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TMI Blog2000 (5) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... her hotel business or business for cinema could be conducted? The aforesaid question is to be decided in the background of the specific provisions granting depreciation to buildings, machinery and plant under section 32 of the Income-tax Act, 1961 (hereinafter referred to as the Act ), and also to decide whether the time has come to have a fresh look at the old precedents and to lay down the law with the changed perceptions keeping in view the provisions of the Act? Further, to what extent are we required to follow and adopt the artificial and largely judge-made sense of the word plant , which is given an inclusive meaning under section 43(3) and in the context of the scheme of section 32? 3. In this batch of civil appeals, some appeals are filed by the Revenue and some by the assessees. Since the question involved in all these appeals is similar, we would deal with the facts in. Civil Appeal No. 4758 of 1998 for convenience. For the assessment year 1986-87, the assessee claimed depreciation at 15 per cent. on the theatre building claiming it to be a plant. The Assessing Officer by order dated September 27, 1988, rejected the claim and allowed depreciation only at 5 per cent. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved ; and if a building is an integral part of hotel business, that is some thing more than merely a place, accommodating some requisites of hotel, then that would partake of the character of plant. For this purpose, the High Court considered the decisions in IRC v. Barclay, Curle and Co. Ltd. [1970] 76 ITR 62 (HL); [1969] 1 WLR 675 (HL) and Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86 (SC). The court observed that the principle that can be deduced is that if a building is merely a setting or place to accommodate some apparatus, then that will not be held as plant but if a building which does not merely accommodate something or which cannot be regarded merely as a setting or premises, but if that plays an important role in carrying on the business, then that would fall within the inclusive definition of the plant. Thereafter, the court observed thus : The hotel building, in our opinion, cannot be equated with a residential building, which provides shelter to the people living therein. The building is essential to run the business of hotel. Without befitting building it is idle to think of a hotel business. A good hotel requires amenities and a building which is so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his court. 6. In CIT v. Taj Mahal Hotel [1971] 82 ITR 44 (SC), this court considered that the sanitary and pipeline fittings fell within the definition of plant in section 10(5) of the Indian Income-tax Act, 1922, and therefore, the assessee was entitled to development rebate in respect thereof. The court further held that the fact that the assessee claimed depreciation on the basis that sanitary and pipeline fittings fell under furniture and fittings in rule 8(2) of the Indian Income-tax Rules, 1922, did not detract from this position as the rules cannot take away what is controlled by the Act or whittle down its effect. After considering the contentions raised by the Revenue, the court-observed as under : It cannot be denied that the business of a hotelier is carried on by adapting a building or premises in a suitable way to be used as a residential hotel where visitors come and stay and where there is arrangement for meals and other amenities are provided for their comfort and convenience. To have sanitary fittings, etc., in a bath room is one of the essential amenities or conveniences which are normally provided in any good hotel in the present times. If the partitions in Jarro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which he carries on his business? If the answer is in the affirmative, it will be a plant. We would add that learned counsel for the assessees on May 3, 2000, has filed an additional submission pointing out the decision rendered by this court in CIT v. Dr. B. Venkata Rao [2000] 243 ITR 81, wherein this court dismissing the appeal filed by the Revenue held that the nursing home building was specially equipped as a plant for the assessee's business. The court observed : What is to be determined is whether the particular nursing home building was equipped as to enable the assessee to carry on the business of a nursing home therein or whether it is just any premises utilised for that object. We find from the order of the Tribunal as also the assessment order that the assessee's nursing home is equipped to enable the sterilisation of surgical instruments and bandages to be carried on. It is reasonable to assume in the circumstances, particularly having regard to the Tribunal's order which states that the sterilisation room covers about 250 sq. ft. that the nursing home is also equipped with an operation theatre. In the circumstances, we think that the finding of the High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was entitled to depreciation and development rebate on the cost of digging the well. The Bombay High Court in CIT v. Caltex Oil Refining (India) Ltd. [1979] 116 ITR 404, held that the fencing round the refinery processing unit constitutes plant and was entitled to depreciation and development rebate. The Karnataka High Court in CIT v. Dr. B. Venkata Rao [1993] 202 ITR 303, held that the building which was used as nursing home was a plant. Similarly, in CIT v. Woodlands Hotel Pvt. Ltd. [1998] 233 ITR 224 [IRTC Nos. 48 and 49 of 1993, dated June 16, 1997] [Against this decision, Civil Appeals Nos. 4373-74 of 1999 are pending before this court-being disposed of by this judgment] and in CIT v. Hotel Rama Pvt. Ltd. [1998] 253 ITR 235 (Kar), held that the building in which the hotel business is carried on is a plant for the purpose of grant of depreciation. The Madras High Court in Addl. CIT v. Madras Cements Ltd. [1977] 110 ITR 281, held that the special reinforced concrete foundation for the purpose of locating or installing the rotary kiln in the factory would come within the scope of the expression plant and is entitled to development rebate. 