2017 (3) TMI 944 - SC - Income Tax

Claim of depreciation - Ownership - scope of explanation to Section 32(1) - Cost of the Hospital building constructed by the partnership firm reimbursed by the Assessee Company - ownership of the land had to remain with the firm, it was also agreed that the land would be given on lease by the firm to the company - Held that - it is only when the assessee holds a lease right or other right of occupancy and any capital expenditure is incurred by the assesee 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 and the expenditure on construction is incurred by the assessee, that assessee would be entitled to depreciation to the extent of any such expenditure incurred. The construction was made by the firm. It is a different thing that the assessee had reimbursed the amount. The construction was not carried out by the assessee himself. Therefore, the explanation also would not come to the aid of the assessee - Claim of depreciation not allowed.

Summary

Issues:
1. Ownership rights of the appellant over the property in question.
2. Claim of depreciation on the building under Section 32 of the Income Tax Act.
3. Interpretation of Explanation 1 to Section 32 regarding lease rights and capital expenditure.

Ownership Rights:
The case involved a private limited company formed to run a super speciality hospital, previously operated as a partnership firm. The building constructed by the firm was agreed to be transferred to the company upon completion, with the firm having a lien until the company paid off the construction costs. The High Court held that the company did not become the owner of the property in the relevant assessment year, as proper registration did not occur, preventing the transfer of ownership.

Depreciation Claim:
The appellant filed for depreciation on the building under Section 32 of the Income Tax Act, claiming ownership. The assessment officer rejected the claim, stating the appellant did not own the property. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) also initially denied the claim. However, the ITAT later allowed the claim, which was overturned by the High Court, affirming that the appellant did not own the property.

Interpretation of Explanation 1 to Section 32:
The appellant argued that they became the lessee of the property under clause 4(g) and should be entitled to depreciation under Explanation 1 to Section 32. The explanation allows for depreciation if the assessee holds a lease or other right of occupancy and incurs capital expenditure on construction. However, the construction was done by the firm, not the appellant, even though the appellant reimbursed the amount. Therefore, the explanation did not apply, and the claim for depreciation was dismissed by the Supreme Court.

In conclusion, the Supreme Court dismissed the appeal, concurring with the High Court's decision that the appellant did not become the owner of the property in question. The court also rejected the claim for depreciation under Section 32, as the construction was not carried out by the appellant, rendering Explanation 1 inapplicable.