The main legal point established in the judgment is the requirement of legal ownership for claiming depreciation and the distinction between capital and revenue expenditure. The judgment emphasizes the need for entitlement to receive income from the property in one's own right for claiming depreciation.

T.N. Vallinayagam, J.

1. The Income-tax Appellate Tribunal has referred the following question of law arising out of its order dated June 5, 1995, in respect of the assessment year 1984-85.

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the aggregate cost by way of payments made to the landlords, stamp and registration costs, i.e., Rs. 26,82,462 in all was not admissible as a deduction, but rent paid in advance only by way of security so that the lessor may adjust out of the said deposit monthly rent payable at the rate mentioned in the documents ?"

2. The assessee had raised two questions which are as under :

"1. Whether, on the facts and in the circumstances and on the contentions taken, the Tribunal was right in holding that depreciation was not admissible in respect of the three flats at Calcutta for the reason that the petitioner was not an owner but holds leasehold rights in respect thereof ?

2. Alternatively, and without prejudice to the foregoing, the Tribunal was right in holding that the aggregate cost by way of payments made to the landlords, stamp and registration costs, i.e., Rs. 26,82,462 in all was not admissible as a deduction, that it was not in the nature of advance rent paid, but rent paid in advance only by way of security so that the lessor may adjust out of the said deposit monthly rent payable at the rate mentioned in the document ?"

In respect of the first question it was found by the Tribunal that the assessee's case is not one where the liability to pay the entire rent for the whole of ninety-nine years arose on the date of the lease and that the rent was paid in advance only by way of security so that the lessor may adjust out of the said deposit monthly rent payable by the tenant at the rate mentioned in the document itself.

3. The Tribunal considered it to be a finding of fact and referred the second question as reproduced above.

4. The facts of the case are that the assessee is a public sector undertaking. The assessment for the assessment year 1984-85 was completed under Section 143(3) on March 30, 1987, and since according to the Commissioner, the assessment was prejudicial to the interests of the Revenue, he passed an order under Section 263 of the Income-tax Act, 1961, taking the position that the assessee was not the owner of the three flats and, therefore, was not entitled to depreciation. According to him, the Assessing Officer had erroneously granted depreciation on the flats. Regarding the building at Hyderabad, the learned Commissioner observed that there should be a legal ownership even for leased property in view of the law laid down in the decision of the Supreme Court in the case of Nawab Sir Mir Osman Ali Khan (Late) v. CWT in which it was observed that the ownership passes on execution of the registered sale deed. This decision of the Supreme Court has considered its earlier decision in CWT v. Bishwanath Chatterjee and Raja Mohammad Amir Ahmad Khan v. Municipal Board of Sitapur. The decision of the Madras High Court in the case of CIT v. Tamil Nadu Agro Industries Corporation Ltd, and the Full Bench of the Kerala High Court in Parthas Trust v. CIT were also relied on and it was held that the ownership of the asset is a condition precedent to the allowance of depreciation and that persons who are merely in possession without any title to the property cannot claim depreciation. He accordingly withdrew the depreciation allowed by the Assessing Officer in respect of the Hyderabad building. Regarding depreciation on the flats situated in Calcutta, the learned Commissioner relying on the decisions of the various High Courts directed the Assessing Officer to withdraw depreciation wrongly allowed to the assessee. The alternate plea of allowing the entire amount of lease as rent was also rejected following the decision in the case of Ramakrishna and Co. v. CIT.

The assessee came in appeal before the Tribunal challenging the order of t