TMI Blog2005 (8) TMI 582X X X X Extracts X X X X X X X X Extracts X X X X ..... . 3. In the course of assessment proceedings, among other things, the Assessing Officer has stressed on two items. The first item is that of the incidental expenses incurred by the assessee-company in selling four ships out of its fleet during the previous year relevant to the assessment year under appeal. The assessee-company had sold four ships during the relevant previous year. The assessee-company has incurred certain expenditure by way of commission and others in selling those ships. The assessee-company reduced such incidental sales expenses from the consideration received against the sale of four ships. The net proceeds were treated as the de facto consideration received on sale of the ships and the said net amount was reduced from the block of assets for the purpose of depreciation. The Assessing Officer took the view that the monies payable in respect of any depreciable asset falling within the block of assets have to be reduced from the value of available block of assets for the purpose of granting the depreciation allowance. The Assessing Officer has placed reliance on the provisions contained in section 43(6), read with the Explanation below section 41(4). The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant previous year. For the two reasons stated above, the Assessing Officer held that the assessee-company was not entitled for the depreciation for the impugned assessment year 1996-97. Accordingly, he disallowed the depreciation of the new two ships acquired by the assessee-company during the previous year and added back the amount to the income of the assessee-company. 5. These two issues were taken before the CIT(A) at Chennai. It was the contention of the assessee-company before the CIT(A) that the claim of depreciation made by the assessee-company on the two tankers acquired during the relevant previous year was disallowed by the assessing authority on an arbitrary finding that the tankers would not have been put to use during the relevant previous year. On the question of depreciation, the assessee-company submitted before the CIT(A) as follows : ( i )That in anticipation of acquiring the two tankers, the assessee-company had executed charter party agreement for carriage of goods and the two tankers have had reported to the loading ports prior to 31st March, 1996 and the loading of cargo actually commenced before the said date; ( ii )That the assessee-company has f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re notorised on the same day. ( iv )Certificates of protocol of delivery and acceptance of vessels dated 29-3-1996. ( v )Copies of log book entries regarding the movements of the vessels on high seas. A copy of the letter filed with the insurance company received on 29-3-1996 along with the copy of cheque for the payment of insurance premium. ( vi )Copies of certificates issued by the Registrar of Indian Ships dated 30-4-1996 on the basis of the application put in by the assessee-company on 29-3-1996. 7. All the above documents had been produced before the assessing authority also. The CIT(A) examined the issue in the light of the above particulars and coined the question to be considered as to whether the assessee-company was exercising the right of ownership over the two ships in exclusion of others from 29-3-1996 onwards. The CIT(A) held that the ships being movable assets got transferred on sale and delivery of the ships. He found that the purchases made by the assessee-company have been recognised by the Registrar of Ships by making registration entries in their official records. He held that the instrument of sales, the certificates of protocol are more important th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) has erred in directing the Assessing Officer to allow incidental expenses of Rs. 26,54,591 pertaining to the sale of two ships for the purpose of W.D.V. of the block of assets as against the expenses were reduced from the gross sale consideration by the Assessing Officer." 11. We heard Shri Rajendra, the learned Commissioner of Income-tax appearing for the revenue. The learned Commissioner contended that the claim of the assessee-company that it had acquired two ships on 29-3-1996 and deployed the same for its business purpose before 31-3-1996 was too incredible to believe. He reiterated the point that the ownership of the ships could be held in favour of the assessee-company only on registration of the transfer of the ownership of the vessels. In the present case, the Registrar of Shipping has not granted the certificate regarding the transfer of ownership to the assessee-company as on 31-3-1996. The registration certificate was granted some time in the month of April, 1996. Therefore, it is very clear that those two ships were not in fact owned by the assessee- company during the relevant previous year or at the end of the previous year. 12. Shri Rajendra further ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards port of loading, copy of the letter sent to the United India Assurance Co. Ltd. and copies of the log book of the ships were very much produced before the assessing authority for his perusal. Copies of those papers were produced before the CIT(A) also. The revenue has not raised any such ground that those vital papers were not produced before the assessing authority and if at all they were produced before the CIT(A) were, for the first time. He, therefore, submitted that regarding that core evidences, there cannot be any valid objection from the revenue. Regarding other papers, the learned counsel submitted that it contained copies of orders passed by the Tribunal, already available annual report of the assessee-company and certain other voyage details of the ships. 