Andhra Pradesh H.C : Whether depreciation allowed at 100 per cent on centering and shuttering material

High Court Of Andhra Pradesh

CIT Vs. Vijaya Enterprises

Assessment Year : 1986-87

Section : 43(3)

V.V.S. Rao And Ramesh Ranganathan, JJ.

 Referred Case No. 116 Of 1996

IT Appeal Nos. 20 Of 1999, 124 And 149 Of 2005

January  19, 2011 

JUDGMENT

V.V.S. Rao, J. – The case referred by the Income-tax Appellate Tribunal, Hyderabad, under section 256(1) of the Income-tax Act, 1961 (the Act), is at the Revenue’s instance. The question referred, namely, whether on the facts and circumstances of the case, the Tribunal was justified in directing to allow depreciation at 100 per cent on centering and shuttering material (hereafter referred to as ‘shuttering material’) is also the question that arises in the three appeals; two of which are filed by the assessees and the third by the Commissioner of Income-tax, Visakhapatnam.

2. The factual background in the referred case is as follows. The assessee-firm is a civil contractor. In their return for 1986-87, they claimed depreciation at 100 per cent on Rs. 3,18,520 towards purchase value of centering and shuttering equipment. Their plea was that the cost of each item was below Rs. 5,000. The Assistant Commissioner-2, Visakhapatnam, allowed 15 per cent depreciation. The Appellate Commissioner of Income-tax reversed the order of the Assessing Officer agreeing with the assessee that each item of centering, shuttering and scaffolding material costs less than Rs. 5,000 and, therefore, they are entitled to claim depreciation at 100 per cent under section 32(1)(ii), proviso. The learned Tribunal confirmed the appellate order, dismissed the Revenue appeal, and, thereafter, a reference was sought.

3. ITTA Nos. 149 and 124 of 2005 are by M/s. Navayuga Engineering Company Ltd. (‘Navayuga’, for short) for the assessment years 1993-94 and 1995-96 respectively. The other appeal ITTA No. 20 of 1999 is by the Commissioner of Income-tax, Visakhapatnam. For completing the background of the cases, we may also refer to the facts in the Revenue appeal as well as the appeal by Navayuga. The assessee is a registered firm engaged in civil contracts. For 1993-94, they filed return of income of Rs. 12,85,780. During scrutiny, the Assessing Officer determined their income at Rs. 65,45,360 after disallowing 1 per cent of the total expenditure under various heads. However, in view of the subsequent objection, the Commissioner revised the order under section 263 of the Act directing the Assessing Officer to allow 25 per cent depreciation on the value of shuttering material used for more than 180 days, and to restrict the depreciation to 12.5 per cent on the value of shuttering material used for less than 180 days. A consequential order was passed on 28-9-2007, restricting the depreciation. In the assessee’s appeal, the learned Tribunal set aside the Commissioner’s order and restored the order of the Assessing Officer allowing 100 per cent depreciation on shuttering sheets. Aggrieved thereby the Revenue filed appeal.

4. In ITTA No. 149 of 2005, the assessee filed a return admitting a total income of Rs. 33,94,790. They claimed depreciation at 100 per cent on the shuttering material. The assessment was completed under section 143(3) of the Act on March 31, 1994, on the total income returned. By order dated 13-2-1996, the assessment was, however, rectified under section 154 of the Act. By yet another order dated 27-3-1998, the assessment was again rectified reducing the depreciation of shuttering material from 100 per cent to 25 per cent. On appeal, the Commissioner accepted the assessee’s contention and allowed 100 per cent depreciation. Before the Tribunal, the Revenue was successful. Aggrieved by the two orders, the assessee filed two appeals separately.

5. The senior standing counsel for income-tax made the following submissions. The centering and shuttering material used by a civil contractor is a “plant” within the meaning to section 43(3) of the Act. Therefore an assessee can claim depreciation at the specified rates only. But under the proviso to section 32(1)(ii) of the Act, where the actual cost of machinery or plant does not exceed Rs. 5,000, the actual cost thereof shall be allowed as deduction. The nature of business determines the purpose of the plant and, in other words, “plant” has to be understood keeping in view the very nature of the business and understanding the way a businessman or a contractor looks at the concept of “plant”. This functional test, if applied, each and every unit forming part of centering, shuttering and scaffolding material used for different purposes by the civil contractor is not a “plant”. The entire material used as such, as a whole is “plant”. He would submit that Sri Krishna Bottlers (P.) Ltd.[1989] 175 ITR 154/[1988] 40 Taxman 15 (AP) does not help in determining the applicable depreciation in the case of centering and shuttering material. According to him, the subsequent decisions of the Madras and Rajasthan High Courts did not decide the nature of centering and shuttering material and merely followed Sri Krishna Bottlers (P.) Ltd.’s case (supra).

