Judgment:
The Court
1. At the instance of the CIT, Gujarat-I, Ahmedabad, the Tribunal, Ahmedabad Bench 'A', has referred the following questions of law arising out of its order in ITA Nos. 952 & 945/Ahd/78-79 relating to the asst. yr. 1971-72 to this Court for its opinion :
'1. Whether, in computing the capital employed for the purpose of relief under s. 80J, an amount of Rs. 8,22,913 representing uninstalled machinery should be taken into consideration
2. Whether, on the facts and in the circumstances of the case, the Tribunal has been right in law in holding that the assessee is entitled to claim development rebate in respect (a) road and culverts. compound walls and medical equipments, pumps and drainage and (b) assets of training centre and further even though it was specifically brought out before the Tribunal in regard to training centre assets that some items worth Rs. 21,430 would fall under the head 'office appliances' on which development rebate was not admissible
3. Whether, relief under s. 80J is required to be calculated on the basis of the assets as on the first day of accounting year without taking into account the increase in the capital during the year
4. Whether, while computing the capital employed for grant of relief under s 80J liabilities and debts are not required to be deducted ?'
2. Question No. 1 relates to the computation of relief to assessee under s. 80J of the IT Act, 1961, as the provision stood in the relevant assessment year. The assessee had, in fact, during the previous year acquired machinery worth Rs. 8,22,913, but had not been installed until the close of the year. For the purpose of computing capital employed to calculating allowable deduction under s. 80J, the Assessing Officer (AO) did not include the aforesaid sum on the ground that the same has not been used during the previous year for the business of the assessee. The AAC accepted the claim of the assessee. The order of AAC has been confirmed on appeal by the Tribunal.
3. The learned counsel appearing for the parties states that the issue is covered by a decision of this Court in the case of CIT vs. Cibatul Ltd. (1979) 115 ITR 879. In identical circumstances, this Court has held as follows :
'The concept of use of the plant does not arise under r. 19A(2)(ii). It is only the question of assets acquired by purchase by the assessee and not entitled to depreciation. Both the requirements of clause (ii) of r. 19A(2) are satisfied in the instant case and on that ground alone the Tribunal was right in coming to the conclusion that the amount of Rs. 8,33,032 should be taken into consideration for the purpose of computation of capital employed for the purpose of granting relief under s. 80J. It may be pointed out that under r. 19A(2)(v), cash in hand or at bank is to be included in the assets and, therefore, when that cash is converted into assets, though in the shape of machinery which has not been installed, that should be included on the assets side in computing the capital employed for the purpose of relief under s. 80J.'
We are in respectful agreement. Accordingly, question No. 1 is answerer in favour of the assessee and against the Revenue by holding that in computing the capital employed for the purpose of relief under s. 80J, an amount of Rs. 8,22,913 representing machinery acquired during the previous year, even if installed later on, ought to be taken into consideration.
4. Regarding question No. 2 : We may at the outset state that the question has not been happily worded and a number of issues have been compounded into one question. The disputes which call for consideration under the aforesaid question relate to different assets and as to whether they are eligible to claim for development rebate under s. 33 of the IT Act. The assets to be considered may be classified as under :
1. Roads and culverts and compound walls;
2. Pumps and drainage for affluent disposal;
3. Medical equipments which are installed at hospital for labour welfare;
4. Assets of training centre for the trainees which are part of workshop.
5. Section 32 of the Act provides for depreciation in respect of building, machinery and plant or furniture owned by the assessee and used for the purpose of business or profession of the assessee during the previous year. Under s. 33, the assessee can claim development rebate which is in addition to depreciation in respect of newship, new machinery or plant other than office appliances or road transport vehicles which is wholly used for the purposes of business carried on by the assessee. Sub-s. (6) of s. 33 prohibits allowance of development rebate in respect of machinery or plant installed after 31st March, 1965 in any office premises or any residential accommodation including any accommodation in the nature of guest houses. Sub-s. (6) therefore makes it clear that even if a particular article or thing may constitute a new machinery or plant and is not an office appliance, yet the same would not be considered for the purpose of allowing development rebate. The condition is that such new machinery and plant installed in office premises or any residential accommodation will be taken out from the purview of eligibility for rebate. It is in the light of the aforesaid provisions the claim of aforesaid items are to be considered for allowance or disallowance of claim for development rebate in the present case.
