TMI Blog2008 (10) TMI 712X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 with the State of Tamil Nadu for development of project in the roads owned by the Govt. of Tamil Nadu between Kudiniyandithoppu (Sholinganallur Junction), Kizputtuputtu, Cheravedy near Pondicherry, measuring nearly 113.2 Kms., more specifically known as East Coast Road System 3 . During the year under consideration it claimed depreciation amounting to ₹ 12,09,08,953/- as depreciation on plant and machinery at the rate of 25% comprising of the following items: Particulars Depreciation Claimed Percentage Roads ₹ 11,78,04,917 25% Other Plant Machinery ₹ 29,04,036 25% Total ₹ 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 Corporation v. CIT, roads are not buildings. In this background the Assessee company wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ended that the decision of Indore Municipal Corporation (supra) relied upon by the Assessing Officer was not applicable 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 Trivancore Cochin Chemical Ltd. CIT and CIT v. Madras Auto Services Pvt. Ltd.. Since the roads were constructed on the lands belonging to the Govt. 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 para 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 requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the appellant because the nature of the asset will not 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.,. 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the cost of project as revenue expenditure. He submitted that the decision in the case of CIT v. Madras Auto Services Pvt. Ltd. (supra) was rendered by the Apex Court for the Asst. 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 Law (Amendment 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 lease hold 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 Corporation (supra) 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see 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 lease hold 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 Govt. 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 Govt. 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, manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acilities for provision 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 Govt. of Tamil Nadu, the Assessee company became entitled to collect fixed amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Reid considered the part which a dry dock played in the assessee-company's operations and observed (at p.67): 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 (p.75 of 76 ITR): 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 dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocess of generation started from letting in water from the reservoir into the penstocks 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant and again the following technical report was taken note of: 1 . The mill building 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 ton 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-inforced steel to accommodate about 40 tons 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 fit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be a plant where the building is specially designed and constructed with some special features to attract customers and another where the building is not so 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld include roads. Therefore, in our view, the Assessee would become entitled to depreciation on the road in the category of building. In these circumstances, we set aside the 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 ₹ 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. 2. Depreciation on roads at ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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