TMI Blog1988 (4) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(1)(ii) of the Act in respect of the bottles and shells purchased and put to use during the year. The assessee had claimed that during the relevant year of account, it had purchased bottles to the tune of Rs. 3,25,021 and that the same should be allowed as outright deduction. It had also claimed the deduction of a further sum of Rs. 1,78,166 towards breakages out of the opening stock as on July 1, 1974. The Income-tax Officer rejected this claim for three reasons, viz., (1) Bottles cannot be treated as plant on which depreciation can be claimed ; bottle and cool drinks therein put together form stock-in-trade and cannot be separated from the drink for the purpose of sale and that the assessee having manufactured the cool drinks supplied them along with bottles. (2) The assessee had all along been following a particular method of accountancy, viz., to claim the breakages as an expenditure in the year of account and that the same cannot be varied to the detriment of the Revenue. (3) The breakages that occurred on account of the assessee's own mistake only led to loss and the liability in the hands of the assessee for breakages was only contingent. On appeal, the Commissioner of Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and shells could not be treated as "plant". The position was no more different from the one where such soft drinks would be sold to customers or retail dealers through plastic or other containers which did not come back to the assessee from the customers or retail dealers. On the other hand, learned counsel for the assessee, Sri M. J. Swamy, brought to our notice a direct ruling of the Rajasthan High Court in CIT v. Jai Drinks (P.) Ltd. [1988] 173 ITR 100. He also referred to the various rulings which were relied upon by the Rajasthan High Court in the abovesaid judgment. In reply, learned counsel for the Department contended that the decision of the Rajasthan High Court is not correct and a reference was made in detail to the decision of the Gujarat High Court in CIT v. Elecon Engineering Co. Ltd. [1974] 96 ITR 672, which has since been affirmed by the Supreme Court in CIT v. Elecon Engineering Co. Ltd. [1987] 166 ITR 66, following the earlier decision of the Supreme Court in Scientific Engineering House (P.) Ltd. v. CIT [1986] 157 ITR 86. The meaning of the word "plant" in the context of section 32(1)(ii) of the Income-tax Act, 1961, has come up for consideration in the courts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice" in the horse. Lindley L. J. and Esher M. R. considered "horse" as "plant", which was being used in the business of the defendant, and that the vice in the horse was a "defect" in the condition of the plant. This case is now treated as the basis for applying the "functional" test. Over the years, courts have developed the above principle in several respects and improved upon the same. In 1944, in J. Lyons and Co. Ltd. v. Attorney-General [1944] 1 Ch 281, a question arose under the War Damage Act, 1943, as to whether "electric lamps and fittings" in a restaurant were "plant". It was held that they were not. Uthwatt J. held that electric lamps and fittings were not part of the "apparatus" used for carrying on the business but were part of the "setting" in which the business was carried on, and, therefore, were not "plant", the subject of compensation within the Act. Uthwatt J. observed (at p. 287) : ". . . but the presence of lamps in this building is not dictated by the nature of the particular trade there carried on or by the fact that it is for trade purposes that the building is used. Lamps are required to enable the building to be used where natural light is insufficien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... text of the words "permanent employment in his business" used by Lindley L. J., and went on to say that these knives and lasts were not "stock in-trade which comes and goes" (i.e., which is sold to the customer) but they were "durable" though not "permanently used". He hastened to add that, no doubt, it may be difficult to treat as plant articles which were quickly "consumed or worn out" in the course of a few operations. In the year 1962, a fourth principle based on whether the asset had "passive" or "active" role in the business was considered in Jarrold v. John Good and Sons Ltd. [1962] 40 TC 681, by the Court of Appeal. In that case, the respondents were carrying on business as shipping agents and to satisfy its fluctuating accommodation requirements, the company made use of special "partitions" to sub-divide the floor space available, in any way it chose. The partitions were secured by screws to the structure of the building only at the floor and ceiling and it was a relatively simple operation to move them from one position to another. It was common ground that the partitioning did not form part of the structure of the building. Initially, Pennycuick J. upheld the Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the trade of ship-builders repairers and engineers. The dry dock acted like a hydraulic chamber in which a volume of water (variable at will) could be used to lower a ship, so that the ship could be exposed for inspection and repair, and to raise it again to high tide level, so that it could sail away. The "dry dock" was held to be "plant". Lord Reid observed (at p. 67): "undoubtedly, this concrete dry dock is a structure, but is it also plant ? The only reason why a structure should also be plant which has been suggested or which has occurred to me is that it fulfils the function of plant in the trader's operations. And if that is so, no test has been suggested to distinguish one structure which fulfils such a function from another. I do not say that every structure which fulfils the function of plant must be regarded as plant, but I think that one would have to find some good reason for excluding such a structure. And I do not think that mere size is sufficient." In the same case, Lord Guest referred to the words of Lindley L. J. in Yarmouth v. France [1887] 19 QBD 647, namely "apparatus used by businessman for carrying on business" and explained (at p. 75 of 76 ITR and p. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D), (apart from Daphne's ), it is clear that "gross materiality" is not a sine qua non for an idea incorporated in a design or a book to be "plant". The Indian scene, at the level of the Supreme Court, virtually opened in 1971 at a stage when at least six broad principles had crystallised in the corresponding field in England and this was when the case, CIT v. Taj Mahal Hotel [1971] 82 ITR 44 (SC), was decided. That case related to sanitary fittings and pipelines in a hotel. Their Lordships referred to Yarmouth v. France [1887] 19 QBD 647 (case of horse), J. Lyons and Co. Ltd. v. Attorney-General [1944] 1 Ch 281 (case of electric lamps and fittings) and Jarrold v. John Good and Sons Ltd. [1962] 40 TC 681, (case of partitions), wherein the first, second and fourth principles referred to above were laid down. After stating that the Act contained only an inclusive definition as to what was "plant" and that it must be construed in the popular sense and in a "wide" manner, Grover J. observed that sanitary fittings, etc., in a bathroom were the essential amenities or conveniences which any good hotel was expected to provide and that these sanitary fittings could not, by any stretch of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to a "gymnasium and laboratory" constructed on prefabricated moveable panels. Each of the items, the gymnasium and the laboratory were considered to be not "plants" for the purpose of the school. Templeman J. observed (at p. 531) : "In considering whether a structure is plant or premises one must look at the finished product and not at the bits and pieces as they arrive from the factory ... the fact that a building or part of a building, holds plant in position does not, by some magic wand, convert the building itself into plant." It was necessary to find whether the business is carried on within the building or whether it was an apparatus used by the businessman for carrying on the business. Here, the subject-matter of inquiry were structures which always remained a building. In this school, Templeman J. pointed out (p. 533) : "Education is not carried out with these particular buildings but in these particular buildings;" a point which was clear from Pearson L. J's observations in Jarrold's case [1962] 40 TC 681, where a distinction was made between an asset or structure in which the business is carried on or one with which the business is carried on, the former exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... life of four to nine years. That too is capital expenditure. Third, he may take in the periodicals, such as Weekly Law Reports and the All England Law Reports. They come out every week or month. He pays for them an annual subscription. That is not capital expenditure. It is revenue expenditure. He can deduct the whole of these annual subscriptions from his income for tax purposes. He can also deduct the cost of binding these weeklies at the end of each year and also the cost of repairing his sets of law reports. That third part is all revenue expenditure. We are not concerned with it today. We are only concerned with the first two parts which I have described as capital expenditure." and held that these two categories are "plant" and overruled Daphne v. Shaw [1926] 11 TC 256 (KB). He pointed out (p. 503) that the word "plant" was not to be understood as an ordinary Englishman understands it but that it had acquired a special meaning in tax cases. Lord Denning M. R. observed (p. 503) : "I do not think 'plant' should be confined to things which are used physically. It seems to me that on principle, it extends to the intellectual storehouse which a barrister or a solicitor or any oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w and Templeman