6. The senior counsel for the assessees Sri C. Kodanda Ram and the amicus curiae, Ms. Anjali Agarwal, appointed in the referred case rely on Sri Krishna Bottlers (P.) Ltd.’s case (supra). They contend that centering and shuttering material is put to different uses in different shapes depending on the construction taken up. Therefore each component or unit is a ‘plant’. They would urge that, if the construction work is large, all the units are used for making scaffolding and shuttering and the same by itself is not crucial. In other situations, even each unit has utility and, therefore, the proviso to section 32(1)(ii) of the Act is attracted. The senior counsel further adds that exercise of power under section 154 of the Act is illegal and not permissible under law. He would also urge that the Tribunal was not correct in disallowing a higher rate of depreciation on the vehicles hired by it.

Exercise of power under section 154 of the Income-tax Act

7. The core issue is the rate of applicable depreciation on centering and shuttering material. We will take up this, after disposing of two other minor questions. The first is whether the rectification is valid under section 154 of the Act. Section 154(1) of the Act confers power on the income-tax authorities, as enumerated in section 116 of the Act, to amend any order passed by it under the provisions of the Act and/or amend any intimation under section 143(1) of the Act. The power can be exercised, “to rectify any mistake apparent on record”. By reason of section 116(c) of the Act such power inheres also in the Commissioner of Income-tax. Section 254(2) of the Act confers power on the Income-tax Appellate Tribunal, “to rectify any mistake apparent on record at any time within four years from the date of the record in an appeal”. The exercise of power under section 154(1) of the Act by the income-tax authorities, and such power by the Appellate Tribunal, are subject to the condition that there is a mistake apparent from the record. The power under the two sections is wide, and an order passed can even be amended, which means that the earlier order can also be totally modified after giving a notice to the assessee. However, by reason of section 154(1A) of the Act, if any matter determined by the income-tax authorities was considered and decided in an appeal or revision relating to such an order, the income-tax authority again cannot pass an order under section 154 of the Act.

8. In Asstt. CIT v. Saurashtra Kutch Stock Exchange Ltd.[2008] 305 ITR 227 / 173 Taxman 322, the Supreme Court, while dealing with a case arising under section 254 of the Act, considered the scope of the words and phrase “mistake apparent on the face of the record”. The Supreme Court also considered the scope of section 254(2) of the Act. It was held therein that the power conferred under section 254(2) of the Act is not the power of review but is a power conferred, “to rectify any mistake apparent on record”. It was also observed that, while doing so, the Tribunal may set aside the earlier order and rehear the matter, and that the phrase “to rectify any mistake apparent on record” is wider in its content than the expression “mistake or error apparent on the face of record” occurring in Order XLVII, rule 1 of the Code of Civil Procedure, 1908 (CPC). The relevant observations are as follows (page 234) :

“Sub-section (2) thus covers two distinct situations :

‘(i) It enables the Tribunal at any time, within four years from the date of the order to amend any order passed under sub-section (1) with a view to rectify any mistake apparent from the record; and

(ii) It requires the Tribunal to make such amendment if the mistake is brought to its notice by the assessee or the Assessing Officer.’

It was submitted that so far as the first part is concerned, it is in the discretion of the Tribunal to rectify the mistake which is clear from the use of the expression ‘may’ by the Legislature. The second part, however, enjoins the Tribunal to exercise the power if such mistake is brought to the notice of the Tribunal either by the assessee or by the Assessing Officer. The use of the word ‘shall’ directs the Tribunal to exercise such power.

