Dwarka Prasad, J. - (1.) THE Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, by its order dated September 14, 1977, referred the following question of law arising out of its order dated September 26, 1973, to this court for its opinion : " Whether in view of the agreement dated June 7, 1967, with National Small Scale Industries Corporation Ltd., New Delhi, the assessee was entitled to depreciation under Section 32 of the Income-tax Act ? "
(2.) THE assessee is a partnership firm engaged in the business of reconditioning of automobile engines. In the year 1967, the assessee imported a crankshaft regrinding machine from U.S.S.R., for which finance was provided by M/s. National Small Scale Industries Corporation Ltd., New Delhi, (hereinafter referred to as " the Corporation "). THE crankshaft machine was purchased under a hire purchase agreement dated June 7, 1967. wherein the Corporation 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 thereafter. In the return filed by the assessee-firm in respect of the assessment years 1970-71 and 1971-72, the assessee claimed depreciation under Section 32 of the I.T. Act, 1961 (in short " the Act"), on the crankshaft machine purchased under the hire purchase agreement, but the claim was rejected by the ITO and that order was ultimately affirmed on appeal by the Income-tax Appellate Tribunal. In the return filed by the assessee in respect of the subsequent assessment year 1972-73, again a claim for depreciation on the crankshaft machine was made by the assessee under Section 32 of the Act in respect of the amount of instalments paid during the previous year corresponding to the assessment year 1972-73. It was asserted by the assessee-firm that it exercised its option in accordance with the hire purchase agreement dated June 7, 1967, at the end of the third year of the hiring of the machine in question and that the hire charges were paid regularly during the year. The ITO, by his order dated November 30, 1974, rejected the claim for depreciation under Section 32 on the ground that the letter of the Corporation dated September 17, 1974, showed that the ownership of the machine was transferred to the assessee-firm only on September 17, 1974, and in view of the fact that the assessee-firm was not the owner of the said machine during the relevant period, the depreciation could not be allowed. The assessee filed an appeal before the AAC of Income-tax, Jodhpur Range, Jodhpur, who, by his order dated July 19, 1975, held that, after the expiry of three years from the date of the agreement, namely June 7, 1967, the assessee having exercised its option, had become the owner of the machine on June 7, 1970, and after that date, the assessee-firm continued to pay the instalment amount of the hire which fell due in September, 1970, and as such the amount of instalments of hire charges paid by the assessee-firm should be considered to be the cost of the machine and the assessee was entitled to depreciation on the amount of hire charges paid as cost of the machine. Thus, the claim for depreciation was allowed. The Department went up in appeal against the aforesaid order passed by the AAC of Income-tax before the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter called " the Tribunal "). Since the asses-see did not appear, the appeal was heard ex parte by the Tribunal and 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 Section 32 of the Act on the amount of instalments of hire purchase paid by the assessee, considering the same as cost of the machinery. Thereafter, the assessee-firm filed an application for making a reference before the Tribunal for stating the case and making a reference to this court and the question mentioned above was referred by the Tribunal to this court for its opinion, by the order dated September 14, 1977. Mr. H. M. Parekh, appearing for the assessee firm, urged before us that, according to the terms of the hire purchase agreement, the assessee-firm was entitled to exercise the option on the expiry of three years subject to the condition that it continued to pay the instalments of hire charges regularly. According to the learned counsel, three years' period expired on June 7, 1970, and as the hire charges were regularly paid by the assessee-firm and as it had also exercised the option for purchase of the said machine, the assessee-firm became the owner of the said machine on the expiry of the period of three years and the Tribunal was not justified in holding that the ownership of the machinery in question was transferred to the assessee-firm only on September 17, 1974, after the payment of the entire sale price was made by way of hire purchase instalments. Learned counsel relied upon the instructions issued by the Central Board of Direct Taxes in its circular dated March 23, 1943, for dealing with cases in which an asset is acquired under a hire purchase agreement. According to the learned counsel for the assessee, after the assessee-firm had exercised its option for the purchase of the machinery in question on the expiry of the period of three years, the assessee-firm-should be considered to have become the owner of the crankshaft machine and was entitled to claim depreciation in respect of the cost thereof. Learned counsel relied upon the expression "owned by the assessee" occurring in Section 32 of the Act and submitted that once the option was exercised by the assessee-firm at the end of the period of three years as stipulated in the hire purchase agreement, the machine must be deemed to be owned by the assessee-firm.
(3.) ON the other hand, learned counsel for the Revenue submitted that even in accordance with the terms of the hire purchase agreement, the assessee-firm had not become the owner of the machinery until September 17, 1974, when the ownership was transferred 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 Section 32 of the Act. Before proceeding to deal with the rival contentions, it would be proper to read Section 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 Section 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 Section 32. ;