TMI Blog2000 (5) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... 61 (hereinafter referred to as "the Act"), and also to decide whether the time has come to have a fresh look at the old precedents and to lay down the law with the changed perceptions keeping in view the provisions of the Act ? Further, to what extent are we required to follow and adopt the artificial and largely judge-made sense of the word "plant", which is given an inclusive meaning under section 43(3) and in the context of the scheme of section 32 ? In this batch of civil appeals, some appeals are filed by the Revenue and some by the assessees. Since the question involved in all these appeals is similar, we would deal with the facts in. Civil Appeal No. 4758 of 1998 for convenience. For the assessment year 1986-87, the assessee claimed depreciation at 15 per cent. on the theatre building claiming it to be a plant. The Assessing Officer by order dated September 27, 1988, rejected the claim and allowed depreciation only at 5 per cent. The appeal filed by the assessee before the Commissioner of Income-tax (Appeals), Trivandrum, was allowed by order dated July 21, 1989, holding that the theatre building is to be treated as a "plant". Being aggrieved, the Revenue filed appeal ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered the decisions in IRC v. Barclay, Curle and Co. Ltd. [1970] 76 ITR 62 (HL); [1969] 1 WLR 675 (HL) and Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86 (SC). The court observed that the principle that can be deduced is that if a building is merely a setting or place to accommodate some apparatus, then that will not be held as plant but if a building which does not merely accommodate something or which cannot be regarded merely as a setting or premises, but if that plays an important role in carrying on the business, then that would fall within the inclusive definition of the plant. Thereafter, the court observed thus : "The hotel building, in our opinion, cannot be equated with a residential building, which provides shelter to the people living therein. The building is essential to run the business of hotel. Without befitting building it is idle to think of a hotel business. A good hotel requires amenities and a building which is so erected as to fulfil the requisite norms of hotel. A building simply accommodating machinery or other apparatus to run a factory is different from the hotel building, which is specially designed, suiting the hotel requirements. So a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was entitled to development rebate in respect thereof. The court further held that the fact that the assessee claimed depreciation on the basis that sanitary and pipeline fittings fell under "furniture and fittings" in rule 8(2) of the Indian Income-tax Rules, 1922, did not detract from this position as the rules cannot take away what is controlled by the Act or whittle down its effect. After considering the contentions raised by the Revenue, the court-observed as under : "It cannot be denied that the business of a hotelier is carried on by adapting a building or premises in a suitable way to be used as a residential hotel where visitors come and stay and where there is arrangement for meals and other amenities are provided for their comfort and convenience. To have sanitary fittings, etc., in a bath room is one of the essential amenities or conveniences which are normally provided in any good hotel in the present times. If the partitions in Jarrold's case [1963] 1 WLR 214 (CA), could be treated as having been used for the purpose of the business of the trader, it is incomprehensible how sanitary fittings can be said to have no connection with the business of the hote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in CIT v. Dr. B. Venkata Rao [2000] 243 ITR 81, wherein this court dismissing the appeal filed by the Revenue held that the nursing home building was specially equipped as a plant for the assessee's business. The court observed : "What is to be determined is whether the particular nursing home building was equipped as to enable the assessee to carry on the business of a nursing home therein or whether it is just any premises utilised for that object. We find from the order of the Tribunal as also the assessment order that the assessee's nursing home is equipped to enable the sterilisation of surgical instruments and bandages to be carried on. It is reasonable to assume in the circumstances, particularly having regard to the Tribunal's order which states that the sterilisation room covers about 250 sq. ft. that the nursing home is also equipped with an operation theatre. In the circumstances, we think that the finding of the High Court should be accepted." This decision is based on the facts found by the Tribunal and the High Court, wherein it was held that the nursing home was equipped to enable sterilisation of surgical instruments and bandages to be carried on and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nit constitutes plant and was entitled to depreciation and development rebate. The Karnataka High Court in CIT v. Dr. B. Venkata Rao [1993] 202 ITR 303, held that the building which was used as nursing home was a plant. Similarly, in CIT v. Woodlands Hotel Pvt. Ltd. [1998] 233 ITR 224 [IRTC Nos. 48 and 49 of 1993, dated June 16, 1997] [Against this decision, Civil Appeals Nos. 4373-74 of 1999 are pending before this court-being disposed of by this judgment] and in CIT v. Hotel Rama Pvt. Ltd. [1998] 253 ITR 235 (Kar), held that the building in which the hotel