11. In CIT v. Sri, Krishna Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance under section 32. (C) Judgments expressing contrary views : 14. In CIT v. Damodar Corporation, Hotel Pankaj [1997] 225 ITR 699, the Kerala High Court held that a hotel in its entirety is not a plant for the purpose of depreciation and observed as under : A perusal of the said statutory provision of section 32A of the Act would show that the words machinery and plant have been used separately with an exclusive character, from each other, finds place in the concerned enactments of the section. The statutory provision also speaks of other requirements for entitlement to investment allowance on the count. 15. In R. C. Chemical Industries v. CIT [1982] 134 ITR 330 (Delhi), the Delhi High Court held that the definition of the word plant given under section 43(3) should be given a wide meaning as it is an inclusive definition. It held that the assessee who constructed a building having atmospheric controls, namely, moisture, temperature and provision for filtered air, which were required for manufacturing of saccharine, would not come within the expression plant . It observed that the mere fact that manufacture of saccharine would be better carried on in this type of building would n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he category of building. Even if a particular building falls within the category of plant then it could not be considered to be a plant and will be considered as building because the golden rule of interpretation is that if a particular item is more near to one category, then by stretching it should not be considered to fall in a category which is far off. The court further observed : The building which is used in the business of hotel remains a building inspite of the fact that it is decorated.... If the skeleton of the building without decoration is building then the items by which it is decorated would not change the character of building. The item may, however, be considered as plant subject to its use. The use of the building is as a setting. Building is not used as a tool of the trade. Different rates of depreciation for building have been provided which also makes the legislative intent clear that the different types of buildings remain as building. The amendment of section 32(1)(v) has only clarified the legislative intent that the building of hotel is a building, though by amendment a higher rate of deprecation is provided for it. In an industry no production can be normal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and the dividing line between plant and building would get obliterated which is not permissible ; (ii) section 43(3) defines plant in inclusive terms. Each item included in section 43(3) is movable. Section 43(3) does not, therefore, contemplate immovable property like a building being considered as plant. The ejusdem generis and noscitor a sociis principles are relevant in this connection ; (iii) Section 32(1)(ii), section 32A and the Appendix to the Income-tax Rules speak of plant and machinery being installed and of building being erected . This again brings out the distinction clearly ; (iv) Section 32(1)(v) unequivocally provides that a new building used as hotel is regarded as a building for purpose of depreciation. In other words, a building which is specially designed and constructed for use as a hotel is nevertheless a building, for the purpose of depreciation ; (v) Section 32(1)(iia) and section 33(1)(b)(B)(ii) and the Appendix to the Income-tax Rules speak of plant and machinery installed in premises used as a hotel, thereby clearly, establishing that the hotel premises are not machinery or plant, but are only a building. The same principle would also apply to a theat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e issue ; (v) The subject of determination whether a hotel building or a cinema theatre can be held to be a plant is not free from difficulty and it is difficult to draw a clear line for plant or building in some cases. Despite this as the Legislature or the Central Board of Direct Taxes has not issued any clarification on the subject, the view adopted by various High Courts requires to be accepted. They submitted that cinema theatre or a hotel building is to be considered as one unit with all attendant apparatus for running the business and if they are construed as one unit it would be a plant. Secondly, these buildings are to be considered not on their own but in relation to the business carried on by the assessee namely running of hotel or cinema. In support of this contention, learned counsel heavily relied upon IRC v. Barclay, Curle and Co. Ltd. [1969] 1 WLR 675---also reported in [1970] 76 ITR 62 (HL), and other decisions stated above. Hence, the controversial question for consideration is---whether building used for running hotel or cinema' business could be held a plant as provided under section 43(3) of the Act? 21. We would first refer to the judgment in Barclay, Curl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax Act and thereafter held that every part of this dry dock plays an essential part in getting large vessels into a position where work on the outside of the hull can begin, and that it is wrong to regard either the concrete or any other part of the dock as a mere setting or part of the premises in which this operation takes place. The whole dock is, I think, the means by which, or plant with which, the operation is performed. 