1974 (2) TMI 7 - HC - Income Tax

Drawings & Patterns as 'Plant' for Depreciation: Court Rules in Favor of Assessee

The court upheld the Tribunal's decision that drawings and patterns are considered 'plant' under section 32 of the Income-tax Act, 1961. The assessee is ... Plant as a tool of trade - inclusive definition of 'plant' in section 43(3) - depreciation allowance under section 32 - functional test for 'plant' - durability and obsolescence as elements of depreciation - material record of know how (drawings, patterns, specifications) as corporeal assetPlant as a tool of trade - functional test for 'plant' - inclusive definition of 'plant' in section 43(3) - Whether drawings and patterns acquired under foreign collaboration agreements constitute 'plant' within the meaning of section 32 of the Income tax Act, 1961 - HELD THAT: - The Court applied the established functional test (what operation the article performs in the assessee's business) and the statutory inclination to give a wide meaning to 'plant' (section 43(3) expressly including items such as books). Having regard to the Tribunal's finding that the drawings and patterns formed 'the basis' of the assessee's manufacturing business and to the commercial understanding that 'plant' includes articles used by a businessman for carrying on his business (not stock in trade and subject to some degree of durability), the Court held that drawings and patterns are basic tools of the trade. The Court rejected the narrow contention that 'plant' must be a purely tangible object subject only to wear and tear, emphasising that obsolescence and inadequacy are recognised causes of depreciation. The Court also treated the material record of know how (drawings, patterns, specifications) as, for the recipient, effectively a corporeal part of the asset used in production and therefore within the wide ambit of 'plant'.Drawings and patterns acquired under the agreements are 'plant' within section 32 and so capable of attracting depreciation allowance.Depreciation allowance under section 32 - durability and obsolescence as elements of depreciation - Whether depreciation under section 32 is available in respect of such drawings and patterns - HELD THAT: - Section 32 grants a statutory depreciation allowance where the asset is owned and used for business and is of a kind covered by 'plant'. The Court observed that the statutory allowance is not confined to diminution by physical wear and tear; accepted accounting and judicial tests include obsolescence and inadequacy as causes of retirement of capital. Since the drawings and patterns are tools of the trade and capable of diminishing in economic value (e.g., by obsolescence), the assessee is entitled, as of right, to the prescribed depreciation allowance once the conditions of section 32 are met.Depreciation under section 32 is allowable in respect of the drawings and patterns.Material record of know how (drawings, patterns, specifications) as corporeal asset - inclusive definition of 'plant' in section 43(3) - Whether the material records of know how (drawings/patterns) are to be treated as distinct from intangible know how for the purpose of qualifying as 'plant' - HELD THAT: - While some authorities distinguished intangible know how from its material record, the Court held that for the recipient the material record is the practical manifestation of know how and forms, in effect, a corporeal asset. Given the legislature's inclusion of 'books' and similar items within 'plant', there is no principled basis to exclude drawings, patterns and specifications which embody know how and serve the purpose of 'teaching at long range' from the wide meaning of 'plant'.Material records of know how embodied in drawings and patterns are to be treated as plant for the purposes of section 32.Remand for apportionment and quantification - Remand for determination of the portion of the total consideration attributable to drawings and patterns - HELD THAT: - The Tribunal had found that only part of the lump sum paid related to drawings and patterns and, because no evidence enabled apportionment, remitted the question for enquiry and determination. The High Court answered the legal question in favour of the assessee (that drawings/patterns are plant and depreciation is allowable) but left the factual task of apportioning the total payment to ascertain the depreciable cost to the assessing authority, consistent with the Tribunal's prior remand.The matter of quantifying and apportioning the expenditure attributable to drawings and patterns is remitted for evidential determination and computation in accordance with law.Final Conclusion: The Court answered the referred question affirmatively: drawings and patterns acquired under the collaboration agreements are 'plant' within the meaning of section 32 and depreciation is allowable thereon; the factual apportionment of the lump sum consideration attributable to those assets remains to be determined by the assessing authority as directed by the Tribunal. Issues Involved:1. Whether drawings and patterns received by an assessee from a foreign company under a collaboration agreement can be considered 'plant' on which depreciation is allowable under section 32 of the Income-tax Act, 1961.Detailed Analysis:1. Background and Agreements:The assessee, a public limited company engaged in manufacturing elevators, entered into two agreements with foreign collaborators-Alfred Wiseman & Co. Ltd. and Spencer (Melksham) Ltd. The agreements involved the supply of drawings, patterns, and technical know-how necessary for manufacturing specific machinery.2. Nature of Expenditure:The assessee claimed that the expenditure of Rs. 3,20,567 incurred under these agreements should be treated as revenue expenditure. This claim was rejected by the Income-tax Officer and the Appellate Assistant Commissioner, who held that the expenditure was of a capital nature and not allowable as revenue deduction. The assessee then claimed depreciation on the expenditure, arguing that the drawings and patterns should be treated as 'plant' under section 32 of the Act.3. Tribunal's Findings:The Tribunal found that the expenditure was capital in nature and allowed the assessee to raise a new claim for depreciation. It concluded that drawings and patterns were 'plant' within the meaning of section 32 and directed the Appellate Assistant Commissioner to ascertain the portion of expenditure attributable to these assets and allow depreciation accordingly.4. Revenue's Arguments:The revenue contended that:- Drawings and patterns were not 'books' and hence not 'plant' under section 43(3) of the Act.- Even under the ordinary meaning, drawings and patterns were not 'plant' as they were merely material vehicles for technical know-how, an intangible asset.- Technical know-how was not a depreciable asset.5. Legal Provisions:Section 32 allows depreciation on buildings, machinery, plant, or furniture owned by the assessee and used for business purposes. Section 43(3) includes 'books' in the definition of 'plant.'6. Court's Analysis:- Books as Plant: The court examined whether drawings and patterns could be considered 'books.' It concluded that 'books' must have both physical and functional characteristics and be useful for business purposes.- Ordinary Meaning of Plant: The court referred to various judicial decisions, noting that 'plant' includes any apparatus used by a businessman for carrying on his business, excluding stock-in-trade and premises. The functional test was emphasized, focusing on whether the asset is a tool of the trade.- Drawings and Patterns as Plant: The court found that drawings and patterns formed the basis of the assessee's manufacturing business and had enduring utility, qualifying them as 'plant.'7. Intangible Nature of Know-How:The court addressed the revenue's argument that technical know-how is intangible and cannot be considered plant. It noted that know-how often takes a physical form, such as drawings and patterns, which can be bought, sold, or imparted. The court concluded that for the recipient, know-how and its material record form a single entity, making the drawings and patterns plant.8. Depreciation and Obsolescence:The court rejected the argument that plant must diminish in value solely by wear and tear. It recognized that depreciation also accounts for obsolescence, making know-how capable of depreciation.Conclusion:The court upheld the Tribunal's decision that drawings and patterns are 'plant' under section 32 of the Income-tax Act, 1961, and the assessee is entitled to depreciation on these assets. The question referred to the court was answered in the affirmative, in favor of the assessee. The Commissioner was directed to pay the costs of the reference to the assessee.