TMI Blog1985 (4) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... n became the owner of the said machine and it agreed that the assessee would use the machine for a period of 3 years as the hirer thereof. The total price of the machine was settled at Rs. 1,00,767.08 out of which a sum of Rs. 16,957 was paid by the assessee before the execution of the hire purchase agreement, while the remaining amount of Rs. 89,810.08 was made payable in 13 equal instalments due on 1st September and 1st March of every year, beginning from September 1, 1968. The agreement provided that if the hire charges were regularly paid by the hirer during the period of three years, the hirer could exercise his option for the purchase of the said machine ; but if during the period of payment of hire charges, the hirer failed to make payment of any of the instalments, the Corporation being the owner could terminate the hiring without any prior notice and take possession of the machine in question. Thus, the hirer could exercise the option to purchase the machine only after the expiry of 3 years of the hiring of the machine in case the hire charges were paid regularly and the remaining amount towards the purchase price of the machine was paid at the end of the third year or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd by its order dated November 30, 1976, the Tribunal held that the crankshaft machine had not become the property of the assessee-firm merely because of the lapse of three years and on account of the fact that the instalments of hire-purchase amount were regularly paid by the assessee during that period. The Tribunal relied upon the letter of the Corporation dated September 17, 1974, stating that the ownership of the machinery in question was passed on by them to the assessee-firm on September 17, 1974. The Tribunal held that in view of the fact that the assessee-firm became the owner of the crankshaft machine only on September 17, 1974, it was entitled to depreciation on the cost of the aforesaid machine only after September 17, 1974. The Tribunal did not agree with the AAC that as soon as the period of three years had expired since the machine was begun to be used by the assessee-firm and instalments thereof were regularly paid, the presumption of ownership would arise in favour of the assessee-firm. The Tribunal set aside the order passed by the AAC of Income-tax and restored the order passed by the ITO disallowing depreciation to the assessee-firm under s. 32 of the Act on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee-firm by the Corporation after the payment of the entire sale price thereof, by way of hire purchase instalments. It was submitted that the title to the property should have passed to the person who claims the ownership of the machinery, plant or furniture, for the purposes of claiming depreciation under s. 32 of the Act. Before proceeding to deal with the rival contentions, it would be proper to read s. 32(1) of the Act and also to consider the nature of hire purchase transactions. Section 32(1) of the Act runs as under : " 32(1) In respect of depreciation of buildings, machinery, plant, or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed. " The crucial words in s. 32 are undoubtedly owned by the assessee If the building, machinery, plant or furniture is owned by the assessee and used for the purposes of business or profession, then only the assessee is entitled to a deduction by way of depreciation in the manner provided in s. 32. Halsbury's Laws of England (fourth edition), vol. 22, contains the following statement of law in para 209 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transaction of hire purchase partakes of the nature of a contract or bailment with an element of sale added to it. In such an agreement, the hirer may or may not be bound to purchase the thing hired; but in either case, if there is an obligation to buy or an option to buy the goods delivered to the hirer by the owner, on the terms that the hirer on payment of a premium as also of a number of instalments, shall enjoy the use of the goods, which ultimately may become his property, the transaction amounts to one of hire purchase, even though the title to the goods has remained with the owner and shall not pass to the hirer until a certain event has happened, namely, that all the stipulated instalments have been paid or that the hirer has exercised his option to finalise the purchase on payment of a sum, nominal or otherwise. Thus, the hire purchase agreement is not only a contract of bailment simpliciter but it has also an element of sale added thereto. In a case relating to imposition of sales tax, K. L. Johar and Co. v. Deputy Commercial Tax Officer [1965] 16 STC 213 (SC); AIR 1965 SC 1082, it was held by the Supreme Court as under (p. 1090 of AIR) i " ........ a hire purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficials cannot control or affect the meaning and construction of the Act. In S. P. B. P. Srirangacharyulu v. CIT [1965] 58 ITR 95 (AP), it was held that the true nature of the transaction should be determined with reference to the terms of the hire purchase agreement, if the terms of the agreement are reduced into writing de hors the facts and circumstances of the case and that the terms of the agreement alone should be referred to in order to determine the nature of the transaction. Now, coming to the facts of the present case, we have to see as to at what point of time the parties intended the title to the machinery to pass to the hirer and for that purpose, we will have to refer to the agreement of hire purchase dated June 7, 1967. Clause 6 of the said agreement, which is relevant for our present purpose, runs as under i " 6. Provided that the obligations under this agreement have meanwhile been only performed by the hirer, the hirer may become the owner of the said property by paying such sum as together with the sum paid in consideration of the option to purchase and as hire rent will in the aggregate amount to the hire purchase price as also the sales tax or general tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs from the date of the execution of the hire purchase agreement, the hirer could not become the owner of the machinery in question or, in other words, the ownership of the said machine would not pass to the hirer prior to the expiry of the period of three years from the date of the execution of the hire purchase agreement, even if the entire hire purchase price was paid. However, on the expiry of the period of three years, the hirer was given a right to exercise the option to purchase the machinery in question, yet that option could not be exercised merely by giving a letter to the Corporation or showing the intention of the hirer to purchase the machinery. But the manner envisaged in clause 6 of the agreement for exercise of the option by the hirer on or after the expiry of the period of three years appears to be that the hirer should make payment of the remaining instalments of hire charges, so as to make up the aggregate amount of hire purchase price agreed to between the parties and also the sales tax or any tax levied or leviable and further the hirer should obtain a clear receipt from the owners admitting the payment by the hirer of all the amounts due to the owners and abou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT v. U. P. State Agro Industrial Corporation Ltd. [1981] 127 ITR 97 (All), wherein it was held that the expression " building owned by the assessee " in s. 32 of the Act has not been used in the sense of property of which complete title was vested in the assessee. It was observed in the aforesaid case that the assessee must be considered to be the owner of the building under s. 32, if he is in a position to exercise the rights of an owner, not on behalf of the person in whom the title vests, but in his own right. In that case, the U.P. Agro Industrial Corporation Ltd. was a joint venture of the Government of India and the Government of U.P., as the capital of the Corporation was subscribed equally by the two Governments. The State Government transferred the possession of its agricultural workshop to the Corporation. The Corporation claimed depreciation under s. 32 in respect of the building taken over by it from the State Government. It was held in that case that the ownership of the property had been passed over by the State Government to the Corporation, inasmuch as in consideration for the transfer of the said property, the State Government had received equity shares of the Cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferred by the seller to the purchaser, however, in the present case, we are not concerned with the controversy regarding the sale of immovable property, yet it was held even in the two cases referred to above, that the entire sale price must be paid and possession of the property must be transferred to the assessee so as to enable the purchaser to become the owner of the property sold for the purposes of claiming depreciation under s. 32 of the Act. Moreover, the facts of the Allahabad case are different from the facts of the case in hand inasmuch as in the case before us, the hirer had only paid six instalments up to the expiry of the period of three years and seven instalments were yet to be paid by him in respect of the hire purchase price of the machinery in question. In the face of the specific condition contained in clause 6 of the hire purchase agreement, the machinery could not be held to be owned by the assessee-firm until the payment of the entire hire purchase price thereof was made. As we have already pointed out above, in the present case, the entire sale price had not been paid even at the end of the period of three years and the mode of exercise of the option in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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