22. Lord Guest agreed with the view taken by Lord Reid. In the judgment rendered by him it was observed that in order to decide whether a particular subject is an apparatus it seems obvious that an inquiry is to be made as to what operation it performs. 23. Lord Hodson disagreed with the above view and observed : The dock as a complete unit contained a large amount of equipment without which the dry dock could not perform its function. This equipment admittedly qualifies for the initial allowance appropriate to expenditure on plant. It includes a dock gate and operating gear, cast iron keel blocks, electrical installation, pipe work installation, pumping installation and other subsidiary equipment, expenditure on which clearly qualifies for initial allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sense, borrowed, unless I am mistaken, from the world of botany. For this purpose, the court quoted the words of Buckley L.J., in Benson v. Yard Arm Club Ltd. [1979] 1 WLR 347, 551 ; 53 TC 67, 80 (CA) (page 1453 of [1982] 1 WLR) : ... as a man who speaks English and understands English accurately but not pedantically would interpret it in context, applying it to the particular subject-matter in question in the circumstances of the particular case. The court further observed (at page 1453 of [1982] 1 WLR) : To this admirable precept Oliver L.J., [1981] STC 671, 682, in delivering the leading judgment in the Court of Appeal in the instant case, warily, and perhaps wearily, added the cautionary rider that 'the English speaker must, I think, be assumed to have studied the authorities.' These however, as he cautiously admitted in an earlier passage cannot be pretended to be at all easy to reconcile, and, as he said in a still earlier passage, at page 675D : 'it is now beyond, doubt that [the word plant ] is used in the relevant section in an artificial and largely judge-made sense. The court thereafter observed (page 1454 of [1982] 1 WLR) : if 'plant' is to be contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;, in other words, a certain kind of atmosphere among the patrons. But the distinction is that the ship, although a chattel, was the place in which the trade was carried on and was therefore the equivalent of the various premises in which the present taxpayer company carry on their trade and not of the apparatus used as an adjunct of the trade carried on in those premises. It was further observed that the dry dock in Barclay, Curle and Co. Ltd.'s case [1970] 76 ITR 62 (HL), was a structure as, well as plant . RELEVANT PROVISIONS UNDER THE ACT FOR GRANT OF DEPRECIATION 31. Before dealing with the rival contentions, we would refer to the relevant parts of sections 32 and 43(3) of the Act. 32. Depreciation.---(1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed--- (i) in the case of ships other than ships ordinarily plying on inland waters, such percentage on the actual cost thereof to the assessee as may, in any case or class of cases or in respect of any period or periods, be prescribed : Provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uest house but does not include premises used as a hotel ; (iii) in the case of any building, machinery, plant or furniture which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof : Provided.... Explanation.---... (iv) in the case of any building which has been newly erected after the 31st day of March, 1961, where the building is used solely for the purpose of residence of persons employed in the business and the income of each such person chargeable under the head 'Salaries' is ten thousand rupees or less, or where the building is used solely or mainly for the welfare of such persons as a hospital, creche, school, canteen, library, recreational centre, shelter, rest-room or lunch-room, a sum equal to forty per cent. of the actual cost of the building to the assessee in respect of the previous year of erection of the building ; but any such sum shall not be deductible in determining the written down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s carried on in a building not owned by the assessee but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession after the 31st day of March, 1970, on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, in respect of depreciation of such structure or work, the following deductions shall, subject to the provisions of section 34, be allowed--- (i) such percentage on the written down value of the structure or work as may in any case or class of cases be prescribed ; Provided... Explanation... (2)....... 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. 32. Rule 5 of the Income-tax Rules, 1962, provides for calculation of depreciation at the percentage specified in the second column of the Table in Part I of Appendix I to the Rules. Appendix I to rule 5 is as under : PART I ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inland waters--- (i) speed boats 20 (ii) other vessels 10 The aforesaid clauses of the section 32 deal with depreciation allowance in respect of assets of the specified description used for the purpose of business or profession. From a careful scrutiny thereof what emerges is : (1) The scheme of section 32 is to provide different rates of depreciation for building, machinery, plant or furniture, ships, buildings used for hotels, aeroplanes and other items mentioned therein. Clause (ii) of section 32 specifically provides for grant of depreciation for building, machinery, plant or furniture at prescribed percentage on the written down value thereof. The rates are prescribed under the Income-tax Rules. (2) Under clause (iia) of section 32(1) specific provision is made for new machinery or plant which has been installed and it