TaxTMI 
TaxTMI 
1988 (4) TMI 10
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....eduction. For the assessment year 1976-77 (year ending June 30, 1975), the assessee-company has claimed deduction under the first proviso to section 32(1)(ii) of the Act in respect of the bottles and shells purchased and put to use during the year. The assessee had claimed that during the relevant year of account, it had purchased bottles to the tune of Rs. 3,25,021 and that the same should be allowed as outright deduction. It had also claimed the deduction of a further sum of Rs. 1,78,166 towards breakages out of the opening stock as on July 1, 1974. The Income-tax Officer rejected this claim for three reasons, viz., (1) Bottles cannot be treated as plant on which depreciation can be claimed ; bottle and cool drinks therein put together form stock-in-trade and cannot be separated from the drink for the purpose of sale and that the assessee having manufactured the cool drinks supplied them along with bottles. (2) The assessee had all along been following a particular method of accountancy, viz., to claim the breakages as an expenditure in the year of account and that the same cannot be varied to the detriment of the Revenue. (3) The breakages that occurred on account of the assesse....
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....1971] 82 ITR 44. He contended that merely because the bottles and shells were not the subject-matter of sale but were retained by the assessee, the bottles and shells could not be treated as "plant". The position was no more different from the one where such soft drinks would be sold to customers or retail dealers through plastic or other containers which did not come back to the assessee from the customers or retail dealers. On the other hand, learned counsel for the assessee, Sri M. J. Swamy, brought to our notice a direct ruling of the Rajasthan High Court in CIT v. Jai Drinks (P.) Ltd. [1988] 173 ITR 100. He also referred to the various rulings which were relied upon by the Rajasthan High Court in the abovesaid judgment. In reply, learned counsel for the Department contended that the decision of the Rajasthan High Court is not correct and a reference was made in detail to the decision of the Gujarat High Court in CIT v. Elecon Engineering Co. Ltd. [1974] 96 ITR 672, which has since been affirmed by the Supreme Court in CIT v. Elecon Engineering Co. Ltd. [1987] 166 ITR 66, following the earlier decision of the Supreme Court in Scientific Engineering House (P.) Ltd. v. CIT [1986]....
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....ne of the horses, known to be a vicious one, kicked him and his leg was broken. It was held that injury to the plaintiff could be treated as having occurred due to a "defect" in the plant, namely, the "vice" in the horse. Lindley L. J. and Esher M. R. considered "horse" as "plant", which was being used in the business of the defendant, and that the vice in the horse was a "defect" in the condition of the plant. This case is now treated as the basis for applying the "functional" test. 6. Over the years, courts have developed the above principle in several respects and improved upon the same. In 1944, in J. Lyons and Co. Ltd. v. Attorney-General [1944] 1 Ch 281, a question arose under the War Damage Act, 1943, as to whether "electric lamps and fittings" in a restaurant were "plant". It was held that they were not. Uthwatt J. held that electric lamps and fittings were not part of the "apparatus" used for carrying on the business but were part of the "setting" in which the business was carried on, and, therefore, were not "plant", the subject of compensation within the Act. Uthwatt J. observed (at p. 287) : ". . . but the presence of lamps in this building is not dictated b....
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....d Reid referred to the dictum of Lord Lindley-in Yarmouth v. France [1887] 19 QBD 647, and also to that of Uthwatt J. in J. Lyons and Co. Ltd. v. Attorney General [1944] 1 Ch 281, and stressed on the "durability" of these knives and lasts in the context of the words "permanent employment in his business" used by Lindley L. J., and went on to say that these knives and lasts were not "stock in-trade which comes and goes" (i.e., which is sold to the customer) but they were "durable" though not "permanently used". He hastened to add that, no doubt, it may be difficult to treat as plant articles which were quickly "consumed or worn out" in the course of a few operations. 9. In the year 1962, a fourth principle based on whether the asset had "passive" or "active" role in the business was considered in Jarrold v. John Good and Sons Ltd. [1962] 40 TC 681, by the Court of Appeal. In that case, the respondents were carrying on business as shipping agents and to satisfy its fluctuating accommodation requirements, the company made use of special "partitions" to sub-divide the floor space available, in any way it chose. The partitions were secured by screws to the structure of the building o....
