TEMPORARY ERECTIONS VIS-A-VIS TEMPORARYCONSTRUCTION

[C.A. DEV KUMAR KOTHARI]

Erection vis-a-vis construction:

In the context of depreciation allowance there is also a general conception in minds of people about certain buildings of the nature of 'temporary construction'. Whereas the relevant entry is 'temporary erections'. Both expressions convey different meanings. The expression 'construction' is included in erection but construction may not include all type of erections.

From Merrium Websters dictionary and thesaurus:

Temporary : one serving for a limited time or purpose lasting, continuing, or serving for a limited time makeshift, stopgap, ad interim, interim, pro tem, pro tempore.

Temporarily - during a limited time

Erection:

Something erected.

The act or process of erecting something or construction.

Construction in this context is defined as follows:

a sculpture that is put together out of separate pieces of often disparate materials
Relevant entries in Appendix to Income-tax Rules:

At present We find the following entry in the Appendix I to the Income Tax Rules in respect of depreciation on purely temporary erections:

 

I. Building [See Notes 1 to 4 below this Table]
(4) Purely temporary erections such as wooden structures	100%

 

From the above entry we notice that:

 the entry is falling under the head Buildings.

The expressions used are 'purely temporary' and 'erections'

 An example is given by use of expression 'such as wooden structure'.

In Appendix IA (For power companies who adopts SLM method of depreciation) also we find relevant entry on almost similar line and it reads as follows:

Temporary erections such as wooden structures -   33.4%

In view of the word erection used in above entries it is wrong to say that what is covered is an items of very short life or that the items should be in nature of erection made of very short lived items like bamboo, sticks, thatch, ropes etc. There is an example 'such as wooden structure'. This itself shows that the item can have long life. Because wooden structures can have very long life. We can find very old wooden structures still in use after having been used for a long period.

Uncertain life is main criterion:

The main consideration is the uncertain life of an item. These items can be rendered useless by several factors. Any time, they can get easily damaged or destroyed. In that sense these items are of 'purely temporary nature'. Therefore, cost of such items can also be allowed as revenue expenditure for the reason that they may not constitute a capital asset having enduring benefit.

Specific use, period, or nature of material:

The author is of opinion that it is not the nature of asset alone but the nature of use or circumstances, the purpose for which erection is made, and some other factors that can give nature of an erection as of temporary erection. If an items is erected for a temporary period or limited use, then such items shall be a temporary erection even if there are certain substantial material used in erection of the item.

Some examples of purely temporary erection:

Wooden huts.

Houses made mainly of wooden particles, bamboo, thatch, including some essential bricks, cement etc.

Wooden erections in a house will also be part of purely temporary erections.

Tents at working sites.

Houses erected on working sites for limited and short period.

Houses constructed near work site for providing accommodation on temporary period to people who will work for a particular purpose.

Make shift arrangements for housing like houses made from prefabricated material for specific and short duration period.

A decision of the ITAT    

In the case of Shalivahana Constructions Ltd. v. DCIT Circle 3(1), [2007] 12 SOT 406 (Hyd.)

This was an appeal of assessee against revision order passed by CIT who disallowed the depreciation allowance allowed by the A.O. on temporary erections for AY 1998-99.

Facts of the case are as follows:

the assessee is a contractor working on site of its customer/ contractee.

Assessee, for the purpose of job to be carried on the site of customer put up certain structures at project site on land given temporarily by the contractee.

Assessee claimed that the erection so made were purely temporary erections and claimed depreciation on the same at the rate of 100 per cent, which is applicable to temporary construction (it should really be 'temporary erections') .

the A.O. examined the claim and allowed the same

On examination of records the CIT acting under section 263 considered details and formed opinion that:

 the structures had characteristics such as a masonry wall in cement, brick masonry in cement, polished Shahbad stone flooring 25 mm thick over 20 mm thick cement mortar bed, 20 mm thick polished cuddapah stone skirting, glazed tile flooring in the toilet, 35 mm thick solid core flush shutter bounded phenol formal dehyde resin with country wood main frame, MS grills of 12 mm square bars for all windows, proprietary water proofing treatment over terraces, fabricating fixing and painting mild steel angle gate, etc,

These structures had all the characteristics of a permanent building and as such depreciation was allowable at the rate of 10 per cent and not 100 per cent.

