1987 (8) TMI 123 - AT - Income Tax

Summary

Issues Involved:
1. Depreciation on immovable assets.
2. Depreciation on movable assets.
3. Applicability of Section 37(2B) of the Income-tax Act.

Detailed Analysis:

1. Depreciation on Immovable Assets:
The core issue pertains to the depreciation claimed by the assessee on immovable assets acquired from M/s. Narendra Ceramics. The assessee argued that it should be allowed depreciation as it had full control and used the assets in its business. However, the ITO and the first appellate authorities denied the claim, stating that the transfer of immovable property was incomplete without a registered deed as per Section 54 of the Transfer of Property Act. The sale deed was registered only on 1-9-1978, beyond the relevant assessment years. The appellate authorities upheld the ITO's decision, emphasizing that legal ownership was necessary for claiming depreciation.

2. Depreciation on Movable Assets:
The assessee also claimed depreciation on movable assets like plant, machinery, motor cars, and trucks. The ITO disallowed this claim, arguing that the transfer of movable assets was part of the same agreement as the immovable assets and was incomplete without the issuance of shares as consideration. The first appellate authorities supported this view. However, for the assessment years 1975-76 and 1976-77, the Commissioner (Appeals) allowed depreciation on movable assets, stating that ownership was transferred upon delivery and the transfer of building was not connected to movable assets.

3. Applicability of Section 37(2B) of the Income-tax Act:
For the assessment year 1975-76, the ITO disallowed Rs. 2,115 under Section 37(2B) of the Act, claiming it was lavish entertainment. The Commissioner (Appeals) deleted this disallowance, relying on the Gujarat High Court's decision in CIT v. Patel Bros. & Co. Ltd., which stated that such expenses did not involve lavish entertainment.

Judgment:

1. Depreciation on Immovable Assets:
The Tribunal found considerable force in the assessee's submissions and held that the assessee was the owner of both movable and immovable properties from M/s. Narendra Ceramics. The Tribunal emphasized the affidavit dated 20-8-1975 by Shri Narendra Tanna, which stated that the assessee was the owner of all assets from 1-4-1972 and that he acted as a trustee for the assessee until the sale deed was executed. The Tribunal noted that two views were possible regarding ownership, citing U.P. State Agro Industrial Corpn. Ltd.'s case in favor of the assessee and Tamil Nadu Agro Industries Corpn. Ltd.'s case in favor of the revenue. Following the principle that when two views are possible, the one favoring the assessee should prevail, the Tribunal directed the ITO to accept the assessee's claim for depreciation on both movable and immovable properties.

2. Depreciation on Movable Assets:
The Tribunal upheld the Commissioner (Appeals)'s decision for the assessment years 1975-76 and 1976-77, allowing depreciation on movable assets. It found that the assessee became the owner of movable assets upon delivery and was entitled to depreciation. The Tribunal rejected the ITO's argument that the transfer was incomplete without the issuance of shares.

3. Applicability of Section 37(2B) of the Income-tax Act:
The Tribunal upheld the Commissioner (Appeals)'s decision to delete the disallowance of Rs. 2,115, agreeing that the expenses did not involve lavish entertainment and were justified based on the Gujarat High Court's decision in CIT v. Patel Bros. & Co. Ltd.

Conclusion:
The appeals filed by the assessee for the first two years were partly allowed, and for the other two years, they were fully allowed. The appeals filed by the revenue were dismissed. The Tribunal directed the ITO to modify the assessments accordingly, allowing the assessee's claim for depreciation on both movable and immovable properties acquired from M/s. Narendra Ceramics.