business is carried on is a plant for the purpose of grant of depreciation. The Madras High Court in Addl. CIT v. Madras Cements Ltd. [1977] 110 ITR 281, held that the special reinforced concrete foundation for the purpose of locating or installing the rotary kiln in the factory would come within the scope of the expression plant and is entitled to development rebate. In CIT v. Sri, Krishna Bottlers P. Ltd. [1989] 175 ITR 154, the Andhra Pradesh High Court held that bottles were essential tools of the trade for it was through them that soft drink was passed on from the assessee to the customers and, therefore, were "plant" fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved as under : "A perusal of the said statutory provision of section 32A of the Act would show that the words 'machinery and plant' have been used separately with an exclusive character, from each other, finds place in the concerned enactments of the section. The statutory provision also speaks of other requirements for entitlement to investment allowance on the count." In R. C. Chemical Industries v. CIT [1982] 134 ITR 330 (Delhi), the Delhi High Court held that the definition of the word "plant" given under section 43(3) should be given a wide meaning as it is an inclusive definition. It held that the assessee who constructed a building having atmospheric controls, namely, moisture, temperature and provision for filtered air, which were required for manufacturing of saccharine, would not come within the expression "plant". It observed that the mere fact that manufacture of saccharine would be better carried on in this type of building would not convert the building from "the setting" to "the means" for carrying on the business. Such a building which is free from atmospheric vagaries might have certain advantages as compared with a normal construction, but it remained, the sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more near to one category, then by stretching it should not be considered to fall in a category which is far off." The court further observed : "The building which is used in the business of hotel remains a building inspite of the fact that it is decorated.... If the skeleton of the building without decoration is building then the items by which it is decorated would not change the character of building. The item may, however, be considered as plant subject to its use. The use of the building is as a setting. Building is not used as a tool of the trade. Different rates of depreciation for building have been provided which also makes the legislative intent clear that the different types of buildings remain as building. The amendment of section 32(1)(v) has only clarified the legislative intent that the building of hotel is a building, though by amendment a higher rate of deprecation is provided for it. In an industry no production can be normally carried on without a building where the plant and machinery is installed but for that reason the building cannot be considered as plant when there is a separate entry for buildings for purpose of depreciation. Buildings may accommodate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, contemplate immovable property like a building being considered as plant. The "ejusdem generis" and "noscitor a sociis" principles are relevant in this connection ; (iii) Section 32(1)(ii), section 32A and the Appendix to the Income-tax Rules speak of plant and machinery being "installed" and of building being "erected". This again brings out the distinction clearly ; (iv) Section 32(1)(v) unequivocally provides that a new building used as hotel is regarded as a building for purpose of depreciation. In other words, a building which is specially designed and constructed for use as a hotel is nevertheless a building, for the purpose of depreciation ; (v) Section 32(1)(iia) and section 33(1)(b)(B)(ii) and the Appendix to the Income-tax Rules speak of plant and machinery installed in premises used as a hotel, thereby clearly, establishing that the hotel premises are not machinery or plant, but are only a building. The same principle would also apply to a theatre building. Section 32(1)(iv) makes it clear that even structures/buildings which are constructed in compliance with the requirements of the Factories Act and Rules are "buildings" for the purpose of depreciation. Mr. B. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spite this as the Legislature or the Central Board of Direct Taxes has not issued any clarification on the subject, the view adopted by various High Courts requires to be accepted. They submitted that cinema theatre or a hotel building is to be considered as one unit with all attendant apparatus for running the business and if they are construed as one unit it would be a plant. Secondly, these buildings are to be considered not on their own but in relation to the business carried on by the assessee namely running of hotel or cinema. In support of this contention, learned counsel heavily relied upon IRC v. Barclay, Curle and Co. Ltd. [1969] 1 WLR 675---also reported in [1970] 76 ITR 62 (HL), and other decisions stated above. Hence, the controversial question for consideration is---whether building used for running hotel or cinema' business could be held a "plant" as provided under section 43(3) of the Act ? We would first refer to the judgment in Barclay, Curle and Co.'s case [1970] 76 ITR 62 (HL), upon which most of the judgments of the High Courts are based for arriving at the conclusion that building which is used for running the hotel business or cinema