6. Regarding road, culverts and compound wall, the ITO disallowed the claim of the assessee on the ground that they are not item of machinery or plant. We may here note that buildings have been separately classified as an asset for the purpose of depreciation under s. 32 of the Act whereas the buildings as such have not been included for considering the claim for development rebate under s. 33 unless the building itself can be said to be a plant. It is only machinery or plant that can qualify for claim under s. 33 for development rebate.
7. We may also notice that under s. 32 of the Act also the words 'machinery and plant' have been used. The question which fell for determination by the Supreme Court in CIT vs. Gwalior Rayon Silk Mfg. Co. Ltd. (1993) 196 ITR 149 was whether roads and culverts fall within the meaning of building in legal sense where building has not been defined to include road. The Supreme Court following the meaning of building given in the Permanent Words and Phrases, Vol. 5A, wherein it was defined to mean 'everything that is necessary to perfect a manufacturing establishment and fit for use designed as a part of it is a building and would serve as necessary link between the raw material and finished products in the business activity. The roads are liable to wear and tear and need constant repairs of relaying the reed constant' approved the decision of the Bombay High Court in CIT vs . Sandvik Asia Ltd. : [1983]144ITR585(Bom) . The Supreme Court held that :
'the roads laid within the factory premises as links or providing approach to the buildings are necessary adjuncts to the factory buildings to carry on the business activity of the assessee and would be building within the meaning of s. 32 of the Act.'
This Court following the aforesaid decision in assessee's own case for the earlier year in CIT vs . Gujarat State Fertilizers Co. Ltd. : [1993]203ITR526(Guj) came to the conclusion that roads laid within the factory are integral part of the factory premises. Accordingly we hold that roads laid within factory are integral part of factory building. So far as culverts are concerned, we are of the opinion that they are part of the roads and therefore they stand on the same footing as roads. As roads are required to be held as part of building, culverts are also required to be held as part of the building. Accordingly, it must be held that the roads and culverts are part of the building. For the same reasoning, compound wall of the factory of the premises must also be held to be integral part of the factory premises and is building.
8. However, the question does not end here. In order to claim benefit of development rebate, the assessee contends that the factory premises itself must be held to be a plant and it cannot be treated as a building simpliciter. After having carefully considered this contention of the learned counsel for the assessee, we are unable to accept the same.
9. As we have noticed above, building is something different from plant and machinery. It is apparent form the difference of language used in s. 32 and s. 33, without laying down that in no case a building can be considered as plant, it can generally be stated that a building ordinarily cannot be construed as plant. In this connection, it may be pointed out that in CIT vs . Coromandel Fertilizers Ltd. : [1985]156ITR283(AP) the question related to the facts as to whether roads, leading to factory are plant within the meaning of s. 32 to claim depreciation at the rate prescribed for plant and not the rate applicable to building simpliciter came up for consideration. The Andhra Pradesh High Court had interpreted that roads leading to the factory are plant. On the other hand, the Bombay High Court in CIT vs. Sandvik Asia Ltd. (supra) held roads to be building and not plant. The Supreme Court affirming the view of the Bombay High Court in Sandvik Asia Ltd. (supra) disapproved the view taken by the Andhra Pradesh High Court and held that roads to the building being integral part of the factory buildings are not plant. In view of the aforesaid clear pronouncement, we are of the opinion that roads and culverts and compound wall are integral part of factory premises and are to be treated as building for the purpose of depreciation.
10. In this connection, it was contended by the learned counsel for the assessee that there being a decision of this Court in relation to the assessee's own case for the earlier assessment year referred to above, there should not be any different decision for this assessment year qua the assessee.
11. The contention of the assessee was that the assessee's claim for depreciation and development rebate has been allowed by this Court in CIT vs. Gujarat State Fertilizers Co. Ltd. (supra). We are unable to read that ratio in the aforesaid decision. There appears to be some incongruity in answering questions Nos. 1 and 3 in negative and affirmative respectively as was before this Court in the aforesaid case. But that incongruity does not detract from the fact the Court has unequivocally said that 'road and culverts cannot be regarded as plant, but they have to be considered as buildings'. Moreover, as discussed above, the Supreme Court itself while dealing with the case of roads laid out within the factory held it to be part of the factory, but negatived the claim of depreciation on those assets as plant. Therefore, in our opinion, the Tribunal was not right in saying that the assessee was entitled to development rebate on roads, culverts and compound walls by treating it to be plant.
