TaxTMI 
TaxTMI 
2000 (5) TMI 4
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....ns granting depreciation to buildings, machinery and plant under section 32 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), and also to decide whether the time has come to have a fresh look at the old precedents and to lay down the law with the changed perceptions keeping in view the provisions of the Act? Further, to what extent are we required to follow and adopt the artificial and largely judge-made sense of the word "plant", which is given an inclusive meaning under section 43(3) and in the context of the scheme of section 32? 3. In this batch of civil appeals, some appeals are filed by the Revenue and some by the assessees. Since the question involved in all these appeals is similar, we would deal with the facts in. Civil Appeal No. 4758 of 1998 for convenience. For the assessment year 1986-87, the assessee claimed depreciation at 15 per cent. on the theatre building claiming it to be a plant. The Assessing Officer by order dated September 27, 1988, rejected the claim and allowed depreciation only at 5 per cent. The appeal filed by the assessee before the Commissioner of Income-tax (Appeals), Trivandrum, was allowed by order dated July 21, 1989, holding ....
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....ccommodating some requisites of hotel, then that would partake of the character of plant. For this purpose, the High Court considered the decisions in IRC v. Barclay, Curle and Co. Ltd. [1970] 76 ITR 62 (HL); [1969] 1 WLR 675 (HL) and Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86 (SC). The court observed that the principle that can be deduced is that if a building is merely a setting or place to accommodate some apparatus, then that will not be held as plant but if a building which does not merely accommodate something or which cannot be regarded merely as a setting or premises, but if that plays an important role in carrying on the business, then that would fall within the inclusive definition of the plant. Thereafter, the court observed thus : "The hotel building, in our opinion, cannot be equated with a residential building, which provides shelter to the people living therein. The building is essential to run the business of hotel. Without befitting building it is idle to think of a hotel business. A good hotel requires amenities and a building which is so erected as to fulfil the requisite norms of hotel. A building simply accommodating machinery or oth....
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....), this court considered that the sanitary and pipeline fittings fell within the definition of "plant" in section 10(5) of the Indian Income-tax Act, 1922, and therefore, the assessee was entitled to development rebate in respect thereof. The court further held that the fact that the assessee claimed depreciation on the basis that sanitary and pipeline fittings fell under "furniture and fittings" in rule 8(2) of the Indian Income-tax Rules, 1922, did not detract from this position as the rules cannot take away what is controlled by the Act or whittle down its effect. After considering the contentions raised by the Revenue, the court-observed as under : "It cannot be denied that the business of a hotelier is carried on by adapting a building or premises in a suitable way to be used as a residential hotel where visitors come and stay and where there is arrangement for meals and other amenities are provided for their comfort and convenience. To have sanitary fittings, etc., in a bath room is one of the essential amenities or conveniences which are normally provided in any good hotel in the present times. If the partitions in Jarrold's case [1963] 1 WLR 214 (CA), could be ....
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....h he carries on his business? If the answer is in the affirmative, it will be a plant." We would add that learned counsel for the assessees on May 3, 2000, has filed an additional submission pointing out the decision rendered by this court in CIT v. Dr. B. Venkata Rao [2000] 243 ITR 81, wherein this court dismissing the appeal filed by the Revenue held that the nursing home building was specially equipped as a plant for the assessee's business. The court observed : "What is to be determined is whether the particular nursing home building was equipped as to enable the assessee to carry on the business of a nursing home therein or whether it is just any premises utilised for that object. We find from the order of the Tribunal as also the assessment order that the assessee's nursing home is equipped to enable the sterilisation of surgical instruments and bandages to be carried on. It is reasonable to assume in the circumstances, particularly having regard to the Tribunal's order which states that the sterilisation room covers about 250 sq. ft. that the nursing home is also equipped with an operation theatre. In the circumstances, we think that th....
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.... a plant within the meaning of section 43(3) and, therefore, the assessee was entitled to depreciation and development rebate on the cost of digging the well. The Bombay High Court in CIT v. Caltex Oil Refining (India) Ltd. [1979] 116 ITR 404, held that the fencing round the refinery processing unit constitutes plant and was entitled to depreciation and development rebate. The Karnataka High Court in CIT v. Dr. B. Venkata Rao [1993] 202 ITR 303, held that the building which was used as nursing home was a plant. Similarly, in CIT v. Woodlands Hotel Pvt. Ltd. [1998] 233 ITR 224 [IRTC Nos. 48 and 49 of 1993, dated June 16, 1997] [Against this decision, Civil Appeals Nos. 4373-74 of 1999 are pending before this court-being disposed of by this judgment] and in CIT v. Hotel Rama Pvt. Ltd. [1998] 253 ITR 235 (Kar), held that the building in which the hotel business is carried on is a plant for the purpose of grant of depreciation. The Madras High Court in Addl. CIT v. Madras Cements Ltd. [1977] 110 ITR 281, held that the special reinforced concrete foundation for the purpose of locating or installing the rotary kiln in the factory would come within the scope of the expression plant and is....