theatre would be a pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the concrete or any other part of the dock as a mere setting or part of the premises in which this operation takes place. The whole dock is, I think, the means by which, or plant with which, the operation is performed." Lord Guest agreed with the view taken by Lord Reid. In the judgment rendered by him it was observed that in order to decide whether a particular subject is an "apparatus" it seems obvious that an inquiry is to be made as to what operation it performs. Lord Hodson disagreed with the above view and observed : "The dock as a complete unit contained a large amount of equipment without which the dry dock could not perform its function. This equipment admittedly qualifies for the initial allowance appropriate to expenditure on plant. It includes a dock gate and operating gear, cast iron keel blocks, electrical installation, pipe work installation, pumping installation and other subsidiary equipment, expenditure on which clearly qualifies for initial allowance as having been incurred in paying for machinery or plant." Further with regard to building it was observed : "A building or structure is normally to be regarded in the context of this statute as someth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (page 1453 of [1982] 1 WLR) : "... as a man who speaks English and understands English accurately but not pedantically would interpret it in context, applying it to the particular subject-matter in question in the circumstances of the particular case." The court further observed (at page 1453 of [1982] 1 WLR) : "To this admirable precept Oliver L.J., [1981] STC 671, 682, in delivering the leading judgment in the Court of Appeal in the instant case, warily, and perhaps wearily, added the cautionary rider that 'the English speaker must, I think, be assumed to have studied the authorities.' These however, as he cautiously admitted in an earlier passage cannot be pretended to be at all easy to reconcile, and, as he said in a still earlier passage, at page 675D : 'it is now beyond, doubt that [the word "plant"] is used in the relevant section in an artificial and largely judge-made sense." The court thereafter observed (page 1454 of [1982] 1 WLR) : "if 'plant' is to be contrasted with the place in which the business is carried on, the line must be drawn somewhere... There must, therefore, be a criterion (or criteria) by which the courts define the frontier between the two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the present taxpayer company carry on their trade and not of the apparatus used as an adjunct of the trade carried on in those premises." It was further observed that "the dry dock in Barclay, Curle and Co. Ltd.'s case [1970] 76 ITR 62 (HL), was a structure as, well as plant". RELEVANT PROVISIONS UNDER THE ACT FOR GRANT OF DEPRECIATION Before dealing with the rival contentions, we would refer to the relevant parts of sections 32 and 43(3) of the Act. "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), su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof : Provided.... Explanation.---... (iv) in the case of any building which has been newly erected after the 31st day of March, 1961, where the building is used solely for the purpose of residence of persons employed in the business and the income of each such person chargeable under the head 'Salaries' is ten thousand rupees or less, or where the building is used solely or mainly for the welfare of such persons as a hospital, creche, school, canteen, library, recreational centre, shelter, rest-room or lunch-room, a sum equal to forty per cent. of the actual cost of the building to the assessee in respect of the previous year of erection of the building ; but any such sum shall not be deductible in determining the written down value for the purposes of clause (ii) of sub-section (1) ;. (v) in the case of any new building, the erection of which is completed after the 31st day of March, 1967, where the building is owned by an Indian company and used by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness or profession after the 31st day of March, 1970, on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, in respect of depreciation of such structure or work, the following deductions shall, subject to the provisions of section 34, be allowed--- (i) such percentage on the written down value of the structure or work as may in any case or class of cases be prescribed ; Provided... Explanation... (2)......." "43. 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." Rule 5 of the Income-tax Rules, 1962, provides for calculation of depreciation at the percentage specified in the second column of the Table in Part I of Appendix I to the Rules. Appendix I to rule 5 is as under : "PART I (See rule 5) TABLE OF RATES AT WHICH DEPRECIATION IS ADMISSIBLE Class of assets Depreciation allowance as percentage of--- i) actual cost in the case of ocean go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o lights 100 IV. Ships : (1) Ocean going ships--- (i) Fishing vessels with wooden hull ; 10 (ii) Dredgers, tugs, barges, survey launches and other similar ships used mainly for dredging purpose ; 7 (iii) Other ships 5 To be calculated on the actual cost (2) Vessels ordinarily operating on inland waters--- 20 (i) speed boats (ii) other vessels 10" The aforesaid clauses of the 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 specifically provides for grant of depreciation for building, machinery, plant or furniture at prescribed percentage on the