol. 22, contains the following statement of law in para 209 in respect of the nature of a hire-purchase transaction:
' 209. Nature of the contract: The contract of hire purchase is one of the variations of the contract of bailment, but it is a modern development and the rules with regard to bailments, which were laid down before any contract of hire purchase was contemplated, cannot be applied without modification because such a contract has in it not only the element of bailment but also the element of sale. At common law, the term 'hire purchase' properly applies only to contracts of hire conferring an option to purchase, but it is often used to describe contracts which are in reality agreements to purchase chattels by instalments, subject to acondition that the property in them is not to pass until all instalments have been paid. The distinction between these two types of contracts is, however, a most important one because under a contract to purchase by instalments, there is a binding obligation on the buyer to buy and he can, therefore, pass a good title to a purchaser or pledgee dealing with him in good faith and without notice of the rights of the true owner, whereas in the case of a contract, which merely confers an option to purchase, there is no binding obligation on the hirer to buy, and a purchaser or pledgee can obtain no better title than the hirer had, except in the case of a sale in market overt.'
11. Further, in para 267 of the same volume, while dealing with the question of passing of title, it has been observed that the general rule in a simple sale of goods is that the property in the goods passes at such time as the parties intend it to pass. In the case of hire purchase agreement, the title to the goods passes when the option to purchase is exercised and in the case of a conditional sale agreement, it will be when all the instalments of the total purchase price have been paid. Prior to that time, the property in the goods remains in the seller or owner, who may transfer it subject to the rights of the hirer or buyer. Conversely, the hirer or buyer cannot give a good title in the goods before the completion of the agreement vests the property in him.
12. In Instalment Supply (Private) Ltd. v. Union of India : 2SCR644 , the nature of the transactions known as hire purchase agreements was considered by their Lordships of the Supreme Court. It was observed in that case that the transaction of hire purchase partakes of the nature of a contract or bailment with an element of sale added to it. In such an agreement, the hirer may or may not be bound to purchase the thing hired ; but in either case, if there is an obligation to buy or an option to buy the goods delivered to the hirer by the owner, on the terms that the hirer on payment of a premium as also of a number of instalments, shall enjoy the use of the goods, which ultimately may become his property, the transaction amounts to one of hire purchase, even though the title to the goods has remained with the owner and shall not pass to the hirer until a certain event has happened, namely, that all the stipulated instalments have been paid or that the hirer has exercised his option to finalise the purchase on payment of a sum, nominal or otherwise. Thus, the hire purchase agreement is not only a contract of bailment simpliciter but it has also an element of sale added thereto.
13. In a case relating to imposition of sales tax, K.L. Johar and Co. v. Deputy Commercial Tax Officer : AIR1965SC1082 , it was held by the Supreme Court as under (p. 1090 of AIR):
'...... a hire purchase agreement has two elements: (1) element of bailment, and (2) element of sale, in the sense that it contemplates an eventual sale. The element of sale fructifies when the option is exercised by the intending purchaser after fulfilling the terms of the agreement. When all the terms of the agreement are satisfied and the option is exercised, a sale takes place of the goods which till then had been hired. When this sale tabes place, it will be liable to sales tax under the Act, for the taxable event under the Act is the taking place of the sale, the Act providing for a multi-point sales tax at the relevant time. Where, however, option is not exercised or cannot be exercised because of the inability of the intending purchaser to fulfil the terms of the agreement, there is no sale at all. As the taxable event is the sale of goods, the tax can only be levied when the option is exercised after fulfilling all the terms of the hire purchase agreement. '
14. It was also observed in the aforesaid case that even though eventually most cases of hire purchase may result in sales by the exercise of the option and the fulfilment of the terms of the agreement, the question as to when the sale takes place in a particular case will depend upon the terms of the hire purchase agreement.
15. In a similar case of hire purchase agreement, Sardar Tara Singh v. CIT : 47ITR756(MP) , the Madhya Pradesh High Court held that before depreciation could be claimed under Clause (vi) of Section 10(2) of the Indian I.T. Act, the asset in relation to which the depreciation allowance was claimed must become the property of the assessee. It was observed in that case that where an asset is let on hire, the assessee who owns the property is entitled to the depreciation allowance, but the machinery and plant should be the asset of the assessee. The circular relied upon by the learned counsel for the assessee in the present case was also referred to in Sardar Tara Singh's case : 47ITR756(MP) and it was pointed out by the learned judges of the Madhya Pradesh High Court that the circular relates only to the method of calculation of the depreciation allowance and it does not lay down, contrary to the provisions of the Act, that a hirer who is not the owner of the asset is entitled to depreciation allowance. It is also observed that the directions issued by the Department for the guidance of its officials cannot control or affect the meaning and construction of the Act.
