1992 (4) TMI 3 - SC - Income Tax

Ruling upholds roads and drains inside factory as part of building under section 32; depreciation allowed; Rules 1983 prospective

The SC upheld that roads and drains within factory premises are integral parts of the factory building under section 32 and that capital expenditure on ... Depreciation on written down value - building includes roads and drains - allowance of depreciation under section 32 - purposive construction of taxing statute - subordinate legislation clarifying scope of assetBuilding includes roads and drains - allowance of depreciation under section 32 - depreciation on written down value - Roads and drains within factory premises form part of the building for the purpose of depreciation under section 32 and are eligible for depreciation on the written down value. - HELD THAT: - The Court examined the purpose of depreciation - to determine net taxable income by allowing wear and tear of assets employed in the business - and applied a purposive and contextual construction to the term 'building'. Precedents of several High Courts, notably the Bombay High Court in CIT v. Colour-Chem Ltd., were held persuasive in treating roads and roadways within a factory as necessary adjuncts of factory buildings because they serve as links for raw materials, finished products and workers and are subject to wear and tear. The Court rejected a restrictive dictionary-only meaning of 'building' (i.e., requiring walls and a roof) and held that roads and drains used in connection with the factory are integral to the factory building. Consequently capital expenditure on such roads and drains is a capital asset falling under section 32 and depreciation is allowable on the written down value in accordance with the Act and applicable Rules.Roads and drains within factory premises are buildings for section 32 purposes and depreciation on their written down value is admissible.Subordinate legislation clarifying scope of asset - purposive construction of taxing statute - The Income-tax (Fourth Amendment) Rules, 1983 which expressly included roads (and related assets) operate as a valid clarification of the scope of 'building' and do not imply that roads were excluded from that meaning prior to their date of enforcement. - HELD THAT: - The Court observed that rules in the Appendix are designed to carry out the provisions of the Act and may clarify the ambit of assets eligible for depreciation without narrowing rights previously conferred by the Act. The Fourth Amendment Rules, 1983 fixed rates and explicitly included roads, bridges, culverts and similar items; the Court treated this as the subordinate legislature giving effect to interpretations consistently adopted by various High Courts rather than expressing a legislative intention that roads were not buildings before April 2, 1983. The Court also noted settled principles that statutory provisions should be read prospectively unless an express or necessary implication indicates otherwise, and that longstanding departmental acceptance of a judicial interpretation should not lightly be disturbed.The 1983 Rules validly clarifed and consolidated the scope and rates; they do not operate to deny that roads were buildings for earlier years where judicial interpretation so held.Final Conclusion: The appeals establishing that roads and drains within factory premises are part of the building under section 32 and that depreciation on their written down value is allowable are dismissed; calculation of depreciation is to be made under section 32 read with the Rules in the Appendix, and the Fourth Amendment Rules, 1983 are a valid clarification of scope and rates (other appeals disposed as per the judgment). Issues Involved:1. Depreciation on roads constructed within factory premises.2. Classification of roads as part of the factory building or plant.3. Applicability of the Income-tax (Fourth Amendment) Rules, 1983.4. Entitlement to development rebate on industrial transport.Issue-wise Detailed Analysis:1. Depreciation on Roads Constructed within Factory Premises:The primary issue in these appeals was whether roads constructed within the factory premises qualify for depreciation under Section 32 of the Income-tax Act, 1961. The assessee claimed depreciation on the written down value of roads, arguing that they form part of the factory building. The Income-tax Officer disallowed this claim, but the Tribunal allowed it, following an earlier order. The High Court declined to call for a reference, leading to the Revenue's special leave petition.The court held that roads within factory premises, used for business activities like transporting raw materials and finished products, are integral to the factory building. The court emphasized that the term 'building' should not be confined to its dictionary meaning but should include roads as necessary adjuncts for the business.2. Classification of Roads as Part of the Factory Building or Plant:The Tribunal and various High Courts had differing views on whether roads should be classified as part of the building or as plant. The Bombay High Court in CIT v. Colour-Chem Ltd. [1977] 106 ITR 323 held that roads within factory premises are part of the building. The court in this judgment agreed with this interpretation, stating that roads are necessary for the business and should be considered part of the factory building for depreciation purposes.3. Applicability of the Income-tax (Fourth Amendment) Rules, 1983:The Revenue argued that the inclusion of roads in the definition of 'building' in the Income-tax (Fourth Amendment) Rules, 1983, effective from April 2, 1983, indicated that roads were not considered part of the building before this date. The court rejected this argument, stating that the amendment was a clarification and not a change in the law. The consistent interpretation by various High Courts that roads are part of the building was accepted by the rule-making authority.4. Entitlement to Development Rebate on Industrial Transport:The assessee also claimed a development rebate on industrial transport used within the factory premises. This claim was initially disallowed by the Income-tax Officer but later allowed by the Tribunal. The court did not specifically address this issue in detail, focusing primarily on the depreciation of roads.Conclusion:The court concluded that roads within factory premises are integral to the factory building and eligible for depreciation under Section 32 of the Income-tax Act. The appeals were dismissed, except for Civil Appeal No. 1404 of 1991, which was partly allowed, directing the Income-tax Officer to compute roads as buildings and grant depreciation accordingly. The court emphasized that the interpretation of 'building' should be broad and inclusive, aligning with the purpose of the Act to compute net taxable income fairly.