written dow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uildings, (II) Furniture and fittings, (III) Machinery and plant, and (IV) Ships. These headings have been further subdivided providing different rates. Like, building is divided into, (i) building generally, (ii) special rate in respect of factory building, and (iii) temporary erections such as wooden structures. In the remarks column (3) it is stated that buildings include roads, bridges, culverts, wells and tube-wells. Furniture and fittings is also divided into, (i) general rate, and (ii) rate for furniture and fittings used in hotels, restaurants and boarding houses, cinema house, theatres, etc. Similarly, machinery and plant are under one heading and are divided into two parts---(i) general rate applicable to machinery and plant, and (ii) special rates, which includes machinery and plant for cinematograph films, recording equipment, reproducing equipments developing machines, printing machines synchronisers and studio lights and projecting equipments of film exhibiting concerns, Further, special rates are provided for machinery used in production and exhibition of cinematograph films being (a) recording equipment, reproducing equipment, developing machines, printing machines, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to give each word some particular definition given by lexicographers and then to reconstruct the instrument upon the basis of those definitions. What particular meaning should be attached to words and phrases in a given instrument is usually to be gathered from the context, the nature of the subject-matter, the purpose or the intention of the author and the effect of giving to them one or the other permissible meaning on the object to be achieved. Words are after all used merely as a vehicle to convey the idea of the speaker or the writer and the words have naturally, therefore, to be so construed as to fit in with the idea which emerges on a consideration of the entire context." Applying the said test, we have to gather the meaning of the words "building" and "plant" in context of scheme of section 32 and it is not necessary that we should adopt a judge sense meaning, which is artificial and imprecise in application, given to the word "plant" in the context of different statutory provisions. The scheme of section 32 unequivocally leads to the conclusion that "building" and "plant" are treated separately for the purpose of grant of depreciation. A higher rate of depreciation is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etation clause declares that they shall include. Further, it is to be stated that section 43 itself provides that "unless the context otherwise requires" the word "plant" is to be given wider meaning as stated therein. This wider meaning does not include building. But in any case even for the time being presuming that the judge-made meaning of the word "plant" includes building in certain set of circumstances, in the context of section 32 such wider meaning cannot be given and plant would not include building in which hotel business is run or a theatre building in which cinema business is carried on. Further, the court specifically observed that : "... the business of a hotelier is carried on by adapting a building or premises in a suitable way to be used as a residential hotel where visitors come and stay..." These observations clearly indicate that the business of a hotelier is carried on in a building or a premises and the building is not an apparatus for running such business. It is a shelter or a home for conduct of such business. Learned counsel also pointed out the decision of the Madras High Court in CIT v. N. Sathyanathan and Sons P. Ltd. [2000] 242 ITR 514, wherein th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9] 1 WLR 675 (HL), such building or premises would be the place in which the operation of carrying on of business takes place and not that they are the means by which the operation is performed. Even the House of Lords in the case of Benson [1979] 1 WLR 347 (CA) arrived at the conclusion that a ship or a floating hulk used as a restaurant was not a plant, even though the ship was used to create a shipboard feeling and certain kind of atmosphere among the patrons. In our view, such buildings cannot be termed as tools for running business but are a mere shelter for carrying on such business activities. Therefore, even the functional test, which is followed and which according to us would not be conclusive in all cases, is also not satisfied. In England also, there are conflicting decisions involving the question whether a structure would be a plant or not and it is stated that each case is required to be decided on the facts of that case. In Commissioners of Inland Revenue v. Scottish and Newcastle Breweries Ltd. [1982] 55 TC 252 (decided by the House of Lords), the Court of Appeal observed that though there is no statutory definition of "plant" for the purpose of section 41 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ending on shop fronts, floor and wall tiles, wall finishes and other non-decorative items which was held by the Special Commissioners as part of the "setting" or premises in which trades were carried on. The appellants contended that all the items were installed to improve the ambience of the restaurant and to attract customers and were thus plant. The court held that they were not plant. The court took up each and every item of decoration separately for analysing whether it constituted a plant or not. Like for shop fronts or doors, the