2000 (5) TMI 4 - SC - Income Tax

Assessee claimed depreciation at 15 per cent. on the theatre building claiming it to be a plant - Held that building which is used as a hotel or a cinema theatre cannot be given depreciation as plant

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.

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