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....el building is to be treated as 'plant' for the purpose of depreciation allowance under section 32." (C) Judgments expressing contrary views : 14. In CIT v. Damodar Corporation, Hotel Pankaj [1997] 225 ITR 699, the Kerala High Court held that a hotel in its entirety is not a plant for the purpose of depreciation and observed as under : "A perusal of the said statutory provision of section 32A of the Act would show that the words 'machinery and plant' have been used separately with an exclusive character, from each other, finds place in the concerned enactments of the section. The statutory provision also speaks of other requirements for entitlement to investment allowance on the count." 15. In R. C. Chemical Industries v. CIT [1982] 134 ITR 330 (Delhi), the Delhi High Court held that the definition of the word "plant" given under section 43(3) should be given a wide meaning as it is an inclusive definition. It held that the assessee who constructed a building having atmospheric controls, namely, moisture, temperature and provision for filtered air, which were required for manufacturing of saccharine, would not come within the expression "plant". It observe....
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....the court came to the conclusion that : "... the building of hotel is a building. Simply because some special fittings or controlling equipments are attached, it will not take it out of the category of building. Even if a particular building falls within the category of plant then it could not be considered to be a plant and will be considered as building because the golden rule of interpretation is that if a particular item is more near to one category, then by stretching it should not be considered to fall in a category which is far off." The court further observed : "The building which is used in the business of hotel remains a building inspite of the fact that it is decorated.... If the skeleton of the building without decoration is building then the items by which it is decorated would not change the character of building. The item may, however, be considered as plant subject to its use. The use of the building is as a setting. Building is not used as a tool of the trade. Different rates of depreciation for building have been provided which also makes the legislative intent clear that the different types of buildings remain as building. The amendment of se....
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....he building suitable for that particular business use. Further, without the building, the business cannot be carried on. That does not lead to the conclusion that the building becomes plant. Otherwise, every building, would become "plant" and the dividing line between "plant" and "building" would get obliterated which is not permissible ; (ii) section 43(3) defines plant in inclusive terms. Each item included in section 43(3) is movable. Section 43(3) does not, therefore, contemplate immovable property like a building being considered as plant. The "ejusdem generis" and "noscitor a sociis" principles are relevant in this connection ; (iii) Section 32(1)(ii), section 32A and the Appendix to the Income-tax Rules speak of plant and machinery being "installed" and of building being "erected". This again brings out the distinction clearly ; (iv) Section 32(1)(v) unequivocally provides that a new building used as hotel is regarded as a building for purpose of depreciation. In other words, a building which is specially designed and constructed for use as a hotel is nevertheless a building, for the purpose of depreciation ; (v) Section 32(1)(iia) and section 33(1)(b)(B)(ii) and the Appendi....
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....Act of 1995. The amending section clearly shows that the legislative intent was never to exclude cinema and hotel buildings which satisfy the functional test from the meaning of the word "plant" ; (iv) Use of the word "installed" or "erection" has no bearing on the issue ; (v) The subject of determination whether a hotel building or a cinema theatre can be held to be a plant is not free from difficulty and it is difficult to draw a clear line for plant or building in some cases. Despite this as the Legislature or the Central Board of Direct Taxes has not issued any clarification on the subject, the view adopted by various High Courts requires to be accepted. They submitted that cinema theatre or a hotel building is to be considered as one unit with all attendant apparatus for running the business and if they are construed as one unit it would be a plant. Secondly, these buildings are to be considered not on their own but in relation to the business carried on by the assessee namely running of hotel or cinema. In support of this contention, learned counsel heavily relied upon IRC v. Barclay, Curle and Co. Ltd. [1969] 1 WLR 675---also reported in [1970] 76 ITR 62 (HL), and other deci....
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....uction, to perform their functions. The dock was not a mere shelter or home but itself played an essential part in the operations which took place in getting a ship into the dock, holding it securely and then returning it to the river." It was further observed that "plant" was not defined under the Income-tax Act and thereafter held that "every part of this dry dock plays an essential part in getting large vessels into a position where work on the outside of the hull can begin, and that it is wrong to regard either the concrete or any other part of the dock as a mere setting or part of the premises in which this operation takes place. The whole dock is, I think, the means by which, or plant with which, the operation is performed." 22. Lord Guest agreed with the view taken by Lord Reid. In the judgment rendered by him it was observed that in order to decide whether a particular subject is an "apparatus" it seems obvious that an inquiry is to be made as to what operation it performs. 23. Lord Hodson disagreed with the above view and observed : "The dock as a complete unit contained a large amount of equipment without which the dry dock could not perform its function....
