1992 (7) TMI 58 - HC - Income Tax

Internal factory roads qualify as buildings for depreciation; s.80J profits computed commercially without mandatory unit-wise depreciation set-off

HC held that internal roads within factory premises constitute part of 'buildings' for purposes of depreciation, following prior HC and SC authority, and ... Entitlement to depreciation on the value of roads, etc. - profits before deduction of depreciation and investment allowance - relief u/s 80J on commercial profits - New Industrial Undertaking - HELD THAT:- In CIT v. Bangalore Turf Club Ltd.[1983 (7) TMI 18 - KARNATAKA HIGH COURT], has held that the assessee is entitled to depreciation on the value of roads, etc. Recently, the Supreme Court has also expressed the same view by pointing out that a building cannot be confined to a structure having walls and roof over it. Roads within the factory premises are to be regarded as part of its buildings (vide CIT v. Gwalior Rayon Silk Manufacturing Co. Ltd.[1992 (4) TMI 3 - SUPREME COURT]. The question is, accordingly, answered in the affirmative and against the Revenue. The assessee contends that, while computing these profits and gains of the unit concerned, it is open to the assessee to ignore deductions available in respect of depreciation and investment allowances. In a given case, the depreciation and investment allowances pertaining to one unit may be deducted out of the gross total income of the assessee since there is no such bar under the Act. Section 32 permits depreciation allowance. This can be deducted from the gross income of the assessee in view of section 28 read with section 29 of the Act. There is no restriction that the depreciation allowed under section 32 has to be only from the income of the said unit. The position under section 32A regarding investment allowance also is the same. It is also contended on behalf of the assessee that, since depreciation and investment allowances are taken note of at the end for the purpose of ' profit and loss account ', while considering the profits and gains from a particular unit, it need not be considered because section 80J nowhere restricts the concept of profits and gains and, therefore, if there is a commercial profit derived from the particular unit, that should suffice to attract section 80J, subject to the other conditions. By the time of the assessment year 1970-71, there was nothing to be carried forward and set off in respect of losses, depreciation allowance, etc., in respect of the cold storage plant. During the said year, however, the cold storage plant made a profit. Since there was deficiency under section 80J regarding the cold storage plant, the assessee claimed that the said amounts of deficiency were liable to be adjusted against the profit earned from the said plant during the assessment year 1970-71. The Revenue contended that, for the purpose of section 80J, the losses as well as the depreciation allowance and development rebate in respect of the business of cold storage for the past assessment years should be first adjusted against the profit of the said year (1970-71). Section 80-1 therein was enacted as a kind of an incentive for the growth of priority industries. The court proceeded to hold that the profits and gains attributable to priority industry must be computed in the commercial sense and not in accordance with such provisions of the Act. We do not find anything in, any of the decisions cited before us as above which supports the contention of the Revenue. Section 80J nowhere compels the computation of the profits and gains, apart from an industrial undertaking, by treating it as a separate entity for all purposes without reference to commercial expediency and practice. In these circumstances, we are of the view that the Appellate Tribunal was justified in upholding the claim of the assessee. Issues Involved:1. Depreciation on value of roads, walls, and fences.2. Inclusion of work-in-progress, machinery, and equipment in transit and under erection in the computation of capital for relief u/s 80J.3. Deduction u/s 35 of capital represented by work-in-progress and machinery in transit and under erection in the assessee's research division.4. Exemption u/s 80J on commercial profits.Summary:Issue 1: Depreciation on Value of Roads, Walls, and FencesThe High Court upheld the Appellate Tribunal's decision that the assessee is entitled to depreciation on the value of roads, walls, and fences. This decision follows the precedent set in CIT v. Bangalore Turf Club Ltd. [1984] 150 ITR 23 and the Supreme Court's view in CIT v. Gwalior Rayon Silk Manufacturing Co. Ltd. [1992] 196 ITR 149, where roads within factory premises are considered part of the building. The question is answered in the affirmative and against the Revenue.Issue 2: Inclusion in Computation of Capital for Relief u/s 80JThe court affirmed the Tribunal's decision to include the value of work-in-progress, machinery, and equipment in transit and under erection in the computation of capital for relief u/s 80J. This follows the decision in Ravi Machine Tools (P.) Ltd. v. CIT [1978] 114 ITR 459. The question is answered in the affirmative and against the Revenue.Issue 3: Deduction u/s 35 for Work-in-Progress and Machinery in TransitThe High Court upheld the Tribunal's decision allowing deduction u/s 35 of the capital represented by work-in-progress and machinery in transit and under erection in the assessee's research division. This decision is consistent with the court's earlier rulings. The question is answered in the affirmative and against the Revenue.Issue 4: Exemption u/s 80J on Commercial ProfitsThe court provided a detailed consideration of the fourth issue. The assessee claimed relief u/s 80J based on commercial profits, not profits computed under the Income-tax Act. The Tribunal upheld this claim, relying on earlier orders and decisions, including CIT v. Patiala Flour Mills Co. P. Ltd. [1981] 127 ITR 301 and the Supreme Court's decision in CIT v. Patiala Flour Mills Co. P. Ltd. [1978] 115 ITR 640. The court discussed the interpretation of section 80J, emphasizing that profits and gains for the purpose of this section should be computed in the same manner as for determining total income chargeable to tax. The court rejected the Revenue's contention that deductions for depreciation and investment allowances must be made from the unit's total income. The decision aligns with the Supreme Court's rulings in Rajapalayam Mills Ltd. v. CIT [1978] 115 ITR 777 and the Calcutta High Court's observation in CIT v. Orient Paper Mills Ltd. [1983] 139 ITR 763. The fourth question is answered in the affirmative and against the Revenue.