TMI Blog2002 (10) TMI 240X X X X Extracts X X X X X X X X Extracts X X X X ..... nder: "3. The assessing/appellate authority has erred in reducing the amount of depreciation claimed under s. 32 by Rs. 131.65 lacs (Rs. 37.60 lacs for building and Rs. 94.05 lacs for plant machinery) in respect of building and plant machinery erroneously presuming that the assessee had claimed depreciation on building and plant machinery not put to use during the year." 4. Ground No. 4 in ITA No. 4014/Del/96 and ground No. 3 in ITA No. 4015/Del/96 are general in nature requiring no adjudication. 5. The relevant facts pertaining to ground No. 2 in both the appeals are that the assessee is a public sector company engaged in the procurement and distribution of foodgrains, fertilizers and other commodities. The facts as appreciated by the AO in 1991-92 assessment year are reproduced in the impugned order at p. 3 are as under: "Note No. 46 of the balance sheet indicates that the assessee has charged depreciation on godowns valued at 3282.86 lacs which are to be transferred to CWC after 15 years of construction. The assessee was asked to furnish the relevant papers regarding this transactions. Copy of an agreement between the CWC and FCI, dt.29th Feb., 1980, was filed. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee as per the above definition to arrive at the actual cost of the assets to the FCI on which depreciation can be allowed. Actual cost of the assets to FCI would be reduced to nil. In view of the above reasons, depreciation allowance claimed in respect of these assets of Rs. 8,20,05,000 would be disallowed." 6. Similarly, in 1992-93 assessment year the assessee-company claimed depreciation at Rs. 142.03 lakhs on godowns constructed by Central Warehousing Corporation (hereinafter called as CWC). Note 41 of the balance sheet for the relevant assessment year indicated that the assessee has charged depreciation on godowns which are to be transferred to CWC after 15 years of construction. Thus, on the same analogy as in the earlier assessment year, the depreciation allowance claimed in respect of these godowns amounting to Rs. 142.03 lakhs was disallowed. 7. In appeal before the first appellate authority, the CIT(A), for the following reason, confirmed the action of the AO: "Looking to the facts and circumstances of the case, I find that the AO has passed a well-reasoned order. Moreover, the assets i.e., godowns are not owned by the assessee-company and the rent is bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constructed by CWC on behalf of FCI and the entire finances for the same were initially provided by the Government of India to the FCI on 1 : 1 debt equity ratio and the CWC was to bear the FCI s liability both for the payment of interest charges and the repayment of the prescribed loan instalments to the Government of India. These payments as per this agreement would be received by the FCI from the CWC and will be made over in equal measure to the Government of India in discharge of its obligations. Clause 7 of this agreement was further emphasized which reads as under: "7. At the end of 15 years, the full ownership of those godowns including railways sidings would pass on from the FCI to the CWC. For this purpose, the CWC would, at the end of 15 years, pay to the FCI the written down value of the assets less the total amount of loan instalments paid by it already during the course of the 15 years period. Thus, the CWC would have paid to the FCI at the end of 15 years the total written down value of the assets." 13. Reference was also made to cls. 9, 10,11 and 12 of this agreement. 14. It was further submitted by the learned authorised representative that the assessment orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instalment basis along with interest. Referring to the arrangement, it was contended that the fund provided by the assessee to the CWC was treated as deposit with CWC at the initial stage and as and when the godowns were completed and the statement of expenditure incurred by CWC was received by the assessee, the assets were capitalized with a corresponding credit to deposit. As per this agreement, after 15 years, the godowns were to be handed over to the CWC at the written down value less the amount received back by the assessee against the finance provided to the CWC but, this fact, it was contended, does not tantamount to saying that the ownership of the godowns does not vest with the assessee. On the basis of which, it was contended that the CWC has been making the payments to the FCI and not to the Government of India and the FCI granted a loan and charged interest from the CWC and received the rent therefrom also. It was further contended that as far as the assessee was concerned, these were the assets used for the purpose of assessee s business as can be seen from the balance sheet and the said assets have not been sold. It was re-emphasized that no depreciation on the said a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15 years, the ownership was to pass over to the CWC and payments for the said transfer were being made by the CWC. Referring to the project agreement appended at flag H internal p. 4 Art. III, it was contended that the arguments of the assessee, namely, that as per the agreement between International Development Association and the FCI dt. 6th Jan., 1978, the corporation, vide cl. 3.01.(c) is barred from selling, letting out on lease, transfer or otherwise dispose of any of its property or assets required for the efficient operation of the project except in the normal course of business is concerned, it was contended that ample exceptions are carved out in cl. 3.02.(c) namely, that the corporation is entitled to take all actions which are "necessary" or "useful" in the conduct of its business or in the carrying out of the project. Accordingly, the contention put forth was that this embargo on transfer by way of selling or leasing out can be disregarded whenever the corporation i.e., the assessee considers the transfer to be necessary or useful. Attention as invited to the fact that why should CWC pay instalments if it is not enjoying the dominion on the said godowns. It was the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was further contended that only when gross written down value is paid after 15 years and the pay adjustments have been made, only then can it be said that the ownership has passed to the CWC. Referring to internal p. 4 Art. III of the project agreement between IDA and FCI, it was contended that specific embargo has been placed on the assessee that it cannot dispose or destroy the godowns and the CWC is only to manage the said godowns and there is no question that any income from the godown is being earned by the CWC. The per bag per month storage charges are only a revenue expenditure on the basis of the quantity of storage. 26. We have heard the rival submissions and perused the material placed on our files. The undisputed facts of the case as we understand are that in 1990-91 assessment year, the AO, vide his order dt. 31st March, 1990, passed under s. 143(3), did not make any disallowance on account of depreciation charges on assets by the assessee wherein in 1991-92 assessment year for the first time taking into consideration Note 46 of the balance sheet, depreciation on godowns to the tune of Rs. 820.05 lakhs was disallowed. It is further borne out that the disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lments to the Government of India. These payments would be received by the FCI (assessee) from the CWC and be made over in equal measure to the Government of India by the FCI i.e., the assessee in discharge of its obligations. 