12. Regarding pumps and drainage pipes for affluent disposal, the AO held it to be not an item of machinery or plant for rejecting the claim of the assessee in respect of development rebate. We fail to understand how pumps are not items of machinery. Obviously, the AO had committed a mistake in dealing with the development rebate on the cost of pumps newly installed during the previous year under s. 33. So far as drainage pipes which are installed for the purpose of discharging of the plant are concerned, in ordinary sense and keeping in view the object of s. 33, the affluent discharge system for discharge of affluent which has come in existence as a result of operation of plant must be deemed to be a part of plant. Without discharge of affluent, the process of functioning of plant would not be complete. Use of drainage pipes and pumps in a drainage system installed for the purpose of discharge of affluent of a plant cannot be equated with ordinary sanitary pipes and fittings installed in a building for the purpose of use of buildings. We are, therefore, of the opinion that as discharge of affluent is an integral part of the operation of the plant, the pumps and drainage pipes are necessary adjuncts of plant itself and therefore plant within the meaning of s. 33 of the Act and cost of acquisition of new pumps and installation of drainage pipes for affluent disposal during the previous year ought to have been considered for allowing the development rebate. Therefore, in our opinion, the Tribunal was right in holding that the assessee was entitled to claim development rebate in respect of pumps and drainage pipes for affluent disposal.
13. In this connection we may usefully refer to a decision of the Supreme Court in CIT vs . Taj Mahal Hotel : [1971]82ITR44(SC) where the Court was considering the allowance of development rebate on the cost of sanitary and pipeline fittings installed in a hotel under the provisions of s. 10(2) off the Indian IT Act, 1922, corresponding to the provisions of s. 33 r/w s. 43(3) of the IT Act, 1961. The contention raised before the Supreme Court on behalf of the Revenue was that the word plant should not be given a wider meaning and on the items which have become part of the building itself development rebate cannot be claimed in respect of them. It was noticed that word 'plant' has been defined for the purpose of the Act under s. 10(5) of the 1922 Act which is pari materia with sub-s. (3) of s. 43 under the 1961 Act and the very fact that even books have been included in the definition of plant, the Court came to be conclusion that the legislature intended to give a wider meaning to the word 'plant'. The Court further observed as follows :
'In the present case, s. 10(5) enlarges the definition of the word 'plant' by including in it the words which have already been mentioned before. The very fact that even books have been included shows that the meaning intended to be given to 'plant' is wide. The word 'includes' is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. When it is so used, these words and phrases must be construed as comprehending not only things as they signify according to their nature and import, but also those things which the interpretation clause declares that they shall include. The word 'include' is also susceptible of other construction which it is unnecessary to go into.'
The law is equally well settled that the expression in a tax statute would ordinarily be understood in the same sense in which it is harmonious with the object of the statute to effectuate the legislative intention. In this connection it may be noticed that while the object of s. 32 in providing for depreciation is to spread over the capital cost incurred on the acquisition of capital assets for the business over a period of years and to arrive at the real profits from operating the business, the object of providing development rebate in addition to depreciation is not to meet with the cost incurred for the purpose of business but to make available the funds for further use for the purpose of development of the business and such fund is not to be used for the purpose of distribution of profits by way of dividend or remittance outside India for creation of any assets outside India. The allowance of development rebate is made only once in respect of the new machinery and a fixed percentage as prescribed in the Act from time to time is allowed as a deduction form the profits of that year. A fixed percentage of said actual allowance has to be transferred to a reserve fund to be utilised by the assessee during the period of 8 years next following for the purpose of business of the undertaking. Therefore, while interpreting the word 'machinery' or 'plant', this difference in object of s. 32 and 33 has to be kept in mind. Another aspect which is to be kept in mind is that while for the purpose of depreciation, buildings have been dealt with separately than plant and machinery and depreciation at different rates has been provided for buildings etc. development rebate is allowed on a flat rate on cost of plant and machinery for creation of development rebate fund or reserve to be used for the business. Thus making sufficient fund available for the use of business otherwise than distribution of profits or creation of assets outside India coupled with definition of 'plant' given under s. 43(3) leaves no room of doubt that an extended meaning was assigned to word 'plant' under s. 33. It is keeping in view this object the apex Court held in Taj Mahal Hotel case (supra) while dealing with the sanitary fitting held that 'it is incomprehensible how sanitary fittings can be said to have no connection with the business of the hotelier. He can reasonably expect to get more customers and earn larger profits by charging higher rates for the use of rooms if the bath rooms have sanitary fittings and similar amenities.'