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.... character and the function of the chattel. 11. The "functional test" was prominently restated by the House of Lords in 1969 in IRC v. Barclay, Curie and Co. Ltd. [1970] 76 ITR 62. That was the famous case of the "dry dock" which was claimed to be "plant" by the respondent company which carried on the trade of ship-builders repairers and engineers. The dry dock acted like a hydraulic chamber in which a volume of water (variable at will) could be used to lower a ship, so that the ship could be exposed for inspection and repair, and to raise it again to high tide level, so that it could sail away. The "dry dock" was held to be "plant". Lord Reid observed (at p. 67): "undoubtedly, this concrete dry dock is a structure, but is it also plant ? The only reason why a structure should also be plant which has been suggested or which has occurred to me is that it fulfils the function of plant in the trader's operations. And if that is so, no test has been suggested to distinguish one structure which fulfils such a function from another. I do not say that every structure which fulfils the function of plant must be regarded as plant, but I think that one would have to find some....
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....necessary though he felt bound by an old decision of Rowlatt J. in Daphne v. Shaw [1926] 11 TC 256 (KB), to the contrary which held solicitor's books was not "plant". As we shall presently show, Daphne v. Shaw [1926] 11 TC 256 (KB), which stood as law for over 50 years was overruled in 1976 by Lord Denning and others. Taking the principle in McVeigh's case [1970] 77 ITR 557 (Ch D), (apart from Daphne's ), it is clear that "gross materiality" is not a sine qua non for an idea incorporated in a design or a book to be "plant". 17. The Indian scene, at the level of the Supreme Court, virtually opened in 1971 at a stage when at least six broad principles had crystallised in the corresponding field in England and this was when the case, CIT v. Taj Mahal Hotel [1971] 82 ITR 44 (SC), was decided. That case related to sanitary fittings and pipelines in a hotel. Their Lordships referred to Yarmouth v. France [1887] 19 QBD 647 (case of horse), J. Lyons and Co. Ltd. v. Attorney-General [1944] 1 Ch 281 (case of electric lamps and fittings) and Jarrold v. John Good and Sons Ltd. [1962] 40 TC 681, (case of partitions), wherein the first, second and fourth principles referred to abo....
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....event, more passive than the moveable partitions in Jarrold's case [1962] 40 TC 681. The pools were the apparatus which were used by the company for carrying on its business as caravan park operators and were not merely the place at which it was carried on. They were, therefore, plant. No new principle was laid herein. (ii) The second case is the one in St. John's School v. Ward [1974] 49 TC 524 (CA), relating to a "gymnasium and laboratory" constructed on prefabricated moveable panels. Each of the items, the gymnasium and the laboratory were considered to be not "plants" for the purpose of the school. Templeman J. observed (at p. 531) : "In considering whether a structure is plant or premises one must look at the finished product and not at the bits and pieces as they arrive from the factory ... the fact that a building or part of a building, holds plant in position does not, by some magic wand, convert the building itself into plant." 19. It was necessary to find whether the business is carried on within the building or whether it was an apparatus used by the businessman for carrying on the business. Here, the subject-matter of inquiry were structures which al....
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....ded in 1977 in Munby v. Furlong [1977] 50 TC 491, by the Court of Appeal. It was there held that barrister's books were plant. In his characteristic style, Lord Denning M. R. opined in the case as follows (at p. 501) : "This case concerns a lawyer's library. It can be divided into three parts. First, when a young man starts at the Bar, he may, if he has enough money, buy a set of law reports. That is capital expenditure. Second, he may buy text books. They have a life of four to nine years. That too is capital expenditure. Third, he may take in the periodicals, such as Weekly Law Reports and the All England Law Reports. They come out every week or month. He pays for them an annual subscription. That is not capital expenditure. It is revenue expenditure. He can deduct the whole of these annual subscriptions from his income for tax purposes. He can also deduct the cost of binding these weeklies at the end of each year and also the cost of repairing his sets of law reports. That third part is all revenue expenditure. We are not concerned with it today. We are only concerned with the first two parts which I have described as capital expenditure." and held that these....