15. On merits of the case, the learned counsel submitted that depreciation is allowable to an assessee, if he is the owner of the asset and has used the asset in his business. Proviso to section 32 further provides that depreciation will be restricted to 50 per cent of the normal depreciation if the asset was used for less than 180 days in the previous year. From the documents mentioned in the statement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed in any other assessment year. Therefore, the crucial difference of timing needs to be considered while deciding the issue of depreciation. This is being reiterated by us for the reason that the Assessing Officer has no case that the assessee had not acquired the two ships during the relevant previous year. On page two of the assessment order, the assessing authority himself has stated as follows : "Though the assessee s contention with reference to acquisition of the above ships before 31-3-1996 may be acceptable, yet the assessee does not become the owner according to the Merchant Shipping Act." Therefore, it is evident that there is no dispute on the basic factum that the assessee-company had acquired two ships during the relevant previous year. The effective question considered by the Assessing Officer in fact was whether depreciation should be allowed for the impugned assessment year 1996-97 or depreciation should be given for the succeeding assessment year 1997-98 onwards. Actually this is a dispute on timing difference . 19. A shipping vessel is not like an ordinary asset on land. A ship is highly capital intensive and its operational expenses are so exorb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 669 had also considered a similar case of depreciation allowance. In the case considered by the Court, the vehicles were purchased by the assessee but the names of the owners were not transferred in the certificate of registration by end of the previous year. The vehicles were also used for the business of the assessee. The contention of the revenue was that till the transfer of ownership is effected in the certification of registration, the assessee could not be considered as the owner. Repelling the said contention of the revenue, the Court held that motor vehicle being a movable property, the transfer of ownership thereof is governed by the Sale of Goods Act, and not by the Motor Vehicles Act. As between the transferor and the transferee, the sale is complete even before the transfer is effected in the registration certificate. The failure to report the same to the registering authority may entail levy of penalty but it does not affect the passing of the title in the vehicle. The court therefore, held that the assessee, who purchased the vehicles was the owner of the vehicles and entitled to depreciation under section 32 of the Act if the vehicles were used for the purpose of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in order to register oneself as an owner of a ship, the applicant must produce all the necessary documentary proof of ownership. It also comes to light that ownership of the ship is an incident which is to take place even prior to the making of application for registration. In the present case, the application for registration was made on 29-3-1996 itself. After the necessary formalities, the registration was granted in the following month itself, i.e., in April, 1996. 24. Therefore, in the facts and circumstances of the case and in the light of the law explained by various courts, we have to hold that the ownership of the ships for the purpose of depreciation cannot be denied to the assessee-company for the technical reason that the ownership of the assessee was not registered as on 31-3-1996. It is a proven fact that the assessee had acquired the vessels on 29-3-1996 and the assessee remained as the de facto owner with full ownership of the vessels by the end of the previous year. The assessee need not be a titular owner of the ships to claim depreciation. Therefore, the reason pointed out by the assessing authority that the assessee could not be treated as the true ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f cases that it is sufficient that the assessee makes the asset ready for putting it to use. The Delhi High Court in the case of Capital Bus Service (P.) Ltd. v. CIT [1980] 123 ITR 404 has held that where an assessee puts assets ready for use that amounts to passive user and in such a case depreciation must be allowed, if claimed by the assessee. The Supreme Court has held in R.B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570 that the term owner has different meaning in different contexts and in certain circumstances, even a lessee may be considered as the owner of the property leased to him. The Kerala High Court has held in the case of Forest Industries Travancore Ltd. v. CIT [1964] 51 ITR 329 that use means kept ready for use and not actual use. The Court has held that allowance for normal depreciation does not depend upon the actual working of the machinery. It is sufficient that the machinery in question is employed by the assessee for the purpose of the business and for no other purpose and has kept ready for actual use of the profit-making apparatus, the moment a need arises. 27. The Kerala High Court in CIT v. Geotech Construction Corpn. [2000] 244 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of assessee for an assessment year based on the relevant previous year ending on the immediately preceding financial year. In the present case, at the end of the financial year even though the assessee-company had used the two ships for business, as the loading was not complete, the income could not be recognised as on that date. The assessee-company had recognised the income from the initial operation in the month of April, 1996 which falls in the succeeding previous year relevant to the assessment year 1997-98. 31. The nexus between the assets used and the income earned need not be satisfied in the very same previous year of deployment of the assets. Lord Thunkerton has held in Hughs (Inspector of Taxes) v. Bank of New Zealand [1938] 6 ITR 636 (HL) that "expenditure in course of the trade which is unremunerative is nonetheless a proper deduction, if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense. . . ." Therefore, recognition of any income corresponding to the deployment of asset in a particular previous year is not a necessary condition for allowing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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