Commissioner of Income Tax vs Bhagat Ram Jai Narain

R.K. Agrawal, J.—The Income Tax Appellate Tribunal, Allahabad Bench, Allahabad, has referred the following question of law for opinion to this court u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") :

"Whether, on the facts and in the circumstances of the case and on a correct interpretation of Section 32(1)(iv) of the Income Tax Act, 1961, the Appellate Tribunal was justified in holding that on the actual cost of the building given to Shri O. N. Mahendra, manager, solely for his residence, the assessee was entitled to the claim of initial depreciation ?"

Briefly stated, the facts giving rise to the present case are that the respondent-assessee is a registered firm constituted by Shri Ram Nath Mahendra, Shri Kailash Nath Mahendra, Shri Nirankar Nath Mahendra, Shri Prem Nath Mahendra and the minor sons of Shri Onkar Nath Mahendra, Master Rahul Mahendra and Master Pankaj Mahendra, admitted to the benefits of partnership. The reference relates to the assessment year 1975-76. During the previous year relevant to this assessment year, the respondent-assessee constructed a residential property at Auckland Road, Allahabad, which was used solely by the manager of the assessee-firm, Shri O. N. Mahendra, for his residence. On the basis that the salary of Shri O. N. Mahendra was only Rs. 600 per month, i.e., less than Rs. 7,500 per year, it was claimed that on the cost of construction of this property the respondent-assessee was entitled to initial depreciation as laid down by Clause (iv) of Sub-section (1) Section 32 of the Act, and also depreciation. The Income Tax Officer gave a finding that this property was given to the manager, Shri O. N. Mahendra, who was being paid a monthly salary of Rs. 600 per month and was in the assessee''s employment for the past several years, but this property was also occupied by the minor sons of Shri O. N. Mahendra who were admitted to the benefits of partnership. The Income Tax Officer further found that this property was also in the occupation of Shri P. N. Mahendra, another partner of the assessee-firm. Here it will be necessary to point out that so far as the previous year relevant to the assessment year 1975-76 under consideration here is concerned, which ended on October 24, 1974, this property was occupied only by Shri O. N. Mahendra, while Shri P. N. Mahendra, partner, shifted to a portion of this property after Grihaprevesh on November 11, 1974, i.e., in the subsequent year. The Income Tax Officer held that initial depreciation and normal depreciation will be admissible only on the actual cost of the out-houses which were occupied for residence by the low-paid employee each of whom was drawing less than Rs. 7,500 per year and not on the actual cost of the rest of the building.

The respondent-assessee was aggrieved by the assessment and, therefore, went up in appeal. The Commissioner of Income Tax (Appeals), however, held that on the portion of the building which was meant for the exclusive use of Shri O. N. Mahendra, manager of the respondent-assessee firm, the respondent-assessee firm was entitled to initial depreciation as well as normal depreciation. However, for the two rooms of the first floor of the building, which were meant to be the guest house and the portion meant for the occupation of Shri P. N. Mahendra, partner, the Commissioner of Income Tax (Appeals) held that in respect of the portion occupied by Shri P. N. Mahendra, partner (in the subsequent year), the respondent-assessee was not entitled even for normal depreciation. The result was that the Commissioner of Income Tax (Appeals) directed the Income Tax Officer to work out the initial depreciation on 3/4ths of the actual cost of the building and similarly allow depreciation on 3/4ths of the actual cost of building, furniture and fittings for the assessment year 1975-76.

Against the order of the Commissioner of Income Tax (Appeals), both the respondent-assessee as well as the Revenue came up in appeal before the Appellate Tribunal. The grievance of the respondent-assessee was that even the disallowance of l/4th of the initial depreciation and depreciation on the actual cost of the building sustained in appeal by the Commissioner of Income Tax (Appeals) was not justified. On the other hand, the grievance of the Revenue was that the Commissioner of Income Tax (Appeals) wrongly allowed initial depreciation on 3/4ths of the actual cost of the building as against the initial depreciation allowed by the Income Tax Officer only on the actual cost of the out-houses. The Appellate Tribunal upheld the order of the Commissioner of Income Tax (Appeals) on this issue in the following words :

