Judgment:
ORDER
Arijit Pasayat, C.J.
1. These four references are taken up for disposal, as they are closely interlinked. Accepting prayer for reference made by the Revenue following questions have been referred for the opinion of this court under Section 256(1) of the Income-tax Act, 1961 (for short, the Act) by the Income-tax Appellate Tribunal Delhi Bench 'B' (In SHORT 'the Tribunal').
1. Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in law in holding that the equipments used in the assessor's business, such as counter, guns, steel equipments, steel furniture, electrical fittings and cooling equipments are to be treated as plant and machinery us 32(1)(ii) and Section 33 for the purpose of grant of depreciation and development rebate respectively.
2. Whether on the facts and in the case, the Tribunal is correct in law in holding that the assessed bank is an industrial company for the purpose of rate of tax.
3. Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the assessed is entitled to deduction us 80-J:
4. Whether on the facts and in the Circumstances of the case, the Tribunal is correct in law holding that the provision for gratuity amounting to Rupees 66,708/- is an admissible deduction in the assessment year 1971-72.
2. Factual position relevant for adjudication of the dispute essentially is as follows. assessed is engaged in the business of banking. For the assessment years 1970-71, 1971-72 disallowances were made by the assessing officer in respect of certain deductions claimed as depreciation and development rebate. Depreciation was claimed in respect of lockers, counters, guns, steel equipment, electrical fittings and cooling equipments. Development rebate was also claimed in respect of such items. Assessing officer disallowed the claim of depreciation on the ground that the articles do not fall within the definition of either plant or machinery. So far as development rebate is concerned, it was observed by the assessing officer that development reserve was not created in 1970-71. In respect of the assessment year 1971-72, the assessing officer disallowed the claim of Rs. 66707.96 credited to profit and loss upon conversion of option to G.P. Fund being non-transaction gratuity liability. The Appellate Assistant Commissioner observed that guns, calculating machines are covered under the head plant and machinery. Reference was made to the first proviso the Section 32(1)(ii) for the purpose. Development rebate was directed to granted in respect of guns, and electrical fittings. Referring to the instructions of the Central Board of Direct Taxes in their letter No. 288/8/72-itr(AII) dated 31.12.1975, it was held that the assessed would be entitled to relief of development rebate even if it could not create any development rebate reserve because of losses.
3. For the assessment year 1971-72, dealing with the claim relating to gratuity payment, it was directed the ITO has to go through the claim and allow relief if the gratuity is on the basis of actuarial process. So far as S. 80J is concerned, it was observed that ITO was to reconsider the claim and allow deduction to the extent it is admissible.
4. Both, the assessed and the Revenue preferred appeals before the Tribunal. After considering the rival submissions, Tribunal held that steel furniture are part of the plant. In view of the purported conclusion that bank is an industrial undertaking, there was no infirmity in the order of the first appellate authority in holding that the claim for deduction in respect of gratuity and relief under Section 80J are admissible. On being move under Section 256(1) as indicated supra four questions have been referred for opinion.
5. There is no appearance on behalf of the assessed in spite of notice. Heard learned counsel for Revenue.
6. We will first deal with the question whether the items referred to above are covered under the category of plant and machinery.
7. Like any other animate and inanimate object business premises, machinery, plant or furniture employed by an assessed in the course of his business, profession, etc., has a limited effective life. The vigour, strength, capability etc of every such object gradually exhausts by the factors of use and time. Depreciation is a provision made for proper recompense of such diminution. As indicated by William Pickles in his illustrious book 'Accountancy' it is the inherent decline in the value of an asset whatsoever. Depreciation is allowable in terms of Section 32 plant and machinery apart from tangible assets like buildings or furniture. The expression 'plant' must be given a wide meaning having regard to the fact that articles like books, scientific apparatus surgical instruments are expressly included in the definition of plant. Its meaning is not confined only to an apparatus used in industry or business or manufacturing of finished goods from raw goods. In its ordinary meaning it is a word of wide import and it must be broadly construed. It includes any article or object fixed or movable, live or deed, used by a businessman for carrying on his business. it would not cover the stock in trade of a businessman. It would also not include an article which is part of the premises in which the business is carried on. An article to qualify as plant must have some degree of durability and that which is quickly consumed or worn out in the course of future operation or within a short time cannot properly be called plant. In the ultimate analysis an enquiry which is to be made is as to what operation the apparatus performs in the assessor's business. The relevant test to be applied is does it fulfilll the function of a plant in the assessor's trading activities? Is it a tool of tax-payers trade? If it is, then it is plant. Aforesaid position was laid down by the apex Court in CIT Vs . Taj Mahal Hotel, : [1971]82ITR44(SC) Reference can be made to expression 'plant' as used in Section 43(3) of the Act. Section 43 