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2007 (9) TMI 290 - AT - Income TaxTransfer of a capital asset - Depreciation for residential buildings and non-residential buildings - Purchase of Shares - Whether the assessee can exercise the rights of the owner in his own right to the exclusion of others - Deemed Owner u/s 27 - HELD THAT - We are of the view that order of learned CIT(A) must be upheld on this issue. There is no dispute that in order to claim the depreciation in respect of any property it is the condition precedent that assessee must be the owner of that property and the same is used for the purpose of business. The word owner has not been defined in the IT Act and therefore the question arises as to what meaning should be assigned to the word owned used by the Legislature in section 32 of the Act. In the case of Mysore Minerals Ltd. 1999 (9) TMI 1 - SUPREME COURT with reference to the word owned in section 32 of the Act with which we are also concerned in the present case. The legal position emerging from discussion is that the word owned in section 32 of the Act has to be understood in a wider sense and not in the legal sense in terms of the provisions of Transfer of Property Act. The true test would be whether the assessee can exercise the rights of the owner in his own right to the exclusion of others. If the answer is in affirmative then assessee would be entitled to depreciation under section 32 of the Act. AO has observed that purchase of shares cannot be equated with the purchase of property. There cannot be any dispute that generally mere purchase of shares in a company would not entitle the shareholder to enjoy the rights of an owner in respect of the properties owned by the company since both the entities are distinct and separate. However Articles of Association of a company engaged in the business of real estate may provide that shareholder of particular shares would be entitled to exercise the rights of owner in respect of properties owned by the company. Such mode of transfer is duly recognized by the Legislature in the provisions of section 2(47)(vi) section 27(iii) and section 269UA(d)(ii) of the Act. It is because of the provisions of section 269UA(d)(ii) that assessee was required to obtain no objection certificate from the competent authority prescribed under Chapter XX of the Act. All these provisions if read together lead to the only inference that Legislature has accepted the fact of transfer of property through the transfer of shares of a company. Therefore the objection of the Assessing Officer that property cannot be transferred through the transfer of shares cannot be sustained. Whether in the present case the assessee can exercise the rights of an owner in its own rights in respect of the property acquired by it through the purchase of shares of Yerrowda Investments Ltd. - A bare reading of the aforesaid articles shows that by virtue of holding of particular Nos. of shares having particular distinctive Nos. the holder would be entitled to have exclusive possession of a particular No. of flat so as to have exclusive use and occupation of the said flat. Thus ownership of a flat is attached with a particular and specific share having specified distinctive Nos. Therefore if that share is transferred then the absolute ownership of that flat is automatically transferred to the other party and the company has no power to refuse the transfer of such share from one person to another. This is an acceptable mode of transfer of property in the case of a company and is duly recognized by section 2(47)(vi) section 27(iii) as well as section 269UA(d) of the Act. Thus we are of the view that assessee had become the owner of the properties by virtue of holding of shares of Yerrowda Investments Ltd. and consequently it was entitled to claim depreciation in accordance with the law. The order of the learned CIT(A) is therefore upheld on this issue. In the result all the appeals are partly allowed.
Issues Involved:
1. Disallowance of interest under section 36(1)(iii) of the Income-tax Act, 1961. 2. Depreciation on premises acquired by purchase of shares. 3. Disallowance of prior period expenses. 4. Addition on account of forfeiture of application money received against issue of partly convertible debentures. 5. Levy of interest under section 234C of the Act vis-a-vis the income computed under section 115JA of the Act. 6. Disallowance of guest house expenses. 7. Disallowance of entertainment expenses out of canteen expenses. 8. Disallowance of Annual General Meeting expenses. 9. Amortised premium on leasehold expenses. 10. Disallowance of premium paid under Investors Welfare Scheme. 11. Disallowance of provisions for obsolete inventory. 12. Classification of interest income as business income or income from other sources. Detailed Analysis: 1. Disallowance of Interest under Section 36(1)(iii): The issue pertains to assessment years 1997-98, 2000-01, and 2001-02. The assessee claimed interest on borrowed funds used for setting up a new plant as a deduction under section 36(1)(iii). The Tribunal upheld the CIT(A)'s decision, which allowed the deduction, holding that the new project was an expansion of the existing business. This decision was based on a precedent from the assessment year 1990-91. 2. Depreciation on Premises Acquired by Purchase of Shares: The assessee claimed depreciation on premises acquired through the purchase of shares. The Assessing Officer disallowed the claim, arguing that the assessee only purchased shares, not buildings. The CIT(A) reversed this decision, considering the Articles of Association which granted exclusive rights to use and occupy the premises. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's judgment in Mysore Minerals Ltd. v. CIT, which interpreted 'owned' in a broader sense under section 32 of the Act. 3. Disallowance of Prior Period Expenses: This issue arises in assessment years 1997-98, 1998-99, and 2000-01. The CIT(A) allowed the claim for prior period expenses, following the Bombay High Court's decision in CIT v. Nagri Mills Co. Ltd., which emphasized consistency in accounting practices. The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered in favor of the assessee by a previous Tribunal decision. 4. Addition on Account of Forfeiture of Application Money: The assessee forfeited sums received against partly convertible debentures due to non-payment of call moneys and credited these to the Profit and Loss Account. The Assessing Officer added these sums to the income, but the CIT(A) deleted the additions, referencing the Bombay High Court's decision in Mahindra & Mahindra Ltd. v. CIT. The Tribunal upheld the CIT(A)'s decision, distinguishing the case from the Supreme Court's judgment in CIT v. T.V. Sundaram Iyengar & Sons Ltd. 5. Levy of Interest under Section 234C: This issue pertains to assessment years 1997-98 and 1998-99. The Tribunal found in favor of the assessee, referencing the Supreme Court's decision in CIT v. Kwality Biscuits Ltd., which held that book profits under section 115JA cannot be computed until the books are finalized, and thus no interest under section 234C is chargeable. 6. Disallowance of Guest House Expenses: The assessee conceded that this issue is covered against them by the Supreme Court's decision in Britannia Industries Ltd. v. CIT. Therefore, the Tribunal dismissed this ground. 7. Disallowance of Entertainment Expenses out of Canteen Expenses: The CIT(A) treated 25% of canteen expenses as entertainment expenses. The assessee conceded that this issue is covered against them by a previous Tribunal decision. The Tribunal dismissed this ground. 8. Disallowance of Annual General Meeting Expenses: The CIT(A) disallowed 50% of the AGM expenses. The assessee conceded that this issue is covered against them by a previous Tribunal decision. The Tribunal dismissed this ground. 9. Amortised Premium on Leasehold Expenses: This ground was dismissed as not pressed by the assessee. 10. Disallowance of Premium Paid under Investors Welfare Scheme: The assessee conceded that this issue is covered against them by a previous Tribunal decision. The Tribunal dismissed this ground. 11. Disallowance of Provisions for Obsolete Inventory: The assessee's claim for writing off obsolete inventory was disallowed by the Assessing Officer and upheld by the CIT(A), referencing the Bombay High Court's decision in CIT v. Heredilla Chemicals Ltd. The Tribunal upheld the CIT(A)'s decision, noting that such loss can only be claimed in the year the items are sold. 12. Classification of Interest Income: This ground was dismissed as not pressed by the assessee. Conclusion: All appeals were partly allowed, with the Tribunal upholding the CIT(A)'s decisions on most issues, while dismissing several grounds raised by the assessee based on precedents.
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