1974 (5) TMI 18 - HC - Income Tax

Court allows depreciation on freezing chamber walls as 'plant' for firm; deems transformer replacement as revenue expenditure.

The court allowed depreciation on freezing chamber walls as 'plant' for a partnership firm, considering it integral for maintaining appropriate ... Plant - depreciation on building forming part of plant - inclusive definition of plant under section 43(3) of the Income-tax Act, 1961 - revenue expenditure by way of replacement of a part - capital expenditurePlant - depreciation on building forming part of plant - inclusive definition of plant under section 43(3) of the Income-tax Act, 1961 - Whether the portion of the walls of the freezing chamber containing insulation materials constituted plant and was entitled to depreciation at the higher rate applicable to plant. - HELD THAT: - The Tribunal inspected the cold storage and found that the walls of the freezing chamber, containing insulation material, were integral to the airconditioning apparatus without which the cold storage could not function. The expression 'plant' in section 43(3) is given an extended, inclusive meaning and may embrace buildings or parts of buildings when they form part of the plant used for business purposes. Viewed in common parlance and in the light of the statutory inclusive definition, the building used as the freezing chamber is part of the airconditioning plant of the cold storage. Accordingly the building is properly treated as plant for the purpose of claiming depreciation at the rate applicable to plant.The Tribunal was right to hold that the freezingchamber walls formed part of the plant and the assessee was entitled to depreciation on that basis.Revenue expenditure by way of replacement of a part - capital expenditure - Whether the payment to the Electric Supply Undertaking for transformer and service line to obtain higher K.V.A. supply was an allowable revenue expenditure or a capital expenditure. - HELD THAT: - The Tribunal found the expenditure was incurred to replace the existing service line (the appliance through which power was received) so that the plant could work more efficiently; ownership of the line vested in the undertaking. Applying the principle in Commissioner of Incometax v. Mahalakshmi Textile Mills, replacement of a part of a composite productive unit, which does not result in creation of a new enduring asset for the assessee, is revenue expenditure. The change in the service line enhanced the functioning of the existing productive unit but did not confer on the assessee a new enduring asset of its own. Therefore the expenditure was revenue in nature and deductible in computing income for 196566.The payment for transformer and service line was revenue expenditure and allowable in computing the assessee's income for the year.Final Conclusion: Both questions referred were answered in the affirmative in favour of the assessee: (1) the freezingchamber walls formed part of the plant and qualified for depreciation at the plant rate; and (2) the payment for the transformer and service line was revenue expenditure deductible for 196566; costs of the reference were awarded to the assessee. Issues:1. Depreciation on freezing chamber walls as 'plant'2. Allowability of expenditure on transformer and service line replacementDepreciation on Freezing Chamber Walls as 'Plant':The case involved a partnership firm claiming depreciation on the freezing chamber walls as 'plant' for the assessment years 1964-65 and 1965-66. The firm purchased a cold storage business and sought depreciation at 15% on the written down value of the factory building, contending it was part of the air-conditioning plant. The Tribunal inspected the cold storage and found the walls were integral for maintaining the appropriate temperature. The court analyzed the definition of 'plant' under section 43(3) of the Income-tax Act, which includes equipment used for business purposes. It concluded that the building in question formed part of the plant for air-conditioning the cold storage, allowing depreciation at 15%.Allowability of Expenditure on Transformer and Service Line Replacement:Regarding the second issue, the Tribunal allowed the firm's claim for expenditure on replacing the transformer and service line for higher electric power. The Commissioner contended it was capital expenditure, while the firm argued it was revenue expenditure. The court applied the principle from a Supreme Court case, emphasizing that if a replacement part enhances the efficiency of the existing setup without creating a new enduring asset, it qualifies as revenue expenditure. In this case, the replacement of the service line was necessary for the cold storage's proper functioning, and no new enduring asset was created. Therefore, the expenditure was deemed revenue expenditure, not capital. Consequently, the court answered both questions in favor of the assessee, allowing depreciation on the freezing chamber walls and treating the expenditure on transformer and service line replacement as revenue expenditure.