Un-necessary litigation by revenue- depreciation:COLD STORAGE BUILDING IS INTEGRAL PART OF ‘COLD STORAGE PLANT’ AND IS ELIGIBLE FOR DEPRECIAITON BASED ON PLANT AND NOT AS BUILDING EVEN AFTER AMENDMENT IN MEANING OF PLANT.

[C.A. DEV KUMAR KOTHARI]

Section 43(3) of Income-tax act, 1961 found at http://www.taxmanagementindia.com/visitor/detail_act.asp?ID=3579     

                  Shyam Enteprises Versus Commissioner of Income Tax  2011 -TMI - 205613 - Allahabad High Court in

Depreciation allowance- un-necessary litigation by revenue:

Depreciation allowance is allowed for wear and tear of depreciable assets at prescribed rates. Questions arise about applicable rate. The assessee wants to maximize whereas revenue want to minimize allowable depreciation. There have been lot of litigation on depreciation allowance and many amendments, even with retrospective effect have been made in the income-tax Act, 1961.

Higher depreciation only pre-pone allowance:

Actual cost of  eligible asset is allowed over a period of time as worked out by applying applicable rates. Deduction over and above cost is generally not allowed for wear and tear. Higher rate of depreciation reduces income or increases loss in one year. This may have effect of reduction of taxable income in some cases and in some cases it causes only increase in carried forward loss or unabsorbed deprecation. Particularly in new projects and that too capital intensive projects, generally there is loss   during initial many years. However, the assessee has to classify the assets in particular category to claim correct depreciation.

For revenue higher depreciation does not make much difference:

For a particular assessee, there can be significant impact if he saves some tax by claiming higher rate of depreciation allowance, however, in broader context of revenue, there may not be significant impact because of several reasons like:

1. Many  of assessee do not have taxable income but claim carry forward of loss and depreciation
2. Over a period of time depreciation is restricted to actual cost.  
3. Depreciation claimed at higher rate reduces the total number of years over which depreciation will be allowed.
4. Higher depreciation causes rapid reduction of written down value and therefore lower deprecation in subsequent years.
5. There is  significant balancing when total claim by all assesses is considered. An assessee will claim higher amount in initial year of asset acquisition whereas other assessee who acquired similar assets some years ago may not claim any deprecation or small deprecation.
6. In case higher rate is provided due to higher wear and tear, the assets become obsolete and even if some written down value remains, there will be allowance by way of terminal deprecation or there will be lesser reduction (than WDV) due to scrap value being less.
7. In cases where higher depreciation is allowed as an incentive, there should be liberal thinking to achieve the purpose of incentive.
8. Example: for assessment year  say 2008-09  “A” claims deprecation @ say 100% in first year, another assessee “B” who claimed 100% depreciation in first year (AY 2007-08)  is not able to claim any deprecation in second year (AY 2008-09). Therefore, depreciation allowance for A and B taken together is balancing total allowance allowed by the revenue.

In this case “B” might have claimed depreciation @ 100% in first year and he may not have chargeable income say during first four years. Therefore, unabsorbed deprecation (originally claimed in first year) is c/f  from year to year and he can claim depreciation to reduce  taxable income in fifth year.

Therefore, we find that there is not much purpose and result orientation for the revenue in indulging into  litigation over rate of depreciation. Liberal approach should be adopted and higher depreciation, which is allowed as an incentive or as per considered rate of wear and tear, should be allowed after considering point of view of business.

It is unfortunate that the revenue is indulging into un-necessary litigation over deprecation even when there is no revenue impact in the same year or even during next few years. We find many cases where many assesses have carried forwarded losses and unabsorbed deprecation which may lapse, yet the revenue is indulging into litigation even by process of reassessment, revision and rectification etc. 

On behalf of profession of CA,CWA,CS as being part of these profession and also for advocate friends author express sincere thanks to the revenue for indulging into such litigation, which creates lot of revenue to professional people. However, at the same time author feels that earning made by such litigation is not desirable earning as it is for un-productive work  but unfortunately very important matters- to save clients from un-necessary and / or before time demands which the revenue can raise.

Buildings used as tool of trade:

In many businesses buildings are integral part of plant or business organization and are not mere setting in which business is carried. Many of such buildings are to be equipped and furnished to make them suitable for carrying business as against mere setting to carry business. For examples in case of cold storage, cinema, hotel, hospital, hostel, schools,..   etc.  buildings are  used as an important tool. It cannot be said that  a furnished class room in a school is merely setting to carry business or activity of school, class room is a necessary  asset with which activity of school is carried , class room is not a mere setting to carry business but is a necessary apparatus or tool required to carry business of a school.

 Courts have taken wider meaning of ‘plant’ and considered many buildings as ‘plant’ eligible for deprecation at higher rate. The revenue has made strong litigation and after losing cases, made amendment in definition of ‘plant’ as defined in section 43(3) to exclude buildings from plant.