There is, however, no dispute by and between the parties that if there is a ‘mistake apparent from the record’ and the assessee brings it to the notice of the Tribunal, it must exercise power under sub-section (2) of section 254 of the Act. Whereas the learned counsel for the Revenue submitted that in the guise of exercise of power under sub-section (2) of section 254 of the Act, really the Tribunal has exercised power of ‘review’ not conferred on it by the Act, the counsel for the assessee urged that the power exercised by the Tribunal was of rectification of ‘mistake apparent from the record’ which was strictly within the four corners of the said provision and no exception can be taken against such action.”

Yet again it was held as follows (page 213) :

“In our judgment, therefore, a patent, manifest and self-evident error which does not require elaborate discussion of evidence or argument to establish it, can be said to be an error apparent on the face of the record and can be corrected while exercising certiorari jurisdiction. An error cannot be said to be apparent on the face of the record if one has to travel beyond the record to see whether the judgment is correct or not. An error apparent on the face of the record means an error which strikes on mere looking and does not need, long drawn out process of reasoning on points where there may conceivably be two opinions. Such error should not require any extraneous matter to show its incorrectness. To put it differently, it should be so manifest and clear that no court would permit it to remain on record. If the view accepted by the court in the original judgment is one of the possible views, the case cannot be said to be covered by an error apparent on the face of the record.

Though learned counsel for the assessee submitted that the phrase ‘to rectify any mistake apparent from the record’ used in section 254(2) (as also in section 154) is wider in its content than the expression ‘mistake or error apparent on the face of the record’ occurring in rule 1 of Order XLVII of the Code of Civil Procedure, 1908 [vide Kil Kotagiri Tea & Coffee Estates Co. Ltd. v. ITAT [1988] 174 ITR 579 (Ker.)], it is not necessary for us to enter into the said question in the present case.”

9. It is no doubt true that, in ITTA No. 149 of 2005, the assessment for the year 1993-94 was completed and the same was rectified vide order JAR No. 1/93-94, dated 13-2-1996, disallowing the amount under Rule 6(d) of the Income-tax Rules, 1962 (the Rules). By yet another order No. 1/97-98, dated 27-3-1998, the assessment for the year 1993-94 was again rectified by the Assistant Commissioner after it being noticed. The reasons therefor in the order of the Assistant Commissioner are as below :

“. . . A perusal of the bills for purchase of shuttering material reveals that the assessee purchased MS pipe and MS sheets of the value of more than Rs. 1 lakh. The assessee has not furnished the total quantity of material used in obtaining the independent units, cutting, welding and assembling charges incurred, number of units obtained etc., to arrive at the value of each unit. The concept of shuttering material can have only functional definition i.e., it is defined by what it does. Though each nut or bolt in this material (which may cost less than Rs. 5,000) may have individual identity, it loses its identity in the organic whole of the shuttering material. Therefore, it is the cost of the organic whole viz., the shuttering material that should be regarded for the purposes of depreciation. Such composite unit can only be treated as plant and machinery and would accordingly be entitled for depreciation at 25 per cent but not at 100 per cent as claimed. In similar other cases, the depreciation was allowed at 25 per cent only for the above reasons. The Andhra Pradesh High Court decision relied on by the assessee is not applicable to the assessee’s case, since the facts and circumstances in that case are different. Though there are some Tribunal decisions and of the Commissioner of Income-tax (Appeals), they were not accepted by the Department and the matter is pending before higher judicial authorities. As such, in conformity with the stand taken by the Department in this regard, the depreciation on shuttering material is restricted to 25 per cent in the assessee’s case also . . . “

10. The Commissioner of Income-tax (Appeals) passed orders on 14-9-1998 allowing the appeal. As noticed supra, the learned Tribunal reversed the Commissioner’s order upholding the order of the assessing authority holding that the assessee had purchased MS pipes and sheets which were converted into shuttering material and, therefore, depreciation at 100 per cent under the first proviso to section 32(1)(ii) of the Act cannot be allowed. It was also held that the assessee had not purchased any centering material, but had purchased raw material to convert it into shuttering material. The Tribunal did not advert to the question of exercise of power under section 154(1) of the Act by the Assessing Officer. As rightly pointed out by the senior standing counsel for the Revenue, this is justified because the assessee did not raise any ground, which is now sought to be raised before us. An appeal, under section 260A of the Act, is only on a question of law. A mixed question of fact and law, which has not been raised before the Tribunal, may in certain situations be permitted to be raised. But in this case no such plea was raised and we are afraid we cannot permit the assessee to raise this ground for the first time before us. Further the question stands concluded by the decision of the Supreme Court in Saurashtra Kutch Stock Exchange Ltd.’s case (supra). The question is, therefore, answered against the assessee.

