Huzaima Bukhari and Dr Ikramul Haq
Whether registered ownership of property (“depreciable asset” in legal jargon) is essential or not, to claim depreciation allowance under section 22 of the Income Tax Ordinance, 2001 is a vexing and important question for taxpayers engaged in business (which also includes profession under the new Ordinance). Like section 23(1)(v) read with Rule 1 of the Third Schedule to the repealed Income Tax Ordinance, 1979 [hereinafter “the RO”], section 22 of the Income Tax Ordinance 2001 [hereinafter “the Ordinance”] does not use the word “registered owner” at all. It provides that “a person shall be allowed a deduction for depreciation of the person’s depreciable assets used in the person’s business in the tax year”.
As evident from the language of section 22 of the Ordinance, the conditions prerequisite for claim of depreciation allowance are:-
1. Depreciation as per rates given in the Third Schedule is allowable on depreciable assets of a person.
2. Assets must be used wholly or partly in person’s business during the relevant tax year.
3. In the case of leased out assets by the leasing companies, scheduled banks, modarabas, investment banks or a development finance institution, it will be assumed that such assets are used by these entities for their own business. However, they can claim depreciation only against lease rental income derived in respect of such assets.
Nowhere does Section 22 explicitly say that it is necessary to be a registered owner of building or machinery etc to claim depreciation. The definition of “depreciable asset” given in sub-section (15) of section 22 reads as under:
“Depreciable asset” means any tangible, immovable property (other than unimproved land), or structural improvement to immovable property, owned by a person that-
(a) has a normal useful life exceeding one year;
(b) is likely to lose value as a result of normal wear and tear, or obsolescence; and
(c) is used wholly or partly by the person in deriving income from business chargeable to tax, but shall not include any tangible movable property, immovable property, or structural improvement to immovable property in relation to which a deduction has been allowed under another section of this Ordinance for the entire cost of the property or improvement in the tax year in which the property is acquired or improvement made by the person; and
“structural improvement” in relation to immovable property, includes any building, road, driveway, car park, railway line, pipeline, bridge, tunnel, airport runway, canal, dock, wharf, retaining wall, fence, power lines, water or sewerage pipes, drainage, landscaping or dam.
The definition of the expression “depreciable asset” does not clearly say whether owner must be registered or not. The provision only says that he must own an asset. The ownership can be de facto, registered or merely beneficial or even benami [holding a property in a name other than that of the real proprietor]. Benami is a Persian compound word consisting of (i) ‘Be’ which means ‘without’ and (ii) ‘Nami’ which means ‘name’. It literally means ‘without a name’, that which is nameless or fictitious, and is used to denote a transaction which is really done by a person without using his own name, (i.e., benami), but in the name of another [details of such transactions and tax implications are discussed in detail in Sree Meenakshi Mills Ltd. v Commissioner of Income Tax, AIR 1957 SC 49 @66].
It is worthwhile to mention that the word “owned” or “owner” is not defined in the Ordinance or General Clauses Act. It means that its generally-accepted meaning would be applicable. Some of the relevant definitions, literal meanings, dictionary meanings and court rulings given below can be helpful to understand this expression with reference to section 22:-
* Owner: “one who has dominion of a thing, real or personal, corporeal or incorporeal, which he has the right to enjoy and to do with it as he pleases – either to spoil or destroy it as far as law permits — unless he be prevented by some law, agreement or covenant which restrains his right”: one who owns: the rightful proprietor—34 Cal 257 = 5 CLJ 148.
* “Owned”: A person or the authority who has ultimate control over the affairs of the undertaking, be he Manager, Managing Director or Managing Agent, is one who owned or is the owner — Balaji Vegetable Products (P) Ltd, Bangalore v Union of India, AIR 1987 Kant113, 120.
* The popular definition of the word ‘owner’ is one who has the right to own; exclusive right of possession; legal or just claim or title; proprietorship.
* The word ‘owner’ has always been construed to include and mean equitable owner, as well as the person who holds legal title.
