High Court Of Andhra Pradesh
CIT Vs. Padmavathi Hatcheries (P.) Ltd.
Assessment Years : 1991-92 And 1992-93
Section : 43(3)
V.V.S. Rao And Ramesh Ranganathan, JJ.
RC Nos. 135 Of 1997, 53, 107 Of 2001, ITA Nos. 178, 186, 376, 607, 674, 765 And 773 Of 2006
November 3, 2010
V.V.S. Rao, J. – The cases referred under section 256(1) of the Income-tax Act, 1961 (“the Act”) and the Income-tax Appellate Tribunal Appeals filed under section 260A of the Act involve a common question compelling disposal by a common order. All the referred cases are at the instance of the Revenue. The only question referred to this court is : “whether, on the facts and in the circumstances of the case, poultry shed should be treated as plant, thereby allowing the assessee-company a higher rate of depreciation as applicable to plant and not the rate of depreciation as applicable to building ?” Before considering the rival contentions of the junior counsel for the Revenue and the counsel for the assessees, it is appropriate to notice the background of the referred cases and I. T. T. As. by referring to R. C. No. 53 of 2001 and I. T. T. A. No. 376 of 2006.
2. In R. C. No. 53 of 2001, M/s. Srinivasa Hatcheries (Private) Limited, Hyderabad, which runs a hatchery and poultry farm, buys one-day old chicks, grows them, hatches them and after incubating them, sells one-day old commercial chicks to poultry farms. In the return for the assessment year 1991-92, they claimed depreciation at 20 per cent. on the poultry sheds treating them as “plant”. The Assessing Officer declined to accept the same and completed the assessment treating the poultry sheds as “building” allowing depreciation at 10 per cent. In their appeal, the assessee was successful. The Revenue unsuccessfully appealed before the Income-tax Appellate Tribunal. The Commissioner of Income-tax sought reference. The Tribunal by order dated July 8, 1996, declined to do so. The matter went to the Supreme Court. Their Lordships by order dated February 4, 2000, in Civil Appeal No. 841 of 2000 (CIT v. Srinivasa Hatcheries P. Ltd.  245 ITR 8 (SC)) (arising out of SLP (C) No. 4847 of 1989) directed the Tribunal to refer the question to the High Court.
3. I. T. T. A. No. 376 of 2006 is filed by the Revenue against the order of the learned Tribunal, dated October 28, 2005, in I. T. A. No. 550/Hyd/ 1999 in relation to the assessment year 1992-93. Therein, the assessment of M/s. Venkateswara Hatcheries, Hyderabad, was completed under section 143(3) on April 22, 1993. On the ground that the deductions under sections 80HH, 80HHC and 80JJ were not properly worked out, the Commissioner in exercise of the revisional jurisdiction set aside the assessment order of the Deputy Commissioner of Income-tax. Consequently, there was reassessment determining the total income at Rs. 1,84,93,920. Inter alia, contending that poultry shed is a plant, within the meaning of section 43(3) of the Act, the assessee successfully filed an appeal. The Commissioner of Income-tax allowed the same on February 11, 1999. The Revenue’s appeal before the learned Tribunal was futile.
4. In these referred cases and I. T. T. As., the senior counsel and junior counsel for the Income-tax Department relying on the decisions of the Supreme Court and the Punjab and Haryana Court contend that if any business or profession is carried on in a premises, it is to be treated as a building. They would add that if the building forms integral part or forms itself as an apparatus in the business process, it has to be treated as plant. According to them, poultry shed used for growing the chicks and hatching and incubating their eggs, is not a plant, and, therefore, does not satisfy the functional test. They rely on CIT v. Venkateswara Hatcheries P. Ltd.  237 ITR 174 (SC), CIT v. Anand Theatres  244 ITR 192 (SC) and CIT v. Shivalik Poultries  274 ITR 529 (P&H).