The CIT considered the order of assessment as erroneous in so far it was considered by him as prejudicial to the interest of revenue within the meaning of Section 263.

 the CIT, therefore, passed an order under section 263 directing the Assessing Officer to treat the structures as permanent building and allow depreciation on the same at the rate of 10 per cent and thus to withdraw excessive deprecation allowed by the A.O.

The facts found by tribunal and reasoning and order of the Tribunal are analyzed below:

in the case like assessee being a contractors working on sites, certain structures are put up at project site on land given temporarily by the contractee/ customer.

these structures are meant for the use by the contractor as his project office and also for housing labour as well as employees of the contractor- this is again a temporary feature.

the land is neither owned by the contractor; nor is it held by the contractor as leasehold.

The structures put up on such land, of whatever nature, are therefore purely temporary structures ( erections).

the assessee might have used material which gave longer life to the structures in question, but the fact remained that the assessee was neither the owner of the land; nor had it any claim over the structures after completion/termination of the contract.

in fact, when such structures are put up on land not belonging to the person, the expenditure is of revenue nature.

the commissioner had overlooked this issue of ownership of land.

Relevant portion of rates of depreciation allowable on buildings as given in appendix i to the Income-tax rules, 1962, it is clear that at best it is only an illustration of the term 'purely temporary erections'.

It is no where mentioned that a purely temporary erection should not be made of cement or brick.

 therefore, the commissioner was wrong in taking the view that the order passed by the Assessing Officer suffered from an error and it was prejudicial to the interests of the revenue.

 Hyderabad Bench 'B' of the Tribunal in the case of Jt. CIT v. Lanco Industries Ltd. [IT Appeal No. 487 (Hyd.) of 2000, order dated 31-1-2005], it was clearly held that for temporary structures depreciation is allowable at 100 per cent.

 hence, the order passed by the commissioner was cancelled. 

Per author:

The Tribunal was also influenced by the fact that the assessee had no ownership of land therefore, the expenses could be allowed as revenue expenses also. There were also other contentions as to lack of jurisdiction of CIT and that the order passed by the A.O. was not erroneous and prejudicial to the interest of revenue. However, those are not relevant for the purpose of this write-up.

As per facts the assessee claimed deprecation allowance and it was allowed by the A.O. As rightly pointed out by the Tribunal the expression' purely temporary erections', is an illustration. The author further add that the expression 'wooden structure' is also an illustration and these both indicate the essence of the entry is that the purely temporary nature can be due to several reasons and it is not merely dependent on the quality or class of material used. If the structure is for a temporary purpose, then also it is 'temporary erection'.

In this case, the assessee could have also claimed expenses as revenue expenses as they were incurred on plot of land which was not owned by the assessee. Even if it be argued that some of material used in erection can be taken away by the assessee after completing the contract, the fact will be that when expenses are incurred and structure is erected they are for purely temporary purposes-the work on site.

In such cases even where the contractor has right to dismantle the structure and take away things, the nature of erection shall remain 'purely temporary erection'. The material taken away can be used in future to make another temporary erection. In that case the cost already included in block of asset shall not again be included in cost, but only additional costs incurred to make another erection for another site will be added in the value of block of asset.   

Another case:

Income-tax Officer v. Gopal Ram Pema Ram [2003] 1 SOT 585 (jodh.)

A.O. disallowed 100% deprecation claimed by assessee on Jhuggi Jhopari. On appeal the Commissioner (Appeals) allowed the same holding that they were purely temporary constructions.

On appeal of revenue the Tribunal also held that Jhuggi Jhopari, being temporary structure were entitled to 100 per cent depreciation following decision in case of M/s. Hanumandas Chhaganlal, ITA No. 1004/JP/88 dated 29-1-1993, which learned CIT(A) has also followed.

In this regards the Tribunal noted and held that Jhuggi Jhopari may well be treated as falling within 'temporary structure' and thus eligible for 100 per cent depreciation as has also been held by Jaipur Tribunal in the case of M/s. Hanumandas Chhaganlal ITA No. 1004 (JP)/88 for assessment year 1986-87.

In this case Jhuggi Jhopari wer considered 'temporary erections' because (a) they provided temporary arrangements like temporary hutments and (b) the material used were also of temporary and short life items like bamboo, sticks etc.

Readers are requested to send their views on the subject matter.