Higher rate of depreciation on vehicles used in contract works

11. The next question relates to ITTA No. 124 of 2005 (assessment year 1995-96) wherein the assessee claimed higher rate of depreciation at 40 per cent on the vehicles hired out to Navayuga as per item (2)(ii) of heading III of Appendix I to Income-tax Rules. The Assessing Officer disallowed on the ground that a higher rate of depreciation can be availed of in a business of running vehicles on hire, and that the assessee is not engaged in such a business. The Appellate Commissioner allowed the appeal of the assessee holding that the business of the assessee did not change the character of hiring the vehicle for consideration. Accordingly the disallowance of excess depreciation was deleted. The Tribunal, however, agreed with the Assessing Officer and held that the assessee, as a civil contractor, used buses, taxis and lorries on hire but did not use them for giving on hire. Though a plea is raised, finding fault with the Assessing Officer and the finding of the Tribunal, senior counsel for the assessee does not pursue the argument in view of the binding precedent in CIT v. Gupta Global Exim (P.) Ltd.[2008] 305 ITR 132/ 171 Taxman 474 (SC).

12. In Gupta Global Exim (P.) Ltd.’s case (supra), the question before the Apex Court was whether the assessee was entitled to depreciation at 40 per cent on the trucks, which were put to use on hire. Referring to item (2)(ii) of heading III of Appendix I to the Income-tax Rules, it was held (page 135) :

“Under item (2)(ii) of heading III, the higher rate of depreciation is admissible on motor trucks used in a business of running them on hire. Therefore, the user of the same in the business of the assessee of transportation is the test.

In the present case, none of the authorities below (except the Assessing Officer) has examined the matter by applying the above test. The Assessing Officer has given his finding that the assessee was not in the business of transportation as he was only in the business of trading in timber logs. That, the burden was on the assessee to establish that it is the owner of motor lorries and that it used the said motor lorries/trucks in the business of running them on hire.

What is relevant for consideration under item (2)(ii) of heading III of Appendix I to the Income-tax Rules, 1962, is whether the assessee was in the business of hiring out his trucks in addition to his business of trading in timber.”

Depreciation on centering material

13. Each unit, be it as a single shutter or plurality of shutters, is a “plant” and if the value is less than Rs. 5,000 it would qualify for 100 per cent depreciation under the proviso to section 32(1)(ii) of the Act. Whether this contention can be countenanced by the court ? We start considering the issue by quoting sections 43(3) and 32(1)(ii) proviso of the Act.

“43. Definitions of certain terms relevant to income from profits and gains of business or profession.—In sections 28 to 41 and in this section, unless the context otherwise requires . . .

(3) ‘plant’ includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession.”

“32. Depreciation.—(1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed . . .

(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed :

Provided that where the actual cost of any machinery or plant does not exceed five thousand rupees, the actual cost thereof shall be allowed as a deduction in respect of the previous year in which such machinery or plant is first put to use by the assessee for the purposes of his business or profession.” [Emphasis supplied]

14. “Plant” is described with an inclusive definition. Anything, “used for the purpose of business or profession” is a “plant”. Whether a thing, a building, a vehicle, a contrivance or a contraption is a plant—at least in Tax jurisprudence—is a vexed question. The term “plant” appears in many places in sections 28 to 41 of the Act, which deal with computation of profits and gains from business or profession. Determination of “plant” is relevant in computing the chargeable income from business or profession in allowing depreciation (section 32), investment allowance (sections 32A and 32AB), development rebate (section 33) and rehabilitation allowance to industrial undertaking in the event of damage or destruction due to calamities (section 33B).

