TMI Blog2008 (10) TMI 275X X X X Extracts X X X X X X X X Extracts X X X X ..... construction of any structure on leasehold property such expenditure will also be treated as capital expenditure and the assessee becomes entitled to depreciation. It is not disputed before us that the road has been constructed and developed on the Government land as well as existing road which is owned by the Government of Tamil Nadu. Therefore, there is no question of claiming such expenditure as revenue expenditure. In any case, the ld counsel for the assessee had mentioned during the hearing that he was only serious about the claim of depreciation and such depreciation should be allowed on the basis as if the road constitutes a plant. Merely because some Optical Fibre lines or connection lines have been laid, the road cannot get converted into a plant. As per agreement entered into Government of Tamil Nadu, the assessee-company became entitled to collect fixed amount of toll per vehicle for which it could have created any kind of barrier for collection of such toll. If the assessee has chosen to install automated toll plaza then the same was done for its own convenience and mere construction of one toll plaza will not change the nature of the asset which remains the road ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d depreciation amounting to Rs. 12,09,08,953 as depreciation on plant and machinery at the rate of 25 per cent comprising of the following items:- ----------------------------------------------------- Particulars Depreciation Percentage Claimed ----------------------------------------------------- Roads Rs. 11,78,04,917 25% ----------------------------------------------------- Other Plant Machinery Rs. 29,04,036 25% ----------------------------------------------------- Total Rs. 12,07,08,953 ----------------------------------------------------- According to the Assessing Officer, road did not figure in the depreciation schedule and, therefore, the same could not be termed as plant and machinery. He further observed that as per the decision of Hon'ble Supreme Court in the case of Indore Municipal Corpn. v. CIT [2001] 247 ITR 803, roads are not buildings. In this background, the assessee-company was asked to explain why depreciation should be allowed. In response, the assessee-company represented that total cost of the project was to be borne by the company as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licable to this case. 6. Without prejudice to the above it was also contended that the Assessing Officer has disallowed the entire expenditure which was claimed as revenue expenditure and in this regard reliance was placed on the decision of the Hon'ble Supreme Court in the case of Travancore-Cochin Chemicals Ltd. v. CIT [1977] 106 ITR 900 and CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468. Since the roads were constructed on the lands belonging to the Government of Tamil Nadu, the whole expenditure should have been allowed as revenue expenditure. 7. The CIT (Appeals), after considering the submissions of the assessee, denied the claim vide paras 2.5 to 2.8 which are as under:- "2.5 I have carefully examined the facts and legal position, the impugned assessment order and various submissions of the appellant on this issue. The mute question of law which arises in this case is whether the appellant is entitled to depreciation under section 32 of the Act on the roads constructed by it on the State Highway. For allowing depreciation under section 32 of the Act, an assessee has to fulfil two basic requirements and that is that the asset under consideration should be owned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot affect the applicability of the basic conditions prescribed in section 32 of the Act for the allowance of depreciation. The infrastructure facility stated to be included in the road system is also owned by the Government and not the appellant. In view of these facts, various contentions of the appellant on this issue are hereby dismissed. 2.7 I have also considered the alternative submission of the appellant that the entire amount should be allowed as revenue expenditure in view of the decision of Hon'ble Supreme Court in the case of Travancore Cochin Chemicals Ltd 106 ITR 900. The learned AR has also relied on the decision of Hon'ble Supreme Court in the case of CIT v. Madras Auto Services Pvt. Ltd 233 ITR 468 with a contention that the land does not belong to the assessee and the appellant was only deriving benefit by the construction of the said road system and, hence, the entire expenditure is required to be allowed a revenue expenditure. 2.8 I have carefully perused the said decisions and I am of the considered view that the facts of the said cases are quite different from the facts of the appellant. In the case of Madras Auto Services (P) Ltd., the appellant was having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Madras Auto Service (P.) Ltd. was rendered by the Apex Court for the assessment year 1968-69 and after that the Act has been amended by insertion of Explanation (1) to section 32 of the Act with effect from 1-4-1988 by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 through which it is specifically declared that if an assessee makes construction of any structure on premises which are only held on the basis of leasehold rights then such expenditure would be treated as capital expenditure. He also argued that the Hon'ble Supreme Court has ultimately held in the case of Indore Municipal Corpn. that the roads are not included in the buildings and, therefore, the assessee was not entitled to even depreciation. In any case, the roads could have been, at best, construed as building, but by no stretch of imagination road can be construed as plant and the decisions relied on by the learned counsel for the assessee are distinguishable on facts of each case. 10. We have considered the rival submissions carefully in the light of the material on record as well as the decision relied by the rival parties. We find that before the Assessing Officer, the assessee had cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is entitled to depreciation as if such building was owned by him. This means even if the expenditure is incurred on construction of any structure on leasehold property such expenditure will also be treated as capital expenditure and the assessee becomes entitled to depreciation. It is not disputed before us that the road has been constructed and developed on the Government land as well as existing road which is owned by the Government of Tamil Nadu. Therefore, there is no question of claiming such expenditure as revenue expenditure. In any case, the learned counsel for the assessee had mentioned during the hearing that he was only serious about the claim of depreciation and such depreciation should be allowed on the basis as if the road constitutes a plant. 