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....nt", Lord Hailsham observed : "... that the word 'plant' in the relevant sense, although admittedly not a term of art, and therefore part of the general English tongue, is not, in this sense, an ordinary word, but one of imprecise application, and, so far as I can see, has been applied to industrial and commercial equipment in a highly analogical and metaphorical sense, borrowed, unless I am mistaken, from the world of botany." For this purpose, the court quoted the words of Buckley L.J., in Benson v. Yard Arm Club Ltd. [1979] 1 WLR 347, 551 ; 53 TC 67, 80 (CA) (page 1453 of [1982] 1 WLR) : "... as a man who speaks English and understands English accurately but not pedantically would interpret it in context, applying it to the particular subject-matter in question in the circumstances of the particular case." The court further observed (at page 1453 of [1982] 1 WLR) : "To this admirable precept Oliver L.J., [1981] STC 671, 682, in delivering the leading judgment in the Court of Appeal in the instant case, warily, and perhaps wearily, added the cautionary rider that 'the English speaker must, I think, be assumed to have studied the author....
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....rliament an intention to encourage by fiscal inducement the improvement of hotel amenity." 30. In the said case, Lord Lowry also considered the case of Benson v. Yard Arm Club Ltd. [1979] 1 WLR 347; [1979] 2 All ER 336 (CA), in which ship, or floating hulk, used as a restaurant was held not to be plant and observed (page 333 of [1982] 1 WLR) : "the Crown relied on the case because of the fact that the ship was used to create a 'shipboard feeling', in other words, a certain kind of atmosphere among the patrons. But the distinction is that the ship, although a chattel, was the place in which the trade was carried on and was therefore the equivalent of the various premises in which the present taxpayer company carry on their trade and not of the apparatus used as an adjunct of the trade carried on in those premises." It was further observed that "the dry dock in Barclay, Curle and Co. Ltd.'s case [1970] 76 ITR 62 (HL), was a structure as, well as plant". RELEVANT PROVISIONS UNDER THE ACT FOR GRANT OF DEPRECIATION 31. Before dealing with the rival contentions, we would refer to the relevant parts of sections 32 and 43(3) of the Act. "32. Depreciation.---(1....
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....; and (c) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head 'Profits and gains of business or profession' of any one previous year. Explanation.---For the purposes of this clause,--- (a) 'new machinery or plant' shall have the meaning assigned to it in clause (2) of the Explanation below clause (vi) of this sub-section ; (b) 'residential accommodation' includes accommodation in the nature of a guest house but does not include premises used as a hotel ; (iii) in the case of any building, machinery, plant or furniture which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof : Provided.... Explanation.---... (iv) in the case of any building which has been newly erected after the 31st day....
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.... ship or aircraft is acquired or the machinery or plant is installed, or if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year ; but any such sum shall not be deductible in determining the written down value for the purposes of clause (ii) : Provided.... Provided further that no deduction shall be allowed under this clause in respect of--- (a) any machinery or plant installed in any office premises or any residential accommodation, including any accommodation in the nature of a guest-house;... Explanation.... (1A) Where the business or profession is carried on in a building not owned by the assessee but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession after the 31st day of March, 1970, on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, in respect of depreciation of such structure or work, the following deductions....
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....: (1) General rate 10 (2) Rate for furniture and fittings used in hotels, restaurants and boarding houses ;....cinema-houses, theatres and... 15 III. Machinery and plant (not being a ship): (i) General rate applicable to machinery and plant (not being a ship) for which no special rate has been prescribed under item (ii) hereinbelow. 15 (ii) Special rates : C. (I) Cinematograph films-Machinery used in the production and exhibition of cinematograph films (N.E.S. A)--- (a) Recording equipment, reproducing equipment, developing machines, printing machines, editing machines, synchronisers and studio lights except bulbs 20 (b) Projecting equipment of film exhibiting concerns.... D. (1) Aeroplanes-Aircraft, aerial photographic apparatus (N. E. S. A.).... 30 E. (1) Aeroplanes---Aeroengines [N.E.S.A.]... 40 F. (2) Cinematograph films---Bulbs of studio lights 100 IV. Ships : (1) Ocean going ships--- ....
