FACTORY BUILDING – A PLANT?

[Mr. M. GOVINDARAJAN]

Plant

Section 43(3) of the Income Tax Act, 1961 (‘Act’ for short) defines the term ‘plant’ as including ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession but does not include tea bushes or livestock or buildings or furniture and fittings.  The definition itself excludes the building to consider the building as ‘plant’.  However Courts consider the building in certain cases as ‘plant’ as discussed in the case laws.

Depreciation

The gradual conversion of the cost of a tangible capital asset or fixed asset into an operational expense, called as depreciation, over the asset’s estimated useful life.  The objectives of computing depreciation are to-

• reflect reduction in the book value of the asset due to obsolescence or wear and tear;
• spread a large expenditure proportionately over a fixed period to match revenue received from it; and
• reduce the taxable income by charging the amount of depreciation against the company’s total income.

The Act provides various rates of depreciation for each and every item.  The plant is eligible for higher rate of depreciation under the Act.

Functional test

The functional test is a decisive test whether a particular item is a plant or not.  In order to find out as to whether a particular item is a plant or not, the meaning which is available in the popular sense, i.e., the people conversant with the subject matter would attribute to it, has to be taken.

Building – a plant?

In ‘Commission of Income Tax V. Anand Theatres’ – 2000 (5) TMI 4 - SUPREME Court the Supreme Court held that the functional test is a decisive test but an item which falls within the category of ‘building’ cannot be considered to be ‘plant’.  The building in which the business is carried on cannot be considered to be a plant.

In ‘Assistant Commissioner of Income Tax V. Victory Aqua Farm Limited’ – 2015 (9) TMI 758 - SUPREME COURT the question before the Court was whether a building used as a hotel or a cinema theatre could be given depreciation on the basis that it was a ‘plant’ and it was in relation to that question that the court considered a host of authorities of the country and England and came to the conclusion that a building which was used as a hotel or cinema theatre could not be given depreciation on the basis that it was a plant.  The Supreme Court held that the Court found that the judgment dated 14.10.2004, rightly rests this case on ‘functional test’ and since the ponds were specially designed for rearing/breeding of the prawn, they have to be treated as tools of the business of the assessee and the depreciation was admissible on these ponds. 

Nursing Home – a plant

In ‘Commissioner of Income Tax V. Dr. B. Venkata Rao’ – 1999 (2) TMI 11 - SUPREME Court the Supreme Court held that the nursing home equipped to enable the sterilization of surgical instruments and bandages was held to be a ‘plant’ applying the functional test.

Factory Building – a plant

In ‘Cachet Pharmaceuticals Private Limited V. Commissioner of Income Tax and another’ – 2016 (4) TMI 713 - PATNA HIGH COURT the appellant filed their return on 03.12.1999 showing total income of ₹ 1.10 crores.  The return was assessed.  The Assessing Officer found that the appellant claimed depreciation on factory building @ 25% instead of allowable depreciation @ 10”%.    The appellant claimed 10% depreciation in the subsequent years.  Therefore the Assessing Officer alleged that the appellant has claimed excess depreciation and added back the same to this income.

The appellant filed appeal before Commission (Appeals).  The appellant relied on the earlier orders of the Adjudicating Authority in their own cases in previous years allowing 25% rate of depreciation for the factory building.  The Commissioner rejected the claim of the appellant for depreciation @ 25% holding that in the earlier orders there was no categorical finding that the building in question is completely used for manufacture of medicine.  However when the assessee produced assessment orders of the previous years in which the Assessing Officer held that the building in question is wholly used for manufacture of medicine and that the factory building in case of the appellant is the plant of the assessee and qualifies for depreciation @ 25%.  The Commissioner (Appeals) rectified the order in favor of the appellant.

Against the order of Commissioner (Appeals) the Revenue filed appeal before the Tribunal.  The Tribunal set aside the order of Commissioner (Appeals).  The appellant, therefore, filed the present appeal before the High Court.  The appellant framed the question of law as – Whether on the facts and circumstances of the case, the claim of the assessee that the building which houses the manufactory is a plant within the meaning of Section 43(3) of the Income tax Act, 1961 and whether the assessee is entitled to claim the depreciation of the factory building at the rate of 25%.

The appellant put forth the following arguments before the High Court-

• The functional test has to be applied to determine whether a particular building especially designed for the tools of the business, to qualify as plant for higher depreciation @ 25%;
• By applying the functional test, the Assessing Officer, in two earlier assessment years held that the building is exclusively constructed for the purpose of manufacture of medicines, therefore it is a plant.Therefore there is no reason not to follow the earlier orders passed in the case of the appellant alone;

The High Court found that in the order of Assessment year 1997 – 98, the Assessing Officer has recorded that the he had gone through the maps and photographs and also functional use of the building and decisions.   Considering all the facts and circumstances, there is no doubt that the factory building is the plant of the assessee and the same qualifies for depreciation @ 25%.  The same was accepted in the subsequent assessment year 1998 – 98.  Though the said order was interfered with by the Commissioner of Income tax while exercising the jurisdiction under Section 263 of the Act, but such order has since been set aside by the Tribunal, the order of Assessing Officer becomes operative.  The High Court, keeping in view of the  finding of the Assessing Officer for two previous years and applying the functional test, the High Court found that the building which is constructed solely for the manufacturing of medicines is a ‘plant’ and is entitled to higher depreciation @ 25%.  The High Court allowed the appeal.