provides for additional sum equal to one half of the amount admissible as depreciation under clause (ii) if the conditions mentioned therein are fulfilled. Further, the proviso carves out an exception to the effect that no deduction shall be allowed in respect of any machinery or plant installed in office premises or any residential accommodation . That means th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, theatres, etc. Similarly, machinery and plant are under one heading and are divided into two parts---(i) general rate applicable to machinery and plant, and (ii) special rates, which includes machinery and plant for cinematograph films, recording equipment, reproducing equipments developing machines, printing machines synchronisers and studio lights and projecting equipments of film exhibiting concerns, Further, special rates are provided for machinery used in production and exhibition of cinematograph films being (a) recording equipment, reproducing equipment, developing machines, printing machines, editing machines, synchronisers and studio lights except bulbs, and (b) projecting equipment of film exhibiting concerns. Further different rates have been provided for machinery for cinematograph films that include studio lights except bulbs under the heading C(1)(b) and for bulbs of studio lights under the heading F(2). From the aforesaid discussion, it is apparent that for a building used as a hotel there is a specific provision for granting depreciation allowance at specified rates depending upon fulfilment of the conditions mentioned therein. Hence, there is no question of ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o fit in with the idea which emerges on a consideration of the entire context. 34. Applying the said test, we have to gather the meaning of the words building and plant in context of scheme of section 32 and it is not necessary that we should adopt a judge sense meaning, which is artificial and imprecise in application, given to the word plant in the context of different statutory provisions. The scheme of section 32 unequivocally leads to the conclusion that building and plant are treated separately for the purpose of grant of depreciation. A higher rate of depreciation is granted to machinery and plant. as against building which has more durability. 35. In CIT v. Mir Mohammad Ali [1964] 53 ITR 165, this court considered the meaning of the word machinery and observed that the word machinery is an ordinary and not a technical word and unless there is something in the context in the Act, the ordinary meaning would prevail. Thereafter, the court observed : According to the above definition, a diesel engine is clearly 'machinery'. Indeed, rule 8 of the Income-tax Rules treats aero-engines separately from aircraft. It is true that this rule cannot be used to interpret the claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y observed that : the business of a hotelier is carried on by adapting a building or premises in a suitable way to be used as a residential hotel where visitors come and stay 37. These observations clearly indicate that the business of a hotelier is carried on in a building or a premises and the building is not an apparatus for running such business. It is a shelter or a home for conduct of such business. Learned counsel also pointed out the decision of the Madras High Court in CIT v. N. Sathyanathan and Sons P. Ltd. [2000] 242 ITR 514, wherein the court observed that in the case of Taj Mahal Hotel, [1971] 82 ITR 44 (SC), even after noticing the fact that the dictionary definition of plant includes buildings, the court did not proceed to hold that the building in which the hotel was run, and wherein the sanitary fittings were used was itself plant , and on that ground sanitary fittings used in the hotel were part of the plant and emphasised that the section specifically provides that buildings used as hotel would indicate that hotel building cannot be construed as a plant . We agree with this view of the Madras High Court. 38. Next it is to be stated that the judgment in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and which according to us would not be conclusive in all cases, is also not satisfied. 39. In England also, there are conflicting decisions involving the question whether a structure would be a plant or not and it is stated that each case is required to be decided on the facts of that case. In Commissioners of Inland Revenue v. Scottish and Newcastle Breweries Ltd. [1982] 55 TC 252 (decided by the House of Lords), the Court of Appeal observed that though there is no statutory definition of plant for the purpose of section 41 of the Finance Act, 1971, from a series of cases decided, the following principles emerge to be settled law. (i) Something which is properly to be regarded as part of the setting in which a business is carried on and not as part of the apparatus used for carrying on the business is not plant : see J. Lyons and Co. Ltd. v. Attorney-General [1944] 1 Ch 281, 287. (ii) Something which forms part of the setting of a trade may nevertheless be plant if it is more a part of the apparatus than part of the setting (Jarrold v. John Good and Sons Ltd. [1963] 1 WLR 214 ; [1962] 40 TC 681 (CA)). (iii) The term plant is not apt to cover the permanent structure of a buildin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that their principal function is to form a necessary part of the premises and doors are needed for ingress and egress. None of the floor or wall tiles can be classed as plant. They are chosen so as to create an attractive setting in which customers will be pleased to sit for the short time required to consume a fast food meal, but their function in the trade does not go beyond that. Considering the facts of this case and various decisions Fox