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....which, the majority in Barclay, Curle's case [1970] 76 ITR 62 (HL), said was "decisive", (the fifth principle referred to above) unless special reasons existed to take it out of the category. 25. The case of a ship acquired for conversion as a floating restaurant was considered in Benson v. Yard Arm Club Ltd. [1979] 53 TC 67 in 1979 by the Court of Appeal. It was held to be not plant, but merely the premises where the business was carried on and not the apparatus employed in the company's "commercial activities". Buckley.L. J. (with whom Shaw and Templeman L. JJ. agreed) pointed out that the distinction was whether the floating restaurant was one in which the business was carried on or one which plays any part "in the carrying on of those activities". Applying the "functional test" (p. 85), he held that the floating restaurant was not "plant". The case again turns upon the functional test laid down in Yarmouth v. France [1887] 19 QBD 647, i.e., the first principle, read with Barclay, Curle [1970] 76 ITR 62 (the fifth principle). Likewise, in Brown v. Burnley Football and Athletic Co. Ltd. [1980] 3 All ER 244, a stand for spectators in a football stadium was held to be no....
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.... is to be contrasted with the place in which the business is carried on, the line must be drawn somewhere ... If the 'plant' is to be distinguished from the housing of the plant ('the place where the business is carried on' as distinct from the means by which it is carried on) it is necessary ... to look at it in order to see what it is and then consider what, in the context of the business actually carried on, is its function . . . the housing is to be distinguished from the plant which it houses." 28. Having emphasised the distinction between the house and the plant which it houses, their Lordships then referred to the "single unit" approach advocated by Lord Reid and Lord Donavan in Barclay Curle's case [1970] 76 ITR 62 (HL), and by Templeman J. in St. John's School's case [1974] 49 TC 524 (CA), as against the "piecemeal approach". But, on the special facts relating to these components carrying electricity, they held that it was an exceptional case where the Commissioners were right in taking each component separately as each was serving a "different purpose" and held that each of them was not "plant". 29. In 1982, in Leeds Permanent Building So....
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....t. The word "plant" is to be given a "very wide" meaning. In its ordinary sense, it includes whatever "apparatus" is used by a businessman for carrying on his business but it does not include his stock-in-trade which he buys or makes for sale. It, however, includes all goods and chattels, fixed or movable, live or dead which the tradesman keeps for permanent employment in his business. (2) But the building or the "setting" in which the business is carried on cannot be plant. (3) The thing need not be part of the machine used in the manufacturing process but could be merely an apparatus used in carrying on the business but having a "degree of durability". (4) Merely because the asset has a passive function in the carrying on of the business, it cannot be said that it is not plant. It may have a passive or an active role. (5) The subject must have a "function" in the trader's operation and if it has, it is prima facie a plant unless there was good reason to exclude it from that category. It must be a "tool in the trade" of the businessman.. (6) Gross materiality or tangibility is not necessary and, in fact, intangible things like ideas and designs contained in a book could be "pl....
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.... to play in the business of the assessee. The bottles and shells are gross matter and, in fact, gross materiality is not a requirement at all for a thing to be treated as plant. 34. For the aforesaid reasons, we agree with the decision of the Rajasthan High Court in CIT v. Jai Drinks (P.) Ltd. [1988] 173 ITR 100. That case also related to bottles and shells, the assessee being a seller of soft drinks. The learned judges, after referring to the two Supreme Court judgments referred to above, also referred to the decision of the Delhi High Court in CIT v. National Air Products Ltd. [1980] 126 ITR 196 and of the Calcutta High Court in CIT v. Steel Rolling Mills of Hindusthan (P.) Ltd. [1987] 164 ITR 633, wherein it was held that "gas cylinders" fall within the definition of "plant". The fact that in the latter two cases, gas could not otherwise be transported especially by cylinders made for that purpose makes no difference. The cylinders are not stock-in-trade and are returned back to the trader as are the bottles and shells in the present case. They too satisfy the "functional" test and answer the definition of "plant". 35. It may be, as suggested for the Revenue, that, some da....