The Title of an immovable property having value of more than Rs. 100/- cannot be deemed as transferred without registration.
In a recent ruling, the two-judge bench of the supreme court categorically held that a Lessee of a Building is not eligible for claiming depreciation even if the cost of construction was reimbursed to the owner of the property since such an arrangement is not covered under explanation 1 of section 32 of the Income Tax Act.
The bench comprising of Justices A.K Sikri and Ashok Bhushan further clarified that in order to become the owner of an immovable property having value of more than Rs. 100/-, it must be executed on a proper stamp paper and is also duly registered with the sub-Registrar
Initially there was a partnership Firm constituted by some of the Directors of the appellant-Company with an aim to run a super specialty hospital. When the construction works were started, the appellant-Company was incorporated since the Directors felt that it would be more suitable to manage and run the hospital. As per an agreement entered into by the Firm and the Company, it was agreed that the firm will complete the construction of the building and hand over possession of the same on completion, on the condition that the entire cost of construction of the building should be borne by the company. The agreement further, provided a clause that “The hospital building shall belong to the company on the company taking possession thereof; but however that the firm has and will have a lien on the hospital building and on any improvements or additions thereto until the money owing by the company to the firm by virtue of this agreement is fully paid off.”
The appellant took the possession of the Company on 18.12.1991 started running the hospital from the very next day. A major portion of the cost of construction was paid to the Firm. Since the balance amount was pending, the Firm had lien over the building and the ownership of the land was also remained with the Firm. As per an agreement, the land was given on lease to the appellant-Company for a rent of 100 rupees. Clause 4(g) of the agreement stated that “in consideration of the FIRM agreeing with the COMPANY to permit situation of the hospital building or any additions thereto belonging to the FIRM as aforesaid, the COMPANY shall pay to the FIRM a ground rent of Rs.100/- per month, but however that the liability to pay such ground rent shall be on and from the 1st day of April 93 only.”
For the assessment year 1992.93, the appellants filed income tax return and claimed depreciation on the said building which was denied by the AO by pointing out that the assessee is not the owner of the property for the relevant AY. On second appeal, the ITAT allowed the appeal. However, the High Court on appeal by the state quashed the relief granted to them and restored the assessment order. Therefore, the appellant approached the Apex Court for relief.
The bench observed that the building which was constructed by the firm belonged to the firm and the property in question is an immovable property. “The title in the said immovable property cannot pass when its value is more than Rs.100/- unless it is executed on a proper stamp paper and is also duly registered with the sub-Registrar. Nothing of the sort took place. In the absence thereof, it could not be said that the assessee had become the owner of the property.”
Before the Court, the appellant took another contention that having regard to clause 4(g), they had become the lessee of the property in question and since the construction was made by the appellant from its funds, by virtue of explanation (1) to Section 32 of the Income Tax Act, the assessee was, in any case, entitled to claim depreciation.
The bench clarified that as per the explanation, 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.
Dismissing the appeal, the bench said that “In the instant case, records show that 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.”
Read the full text of the order below.