defines certain terms relevant to income from profits and gains of business or profession 'plant' is defined in Section 43(3). The same has to be construed in the popular sense, namely, in the sense in which public conversant with the subject matter in which the subject is dealing would attribute to it. In its ordinary sense it includes whatever apparatus used by a businessman for carrying on business but it does not include stock in trade which he buys or sells. It includes all goods fixed or moveable, live or dead which the tradesman keeps for permanent employment in the business but the building or setting in which the business is carried out cannot be plant. The thing need not be part of the machine used in the manufacturing process but could be merely an apparatus used in carrying on the business but having a degree of durability. Merely because the asset has a passive function in the carrying on the business, it cannot be said that it is not plant. It may have a passive or an active role. The subject must have a function in the trader's operation and if it has, it is prima facie a plant unless there was good reason to exclude it from that category. It must be a tool in the trade of the businessman. Gross materiality or tangibility is not necessary and in fact intangible things like ideas and designs contained in a book could be plant. They fall under the category of intellectual storehouse. In considering whether a structure is plant or premises, one must look at the finished product and not at the bits and pieces as they arrive from the factory. The fact that a building or part of the building holds the plant in position does not convert the building into plant. A piecemeal approach is not permissible and the entire matter must be considered as a single unit unless of course, the component parts can be treated as separate units having different purposes. The functional test is a decisive test. Furniture in the business can be said to mean article of convenience or decoration used to furnish a house, apartment, place of business or of an accommodation. Webster's New International Dictionary defines it to be so. In Shorter Oxford, English dictionary, the expression is defined as to fit up with all that is requisite, including moveable furniture, which is now the predominant notion. The term furniture can apply to equipments to be employed in several places for ornament or to promote comfort or to facilitate business therein.
8. The expression plant has been defined in clause (3) of section 43 of the Act to include ships, Vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession. Obviously, it is na inclusive definition. Its intention is to enlarge the meaning of the expression 'plant' occurring in the Act to include not only such items as are commonly know as plant but also those which are enumerated therein. To decide whether a particular item is plant or not, one of the tests applied is the common parlance or trade of commercial parlance test. Another test that is often applied for that purpose is the functional test. This test was applied by the Supreme Court in Scientific engineering House P. Ltd., v. CIT, [1986] 158 ITR 86 to determine whether technical know how acquired by the assessed in the shape of drawings, designs, charts, plants, processing data and other literature, fell within the definition of plant. The Supreme Court referred to the material passage from the speech of Lindley L.J. in Yarmouth v. France [1887] 19 QBD 647 where a cart-horse was held to be plant and observed (at page 96):
'......that plant would include any article or object fixed or movable, live or dead. used by a businessman for carrying on his business and it is not necessarily confined to an apparatus which is used for mechanical operations or processes or is employed in mechanical or industrial business.'
The Supreme Court formulated the following test (at page 96):
'Does the article fulfilll the function of a plant in the assessor's trading activity? Is it a tool of his trade with which he carries on his business? If the answer is in the affirmative, it will be a plant.'
Applying the above test, it was held that technical know-how in the shape of drawings, designs, charts, plants, processing data and other literature fell within the definition of plant. applying the same test, in Taj Mahal Hotel's case (supra), it was held that sanitary and pipeline fittings, installed by the assessed who ran a hotel, constituted 'plant'. In the above decision, the Supreme Court also approved the decision of the Allahabad High court in CIT Vs . Indian Turpentine and rosin Co. Ltd. : [1970]75ITR533(All) where in the case of an assessed engaged in manufacturing and selling of rosin and turpentine, poles, cables, conductors and switch boards for distribution of electricity where treated as plant. The functional test also came to be considered by the Bombay High Court in CIT Vs . Mazagaon Dock Ltd. : [1994]206ITR260(Bom) were it was urged on behalf of the assessed that judging from the functional test, the 'approach channel' constructed by dredging the sea can be treated as 'plant'. The above contention was rejected by the Bombay High Court. While doing so, said court also cautioned against indiscriminate application of this test in the following words (at page 267)'.
'In our opinion, the functional test has to be rationally. Tooliberal and application of this test may bring in everything including the roads within the factory which have already been held by the Supreme Court to be 'building' within the expression 'plant'. On such liberal interpretation, even the factory building itself may have to be held to be a plant because without it the plant cannot be operated in the open. But that is not so, Structures which fall within the expression 'building or pathways like roads, etc, required for providing approach to the factory have been held to be buildings or roads and not plant.....'