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....s used as a hotel". So, the Legislature has not considered hotel building by itself as a plant. The phrase is "premises used as a hotel" where machinery or plant is installed. (3) Under clause (v) of sub-section (1) of section 32 specific provision is made for a "new building", the erection of which is completed after March 31, 1967, which is "used as a hotel". If the conditions mentioned therein are satisfied then for a building which is used for a hotel, a sum equivalent to 25 per cent. of the actual cost of the erection of the building is granted as depreciation. Further, the Legislature has considered building as separate from the hotel business and building is not considered as a plant for running the hotel. Therefore, building and the use of such building as a hotel are considered distinct. (4) All throughout section 32 for building it is specifically mentioned that "whenever it is erected", while for machinery and plant, the words used are "whenever it is installed" and there is no question of installing building. Section 32(1)(iia) uses the phrase "machinery" or "plant" installed in any premises used as a hotel and section 33(1)(b)(B)(ii) provides in case ....
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....preciation at different rates for building, machinery and plant, furniture and fixtures, ships, building used for hospital, aeroplanes, cinematograph films, machinery used in the production and exhibition of cinematograph films, recording equipment reproducing equipment, developing machines, printing machines, synchronisers and studio lights except bulbs, projecting equipment of film exhibiting concerns, even though the word "plant" may include building or structure in certain set of circumstances as per the dictionary meaning, but to say that building used for running the business of hotel or a cinema would be "plant" under the Act appears, on the face of it, to be inconsistent with the aforesaid provisions. Such meaning would be clearly against the legislative intent. 33. While interpreting the words "consumption", "raw material" and "utilised" in clause (c) of the Import Control Policy formulated by the Government of India, this court in the case of Deputy Chief Controller of Imports and Exports v. K. T. Kosalram [1970] 3 SCC 82 ; AIR 1971 SC 1283 observed thus : "In our opinion dictionary meanings, however helpful in understanding the general sense of the words, can....
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....39;plant' or part of a plant : because they had not been installed in any vehicle. They were, according to the definition given by the Privy Council, machinery. They were not yet part of a plant, and, accordingly to the Act, 20 per cent. of the cost thereof was allowable of the assessee. All the conditions required by the Act are satisfied. If we look at the point of time of purchase and installation, what was purchased and installed was machinery." Thereafter, the court considered the meaning of the expression "install" and held that when an engine is fixed in a vehicle it is installed within the meaning of section 10(2)(vi) and 10(2)(via) of the Act of 1922. Similarly, in the present case the word "plant" is given meaning under section 43(3) to include ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession, but this would not mean that it includes building which is treated separately from machinery and plant. A wider meaning to the word "plant" is given by including specified items mentioned above, that is, it includes ships, vehicles, books, etc. 36. In Taj Mahal Hotel's case [1971] 82 ITR 44, this court ....
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.... for carrying on the business of cinema will be a "plant" because in the said case the majority view was that the dry dock was not the mere "setting" or the premises in which ships were repaired. It was not mere a shelter or home but "itself" played an essential part in the operations which took place in getting a ship into the dock, holding it securely and then returning it to the river. It was a complete unit by itself, therefore, it was a "plant". Against that, for a hotel premises under the Act, building is not considered to be an apparatus for running the hotel business but is merely a shelter or home or setting in which business is carried out. In our view, the same would be the position with regard to a theatre in which cinema business is carried on. Webster Comprehensive Dictionary (International Edition) gives meaning to the word "theatre" that "(1) A building especially adapted to dramatic, operatic, or spectacular representations ; playhouse ; (2) The theatrical world and everything relating to it ; (3) A room or hall arranged with seats that rise as they recede from a platform, especially adopted to lectures, surgical demonstrations, etc ; (4) Any place of semi-circular....
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....ng which is a structure or part of a structure may nevertheless be plant, if it fulfills the function of plant in the trader's operations (IRC v. Barclay, Curie and Co. Ltd. [1970] 76 ITR 62 (HL) ; [1969] SC (HL) 30 ; [1969] 45 TC 221 (HL) ;. (v) Apparatus which has no functional purpose in the commercial process, even if it serves to attract custom, is not plant (Dixon v. Fitch's Garage Ltd. [1976] 1 WLR 215 ; [1975] 50 TC 509 (Ch D), in this case the apparatus in question was a canopy constructed over the pumps of a petrol filling station to provide shelter while the commercial process of delivering fuel was carried on). In the said case, Lord Stott adopted the distinction made by Shaw L. J. in Benson v. Yard Arm Club Ltd. [1979] 1 WLR 347, at page 358 ; 53 TC 67, at page 88 (CA), and relied upon the following observation (at page 268 of [1982] 55 TC) : "A characteristic of plant appears to me to be that it is an adjunct to the carrying on of a business and not the essential site or core of the business itself." Applying the aforesaid characteristic of "plant" in our view, building for hotel or cinema cannot be stated to be adjunct, that is to say ....