15. The precedents are galore which distinguish between a “building” and a “plant”. If the business or industrial process is carried on “with something”, it is a “plant” and if “business activity or industrial process” is carried on in a place or at a place, it is a “building”. Ramanatha Aiyar’s Advanced Law Lexicon contains about 30 definitions/descriptions of the term “plant” with reference to dictionaries, precedents and statutes. The best possible way is to understand the nature of the business, and the purpose of a thing in such a business. If one single individual unit itself is sufficient to carry on any business it is a “plant”. But if one single individual thing or item is not, by itself, fully useful to carry on business or advance trade, it is certainly not a “plant”. Even if such a thing, associated with many other similar or dissimilar things, is of immense utility for the business, it is in plurality and is to be considered as “plant”. In other words, the way a businessman understands the term “plant” is the most relevant because it would carry natural and proper sense.

16. In Challapalli Sugars Ltd.’s case (supra), the Supreme Court held that the expression “actual cost” should be construed in the sense no commercial man would misunderstand and the accepted accountancy rule should be adopted “for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary”. Referring to Challapalli Sugars Ltd. v. CIT[1975] 98 ITR 167 (SC) in the Principles of Statutory Interpretation Justice G.P. Singh elucidates as under :

“The principle that in statutes directed to commercial men, words having definite commercial sense must be understood in that sense as that would be ‘the natural and proper sense’ in that context has been applied in the construction of Income-tax Acts. It was, therefore, held that the words ‘profits and gains’, when used in an Income-tax Act should be understood in a sense which no commercial man would misunderstand. Applying the same principle the expression ‘borrowed money’ or ‘capital borrowed’ when used in an Income-tax Act has to be understood in its ordinary commercial usage implying a transaction of loan with relationship of borrower and lender. Similarly the word ‘investments’ in section 23A of the Income-tax Act, 1922 was construed in the ordinary popular sense of the word as used by businessmen and it was held that it is not limited to investments in shares, debentures, stocks etc. but also covers investments in house property or other income yielding property. In determining the commercial sense of an expression in a statute directed to commercial men but not containing any definition of that expression, it may be relevant to refer to the normal rules of accountancy prevailing in commerce and industry.”

17. In the building engineering construction industry, how does a businessman, or one connected with construction, understand shuttering material. For this purpose, it is necessary to indicate engineering and other aspects of shuttering material in the construction industry.

18. The word “centering” or “shuttering” is a false work erected to give temporary support to “concrete structure” and it is removed after the concrete structure gains strength. The concerned IS code for this work is IS 14687 : 1999.

19. In Wikipedia, the false work in construction is elucidated as follows :

“Falsework consists of temporary structures used in construction to support spanning or arched structures in order to hold the component in place until its construction is sufficiently advanced to support itself. Falsework also includes temporary support structures for formwork used to mould concrete to form a desired shape and scaffolding to give workers access to the structure being constructed.

Until the turn of the twentieth century almost all falsework was constructed from timber. To compensate for timber shortages in different regions and to rationalize labour and material usage, new systems were developed. The major development include the design of connection devices (coupler), transitions to other spanning beams such as steel pipes or profiles or reusable timber beams, and adjustable steel props.

During the same period many different scaffolding systems were being developed around the world. These consisted of welded frames that could be slotted or clipped together to form access or support towers. The reduction in construction time and complexity led to reduced labour costs and required less skill in assembly. Further developments have made scaffolding systems even easier to use. Stronger systems have been introduced that either incorporate horizontal restraints (via lacers, ties, or braces) at more levels or use stronger tubes or connections. Materials from which falsework systems are manufactured have also diversified from traditional steel and timber to aluminium components.”

20. In Harijan Evam Nirbal Varg Avas Nigam Ltd. v. CIT[1998] 229 ITR 776/[1996] 85 Taxman 456, 781, the Allahabad High Court quoted with approval the observations of the Income-tax Appellate Tribunal with regard to the shuttering material. “Shuttering is normally used to support the roof when concrete is being laid on it. These are not items of consumable stores, for they are retrieved after the roof has been laid and used again elsewhere. It is like any other tool with the help of which construction is done . . . shuttering material is a plant and machinery just as a concrete mixer or any other tool with which masons work”.

21. In CIT v. Alagendran Finance Ltd.[2003] 264 ITR 269 / 136 Taxman 165 , 273 (Mad.), the purpose of shuttering material was explained thus : “While erecting scaffoldings for a building, centering sheets are usually arranged in different shapes and sizes and a single sheet also is used for a particular work. It is not, as a matter of rule, centering sheets have to be used collectively for all works. Depending upon the nature of work, the number of centering sheets to be used varies. A single individual centering sheet may be sufficient for a particular work in the process of construction of a building and hence it would constitute a plant . . .”.