L. J., observed : In the light of the authorities the position appears to me to be this. There is a well-established distinction, in general terms, between the premises in which the business is carried on and the plant with which the business is carried on. The premises are not plant. In its simplest form that is illustrated by Lord Lowry's example of the creation of atmosphere in a hotel by beautiful buildings and gardens on the one hand and fine china glass and other tableware on the other. The latter are plant ; the former are not. The former are simply the premises in which the business is conducted. The distinction, however, needs to be elaborated, for present purposes, by reference to Lord Lowry's further formulation, namely, tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e end result having the character of equipment or apparatus. For this purpose, the court referred to various principles in the context of section 41(1) of the Finance Act 1971, which is applicable to machinery or plant . In the context of that section, the court observed that plant carries with it a connotation of equipment or apparatus, either fixed or unfixed. It does not convey a meaning wide enough to include buildings in general. The court pertinently observed that building would not normally be regarded as plant, do not cease to be buildings and become plant simply because they are purpose-built for a particular trading activity. Such a distinction would make no sense. Thus the stables of a racehorse trainer are properly to be regarded as buildings and not plant. A hotel building remains a building even when constructed to a luxury specification. Similarly with a hospital for infectious diseases. This might require special layout and other features but this does not convert the buildings into plant. A purpose-built building, as much as one which is not purpose built, prima facie is no more than the premises on which the business is conducted. 41. In Gray v. Seymours Garden Ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not something with which business is carried on. In Carr v. Sayer (65 TC 15 (Ch D)), the court observed that a hotel building remains a building even when constructed to a luxury specification and also a hospital building for infectious diseases which might require special layout and other features was not held to be a plant by observing that a purpose-built building is no more than the premises in which the business is conducted. Further, there are hotels of all kinds and hotel business can be carried on in all kinds of buildings, may be pucca or kacha constructions. A building intended to be used or in fact used earlier either as a residential accommodation or business purpose can be converted for running hotel business. Section 32 itself contemplates, a hotel business being carried on in residential accommodation including accommodation which is in the nature of a guest house. On occasions hotel buildings may be constructed with a special design and features so as to attract and accommodate a certain class of tourists. Similarly with regard to cinema business, it can be carried on in a specially designed and constructed building and also in other buildings. Still, however, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al to it . He submitted that in the modern era, theatre building and hotel building are integral part of operation for carrying out such business and, therefore, such building should be considered as a plant . 43. As discussed above, the aforesaid contention cannot be accepted. Firstly, it would be difficult to draw a line between a building which is specifically constructed for the aforesaid purposes and buildings which are used for the aforesaid purposes by converting a residential accommodation or industrial premises for such purposes. Secondly, depreciation as a general principle represents the diminution in value of a capital asset when applied to the purpose of making profit or gain. The object is to get a true picture of the real income of the business. Hence, it can be inferred that the Legislature never intended to give such benefit of depreciation to a building which is usually more durable than machinery or plant . In CIT v.. Alps Theatre [1967] 65 ITR 377 ; AIR 1967 SC 1437, the court considered the question---whether the cost of land is entitled to depreciation under the Schedule to the Income-tax Act along with the cost of the building standing thereon? The court obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel for the assessees which would be inconsistent with scheme of section 32. 46. In the result, it is held that the building used for running of a hotel or carrying on cinema business cannot be held to be a plant because : (1) The scheme of section 32 as discussed above clearly envisages separate depreciation for a building, machinery and plant, furniture and fittings, etc. The word plant is given inclusive meaning under section 43(3) which nowhere includes buildings. The rules prescribing the rates of depreciation specifically provide grant of depreciation on buildings, furniture and fittings machinery and plant and ships. Machinery and plant include cinematograph films and other items and the building is further given a meaning to include roads, bridges, culverts, wells and tube-wells. (2) In the case of Taj Mahal Hotel [1971] 82 ITR 44, this court has observed that the business of a hotelier is carried on by adapting building or premises in suitable way, meaning thereby building for a hotel is not apparatus or adjunct for running of a hotel. The court did not proceed to hold that a building in which the hotel was run was itself a plant, otherwise the court would not have gone ..... X X X X Extracts X X X X X X X X Extracts X X X X
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