Judicial pronouncements
The word “owner” has been a subject matter of debate and controversy since the inception of income tax law in the Sub-continent in 1986. In Burma Railway Company v Secretary of State 1 ITC 140 (Burma), the following illuminating remarks were made:
“It must be presumed that the legislature was aware that the expression ‘owner’, ‘ownership’ and the verb ‘to own’ in its various tenses have been frequently used in the Acts of similar nature and further that they can be and are used in various meanings in different Acts, in some of which they have been specifically defined for the purposes of particular sections’. Nevertheless the expression has not been defined for the purpose of this Act [Income Tax Act of 1918]. It may have the narrow and technical meaning of the full ultimate and legal owner, but if this was intended, it could easily have been expressed and the failure to do so points to its not having been so intended”.
It is a matter of record that the expressions ‘owner’ and ‘owned’ have never been defined in any income tax statutes i.e. Income Tax Acts of 1918 and 1922, Income tax Ordinances of 1979 and 2001. Applying the ratio of the above case, it can safely be concluded that it has never been the intention of the legislature to restrict its scope to a registered owner alone. A number of judicial pronouncements are available that determine and highlight the scope and import of this expression. These are mainly related to explanation of the term ‘owner’ vis-à-vis chargeability of tax under the head “Income from Property’ [section 19 of the RO which is pari materia to section 15 of the Ordinance]. However, these court rulings are very relevant for the purpose of section 22 as well, as in both the provisions the word “owner” or “owned by” are used in the same context. Some relevant case law is reproduced below:
1. The Supreme Court in Mehran Associates Ltd v Commissioner of Income Tax, Karachi [1992] 66 TAX 246 (S.C.Pak) held that “the word owner includes persons holding lease”.
2. Title to the property does not pass by mere executing an agreement to sell—a [1989] 60 TAX 79 (H.C.Kar.)
3. Property was not conveyed by a registered deed but purchasers were given possession of property and rights to enjoy rental income, held that they were owners of property and liable to tax—[1967] 15 TAX 37 (H.C.Kar.) = 1967 PTD 170 = PLD 1067 Kar. 372
4. In the absence of any evidence that wife and sons of assessee were benamidars for assessee, such persons could be taken to be real owners—[1986] 53 TAX 80 (H.C.B.D.)
5. Where property is held in trust for beneficiaries, beneficiaries are assessable— [1939] 7 ITR 139 (Bom.); [1940] 8 ITR 501 (Sind)
6. Official assignee becomes owner of property vesting in him on insolvency of owner— [1937] 5 ITR 233 (Cal.)
7. Lessee who constructs a building on leasehold land is owner and liable to tax— [1946] 14 ITR 409 (Cal.)
8. Assessee, a transferee of an evacuee cotton factory with Provisional Transfer Order in his favour is entitled to depreciation—[1977] 35 TAX 178 (H.C.Lah.)
9. Plant and machinery used by the firm was exclusive property of the partner and depreciation on plant and machinery was neither claimed nor allowed in the hands of the firm; partner is entitled to deduct depreciation from his share of profits in the firm—[1966] 13 TAX 214 (H.C.Lah.)
The above judicial pronouncements establish beyond doubt that a taxpayer is entitled to depreciation in cases where he is not a registered owner but holds property for use in his business in the capacity of even beneficial owner. The Federal Board of Revenue (FBR) in its Circular No. 8 of 1955 observed that a custodian of evacuee property under section 6 of the Pakistan (Administration of Evacuee Property) Ordinance, 1949 is to be treated as owner of the property. It shows that FBR also accepts that to claim depreciation it is not necessary that the taxpayer should be a registered owner.