court agreed with the observations of the Chancery Division that none of the shop fronts or doors qualifies as plant by holding that their principal function is to form a necessary part of the premises and doors are needed for ingress and egress. None of the floor or wall tiles can be classed as plant. They are chosen so as to create an attractive setting in which customers will be pleased to sit for the short time required to consume a fast food meal, but their function in the trade does not go beyond that. Considering the facts of this case and various decisions Fox L. J., observed : "In the light of the authorities the position appears to me to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructed at their premises. Some of the kennels were movable. The permanent kennels comprised a flat-roofed structure which consisted principally of a series of pens divided from each other by walls and with bars and metal mesh across the front, The court held that those kennels were not plant ; they were purpose-built permanent buildings or structures, used as such, and were the premises in which business was conducted ; while they were specifically designed for quarantine purposes, the particular roof and walls were building design features and no more, which did not result in structures being characterised as anything other than buildings or lead to the end result having the character of equipment or apparatus. For this purpose, the court referred to various principles in the context of section 41(1) of the Finance Act 1971, which is applicable to "machinery or plant". In the context of that section, the court observed that plant carries with it a connotation of equipment or apparatus, either fixed or unfixed. It does not convey a meaning wide enough to include buildings in general. The court pertinently observed that building would not normally be regarded as plant, do not cease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at, the aforesaid decisions by courts in England are based upon section 41 of the Finance Act, 1971, which provide for allowance for capital expenditure incurred on the provisions of machinery or plant for the purposes of the trade and the courts were only dealing with general meaning of the word "plant". Even there, as quoted above, courts have specifically held that creation of atmosphere in a hotel by beautiful buildings and gardens would not make such buildings as plants. The suitability of such building is simply the reason why the business is carried on there which may flourish, but the premises remain premises where business is carried on and are not something with which business is carried on. In Carr v. Sayer (65 TC 15 (Ch D)), the court observed that a hotel building remains a building even when constructed to a luxury specification and also a hospital building for infectious diseases which might require special layout and other features was not held to be a plant by observing that a purpose-built building is no more than the premises in which the business is conducted. Further, there are hotels of all kinds and hotel business can be carried on in all kinds of buildings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. Learned counsel for the assessee submitted that the words "plant" and "building" are not mutually exclusive. "Plant" may include building in certain set of circumstances and, therefore, applying the functional tests the assessee would be entitled to depreciation under the head "It is more beneficial to it". He submitted that in the modern era, theatre building and hotel building are integral part of operation for carrying out such business and, therefore, such building should be considered as a "plant". As discussed above, the aforesaid contention cannot be accepted. Firstly, it would be difficult to draw a line between a building which is specifically constructed for the aforesaid purposes and buildings which are used for the aforesaid purposes by converting a residential accommodation or industrial premis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3(3) of the Act by the Finance Act of 1995, by excluding tea bushes and livestock with retrospective effect from 1962, it has not excluded buildings which are used for running hotel or cinema business. It has not clarified or carried out any amendment in the provision and, therefore, it should be held that interpretation given by the High Courts was accepted by the Revenue and the Legislature. We do not know that the Revenue Board was alive to the said controversy. If that was so, it would have clarified either way and litigations could have been avoided. But that is no ground for accepting the interpretation suggested by learned counsel for the assessees which would be inconsistent with scheme of section 32. In the result, 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 depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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. used as a cinema along with its fittings and fixtures and wherein cinema business was carried on constituted a plant. 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. Accordingly Civil Appeals Nos. 55-57 of 2000 filed by the assessee and Civil Appeals Nos. 4758, 5198-99, 5391 of 1998, 15, 2784-86, 2787, 3690 of 1999 and Civil Appeals Nos. 3434-3435 of 2000 at S. L. P. (C) No. 4373-74 of 1999 filed by the Revenue are disposed of, but in the circumstances of the case, without costs. In Civil Appeals Nos. 241, 242-243, 244, 245, 246-48 of 1999, learned coun ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
