1978 (7) TMI 85 - HC - Income Tax

Court rules designs and blueprints as 'plant' for depreciation, parties to bear own costs.

The court held that part of the payments were for designs, drawings, plans, and technical data, contrary to the Tribunal's finding that they were for ... Plant - depreciation under s. 32 - inclusive definition of plant under s. 43(3) - technical know-how - designs, drawings, plans and technical data as plant - capital expenditure versus revenue expenditureDesigns, drawings, plans and technical data as plant - technical know-how - The nature of the payments of Rs. 1,95,300 paid to the foreign collaborators - whether they were entirely for diverse considerations or partly for designs, drawings, plans and technical data. - HELD THAT: - The agreements show that the amounts paid to the Japanese collaborators were in consideration both for furnishing designs, drawings, plans and technical data necessary for erecting the factories and for other assistance and knowhow. The Tribunal's conclusion that the payments were not for designs and blueprints as such was erroneous. The proper construction of the contracts requires treating the payment as made partly for the acquisition of the designs, drawings, plans and technical data and partly for other forms of assistance and knowhow.Payments were partly for designs, drawings, plans and technical data and partly for other assistance/knowhow; the Tribunal's finding that they were not for designs and blueprints as such is set aside.Plant - depreciation under s. 32 - inclusive definition of plant under s. 43(3) - capital expenditure versus revenue expenditure - Whether designs, drawings, plans and technical data acquired for erecting the manufacturing plant constitute 'plant' for the purpose of allowing depreciation under s. 32 of the Act. - HELD THAT: - Section 32(1) allows depreciation in respect of plant used in the business; s. 43(3) provides an inclusive definition of 'plant'. Applying the established authorities and a liberal construction of 'plant', intangible items such as designs, drawings, plans and technical data - components of technical knowhow without which production could not commence - fall within the meaning of 'plant'. The court observed that the concept of plant must be construed broadly, that intangible assets used for production may be treated as fixed capital, and that denying depreciation for such capitalised technical items would frustrate the statutory scheme of computing true profits. The court endorsed the approach of courts which have held that drawings, patterns and technical information necessary for carrying on the business qualify as plant and are eligible for depreciation.Designs, drawings, plans and technical data acquired and capitalised for erecting the factory constitute 'plant' and are eligible for depreciation under s. 32.Final Conclusion: First question answered in the negative (payments were partly for the designs/drawings/plans/technical data); second question answered in the affirmative (those designs/drawings/plans/technical data constitute 'plant' and qualify for depreciation under s. 32). Issues Involved:1. Interpretation of agreements regarding payments for designs and blue-prints.2. Classification of designs and blue-prints as 'plant' for depreciation allowance u/s 32 of the Income-tax Act, 1961.Summary:Issue 1: Interpretation of AgreementsThe court examined whether the payments of Rs. 1,95,300 were solely for designs and blue-prints or for diverse considerations. The Tribunal had held that the payments were for diverse considerations, primarily know-how. However, the court found that part of the payments must be treated as having been made for designs, drawings, plans, and technical data. Therefore, the Tribunal erred in its conclusion. The court answered the first question in the negative, indicating that the payments were indeed partly for designs and blue-prints.Issue 2: Classification as 'Plant'The second issue was whether the designs and blue-prints constituted 'plant' for the purpose of depreciation allowance u/s 32 of the Income-tax Act, 1961. The court noted that s. 32(1) allows depreciation for buildings, machinery, plant, or furniture used for business purposes. The definition of 'plant' u/s 43(3) is inclusive and broad, encompassing items like ships, vehicles, books, scientific apparatus, and surgical equipment. The court emphasized that 'plant' should be given a wide meaning, as established in CIT v. Taj Mahal Hotel [1971] 82 ITR 44, and that it includes items necessary for carrying on business, such as technical know-how.The court referred to various judgments, including Rolls-Royce Ltd. v. Jeffrey and CIT v. Elecon Engineering Co. Ltd., which supported the view that technical know-how and related items could be considered 'plant.' The court concluded that designs and blue-prints, being essential for the erection of the factory, fall within the meaning of 'plant' and are eligible for depreciation allowance.In conclusion, the court answered the second question in the affirmative, recognizing designs and blue-prints as 'plant' for the purpose of depreciation u/s 32 of the Act. The parties were directed to bear their own costs.