22. In CIT v. Mohta Construction Co.[2005] 273 ITR 276, 277 the Rajasthan High Court took the view that, “shuttering being a necessary component for construction of the building, is a plant and each shuttering in itself is an independent unit, as that depends upon the use of shuttering in different places . . .”. In Express Newspapers Ltd. v. Deputy CIT [2006] 280 ITR 452/ 152 Taxman 465, 457, the Madras High Court, while referring to Cripps v. Judge [1884] 13 QBD 583 (CA), held that “scaffolding is a plant . . .” and observed that, “each machinery or plant, has to be taken individually for the purpose of considering the computation of depreciation and not the organization of the unit as a whole by treating each and other apparatus necessary for the function of the factory as forming integral part of the factory”.

23. From the case law available, it is clear that shuttering is not an integrated component forming a plant. It consists of metal and non-metal props, pipes, right angles, sewer clamps, fixed base plates, wooden poles, wooden planks, plates, steel and aluminium boxes, wooden shapes and anything which can be used to support a suspended wall, reinforced cement concrete slab, an arch, a sunshade, a cantilever cement structure as support when such structures are being built with cement concrete. The purpose of the shuttering is only till the setting of the cement concrete or cement material. The moment the cement concrete achieves the required setting, the shuttering material is removed and used or re-used in other constructions. To that extent, the assessees do not dispute. In the very nature of things, and as understood in the construction industry, a single metal or wooden pole or supporting material is never understood as forming shuttering material. The owner of the building under construction, the contractor/mason who undertakes construction and/or a businessman who arranges or supplies shuttering material, understand only one concept of shuttering. Shuttering material is an integrated unit consisting of more than a few metal or wooden poles, planks and other props used to support the cement construction stage of a building.

24. The proviso to section 32(1)( ii) of the Income-tax Act allows the actual cost of the plant as depreciation if the same does not exceed Rs. 5,000. The assessees contend that each shuttering component, forming the integrated unit, has to be treated as one plant whereas the Revenue took the contra position contending that the entire shuttering material forming one integrated unit has to be considered while applying the proviso to section 32(1)(ii). The Madras High Court in Alagendran Finance Ltd.’s case (supra) and Express Newspapers Ltd.’s case (supra) and the Rajasthan High Court in Mohta Construction Co.’s case (supra) took the view that each component forms an integrated unit of shuttering material. With respect, we are not persuaded by these opinions. What is the test to be applied to determine whether a single component of a plant is, by itself, a plant or stand alone, cannot be of any assistance in business operations.

25. In CIT v. Taj Mahal Hotel[1971] 82 ITR 44, the Supreme Court held that, sanitary and pipeline fittings installed in a hotel are to be treated as plant for the purpose of development rebate. It was pointed out that the intention of Parliament was to give the expression a very wide meaning and that is why Articles like books and surgical equipment were expressly included in the definition of “plant”. Further it was held that the apparatus employed in carrying on trade or industrial business is a plant. In CIT v. Elecon Engg. Co. Ltd.[1974] 96 ITR 672 (Guj.), the word/expression “plant”, as defined in section 43(3) of the Income-tax Act, was explained as follows :

“The word ‘plant’ in its ordinary meaning is a word of wide import and it must be broadly construed having regard to the fact that articles like books and surgical instruments are expressly included in the definition of plant in section 43(3) of the Act. It includes any article or object, fixed or movable, live or dead, used by a businessman for carrying on his business. It is not necessarily confined to an apparatus which is used for mechanical operations or processes or is employed in mechanical or industrial business. It would not, however, cover the stock-in-trade, that is, goods bought or made for sale by a businessman. It would also not include an article which is merely a part of the premises in which the business is carried on. An article to qualify as ‘plant’ must furthermore have some degree of durability and that which is quickly consumed or worn out in the course of a few operations or within a short time cannot properly be called plant. But an articles would not be any the less plant because it is small in size or cheap in value or a large quantity thereof is consumed while being employed in carrying on business. In the ultimate analysis the inquiry which must be made is as to what operation the apparatus performs in the assessee’s business. The relevant test to be applied is : does it fulfil the function of plant in the assessee’s trading activity? Is it the tool of the taxpayer’s trade? If it is, then it is plant, no matter that it is not very long-lasting or does not contain working parts such as a machine does and plays a merely passive role in the accomplishment of the trading purpose.” [Emphasis supplied]