5. The counsel for the assessee submits that all poultry sheds are constructed to serve the assessee’s special technical requirements and are specially designed. Poultry sheds are tools and apparatus for the purpose of business and, therefore, they cannot be treated as “building”. He would vehemently contend that poultry shed is a “plant” and the assessees would be entitled to claim depreciation at 25 per cent. He placed reliance on CIT v. Dr. B. Venkata Rao  243 ITR 81 (SC), CIT v. Karnataka Power Corporation  247 ITR 268 (SC) and CIT v. Dr. Ganga R. Menon, Palghat Poly Clinic  259 ITR 661 (Ker).
The point for consideration is whether poultry shed should be treated as “plant” thereby allowing the assessees to claim higher rate of applicable to depreciation ?
6. Sections 28 to 41 of the Act contain the procedure for computation of profits and gains of business or profession. Section 32 of the Act allows the assessee certain deductions in respect of depreciation of tangible assets like buildings, machinery, plant or furniture. Deduction in respect of depreciation of intangible assets like know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature is also permitted. Section 43 contains definitions of the terms used in sections 28 to 41. Section 43(3) defines “plant”. For understanding the controversy, it is necessary to read sections 32(1) and 43(3) of the Act, extracted hereunder :
“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-
(i) in the case of ships other than ships ordinarily plying on inland waters, such percentage on the actual cost thereof to the assessee as may, in any case or class of cases or in respect of any period or periods, be prescribed :
Provided that different percentages may be prescribed for different periods having regard to the date of acquisition of the ship ;
(ii) in the case of buildings, machinery, plant or furniture, other than ships covered by clause
(i), such percentage on the written down value thereof as may in any case or class of cases be prescribed :
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 ;”
7. “Plant” is the inclusive definition. Everything which is not building, furniture or fittings “used for the purpose of business” is a “plant”. If it is a “building”, it cannot be a “plant”. But, in certain circumstances, a “plant” itself can be a “building”. As per section 32(1) of the Act, an assessee can claim deduction of depreciation as prescribed by rule 5 of the Income-tax Rules, 1962, read with Appendix I thereto. There is no dispute at the relevant time, the rules permit depreciation of 10 per cent. if it is a “building” and 20 or 25 per cent. if it is a “plant”.
8. In Srinivasa Hatcheries P. Ltd., the Assessing Officer came to the conclusion that poultry sheds are buildings. The reasoning is as follows :
“The assessee argued that the poultry sheds are tools with the help of which business is carried on. The assessee also explained the three types of poultry sheds to cater to brooding, grooving and laying of one-day old chicks. The contention of the assessee is that the poultry shed is a tool with the help of which business is carried on is not acceptable because poultry shed is a mere place where business activities of the assessee is carried on. Therefore, the poultry sheds are treated as buildings and accordingly, depreciation rate applicable to buildings is allowed.”
9. The Commissioner of Income-tax (Appeals) did not agree with the conclusion of the Assessing Officer. He came to the conclusion-without much reason–that poultry shed is to be allowed depreciation at the rates of plant and machinery. The learned Tribunal did not devote much time or space to this aspect. It merely relied on its earlier decision in Srinivasa Hatcheries P. Ltd. for the assessment year 1989-90 and agreed with the Commissioner of Income-tax (Appeals). Therefore, in so far as finding of fact is concerned, there is no reasoning by the Appellate Commissioner or the Tribunal. We may recall the reasoning of the Assessing Officer that poultry shed is not a tool, with the help of which, the assessee carried on business and that it is a mere place where business activity of the assessee is carried on. This is indisputable even in these referred cases, and for that matter, in all other matters. Indeed, the assessee did not dispute that whether or not a poultry shed is constructed as per the specific needs of the particular hatcheries, a poultry shed is a place in which the business is carried on. It is a place from where the hatcheries company carries on the business of hatching, brooding and producing commercial chicks and marketing them to needy poultry farms. With this background, we may now consider the case law, relied on by both the sides.
