2000 (5) TMI 4 - SC - Income Tax

Interpretation of word building and plant - Grant for depreciation on buildings machinery and plant - buildings used as hotels or cinema theatres - classified as plant - HELD THAT - It is held that the building used for running of a hotel or carrying on cinema business cannot be held to be a plant because (1) The scheme of section 32 as discussed above clearly envisages separate depreciation for a building machinery and plant furniture and fittings etc. The word plant is given inclusive meaning under section 43(3) which nowhere includes buildings. The rules prescribing the rates of depreciation specifically provide grant of depreciation on buildings furniture and fittings machinery and plant and ships. Machinery and plant include cinematograph films and other items and the building is further given a meaning to include roads bridges culverts wells and tube-wells. (2) In the case of Taj Mahal Hotel 1971 (8) TMI 2 - SUPREME COURT this court has observed that the business of a hotelier is carried on by adapting building or premises in suitable way meaning thereby building for a hotel is not apparatus or adjunct for running of a hotel. The court did not proceed to hold that a building in which the hotel was run was itself a plant otherwise the court would not have gone into the question whether the sanitary fittings used in bath room was plant. (3) For a building used for a hotel specific provision is made granting additional depreciation under section 32(1)(v) of the Act. (4) Barclay Curle and Co. s 1969 (1) TMI 69 - HOUSE OF LORDS decided by the House of Lords pertains to a dry dock yard which itself was functioning as a plant that is to say structure for the plant was constructed so that dry dock can operate. It operated as an essential part in the operations which took place in getting a ship into the dock holding it securely and then returning it to the river. The dock as a complete unit contained a large amount of equipment without which the dry dock could not perform its function. (5) Even in England courts have repeatedly held that the meaning of the word plant given in various decisions is artificial and imprecise in application that is to use the words of Lord Buckley it is now beyond doubt that the word plant is used in the relevant section in an artificial and largely judge-made sense. Lord Wilberforce commented by stating that no ordinary man literate or semi-literate would think that a horse a swimming pool movable partitions or even a dry-dock was plant. (6) For the hotel building and hospital in the case of Carr v. Sayer 65 TC 15 (Ch. D.) it has been observed that a hotel building remains a building even when constructed to a luxury specification and similarly a hospital building for infectious diseases which might require a special layout and other features also remains a premises and is not plant. It is to be added that all these decisions are based upon the interpretation of the phrase machinery or plant under section 41 of the Finance Act 1971 which was applicable and there appears no such distinction for grant of allowance on different heads as provided under section 32 of the Income-tax Act. (7) To differentiate a building for grant of additional depreciation by holding it to be a plant in one case where the building is specially designed and constructed with some special features to attract the customers and a building not so constructed but used for the same purpose namely as a hotel or theatre would be unreasonable. Hence the question is answered in favour of the Revenue and against the assessee by holding that building which is used as a hotel or a cinema theatre cannot be given depreciation as plant. Ordered accordingly.

Summary

Issues Involved:

1. Whether buildings used as a hotel or a cinema theatre can be considered as a "plant" for the purpose of depreciation under the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Definition and Interpretation of "Plant":

The central issue was whether buildings used as hotels or cinema theatres qualify as "plant" under Section 43(3) of the Income-tax Act, 1961, for the purpose of claiming depreciation. The court examined whether such buildings are merely settings for business or integral tools of the trade. The court emphasized that buildings and plants are treated separately under the Act, with different rates of depreciation applicable to each.

2. Legislative Intent and Scheme of Section 32:

The court analyzed the legislative scheme of Section 32, which provides distinct depreciation rates for buildings, machinery, and plant. It noted that the Act and the Income-tax Rules specifically provide for depreciation on buildings, indicating a clear legislative intent to treat buildings differently from plant and machinery. The court highlighted that the word "plant" is given an inclusive definition under Section 43(3), but this does not extend to buildings.

3. Functional Test and Judicial Precedents:

The court considered various judicial precedents, including the functional test applied in cases like IRC v. Barclay, Curle and Co. Ltd., which held that a dry dock was a plant because it played an essential part in operations. However, the court distinguished these cases, emphasizing that a hotel or cinema building does not perform a similar integral function in business operations. The court noted that even in England, the word "plant" is used in an artificial and largely judge-made sense, and the functional test is not conclusive in all cases.

4. Analysis of High Court Decisions:

The court reviewed conflicting High Court decisions on whether hotel and cinema buildings qualify as plant. It noted that some High Courts applied the functional test to classify such buildings as plant, while others disagreed. The court favored the latter view, aligning with decisions like R.C. Chemical Industries v. CIT and Lake Palace Hotels and Motels P. Ltd. v. CIT, which held that buildings do not become plant merely because they are purpose-built for a specific business.

5. Practical Implications and Legislative Amendments:

The court addressed the practical implications of classifying buildings as plant, noting that such an interpretation would blur the distinction between buildings and plant, contrary to the legislative scheme. It also considered the lack of legislative or administrative clarification on the issue despite conflicting judgments, concluding that this does not justify adopting an interpretation inconsistent with the Act's provisions.

Conclusion:

The Supreme Court concluded that buildings used for running a hotel or cinema business cannot be classified as "plant" for the purpose of depreciation under the Income-tax Act. The court emphasized the distinct treatment of buildings and plant under the Act and the importance of adhering to the legislative scheme. Consequently, the appeals filed by the Revenue were allowed, and those by the assessees were dismissed, with the court ruling in favor of the Revenue.