Definition of plant:

Definition of ‘plant’ is reproduced below  with highlights:

Definitions of certain terms relevant to income from profits and gains of business or profession.

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 ¹⁸[but does not include tea bushes or livestock] ¹⁹[or buildings or furniture and fittings];

18. Inserted by the Finance Act, 1995, w.r.e.f. 1-4-1962.

19. Inserted by the Finance Act, 2003, w.e.f. 1-4-2004.

Source:    http://www.taxmanagementindia.com/visitor/detail_act.asp?ID=3579

We find that the definition is subject to context and is an inclusive definition. Though some items have been excluded from the definition of plant, however those exclusions are also for the specific purposes for which they have been excluded and are subject to contextual requirement.

Allahabad High Court’s judgment after amendment:

We find that buildings have been excluded from definition of plant w.e.f. 01.04.2004. Matter for consideration of amended definition came before Allahabad high Court in the following case:

Shyam Enteprises Versus Commissioner of Income Tax  2011 -TMI - 205613 - Allahabad High Court in Appeal no.  - 209 of 2008 which has been decided in favour of assessee on  04 August 2011.

This appeal under Section 260A of the Income Tax Act, was preferred by the assessee and admitted by court   on two substantial question of law as follows:-  

"I. Whether on the facts and in the circumstances, the Ld. ITAT is justified in restricting the depreciation or cold storage chambers to 10% treating them as special type of buildings and not eligible to depreciation @ 25% as plant, in view of amendment to section 43 (3) with effect from 1.4.2004?  

II. Whether the amended provisions of section 43 (3) brought into force with effect from the assessment year 2004-05 exclude the cold storage chambers from the ambit of 'plant'?"  

The facts of the case, as per reported judgment with necessary other details , added by author ( indicated in brackets  are as follows:

1. The assessee was  running a cold storage (per author:as its business and not simply letting out of house property).
2. Assessee claimed depreciation on cold storage at the rate of 25% including cooling plant and the special chambers, lined with thermocol . The assessee explained that these  do not have any separate existence from the cooling plant.
3.  The authorities allowed depreciation at the rate of 10% (based on building) and  made the addition of Rs.5,28,878/-.
4. The Income Tax Appellate Tribunal also  opined that after the amendment in S. 43 (3) w.e.f. 1.4.2004 the building has been specifically excluded from the definition of plant; According to Tribunal S. 32 provides for different rates of depreciation for building, machinery, plant or furniture, ships, buildings used for hotels, aeroplanes and other items mentioned therein. The word 'plant' is given an inclusive meaning under S. 43 (3) which does not include buildings. The rules prescribing the rates of depreciation in Appendix-1 with reference to Rule 5 gives rates in a table on which depreciation is admissible. These specifically provide for grant of depreciation dealing with furniture and fittings, separately than the machinery and plant. The chambers, which required thermocole lining, have separate existence. The cold storage building is a specific type of building, which requires chambers fitted with thermocole, nevertheless it should remain as a specific building and needs a separate cooling plant. The Tribunal found that for cooling plant the assessee already enjoys depreciation at the rate of 25% and that thermocol fitted chambers are entitled to depreciation at the normal rate of 10%, as given by the lower authorities.  
5. Arguments of assessee:
   1. the amendment in S. 43 (3) w.e.f. 1.4.2004 does not make any change in the definition of the word 'plant', which remains an inclusive definition.
   2. Even after amendment ‘plant’  includes buildings or furniture and fittings, which are other than, and are not integrally connected with the plant
   3. The building, which does not have separate existence, and is integral part of the plant, used for the purposes of business or profession, is not to be treated separately for depreciation.
   4.  The ratio of the judgment of Calcutta High Court in Commissioner of Income Tax vs. Shree Gopikishan Industries Pvt. Ltd., 2003 -TMI - 11867 – (CALCUTTA High Court), is entirely applicable to the facts of this case.
   5.  The Calcutta High Court considered the distinction between plant and building in the case of cold storage.
   6. It was held relying upon the nature of the building of cold storage, which requires insulation, refrigeration and sanitary or other arrangement strictly in accordance with West Bengal Cold Storage (Licensing and Regulation) Act, 1966, the storage of chamber itself is an apparatus and tool of the trade through which the business is carried on. The Calcutta High Court held as follows:-  

                        "Infact, it is the whole building, which houses the chambers to be constructed in a particular manner according to the specification. Without a thermocole, a chamber cannot function. At the same time, without the building the thermocole cannot have a separate existence. Both these parts are integral parts of each other. Once cannot survive without the other. Therefore, a cold storage is definitely plant."