16. In S.R.B.P. Srirangacharyulu v. CIT : 58ITR95(AP) , it was held that the true nature of the transaction should be determined with reference to the terms of the hire purchase agreement, if the terms of theagreement are reduced into writing de hors the facts and circumstances of the case and that the terms of the agreement alone should be referred to in order to determine the nature of the transaction.
17. Now, coming to the facts of the present case, we have to see as to at what point of time the parties intended the title to the machinery to pass to the hirer and for that purpose, we will have to refer to the agreement of hire purchase dated June 7, 1967. Clause 6 of the said agreement, which is relevant for our present purpose, runs as under :
' 6. Provided that the obligations under this agreement have meanwhile been only performed by the hirer, the hirer may become the owner of the said property by paying such sum as together with the sum paid in consideration of the option to purchase and as hire rent will in the aggregate amount to the hire purchase price as also the sales tax or general tax or purchase tax or any tax levied or leviable on such transaction under by any law for the time being in force and the hirer has obtained a clear receipt in writing from the owners admitting the payment by the hirer of all the above amounts and fulfilment of all the hirer's obligations and liabilities under this agreement and stating that the hirer has become entitled to the ownership of the said property, and thereupon this agreement shall determine, but until such time, the property shall remain the sole property of the owners and the hirer a mere bailee thereof :
Provided further that the hirer shall not be entitled to exercise his aforesaid option of purchase in respect of the said property for a period of 3 years from the date thereof.'
18. A perusal of the contents of Clause 6 above leaves no doubt in our mind that the property in the machinery was intended to be passed to the hirer only on payment of the aggregate amount of the hire purchase price and tax levied or leviable by the hirer. It has been specifically provided in the aforesaid Clause 6 that until such time that the entire hire purchase price of the machinery is not paid by the hirer to the Corporation, the asset in question shall remain the sole property of the owner and the hirer would be merely a bailee thereof. Undoubtedly, the Clause allowed the hirer an opportunity to exercise his option to purchase the machinery even earlier by payment of the entire outstanding hire charges so that along with the amount of hire purchase instalments already paid, the aggregate amount of the hire purchase price is paid by the hirer to the Corporation. Proviso to Clause 6 restricts the right of the hirer to become the owner of the machinery by providing that the hirer could not exercise his option of purchase in respect of the machinery in question within the period of three years from the date of the agreement. Thus, reading the main Clause 6 and the proviso together, it is perfectly clear that the hirercould exercise the option to purchase the machinery in question only after the expiry of the period of three years from the date of the execution of the hire purchase agreement by making payment of the entire outstanding amount of instalments, out of the hire purchase price. Thus, even upon payment of the entire aggregate amount of the hire purchase price, prior to the expiry of the period of three years from the date of the execution of the hire purchase agreement, the hirer could not become the owner of the machinery in question or, in other words, the ownership of the said machine would not pass to the hirer prior to the expiry of the period of three years from the date of the execution of the hire purchase agreement, even if the entire hire purchase price was paid. However, on the expiry of the period of three years, the hirer was given a right to exercise the option to purchase the machinery in question, yet that option could not he exercised merely by giving a letter to the Corporation or showing the intention of the hirer to purchase the machinery. But the manner envisaged in Clause 6 of the agreement for exercise of the option by the hirer on or after the expiry of the period of three years appears to be that the hirer should make payment of the remaining instalments of hire charges, so as to make up the aggregate amount of hire purchase price agreed to between the parties and also the sales tax or any tax levied or leviable and further the hirer should obtain a clear receipt from the owners admitting the payment by the hirer of all the amounts due to the owners and about the fulfilment of all the obligations and liabilities of the hirer in accordance with the hire purchase agreement. It is not the case of the hirer that on the expiry of the period of three years from the date of the execution of the hire purchase agreement, i.e., on June 1, 1970, or while exercising the so-called option, the hirer had paid the amount remaining outstanding out of the aggregate amount of hire purchase price in a lump sum.
19. The argument of Mr. Parekh is that, as the hirer continued to pay the instalments regularly, in accordance with the hire purchase agreement, before as well as after the expiry of the period of three years, the hirer should be considered to have become the owner of the machinery in question on the expiry of the period of three years, when the hirer exercised the option and indicated the same by payment of further instalments of the hire purchase amount falling due thereafter. We are unable to agree with the contention of the learned counsel as it does not correctly reflect the interpretation of Clause 6 of the hire purchase agreement, according to which the ownership in the machinery could not pass to the hirer until and unless the entire hire purchase price was paid by him and even if a part of the hire purchase price remained unpaid, the said machinery continued to remain the sole property of the owners and the hirer continued to be merely a bailee thereof. Thus, for the transfer of ownershipin the machinery to the hirer, the payment of the entire purchase price was necessary and merely because the hirer continued to make payment of the instalments regularly, as agreed under the hire purchase agreement, the hirer could not become the owner of the property in question at an earlier stage before the payment of full price of the machine. Clause 11 of the hire purchase agreement gave the hirer a right to determine the hiring at any time by giving a notice in writing to the owner and by actually returning the property in question at the hirer's risk and cost. Similarly, the owner had also a right to determine the hiring, if any instalment was not paid and a breach of the agreement was committed. Thus, it is absolutely clear that the ownership of the machinery did not and could not pass to the hirer until any part of the hire purchase price remained unpaid.