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.... atmosphere is not relevant : one thing may function as part of the premises and the other as part of the plant. Thus, 'something which becomes part of the premises instead of merely embellishing them is not plant except in the rare case where the premises are themselves plant'... I do not think that what Oliver L. J., was saying in Cole Brothers is at variance with Lord Lowry's approach. It is proper to consider the function of the item in dispute. But the question is what does it function as? If it functions as part of the premises it is not plant. The fact that the building in which a business is carried on is, by its construction particularly well-suited to the business, or indeed was specially built for that business, does not make it plant. Its suitability is simply the reason why the business is carried on there. But it remains the place in which the business is carried on and is not something with which the business is carried on." Similarly, Lord Hoffmann J. (Chancery Division) observed : "... the question is whether it would be more appropriate to describe the item as part of the premises rather than as having retained a separate identity. It seems to....
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.... where the assessee expended on the construction of planteria which was a fixed structure designed to maintain plants of many different kinds moved from nurseries, in an environment in which they would remain in good condition until sale. It was designed so that an appropriate mini-climate could be provided in different parts of the planteria suitable for different varieties of plant, and so as to be open to the public who could walk around it and choose from the plants on offer. The Court of Appeal held that the true and only reasonable conclusion from the facts found was that the planteria was part of the premises in which the business was carried on. It was a structure to which plants were brought which required special treatment. However, the fact that planteria provided the function of nurturing and preserving the plants while they were there could not transform it into something other than part of the premises in which business was carried on ; the highest it could be put was that it functioned as a purpose-built structure, but that was not enough to make the structure plant. Hence, to rely upon Barclay, Curle and Co.'s case [1970] 76 ITR 62 (HL) (dealing with dry dock....
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....ferentiate by holding that a building which is specially designed and constructed for running a hotel or cinema would be covered by "plant" and other buildings used for the same purpose would not get depreciation as "plant", even though such business is carried on in such premises. In our view, the Delhi High Court has in the case of R. C. Chemical Industry [1982] 134 ITR 330, rightly observed that the mere fact that manufacture of saccharine would be better carried on in a building having atmospheric controls would not convert the building from "the setting" to "the means" for carrying the business. Similarly, the Rajasthan High Court also in Lake Palace Hotels and Motels' case [1997] 226 ITR 561, rightly observed that simply because some special fittings or controlling equipment is attached for the purpose of carrying on hotel business, it will not take it out of the category of building and make it plant. In our view special fittings or equipment to control atmospheric effects would be plant, but not the building which houses such equipment. Further for running almost all industries or for carrying on any trade or business building is required. On occasions a building may....
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..... 6) thus : "(6) It would be noticed that the word used is 'depreciation' and 'depreciation' means : 'a decrease in value of property through wear, deterioration or obsolescence ; the allowance made for this in book-keeping accounting etc.' (Webster's New) World Dictionary). In that sense land cannot depreciate. The other words to notice are 'such buildings'. We have noticed that in sub-clauses (iv) and (v), 'building' clearly means structures and does not include site." The court also held (in paras. 7 and 8 ) that : "(7) One other consideration is important. The whole object of section 10 is to arrive at the assessable income of a business after allowing necessary expenditure and deductions. (8) Depreciation is allowable as a deduction both according to accountancy principles and according to the Indian Income-tax Act. Why? Because otherwise one would not have a true picture of the real income of the business. But land does not depreciate, and if depreciation was allowed it would give a wrong picture of the true income." 44. Under the new Act also for the building and machinery or....
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....hotel was run was itself a plant, otherwise the court would not have gone into the question whether the sanitary fittings used in bath room was plant. (3) For a building used for a hotel, specific provision is made granting additional depreciation under section 32(1)(v) of the Act. (4) Barclay, Curle and Co.'s case [1970] 76 ITR 62, decided by the House of Lords pertains to a dry dock yard which itself was functioning as a plant that is to say, structure for the plant was constructed so that dry dock can operate. It operated as an essential part in the operations which took place in getting a ship into the dock, holding it securely and then returning it to the river. The dock as a complete unit contained a large amount of equipment without which the dry dock could not perform its function. (5) Even in England, courts have repeatedly held that the meaning of the word "plant" given in various decisions is artificial and imprecise in application, that is to use the words of Lord Buckley, "it is now beyond doubt that the word 'plant' is used in the relevant section in an artificial and largely judge-made sense." Lord Wilberforce commented by stati....