L. JJ. agreed) pointed out that the distinction was whether the floating restaurant was one in which the business was carried on or one which plays any part "in the carrying on of those activities". Applying the "functional test" (p. 85), he held that the floating restaurant was not "plant". The case again turns upon the functional test laid down in Yarmouth v. France [1887] 19 QBD 647, i.e., the first principle, read with Barclay, Curle [1970] 76 ITR 62 (the fifth principle). Likewise, in Brown v. Burnley Football and Athletic Co. Ltd. [1980] 3 All ER 244, a stand for spectators in a football stadium was held to be not "plant" by Vinelott J. The "functional test" in Barclay Curle [1970] 76 ITR 62 was applied. Thus, Benson v. Yard Arm Club Ltd. [1979] 53 TC 67 (CA) and Brown v. Burnley Football and Athletic Co. Ltd. [1980] 3 All ER 244, are also based on the "functional test" referred to in the first and fifth principles referred to above. In 1980, two cases of considerable importance were decided by the House of Lords. The first is in IRC v. Scottish and Newcastle Breweries Ltd. [1982] 2 All ER 230 (HL). That was a case of electric light fittings, decor and mural ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then referred to the "single unit" approach advocated by Lord Reid and Lord Donavan in Barclay Curle's case [1970] 76 ITR 62 (HL), and by Templeman J. in St. John's School's case [1974] 49 TC 524 (CA), as against the "piecemeal approach". But, on the special facts relating to these components carrying electricity, they held that it was an exceptional case where the Commissioners were right in taking each component separately as each was serving a "different purpose" and held that each of them was not "plant". In 1982, in Leeds Permanent Building Society v. Procter [1982] 56 TC 293 (Ch D), Goulding J. held that advertisement screens placed in windows of branch offices of a society whose business was to supply finance to help people buy their own houses were "plant" and not merely the setting because these screens had a function connected with the business. The learned judge said (p. 308) that the "functional test" led him to that conclusion. It is in 1986 that our Supreme Court decided Scientific Engineering House (P.) Ltd. v. CIT [1986] 157 ITR 86. That case related to drawings, designs, plans, processing data, etc., of a company manufacturing scientific instruments and apparat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erely because the asset has a passive function in the carrying on of the business, it cannot be said that it is not plant. It may have a passive or an active role. (5) The subject must have a "function" in the trader's operation and if it has, it is prima facie a plant unless there was good reason to exclude it from that category. It must be a "tool in the trade" of the businessman.. (6) Gross materiality or tangibility is not necessary and, in fact, intangible things like ideas and designs contained in a book could be "plant". They fall under the category of "intellectual storehouse". (7) In considering whether a structure is plant or premises, one must look at the finished product and not at the bits and pieces as they arrive from the factory. The fact that a building or part of a building holds the plant in position does not, convert the building into plant. A piecemeal approach is not permissible and the entire matter must be considered as a single unit unless of course, the component parts can be treated as separate units having different purposes. (8) The functional test is a decisive test. Bearing these principles in mind, we shall approach the facts of the present case. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 633, wherein it was held that "gas cylinders" fall within the definition of "plant". The fact that in the latter two cases, gas could not otherwise be transported especially by cylinders made for that purpose makes no difference. The cylinders are not stock-in-trade and are returned back to the trader as are the bottles and shells in the present case. They too satisfy the "functional" test and answer the definition of "plant". It may be, as suggested for the Revenue, that, some day, soft drinks might be conveyed by plastic or other material which may also be the subject-matter of sale. In such an event, they may partake of the character of stock-in-trade. But that does not affect the position here because it is nobody's case that the bottles and shells are stock-in-trade. Before parting with the case, we may refer to the observations of Lord Wilberforce in Scottish and Newcastle Breweries' case [1982] 2 All ER 230 (HL) in 1982 that, "as case follows case", and one extension leads to another, the meaning of the word "plant" diverges from its natural and dictionary meaning. But as long as we are concerned with its popular meaning in the context in which the word is used in the A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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