"We have carefully considered the rival submissions. It is not under dispute that Shri O. N. Mahendra was employed by the assessee-firm as its manager for the past several years and during the previous year relevant to the assessment year 1975-76 he was being paid salary of Rs. 600 per month. It is further not under dispute that the value of the perquisite of the rent-free house was worked out in the assessment of Shri O. N. Mahendra for the assessment year 1975-76, that is, the assessment year under consideration here, at Rs. 900 only and the income of Shri O. N. Mahendra chargeable under the head "Salaries" including the value of this perquisite was determined by the Income Tax Officer at Rs. 6,680 only. Here it might also perhaps not be out of place to mention that it is not the Department''s case that the value of the rent-free house was treated as the perquisite and added to the total income of any of the minor sons of Shri O. N. Mahendra who were admitted to the benefits of the partnership. Considering all this, we have no hesitation in coming to the conclusion that the portion of the house in the occupation of Shri O. N. Mahendra was given to him for use by him solely for the purpose of residence and the minor sons and wife stayed with him not because the houses were given to the family of Shri O. N. Mahendra who in the normal course of human conduct were supposed to stay with the father or husband, as the case may be. Considering all this, we hold that on the actual cost of the building given to Shri O. N. Mahendra solely for his residence, the assessee was entitled to the claim of both initial depreciation and normal depreciation."

We have heard Shri A. N. Mahajan, learned standing counsel appearing for the Revenue, and Shri Vikram Gulati, learned counsel for the respondent-assessee.

Learned counsel for the Revenue has submitted that since Shri Onkar Nath Mahendra, who was given by the respondent-assessee, to live/reside in the residential property at Auckland Road, Allahabad, was also the father/guardian of two minor sons, namely, Master Rahul Mahendra and Master Pankaj Mahendra, who have been admitted to the benefits of the partnership firm, was thus, not using the property solely for the purpose of his residence and, therefore, the respondent-assessee, was not entitled for higher depreciation of 20 per cent. as provided in Clause (iv) of Section 32(1) of the Act as it stood during the relevant assessment year. According to him, his two minor sons who are admitted to the benefits of the partnership firm, had a right to such share of the property and of the profits of the firm, as may be agreed upon as provided u/s 30(2) of the Indian Partnership Act, 1932.

Shri A. N. Mahajan, learned counsel, further submitted that the respondent-assessee had adopted a colourable device to avoid the payment of tax by dubious methods, which is not permissible under law. In support of his above submissions, he relied upon a decision of the Supreme Court in the case of McDowell and Co. Ltd. Vs. Commercial Tax Officer, . In the aforesaid case, the Supreme Court had held that tax planning may be legitimate provided it is within the framework of the law and colourable device cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It further held that it is the obligation of every citizen to pay the taxes honestly without resorting to subterfuge. However, in the present case avoidance of tax by dubious method does not arise.

Shri Vikram Gulati, learned counsel for the respondent-assessee, has, however, submitted that Shri Onkar Nath Mahendra was an employee of the respondent-assessee and in that capacity, he was provided with the residential accommodation and merely because, the two minors, namely, Master Rahul Mahendra and Master Pankaj Mahendra, who have been admitted to the benefit of the partnership firm happened to be his sons and were living with him, would not mean that the residential premises was not solely used for the purpose of residence of Shri Onkar Nath Mahendra and, thus, the Tribunal was justified in giving the benefit of Clause (iv) of Section 32(1) of the Act.

Shri Vikram Gulati, learned counsel, further submitted that this court in reference has to go with the findings of fact as found by the Tribunal and cannot reappraise the evidence. It has to answer the question of law on the basis of the facts and circumstances of the case as found by the Tribunal and the question referred to this court has to be understood in the light of the controversy between the parties before the various authorities. In support of his aforesaid plea, he relied upon the following decisions :

(1) Commissioner of Income Tax, Bihar and Orissa Vs. Kirkend Coal Co., ;

(2) Associated Stone Industries (Kotah) Ltd. Vs. Commissioner of Income Tax, New Delhi, ; and

(3) Patnaik and Co. Ltd. Vs. Commissioner of Income Tax, Orissa, .