Arguments and contentions of revenue:

1. that S. 43 (3) has to be read along with S. 43 (1) (sic.32(1 per author).
2.  S. 43 (3) has to be read with S. 32, providing for depreciation.  S. 32 provides for depreciation of (i) buildings, machinery, plant or furniture, being tangible assets; and (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998.
3. The cold storage building has separate existence from the cooling plant.
4. The table of rates at which depreciation is admissible under Appendix-I with reference to Rule 5 of the Income Tax Rules, 1962 provide for depreciation at different rates for tangible assets and which separately provides for depreciation on buildings. In case of buildings, which are used only for residential purposes, except hotel and boarding houses, depreciation is provided at 5% and for buildings other than those used mainly for residential purposes and not covered by sub-items (1) above and (3) below, the depreciation is provided at 10%. Item-3 provides buildings acquired on or after the 1st day of September, 2002 for installing machinery and plant forming part of water supply project or water treatment system, and which is put to use for the purpose of business of providing infrastructure facilities under clause (i) of Sub-S. (4) of Section 80-1A for which depreciation is provided at 100%. For plant and machinery in sub-category (iii) the depreciation is provided at 35%. The machinery and plant other than those, which are covered by sub-item 2, 3 and 8 of the heading machinery and plant are provided depreciation at 25%. Sub-category 2 to 8 includes vehicles including commercial vehicles etc.  

Observations of Allahabad High Court:

1. High Court did not find  substance in the  contentions raised on behalf of revenue by  Shri Bharat Ji Agrawal that building has separate existence from the cooling plant and for which the depreciation are admissible at different rates.
2. Court considered that this question has come up earlier in the same  Court also and  it was held  in Commissioner of Income-Tax, Lucknow vs. Kanodia Cold Storage, 1974 -TMI - 39673 – (ALLAHABAD High Court) that in common parlance the word 'plant' includes within its ambit buildings and equipment used for manufacturing purposes. The definition of 'plant' in S. 43 (3) is inclusive and does not exclude things normally included in it. Where a building with insulated walls is used as a freezing chamber though it is not machinery or part thereof, it is a part of the air conditioning plant of the cold storage of the assessee, and will be entitled to special depreciation at 15% on its written down value, (as provided at that time). The Court had an occasion to consider the structure of the building of the cold storage and held that the service line was a part of the entire set up for the functioning of the cold storage. The replacement of the existing line with a new line did not result in the creation of any new asset of enduring nature.  
3.   The amendment in S. 43 (3) w.e.f. 1.4.2004 is only clarificatory in nature, and which excluded the live stock or buildings or furniture and fittings from the plant. What was excluded in the context was building or furniture and fittings and not building of special nature, which does not have existence independent from the plant. In case of cold storage as it was found by Calcutta High Court, the building is required to be constructed for cooling chambers in a specific process and manner and without such specific process and manner a chamber cannot be commissioned, for which a licence is also required to be obtained. The whole building, which houses the chambers has to be constructed according to specifications in a particular manner.
4. Without a thermocole a chamber cannot function independently and at the same time without the building the thermocole cannot have a separate existence. Both these parts are integral parts of each other.  
5.  The cold storage has special facilities for refrigeration.
6. Illustrated and compared with refrigerator by High Court:

     Just as a refrigerator cannot be divided into two parts namely the cooling system behind or under the refrigerator, and the cabinet in front, or on top thereof, the plant of cold storage also cannot be separated in a manner that the special chambers may have separate existence and be treated as building, sans cooling plant for providing a different rate of depreciation.

1. Referring to Delhi Cold Storage P. Ltd. vs. CIT 1991 (19) ITR 656, court considered that in that case the Supreme Court was concerned with the word 'processing' to be understood as an action which brings some change or alteration of the goods or material subjected to the act of processing. The court was concerned with the definition of 'industrial company' as defined under S. 2 (7) (c) of the Finance Act, 1973 for the purposes of 1st Schedule of the Act.
2. Court considered that  the judgment in case of Delhi Cold Storage (supra.) does not apply to the present case as there is no material or any plea that any manufacturing or processing of goods is carried out in the cold storage.  
3. The Court allowed the income tax appeal  and both the questions were  decided in favour of the assessee and against the department.
4.  The assessee will be entitled to compute and to take benefit of depreciation on the cooling chambers of the cold storage in the relevant assessment year, at the notified rate of 25%.

Author’s point of view:

When an amendment is made to take a contrary view than the views taken by courts on interpretation of prior to amendment provisions and the matters were well settled then it is necessary to see what was purpose of amendment ?  If an amendment is made with a specific purpose, and that too without disturbing the original purpose, then amendment should be applied in a restricted manner to achieve the purpose of amendment.   In case of ‘plant’ we find that the definition is still an inclusive and wider definition, the terms building and furniture are not yet defined in the Act, though in the Appendix I   vide note no. 1 below the table building has been defined in an inclusive manner as follows:

1. ‘Building’ include roads, bridges, culverts, wells and tubewells.

From this definition also we find that building will include only ordinary building which provide a setting to do something or carry business but not a building which itself is used as a tool of trade or with which business is carried.

In view of  the author the judgment of Allahabad High Court deserves to be aqccepted by the revenue and the revenue should also take a purpose seeking  approach and overall aspect while deciding to indulge into litigation.