26. In Sri Krishna Bottlers (P.) Ltd.’s case (supra), the Division Bench comprising Jeevan Reddy and Jagannatha Rao, JJ. (as they then were) considered the question whether bottles and shells used by manufacture of soft drinks constitute “plant” and depreciation admissible thereon under section 32(1)(ii) of the Income-tax Act. Beginning with the statement of law by Lord Justice Lindley in Yarmouth v. France [1887] 19 QBD 647, 658 (“Plant in its ordinary sense, includes whatever apparatus is used by a businessman for carrying on his business—not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in his business) the Division Bench referred to English and Indian authorities and summed up the following eight applicable principles to determine whether an equipment is “plant” (page 169 of 175 ITR) :

“(1)’Plant’ in section 43(3) of the Act is to be construed in the popular sense, namely, in the sense in which people conversant with the subject-matter with which the section is dealing, would attribute to it. 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 matter 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 “plant”. They fall under the category of “intellectual storehouse”. (7) 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 or a building holds the plant in position does not, convert the building into plant. A piecemeal approach is not permissible and the entire matter must be considered as a single unit unless of course, the component parts can be treated as separate units having different purposes. (8) The functional test is a decisive test.”

27. Applying the above principles, this court held that the bottles and shells used by soft drinks bottling industry is “plant”. The Division Bench nowhere observed that each bottle or each shell would also be a plant for the purpose of section 32(1)(ii ).

28. In Pathange Poultry Farm v. CIT[1994] 210 ITR 668/[1995] 80 Taxman 553 (Kar.), Chief Justice S.B. Majmudar and Tirath Singh Thakur, JJ. (as they then were) were dealing with an income-tax reference under section 256(1) of the Income-tax Act as to whether the assessee was not entitled to depreciation at 100 per cent on poultry cages whose individual cost was less than Rs. 750 on the ground that the cages had been fabricated into one unit and thereby lost its individuality. Beginning with Yarmouth’s case (supra), the Division Bench of the Karnataka High Court referred to various English decisions as well as Indian decisions, and observed that there is no universal formula which can solve these puzzles; in the end each case must be resolved by considering carefully the nature of a particular trade being carried on, and the relation of the expenditure to the promotion of the trade, and the court must ask whether it can really be supposed that Parliament desired to encourage a particular expenditure out of taxpayers’ money. The Division Bench further observed as follows (page 678) :

“What then is the true test to be applied ? Is it the possibility of the thing or the article in question being capable of use in some other business of a similar or dissimilar kind, which would provide the answer, whether or not to treat the article or thing as a plant ? Or is it the function which the article performs in the trading activity of the assessee which is the key to the solution ? . . . The fact that the cages which the assessee in the case before us has purchased could be used by the same or some other assessee for a similar or some other business is not, in our opinion, a conclusive test. What is important is the function which the cage is utilised to perform, in the trading activity of the assessee. If this function was one of a self-contained unit, it may have been permissible to treat all the 9,000 cages purchased by the assessee to be as many independent units, in which case, each one of those cages may have qualified for a 100 per cent depreciation, the value of each cage being admittedly less than Rs. 750. A clear finding of fact which the income-tax authorities and the Appellate Tribunal have returned is that the cages are not used as independent units, but are utilised by the assessee for fabrication of bigger compartments to have a larger number of birds, with common facilities of lighting and feeding and watering, etc.” [Emphasis supplied]

29. The Division Bench further noticed that smaller poultry cages are integrated with a bigger unit; they lose their identity on such integration and become part of the bigger plant and cease to perform any function independent of what is performed by the entire unit as one complete plant and machinery; and, therefore, it was held that each smaller cage would not qualify for depreciation as plant.