9. Reference may also be made at this stage to the decisions of the House of Lords in Cole Bros. Ltd. v. Phillips, [1982] 55 TC 188, ITC v. Scottish and New Castle Breweries Ltd., [1982] 55 TC 252 and the decision of the Court of Appeal in Wimply International Ltd. v. Warland [1988] 61 TC 51. In Cole Bros Ltd., v. Phillips, [1982] 55 TC 188(Raj.) (HL), the controversy was whether lighting and other apparatus installed in shop premises qualified as plant within the meaning of Section 40 and 41 of the Finance Act. 1971. the Revenue held it not to be plant. On the above decision being affirmed by the chancery Division, the company appealed to the Court of Appeal. Said Court held that in deciding whether expenditure on a particular item is allowable as expenditure on plant, the question which the court must ask itself is: 'Whether the particular subject matter under consideration either itself performs or is a necessary or integral part of that which performs simply and solely the function of housing the business or whether as its sole function or as its additional function, it performs some other distinct business purpose.' A distinction was drawn between plant and setting. It was held that the lighting and other apparatus installed in the shop premises did not qualify as plant but formed part of the setting. On Appeal against the above decision, the House of Lords reaffirmed the distinction between plant and setting and dismissed the Appeal. It was held (headnote):
'the criteria by which the courts define the frontier between those concepts plant and setting is to look at the disputed object in order to see what it is and then to consider what in the context of the business actually being carried on is its function..'
It was observed that (headnote):
'the two concepts are not mutually exclusive and in certain cases notably that of a hotelier and restaurant proprietor the very thing the trader is selling includes and ambience or setting...'
10. In IRC v. Scottish and Newcastle Breweries Ltd., [1982] 55TC 252 (HL), expenditure on 'decor' in a hotel and licensed premises was held to be expenditure on the provision of plant. This conclusion, however, was arrived at because of a clear and emphatic findings of the commissioners that the decor went to create the atmosphere or ambience which it was an important function of the company's particular trade to provide for its customers to resort to and enjoy. a somewhat similar dispute came up before the Court of Appeal in Wimpy International Ltd. v. Warland, [1988] 61 TC 51. In that case Wimpy International Ltd. Owned and operated fast food restaurants (Wimpy Bars). serving a standard range of food items to be selected by the customers at the counter with no table service. Similarly, another assessee, Associated restaurants Ltd owned and operated Pizza land restaurants serving quick inexpensive meals with pizza main course, starter courses and sweets. They were licensed to sell liquor and offered table services. These companies expended money on improving and modernizing their restaurants e.g. shop fronts, floor and wall tiles, suspended ceilings, raised floors, light fittings, wall finishes, fire doors and fire proofing and other decorative items, In their assessments to corporation tax they claimed that this expenditure qualified for capital allowance under Section 41 of the Finance Act, 1971, as plant used in the carrying on of their respective trades. The Special Commissioners disallowed the claims in respect of shop fronts, floors and wall tiles, wall finishes and the other non-decorative items, which they held, were part of the setting or premises in which the treads were carried on but allowed those in respect of certain decorative items such as murals, decorative brickwork and wall panels, as being embellishments not part of the premises. On Appeal by the company, the Chancery division held (headnote):
1. Although one test to be applied in determining whether an item was plant is whether the item, not being stock-in-trade, was used for carrying on the business (the functional or business use test) an item still might not qualify if it was used as or was part of, the premises or place upon hich the business was conducted (the premises test).
2. The light fittings passed both the 'premises' and the 'business use' tests and were, thereforee plant.
The Court of Appeal while doing so, laid down the following test (headnote):
'In relation to any item in dispute, the question to be asked iswhat does the item function as? Is it more appropriate to describe the item as part of the premises rather than having retained a separate identify? If the item forms part of the premises it is not plant...'
11. It is clear from the above discussion that an item would not qualify to be plant even if it satisfies the functional test, if on an application of premises test, it is found to be used as or part of the premises or place upon which the business was conducted. In Jarrold v. John Goods & sons Ltd (1962) 40 TC 681 movable office partitions were held to be plant. In Sunderan Motors Pvt. Ltd., Vs . Commissioner of Income-tax : [1969]71ITR587(Mad) electrical fans and other office appliances were held to be plant.
12. So far as the lockers are concerned, it is undisputably an article which is used for the purpose of carrying on the trade. It is the primary safety article of a bank. The Tribunal was thereforee justified in its conclusion that encompassed by the heading plant. Similar view has been taken by several High Courts (See CIT Vs . Union Bank of India, : [1976]102ITR270(Bom) . CIT., Vs . Bank of India Ltd., : [1979]118ITR809(Bom) ., Syndicate bank v. CIT, (1984) 160 ITR 198 Syndicate Bank Vs . CIT, : [1988]172ITR561(KAR) .