Position under transfer of property act
According to section 53A of the Transfer of Property Act, 1882, a person who has made a transfer of some property by means of an unregistered deed, when under the law the transfer should have been made by means of a registered deed, is debarred from enforcing any right in respect of the property if the transferee has in part performance of the contract taken possession of it. The exact language of section 53A is as under:
“where a person contracts to transfer for consideration any immovable property by writing signed him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty,
and the transferee, has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract,
and the transferee has, performed or is willing to perform his part of the contract,
then notwithstanding that the contract though required to be registered, has not been registered, or, where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefore by the law for the time being in force, the transfer or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract:
Provided that nothing contained in this section shall affect the rights of the transferee for consideration who has no notice of the contract or of the part of performance thereof”.
It is obvious from this provision that although section 53A does not create any title in favour of the transferee, it protects him against the transferor or any other person from enforcing any right in respect of the property notwithstanding the fact that the contract, though required to be registered, had not been registered or where there is an instrument of transfer the same has not been completed in the manner prescribed by the law for the time in force. Thus, in accordance with the Transfer of Property Act, once the transferee has possession over property, he cannot be debarred from his right. It is therefore clear that he can claim depreciation though he is yet not a registered owner of the property
Contrary judgements
There are some contrary judgements also wherein it has been held that depreciation can be allowed only if the taxpayer has a title or registration of property in his own name. The gist of such cases is as under:
1. Depreciation is admissible if assessee is owner of asset—Commissioner of Income Tax v Buckingham & Carnatic Co Ltd [1935] 3 ITR 384 (PC).
2. Depreciation is not admissible if asset is not owned by the assessee—Poona Electric Supply Co. Ltd v Commissioner of Income Tax [1946] 14 ITR 618 (Bom).
These two judgements cited above requiring that taxpayer should be the registered owner of an asset to claim depreciation belong to pre-partition era. Such judgements are binding on Pakistani courts if not overruled by Pakistani courts after independence—Ramkola Sugar Mills Ltd v CIT, Punjab & NWFP (1960) 2 TAX (Suppl. 29) (S.C.Pak). It is true that there is no authoritative judgement of a Pakistani court after independence that determines whether the expression “owner” for the purpose of depreciation claim means the registered owner or not. The cases decided in respect of ownership and discussed above relate to income chargeable under the head property [section 19 of the RO that are relevant strictly for section 15 of the new Ordinance].
Registration not necessary in the case of association of persons
Section 80(2)(a) & (c) of the Ordinance define the term ‘association of persons’ to include:-
(a) a firm
(b) a Hindu Undivided Family
(c) any artificial juridical person
(d) any body of persons formed under a foreign law, not a company
There is no dearth of case law to confirm that no registration of property/asset is required in the case of firm to claim depreciation. Where partners transfer the property to the firm as capital contribution, registration is not required to claim depreciation.
In Rai Bahadur Sahu Parasad Radha Raman v CIT 10 ITC 83 (All) it was held that where the assessee family had loaned its machinery to a firm, of which it was a partner, for being used in the business, the firm was entitled to claim depreciation in full.
Conclusion
From the above discussion, it can be concluded that the Legislature has not used the term “owned” by a person in respect of “depreciable asset” for claim of depreciation under section 22 in the strict sense of “registered owner”. To claim depreciation in respect of assets, the registration of depreciable assets in the name of taxpayer is not essential. If he uses the asset wholly or partly for his business during the tax year deduction under section 22 is admissible. There is no reason to interpret the words “owned by a person” in the narrow sense of a registered owner, which will be contrary to provisions of Transfer of Property Act. A person holding beneficial interest in the property is also owner as explained by the apex court in Mehran Associate Case and admitted by FBR in its circular No. 8 of 1955 quoted above. There is no reason to conclude that the word ownership as used in section 19 of RO [parallel to section 15 of the Ordinance] is not relevant for the purpose of section 22 or that the term ‘owned by a person’ is restricted to a registered or legal owner. The Legislature has not defined this expression to this effect, which confirms that the intention is not to restrict its widely accepted meanings.
In the end, considering the importance of the issue and possible legal controversy over the interpretation of the term “owned by a person”, it is highly desirable that the legislature should step in to clarify the provision by adding an explanation to section 22 with regard to the meaning of this term as contemplated by it. (The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)