30. In Harijan Evam Nirbal Varg Avas Nigam Ltd.’s case (supra ), the Allahabad High Court was concerned with the question whether shuttering material is a plant and whether depreciation can be allowed on it. The question whether each component of shuttering material is eligible for 100 per cent depreciation was not before the Allahabad Bench. Dealing with the question as to whether shuttering material is a plant, the learned judges observed (page 781) :

“The word ‘plant’ in its ordinary meaning is a word of wide import and it must be broadly construed having regard to the fact that articles like books and surgical equipment are expressly included in the definition of plant in section 43(3) of the Act. It includes any article or object, fixed or movable, live or dead, used by the businessman for carrying on his business. It is not necessarily confined to an apparatus which is used for mechanical operation or processing or is employed in mechanical or industrial business. It, however, does not cover the stock-in-trade or an article which is merely a part of the premises in which business is carried on.

To reach a correct conclusion whether a given item is plant or not, the inquiry which must be made is as to what operation the apparatus performs in the assessee’s business. The relevant test to be applied is : Does it fulfil the function of plant in the assessee’s trading activities ? Is it the tool of the taxpayer’s trade ? If it is, then it is plant. No matter that it is not very long lasting or does not contain working parts such as a machine does and plays merely a passive role in the accomplishment of the trading purpose. So the main test is whether a given item is such without which business cannot be carried on.” [Emphasis supplied]

31. In First Leasing Co. of India Ltd. v. CIT (No. 2)[2000] 244 ITR 238 /[2001] 115 Taxman 664, a Division Bench of the Madras High Court considered the question whether soft drinks bottles, leased out by the assessee to Spencer were eligible for 100 per cent depreciation allowance under the first proviso to section 32(1)(ii). Following the decision in Sri Krishna Bottlers (P.) Ltd.’s case (supra) and other decisions, it was held that 100 per cent depreciation can be claimed on the bottles used in soft drinks. The reasoning of the Madras Bench is as follows (page 241) :

“Bottles by their very nature are required to be used individually, each bottle is used separately for the purposes of consumption even though the bottling plant may be capable of filling a large number of bottles simultaneously. What is ultimately marketed is the contents of each bottle though the wholesaler may buy a large number of such bottles. Each bottle is an independent unit and is not dependent for its user on the availability of other bottles whether empty or filled. In the event of any damage it is the bottle which has suffered the damage that has to be discarded, and not all the bottles bought along with particular bottle. The use of one bottle is not interconnected with the use of the other bottles.” [Emphasis supplied]

32. In all the decisions, to our mind, the courts have applied the durability and/or functional tests. If a thing itself is durable (in the senseit can be used and re-used as non-interdependent, interconnected a non-consumable thing) and has functional utility in the trade or business of the assessee to advance his business interest, such thing would be a plant. If it is durable, but cannot effectively stand alone without functional integration with other similar or dissimilar components or units, it would not qualify as a plant. As is understood in the engineering construction industry, a single unit of centering or shuttering material by itself—though durable—may not have functional value. Similar units form one integrated part which can be used as shuttering material. Therefore, it is not possible to accept the plea of the assessees that each similar or dissimilar component or unit, forming part of the whole integrated shuttering material, is entitled for 100 per cent depreciation as a plant. As observed by Lord Wilberforce [quoted with approval in Pathange Poultry Farm’s case (supra)] in IRC v. Scottish & Newcastle Breweries Ltd. [1982] 55 TC 252 (HL) “. . . it is too much to stomach”, that each one of all the hundreds and thousands of props or poles, sheets, plates and planks forming part of centering or shuttering material, would be of functional utility to the builder, contractor or the owner of the property in construction activity. “As pointed out by the Supreme Court in Challapalli Sugars Ltd.’s case (supra), the term “plant” is to be understood in the sense no commercial man would misunderstand. Applying this test, we are convinced that each item of shuttering material cannot be treated as one whole the shuttering material forming one plant eligible for 100 per cent depreciation under the first proviso to section 32(1)(ii) of the Income-tax Act. We answer the reference accordingly.

33. In the result, for the above reasons, we answer the reference in RC No. 116 of 1996 in the negative against the assessee and in favour of the Revenue, allow the ITTA No. 20 of 1999 and dismiss the ITTA Nos. 124 and 149 of 2005. We, however, decline to make any order as to costs.

[Citation :  332 ITR 235]

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