10. Anand Theatres  244 ITR 192 (SC) involves the question whether a building used as a hotel or cinema theatre can be considered to be an apparatus or tool for running business, so that it can be termed as a “plant” and depreciation can be allowed accordingly or whether it remains a “building” wherein either hotel business or business for cinema could be conducted. On an analysis of the relevant provisions of the Act, the decisions of the Supreme Court and various High Courts, their Lordships summarized the legal position as under (page 213 of 244 ITR).
“The aforesaid clauses of section 32 deal with depreciation allowance in respect of assets of the specified description used for the purpose of business or profession. From a careful scrutiny thereof what emerges is :
(1) The scheme of section 32 is to provide different rates of depreciation for building, machinery, plant or furniture, ships, buildings used for hotels, aeroplanes and other items mentioned therein. Clause (ii) of section 32(1) specifically provides for grant of depreciation for building, machinery, plant or furniture at prescribed percentage on the written down value thereof. The rates are prescribed under the Income-tax Rules.
(2) Under clause (iia) of section 32(1) specific provision is made for new machinery or plant which has been installed and it provides for additional sum equal to one-half of the amount admissible as depreciation under clause (ii) if the conditions mentioned therein are fulfilled. Further, the proviso carves out an exception to the effect that no deduction shall be allowed in respect of any machinery or plant installed ‘in office premises or any residential accommodation’. That means the Legislature has divided building into different categories, namely, (i) buildings used for office premises ; or (ii) for residential accommodation ; or (iii) premises used for other purposes. The meaning of the phrase ‘residential accommodation’ is also given under the Explanation which includes accommodation in the nature of a guest house and it specifically excludes ‘premises 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 of ‘machinery’ or ‘plant’ is installed for the purposes of business or construction, etc., which indicates that ‘plant’ is to be installed and there is no question of erection.”
11. Further, the apex court also laid down that even if special fittings or equipment to control atmospheric affects are permitted in a building, it would not make “building” a “plant” although special fittings and equipment would be “plant”. It was further observed (page 223 of 244 ITR) :
“Further, for running almost all industries or for carrying on any trade or business building is required. On occasions building may be designed and constructed to suit the requirement of a particular industry, trade or business. But that would not make such building plant. It only shelters running of such business. For each and every business, trade or industry, a building is required to carry on such activity. That means building plays some role and in other words, its function is to shelter the business, but it has no other function except in some rare cases such as dry dock where it plays an essential part in the operations which take place in getting a ship into the dock, holding it securely and then returning it to the river. Building is more durable. If the contention of the assessee is accepted, virtually all such buildings would be considered to be a plant and the distinction which the Legislature has made between the ‘building’ and ‘machinery’ or ‘plant’ would be obliterated.” (emphasis supplied)
12. In Shivalik Poultries  274 ITR 529 (P&H), a Division Bench of the Punjab and Haryana High Court held that (page 532) :
“The word ‘plant’ is given an inclusive meaning in section 43(3) of the Act which nowhere includes buildings. There is a well-established distinction between the premises in which the business is carried on and the apparatus with which the business is carried on. The latter category would fall within the ambit of the phrase ‘plant’. The premises cannot be termed as ‘plant’. The building in which the business is carried on might be well suited to the business or have been built for the business but it would not be a plant. The suitability is the reason why the business is carried on there but it does not make it a thing with which the business is carried on. If a building is merely a setting or place to accommodate some apparatus, then that cannot be termed as plant but if that plays an important role in carrying on the business then it will fall within the definition of the term ‘plant’. It would be a plant if it is a tool of the trade with which one carries on his business. The poultry shed cannot be considered as an apparatus or tool for running the poultry business but is merely a shelter or home or setting in which the business is carried on. Thus, the poultry shed cannot be termed as plant but would fall under the term ‘building’.”
