1979 (1) TMI 45 - HC - Income Tax

Cold Storage Plant, Electrical Machinery, Factory Building, Higher Rate, Rate Of Depreciation, Special Rate

Summary

Issues Involved:
1. Classification of the cold storage building as a factory building for depreciation purposes.
2. Appropriate rate of depreciation for electrical machinery and equipment used in the cold storage plant.

Issue-wise Detailed Analysis:

1. Classification of the Cold Storage Building as a Factory Building for Depreciation Purposes:
The primary issue was whether the cold storage building owned by the assessee could be classified as a factory building, thereby qualifying for a higher depreciation rate of 10% instead of 5%. The Income Tax Officer (ITO) initially treated the building as a godown, allowing depreciation at 5%. However, the Appellate Assistant Commissioner (AAC) held that since machinery was installed in the building for cold storage, it should be considered a factory, thus allowing depreciation at 10%.

The Tribunal noted that the term "factory" was not defined in the Income Tax Act but observed that the assessee had been treated as a factory under the Factories Act, 1948, requiring a license. The Tribunal also referenced Section 80J(4) of the Income Tax Act, which equates cold storage plants with other industrial undertakings, including factories. Despite this, the High Court found that obtaining a license under the Factories Act was not conclusive proof of the building being a factory. The court emphasized that the definitions of "factory" and "manufacturing process" under the Factories Act did not encompass cold storage operations. Consequently, the court held that the cold storage building could not be classified as a factory building for depreciation purposes. The court referenced a decision by the Madras High Court in New Taj Mahal Cafe Ltd. v. Inspector of Factories, which supported this view. Therefore, the High Court answered question No. 1 in the negative, ruling in favor of the revenue.

2. Appropriate Rate of Depreciation for Electrical Machinery and Equipment:
The second issue concerned the rate of depreciation applicable to the electrical machinery and equipment used in the cold storage plant. The ITO had allowed depreciation at the general rate of 10%, while the AAC allowed a higher rate of 15%, considering the equipment as part of the refrigeration plant.

The Tribunal found that the electrical machinery and equipment, specifically the switchgear and motors, were indeed part of the refrigeration plant. This finding was not contested by the revenue. According to Appendix I, Part I of the Income Tax Rules, 1962, the prescribed rate of depreciation for refrigeration plant equipment is 15%. Therefore, the Tribunal's decision to affirm the AAC's order was deemed correct by the High Court. The court answered question No. 2 in the affirmative, ruling in favor of the assessee.

Conclusion:
The High Court concluded that the cold storage building could not be classified as a factory building under the Factories Act, 1948, and thus, the lower depreciation rate of 5% was applicable. However, the electrical machinery and equipment, being part of the refrigeration plant, qualified for a higher depreciation rate of 15%. The reference was disposed of accordingly, with no order as to costs.