13. In relation to electrical fittings are concerned there can be no generalization. It would depend upon the facts of a particular case. It may be that the assessor's banking business is of such type that it could not be carried out without various electric fittings which have been installed. A locker cannot be made functional in darkness at various banking premises which would grossly be effected if there would be no intercommunication facility. Unfortunately, there appears to be no factual determination of the question whether the installations were of a special nature absolutely necessary for the purpose of carrying out banking business of the assessee. It would be unsafe to proceed on any hypothetical basis. It is to be noted that in Section 32 for the propose of depreciation, the expressions used are ' building, machinery, plant or furniture being tangible assets.' thereforee if any article falls within the category of plant or furniture, depreciation will be admissible. So far as 'development rebate' is concerned, it is dealt with in Section 33. Sections 32 and 33 are independent provisions. The latter is allowable by way of an incentive for industrial growth and expansion which former is normally an annual feature, latter is allowable only once that too in the year is installation or fixed use of a new ship, or new machinery or plant ( other than office appliances or road transport vehicles). thereforee, we think it proper to direct Tribunal to re-examine factual aspects to determine whether development rebate is allowable, though depreciation is allowable in view of user of the expression 'plant or furniture'.
14. Coming to guns, they are used by security personnel. Though there is no elaborate discussion in that regard, it is not disputed that they are used by guards for security and protection purposes. Guns cannot be said to be without any link with assessor's business. On the other hand, they are intrinsically linked with it. a bank without security measures in inconceivable. thereforee, the Tribunal was justified in holding that it was encompassed by the expression 'plant'.
15. In respect of counters, the learned counsel for the Revenue submitted that they are in the nature of furniture and not plant. Even if factually there is no discussion even from the common man's view also it is abundantly clear that a bank without counter is inconceivable. Counters are integral part of the business activity. In fact, it is often said that across the counter banking transactions are held. We, thereforee find nothing illegal in the conclusion of the Tribunal that counter is covered by the expression 'plant'.
16. So far as steel equipments are concerned, we find that at some place the authorities have referred to it as steel furniture and equipments. It is not brought on record as to what were the accounts relatable to the steel furniture and steel equipments. Similar is the case of cooling equipment. In the absence of actual details and materials to substantiate the conclusion. We direct similar course to be adopted as in the case of 'electrical dittings'. Our directions and observations relating to 'electrical fittings' shall apply to steel equipments and furniture. First question is accordingly answered.
17. Coming to questions No. 2 to 4 the Tribunal held as under:
'...So far as the question of allowability of the claim in respect of provision of gratuity and relief under Section 80-J is concerned since we have already stated that the bank is an industrial undertaking, do not think there is any infirmity in the order of the Appellate Asstt Commissioner....'
18. There is no discussion by the Tribunal as to how the assessed was an 'industrial taking' for the purpose of levy of tax. Regarding the ute relating to provision for gratuity, the Assistant Commissioner has only directed the claim to be re-examined and if the claim was on the basis of actual valuation by acturial, it was to be allowed. Same is correct position in law and since no final decision has been rendered by the Tribunal, question is of academic interest. Similar is the position in respect of deduction under Section 80-J.
19. In the absence of any material to hold that the assessed is an industrial undertaking, the Tribunal's conclusion are indefensible. The expression 'industrial company' is usually referred to in rate schedules in the finance Act. It was destined under Section 109(i)(a) between 1.4.76 and 31.3.78. It was referred to in S. 109(iii)(1) up to 31.3.1988. According to Section 2(T)(C) of the Finance Act, 1981, an industrial company means a company which is mainly engaged in the business of generation of electricity or any other form of power or in the construction or manufacture of goods. Test for fulfilllment of the condition of mainly is laid down in the Explanationn to that Section that income attributable to any one or more of the aforesaid activities included in its total income before it has not considered deduction under Chapter VI-A, Section 80A to 80U. A Banking company cannot prima facie be held to be an industrial company. It is to be noted that the Tribunal did not use the expression 'industrial company', but used the expression 'industrial undertaking', It was observed as follows:
'so far as the question of allowability of the claim in respect of provision for gratuity and relief under Section 90-J is concerned since we have already stated that the bank is an industrial undertaking, do not think there is any conformity in the order or the Appellate Asstt. Commissioner in holding that both the claims are admissible and thereby directing the Income-tax officer to consider the same and allow relief according to law.'
20. Expression 'Industrial undertaking' is used in Section 10(15)(iv) and Section 80-I. Definition is in the Explanationn to provision. Though Tribunal held in the quoted portion referred to above that it has already held the assessed to be an industrial undertaking, no such conclusion is found in any earlier part of the order. That being so we direct the tribunal to re-adjudicate that aspect also, so far question No. 2 referred is concerned.