13. Karnataka Power Corporation  247 ITR 268 (SC) is a case wherein it was held that the question whether a place is a “building” or a “plant” is a question of fact and that (page 271) : “. . . where it is found as a fact that a building has been so planned and constructed as to serve an assessee’s special technical requirements, it will qualify to be treated as a plant “. The Supreme Court therein held that, “power generating station is a plant eligible for investment allowance under section 32A of the Act”. Dr. B. Venkat Rao  243 ITR 81 (SC) and Dr. Ganga R. Menon  259 ITR 661 (Ker) are the cases of nursing home and hospital respectively. It was held therein that, “in case of nursing home or hospital, the building with sterilization plants, operation theatres plays an important part in the business and, therefore, can be treated as ‘plant'”.
14. The brief analysis of the precedents would show that if a building itself is the place with which the business is carried on, it is a “plant”. But, if the building is a place from where the business is carried on it is only a “building” notwithstanding special arrangements like temporary control systems, humidity control systems, air-conditioners, etc., being fitted to such building. As held in Shivalik Poultries  274 ITR 529 (P&H), a poultry shed “is merely a shelter or home or setting in which the business is carried on” and, therefore, it is only a “building” and not a “plant”. The submission of the counsel for the assessee that the poultry shed of hatchery is built according to specific technical requirements does not change the situation nor legal position.
15. That a poultry shed is not a “plant” stands concluded-in our view ; by the decision of the Supreme Court in Venkateswara Hatcheries P. Ltd.  237 ITR 174 (SC). Therein the assessee claimed to be an industrial undertaking engaged in the business of producing articles or things entitled to, and that it was entitled to development allowance under section 32A of the Act and deductions under sections 80HH, 80HHA and 80J of the Act. The claim was rejected by the Tribunal on the ground that the chicks are not articles or things within the meaning of section 32A to or section 80J(4) of the Act. It was also held that the assessee is not an industrial undertaking. But, the High Court held that hatchery business comes within the meaning of the expression of an industrial undertaking producing article or thing and thus, allowed the claim of the assessee. Before the Supreme Court, in their appeals, the Revenue contended that chicks being animate creatures cannot be permitted as articles or things, that producing of chicks being natural process, it cannot be said that the asseessee is producing the chicks. These contentions weighed with the apex court. While allowing the appeals, it was held (page 183 of 237 ITR).
“From a perusal of the self-stated steps taken by the assessee for the alleged production of chicks, it is clear that the assessee does not contribute to the formation of chicks. The formation of chicks is a natural and biological process over which the assessee has no hand or control. In fact, what the assessee is doing is to help the natural or biological process of giving birth to chicks. The chicks otherwise can also be produced by conventional or natural method and in that process also, the same time is taken when the chicks come out from the eggs. What the assessee by application of mechanical process does in the hatchery is to preserve and protect the eggs at a particular temperature. But the coming out of chicks from the eggs is an event of nature. The only difference seems to be that, by application of mechanical methods, the mortality rate of chicks is less and the assessee may get chicks more in number. This, however, would not mean that the assessee produces chicks and that chicks are ‘articles or things’. We are, therefore, of the opinion that the assessee is neither an industrial undertaking nor does the business of hatchery carried out by the assessee fall within the meaning of section 32A and section 80J of the Act.”
16. After the judgment of the Supreme Court in Venkateswara Hatcheries P. Ltd.  237 ITR 174 (SC), a Division Bench of this court disposed of the Referred Case No. 148 of 1996, wherein the question referred was similar to the one in these cases. Following Venkateswara Hatcheries P. Ltd.  237 ITR 174 (SC) the Division Bench in its order dated October 10, 2007, answered the reference in favour of the Revenue, holding that the assessee is not entitled to investment allowance for poultry sheds treating them as “plant”. Although, the case was decided in a different context, the ruling that a poultry shed is not a “plant” is binding on this court. We, therefore, hold that a poultry shed is not a “plant” enabling the assessee to the higher rate of depreciation as applicable to a “plant” and that it is entitled to claim depreciation as applicable to a “building” only.
17. In the result, for the above reasons, the reference is answered in the negative in favour of the Revenue and against the assessees. All the appeals filed by the Revenue are accordingly allowed without any order as to costs.
[Citation : 335 ITR 325]