In the case of Commissioner of Income Tax, Bihar and Orissa Vs. Kirkend Coal Co., , the Supreme Court had held that in a reference u/s 66 of the Indian Income Tax Act, 1922, which corresponds to Section 256 of the Income Tax Act, 1961, only the question which is either raised or argued before the Tribunal may be answered, even if the language of the question framed by the Tribunal may apparently include an inquiry into other matters which could have been, but were not raised or argued. The Supreme Court in the case of Associated Stone Industries (Kotah) Ltd. Vs. Commissioner of Income Tax, New Delhi, , had held that the question has to be understood in the light of the controversy between the parties before the Income Tax Officer, the Appellate Assistant Commissioner and the Tribunal. In the case of Patnaik and Co. Ltd. Vs. Commissioner of Income Tax, Orissa, , the Supreme Court had held that the Appellate Tribunal is the final fact-finding authority under the Income Tax Act and that the court has no jurisdiction to go behind the statement of facts made by the Tribunal in its appellate order. The court may do so only if there is no evidence to support them or the Appellate Tribunal has misdirected itself in law in arriving at the findings of fact. But even there the court cannot disturb the finding of fact given by the Appellate Tribunal unless a challenge is directed specifically by a question framed in a reference against the validity of the impugned findings of fact on the ground that there is no evidence to support them or they are the result of a misdirection in law.

The various decisions relied upon by Shri Gulati are of no help to the respondent-assessee. The court is neither going into the findings of fact recorded by the Tribunal nor is deciding any question which has not been raised or argued before the Tribunal.

The facts are not in dispute. The question is as to whether the residential premises which was given for use of the respondent-assessee was solely used by the employee, Shri Onkar Nath Mahendra, so as to qualify for the depreciation of 20 per cent. as provided in Clause (iv) of Section 32(1) of the Act. For ready reference, Clause (iv) of Section 32(1) of the Act as it stood during the relevant year, i.e., 1975-76, is reproduced below :

"in the case of any building which has been newly erected after the March 31, 1961, where the building is used solely for the purpose of residence of persons employed in the business and the income of each such person chargeable under the head ''Salaries'' is seven thousand and five hundred rupees or less, or where the building is used solely or mainly for the welfare of such persons as a hospital, creche, school, canteen, library, recreational centre, shelter, rest-room or lunch room, a sum equal to twenty per cent. of the actual cost of the building to the assessee in respect of the previous year of erection of the building ; but any such sum shall not be deductible in determining the written down value for the purposes of Clause (ii) of Sub-section (1)."

Normally, depreciation on building as specified in Appendix I, is only 2.5 per cent. on the building in respect of the first class substantial building of selected material, 5 per cent. on second class building of less substantial construction and 7.5 per cent. on third class building on construction inferior to that of the second class building but not including purely temporary erection is admissible during the relevant assessment year, i. e., 1975-76. Higher depreciation of 20 per cent. could be claimed only if it falls within the four corners of Clause (iv) of Section 32(1) of the Act, otherwise not. For claiming the depreciation under Clause (iv) of Section 32(1) of the Act, the following three conditions are to be fulfilled, viz., firstly, the building should have been newly erected after March 51, 1961 ; secondly, the building should be used solely for the purpose of residence of persons employed in the business ; and thirdly, the income of such persons chargeable under the head "Salaries" is Rs. 7,500 or less.

In the present case, the first and third conditions are fulfilled. The question is as to whether the second condition, i.e., it should be used solely for the purpose of residence of persons employed in the business is fulfilled or not. The emphasis is on the words "used solely" for the purpose of residence of the persons employed in the business. In the present case, there is no dispute that the two minor sons of Shir Onkar Nath Mahendra have been admitted to the benefits of the partnership firm, i.e., respondent-assessee. u/s 30(2) of the Indian Partnership Act, each minor who has been admitted to the benefit of the partnership firm has a right to such share of the property and of the profits of the firm as may be agreed upon. The two minor sons of Onkar Nath Mahendra, are thus, having a share in the residential property which has been given to Shri Onkar Nath Mahendra,. i.e., their father, for use as residence. His two sons are living in the said property in their own right as they have a right in the said property. Thus, it cannot be said that the said property is being used solely for the purpose of residence of Shri Onkar Nath Mahendra. In that view of the matter, the second condition is not fulfilled and, therefore, the depreciation under Clause (iv) of Section 32(1) of the Act is not admissible.

In view of the foregoing discussions, we answer the question referred to us, in the negative, i.e., in favour of the Revenue and against the assessee. However, the parties shall bear their own costs.