28. A perusal of cl. 7 of this tripartite agreement further shows that it was further agreed that at the end of 15 days, the full ownership of these godowns including railway sidings would pass on from the FCI i.e., the assessee to CWC and for this purpose, the CWC would at the end of 15 years pay to the assessee the written down value of the assets less the total value of loan instalments paid by it already during the course of 15 years period. Thus, the CWC would have paid to the FCI at the end of 15 years the total written down value of the assets. 29. It was further agreed as per cl. 8 of this tripartite agreement that the two corporations would continue to receive equity funds from the Government on the considerations relevant to them respectively and thus, would not disturb the other capital financial arrangements specific to the World Bank project funding in the instant context. 30. This tripartite agreement further shows vide cl. 9 that it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in its books nor does it charge or provide for depreciation on these depots. It is also confirmed therein that for 1990-91 assessment year, the cost calculation based on the rental fixed does not include the element of depreciation charged on these base depot godowns. 35. We have also considered at length the project agreement, dt.6th Jan., 1978, between International Development Association and the FCI. A perusal of this project agreement shows that on the same date, the Department Credit Agreement between India and the International Development Association took place as a result of which, the IDA agreed to make available India an amount equivalent to one hundred and seven million dollars on the terms and conditions set forth in the Development Credit Agreement on the condition that the FCI i.e., the assessee agrees to undertake such obligations towards the IDA as set forth in the project agreement, dt.6th April, 1978. 36. We have also taken into consideration art. III of the project agreement on which heavy emphasis has been laid upon by the assessee as well as the learned Departmental Representative. The same is being reproduced for ready reference: "Management and ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property or asset except in the manner as laid out in art. III of the project agreement the issues before us can be adjudicated without getting into the niceties to determine whether it is an absolute bar or a conditional bar as it is not imperative to decide the same so as to adjudicate the issue before us. We have also seen that it was envisaged that after a period of 15 years, the ownership would pass to the CWC after certain adjustments have been made. We are unable to see how on the facts as they stand it can be said that the ownership has passed to the CWC. As per the facts as they stand before us, the uniform stand of the assessee as well as the CWC is that the ownership vests with the assessee. It is also their common stand that the depreciation is also to be accordingly claimed by the assessee. It is also a common stand that the operational functions and management functions are discharged by the CWC for the FCI i.e., the assessee as a result of it payments are being made to it to cover the revenue expenditure. All these facts on record are coupled by the undisputed fact that no depreciation on the said assets is being claimed by the CWC or by any other authority. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with ownership after 15 years is concerned is also not in the realm of the present issue as it is not necessary to go into the issue of what kind of future arrangement the assessee could or could not have entered into as a result of the project agreement as the issue to be decided in the present forum is whether to allow the claim of the assessee regarding depreciation or not? Having considered the facts of the case at length, we have come to the conclusion that the claim deserves to be allowed. 40. Before arriving at the conclusion in favour of the assessee, we have taken into consideration the decision cited at Bar before us. The next point for our consideration at this juncture is to examine the position of law and its applicability on the facts as they stand before us. Thus, it is necessary to consider the decision relied upon by either side before us. In the decision of the Supreme Court in the case of Podar Cement, the criteria for deciding the issue was beneficial ownership and was based on the fact that for the purposes of s. 22, owner is a person who is entitled to receive income in his own right. Therein, the requirement for registration of sale deed was considered to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement and the only other interested party i.e., the CWC is not claiming any ownership rights on the said assets. Whatever may be the position after 15 years whether the ownership is parted with by the assessee on the basis of the tripartite agreement or on reconsideration, it is not parted with or for that matter the assessee is estopped from parting it as a result of the project agreement which acts as a bar which is absolute as per the learned Departmental Representative. The fact remains that as far as the present position is concerned, the ownership at present undisputably vests with the assessee which fact is not contested by the only other interested party i.e., the CWC and, accordingly, no depreciation on the assets has been claimed by it. This fact is further fortified by the past assessments and future assessments made in the case of the assessee. 43. In the aforementioned facts and position, we are of the view that undisputedly as the facts stand, ownership vests with the assessee. To go back to the basics, an asset owned by a person and used for the purposes of his business or profession cannot be denied depreciation for the reason that over a period of time on accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by the learned Departmental Representative also does not advance the case of the assessee. 46. Similarly, the facts as appreciated by the Allahabad High Court in the case of U.P. State Agro Industrial Corporation Ltd. also were diametrically different to the issue at hand. 47. Accordingly, for the detailed reasons given hereinabove, ground No. 2 raised by the assessee in both the years is allowed. 48. In the result, ITA No. 4015/Del/96 is allowed. 49. In ITA No. 4014/Del/96, another ground has been raised by the assessee which reads as under: "3. The assessing/appellate authority has erred in reducing the amount of depreciation claimed under s. 32 by Rs. 131.65 lacs (Rs. 37.60 lacs for building and Rs. 94.05 lacs for plant and machinery) in respect of building and plant and machinery erroneously presuming that the assessee had claimed depreciation on building and plant and machinery not put to use during the year." 50. The relevant facts pertaining to this ground are that the AO observed from Note 4 to the statement of fixed assets that cost of building, plant and machinery, furniture includes value at Rs. 753.20 lakhs not put to use. The break-up of this figure cate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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