11. We have carefully perused the agreement entered into by the assessee-company with the Government of Tamil Nadu vide concession agreement dated 22-12-2000. In this agreement Article 1 deals with the definition of 'Project' as defined under:- '"Project" means the Project described in Appendix 1 which the Concessionaire is required to design, engineer, procure, finance, construct, rehabilitate, repair, improve, operate, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of 24 hours patrolling, vehicle break-down, tow-away and ambulance service on the Project Road; (19) Establishment/development of Site offices, control rooms, residential quarters and storage spaces/stock yards, etc., required for implementation of Project; and (20) Establishment/Installation/Development of any other structures/service/systems agreed to by the Parties as constituting the Project under this Agreement. The above details of project clearly show that it is basically the project for widening, strengthening, etc., of the existing road. Clause (16) refers to Optional establishment of Two Way side amenities including restaurants. But on questioning, it was admitted that no such amenities have been created and the assessee was not deriving any income from such amenities. Merely because some Optical Fibre lines or connection lines have been laid, the road cannot get converted into a plant. We do not find force in the statement that the assessee has installed specialized automated toll plaza and, therefore, it should be construed as plant. As per agreement entered into Government of Tamil Nadu, the assessee-company became entitled to collect fixed amount of toll pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered the part which a dry dock played in the assessee-company's operations and observed: "It seems to me that every part of this dry dock plays an essential part The whole dock is, I think, the means by which, or plant with which, the operation is performed." Lord Guest indicated a functional test in these words: "In order to decide whether a particular subject is an 'apparatus' it seems obvious that an enquiry has to be made as to what operation it performs. The functional test is, therefore, essential at any rate as a preliminary." In other words, the test would be: Does the article fulfil the function of a plant in the assessee's trading activity? Is it a tool of his trade with which he carries on his business? If the answer is in the affirmative, it will be a plant. If the aforesaid test is applied to the drawings, designs, charts, plans, processing data and other literature comprised in the "documentation service" as specified in clause 3 of the agreement, it will be difficult to resist the conclusion that these documents as constituting a book would fall within the definition of "plant". It cannot be disputed that these documents regarded collectively will have to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and ducts which were the water conductor system into the turbines. Once electricity had been produced by generation, it had to be conducted, as it was not possible to store the same, and the process of generation continued until the electricity was led to the transmission towers. The water that was used for rotation of the turbines had to be removed and this was done through the tail race channel. For stepping up the electricity, transformers were used in the outdoor yard. The condition of the electricity was through conductors held in ducts, called the cable duct system, which were specifically designed for the purpose. The case of the assessee, therefore, was that all these were part of the special engineering works that were an essential part of a generating plant and, therefore, it was entitled to have the same treated as a plant for the purposes investment allowance. The Commissioner accepted the correctness of the assessee's case. He held that it was clear that the generating station building had to be treated as a plant for the purposes of investment allowance. These buildings could not be separated from the machinery and the machinery could not be worked without such speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is designed in such a manner that it holds the entire plant and machinery. Beams and columns are erected to hold the entire load of plant and machinery on each floor. All the floors are constructed with holes for passing of the flow pipes, belts, chains, etc. The floors are constructed with specifically reinforced RCC materials as per technical requirements. The structure is made with heavy re-enforced steel and concrete to hold the weight of heavy machines installed in each floor with a load bearing capacity of one tonne per sq.mtr. On the roof of the building water tanks with 40,000 litres capacity have been erected for washing and clearing the wheat in process. 2. That almost 1/3rd part of the four storied structures is covered for erection of silos (storage bins). The twelve numbers of storage bins are specially made with re-enforced steel to accommodate about 40 tonnes of wheat in process in each bin. These are made for washing and conditioning the wheat before milling. These bins are essential for processing of the wheat. 3. That all the four walls of the structure and ceiling are fitted with flow pipes and other electrical fittings. 4. That the plant cannot be held and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constructed, but used for the same purpose, namely, as a hotel or theatre, would be unreasonable. A characteristic of plant is that it is an adjunct to the carrying on of a business and not the essential site or core of the business itself. Therefore, a hotel or cinema building cannot be stated to be an adjunct to the carrying on of the business, that is to say, something added to another, or which is in a subordinate, auxiliary or dependent position. By the Court: Depreciation as a general principle represents the diminution in value of a capital when applied to the purpose of making profit or gain. The object is to get the true picture of the real income of the business. Hence, it can be inferred that the Legislature never intended to give such benefit of depreciation to a building which is usually more durable than machinery or plant." From the above observations it becomes absolutely clear that as a matter of general principle, a particular building or structure cannot be treated as a plant because generally it has more durability or life than the machinery or plant. The same principle would apply to roads also. 16. On a specific question by the Bench as to whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the CIT (Appeals) on this issue and direct the Assessing Officer to allow depreciation on the road at the rate applicable to the buildings. 18. This appeal is partly allowed. 19. ITA No. 817/Mds./07: In this appeal, the assessee has raised three grounds out of which Ground No. 3 was not pressed at the time of hearing. Therefore, the same is dismissed as not pressed. The other two grounds read as under:- 1. Provision for doubtful debts amounting to Rs. 1,22,02,790. The provision for doubtful debts is an ascertained liability and the assessee prays that appeal be allowed based on the judgment of the Bombay High Court in the case of CIT v. Echjay Forgings Pvt. Ltd. (251 ITR 15). 2. Depreciation on roads at Rs. 9,06,84,834. The CIT (Appeals) has erred in not upholding the assessee's claim for depreciation on roads by classifying it under the head 'Plant and machinery'. 20. As far as the first ground is concerned, after hearing both the parties we find that this issue has been decided by CIT (Appeals) following the decision of the Hon'ble Jurisdictional High Court in the case of Dy. CIT v. Beardsell Ltd. [2000] 244 ITR 256 (Mad.) wherein it was held that:- "if ..... X X X X Extracts X X X X X X X X Extracts X X X X
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