20. Mr. Parekh relied upon the decision of the Allahabad Court in Addl. CIT v. U. P. State Agro Industrial Corporation Ltd. : 127ITR97(All) , wherein it was held that the expression ' building owned by the assessee ' in s, 32 of the Act has not been used in the sense of property of which complete title was vested in the assessee. It was observed in the aforesaid case that the assessee must be considered to be the owner of the building under Section 32, if he is in a position to exercise the rights of an owner, not on behalf of the person in whom the title vests, but in his own right. In that case, the U.P. Agro Industrial Corporation Ltd. was a joint venture of the Government of India and the Government of U.P., as the capital of the Corporation was subscribed equally by the two Governments. The State Government transferred the possession of its agricultural workshop to the Corporation. The Corporation claimed depreciation under Section 32 in respect of the building taken over by it from the State Government. It was held in that case that the ownership of the property had been passed over by the State Government to the Corporation, inasmuch as in consideration for the transfer of the said property, the State Government had received equity shares of the Corporation amounting to Rs. 40 lakhs and also cash amounting to Rs. 4,07,589. Thus, the State Government having put the Corporation in possession of the property in dispute and the Corporation having fully performed its part of the contract by making payment of the sale price in the form of equity shares and payment of cash amount, what remained was that the State Government was to execute a registered sale deed in favour of the Corporation. It was held in these circumstances that even if the sale deed was not executed, the ownership in the property stood transferred to the Corporation so as to enable the Corporation to claim depreciation under Section 32 of the Act.
21. In CIT v. Hindustan Cold Storage and Refrigeration P. Ltd. : 103ITR455(Delhi) , the Delhi High Court has taken a view different from thattaken in the U.P. State Agro Industrial Corporation's case : 127ITR97(All) . That case also related to the transfer of immovable property by sale and it was held that if the sale price or the consideration for the transfer was fully paid by the assessee by allotting to the seller its shares to the extent of the face value of the sale price and even if the possession of the flour mill was also transferred to the assessee-company, yet the assessee-company did not become the owner of the flour mill and could not claim depreciation under Section 32(1) of the Act because the sale deed as contemplated by the agreement had not been executed and the execution thereof was postponed. It was held that the flour mill did not become the property of the company during the assessment year in question, as one of the conditions prescribed in Section 10(2)(vi) of the 1922 Act was not satisfied. It was also observed that the transfer of the flour mill, consti-tuting immovable property of more than Rs. 100 in value, could not be effected without the execution of a registered sale deed and the title therein could not pass to the assessee in the absence of a registered document of sale.
22. Although divergent views have been expressed by the Delhi and the Allahabad High Courts in respect of sale of immovable properties on the question as to whether the execution of a registered document of sale was essential for making the transferee owner of the immovable property so transferred, even after the entire stipulated sale price has been paid and the possession of the immovable property was also transferred by the seller to the purchaser, however, in the present case, we are not concerned with the controversy regarding the sale of immovable property, yet it was held even in the two cases referred to above, that the entire sale price must be paid and possession of the property must be transferred to the assessee so as to enable the purchaser to become the owner of the property sold for the purposes of claiming depreciation under Section 32 of the Act.
23. Moreover, the facts of the Allahabad case are different from the facts of the case in hand inasmuch as in the case before us, the hirer had only paid six instalments up to the expiry of the period of three years and seven instalments were yet to be paid by him in respect of the hire purchase price of the machinery in question. In the face of the specific condition contained in Clause 6 of the hire purchase agreement, the machinery could not be held to be owned by the assessee-firm until the payment of the entire hire purchase price thereof was made. As we have already pointed out above, in the present case, the entire sale price had not been paid even at the end of the period of three years and the mode of exercise of the option indicated in Clause 6 of the agreement was thatthe buyer should make payment of the remaining amount of the hire purchase price and taxes, if any, and obtain a receipt in respect thereof from the owners of the machinery in order to become the owner of the machinery. Thus, without payment of the full purchase price, the assessee-firm could not have become the owner of the machinery in question and the title to the machinery did not pass to the assessee-firm during the accounting period relevant to the assessment year 1972-73 because the full price of the machinery had not been paid to the Corporation.
24. In this view of the matter, we hold that the assessee-company was not entitled to claim depreciation allowance under Section 32(1) of the I.T. Act in respect of crankshaft machine during the assessment year 1972-73. The view taken by the Appellate Tribunal in this respect appears to be justified. We, therefore, answer the reference in the affirmative and in favour of the Revenue and against the assessee-firm.
25. The parties are left to bear their own costs.