14. The Supreme Court further observed that :
'we are unable to see how the sanitary fittings in the bath rooms in a hotel will not be 'plant' within s. 10(2)(vib) r/w s. 10(2)(5) when it is quite clear that the intention of the legislature was to give it a wide meaning and that is why articles like books and surgical instruments were expressly included in the definition of 'plant'.'
15. From the above it is also clear that if anything is installed which is primarily for the use of business to be run smoothly and to augment profits, rather than as an amenity necessary for the use of building alone, in that event, such adjuncts for the purpose of claiming development rebate under s. 33 may properly constitute as 'plant' notwithstanding the same may for the purpose of s. 32 fall to constitute as part of building.
16. We may further notice that the Supreme Court has noticed the definition of 'plant' is Webster's Third New International Dictionary to mean, land, buildings, machinery, apparatus and fixtures employed in carrying on trade or other industrial business. The Supreme Court did not decide the applicability of those wide dictionary meaning to the provisions of s. 33. In the present case also, no question had been raised before the authorities under the Act and as it does not arise from the order of the Tribunal whether the factory building itself can be 'plant', in the facts and circumstances of the present case, we are not dwelling into that question though the learned counsel for the assessee made an attempt to argue that for the purpose of s. 33, the factory premises itself is a plant.
17. Regarding medical equipments, the claim has been denied on the ground that the equipments are for hospital labour welfare, It is not the case that it is not machinery or plant. As we have noticed, from the point of considering any plant and machinery used for the purpose of business, it is not necessary that machinery or plant must have been installed in the factory premises itself. What has been prohibited is that any machinery or plant if installed in office premises or residential accommodation, the same has not to be considered for development rebate. It is also not the case that the medical equipments are office appliances. Obviously that could not have been the case. The requirement of s. 33 is that machinery or plant, as the case may be, must be used for the purpose of business of the assessee. The second condition which has been inserted by sub-s. (6) is that such machinery or plant ought not to have been installed in office premises or residential accommodation. There is no finding that medical equipment is not machinery or plant. It is neither the case that medical equipments have been installed in office building or residential accommodation and the same cannot be excluded from the consideration under sub-s. (6) of s. 33. The hospital run by the assessee for the purpose of labour welfare to give effect to the labour welfare legislation cannot be considered as office building. It being primarily made for the welfare of the labourers working in the factory, an adjunct of factory premises and not an adjunct of office premises. In view thereof, in our opinion, the Tribunal was right in holding that the assessee is entitled to claim development rebate in respect of medical equipment installed in hospital run by it also.
18. Regarding assets of training centre, we find that in the order of assessment the claim has been disallowed only by stating that they are assets. We have not been able to discern anything from the said consideration as to why training centre or equipments or machinery installed at the training centre has been disallowed from being considered for development rebate by the ITO. The Tribunal has recorded a finding which is not in challenge before us that the equipments, apparatus, of items claimed under this head are installed at the workshop. Rather it was admitted before the Tribunal that the assets in respect of which development rebate is claimed in connection with the training centre include machineries like pumps, transformers etc. which are otherwise eligible for development rebate but for having been installed in the workshop and not in the factory. The finding of the Tribunal has been recorded in following terms :
'On examining the details we find that the assets in respect of which development rebate is claimed include machineries like pump, transformers, heat exchangers etc. If these assets were to be in the factory proper of the assessee there would be no dispute as to their entitlement for development rebate. Merely because the assessee on account of its vast size and operation and the large number of the employees to be trained has opened a training centre with machineries and prototypes in a workshop instead of keeping all these assets in its own factory'.
It is an admitted case that the assets at training centre are otherwise machinery and plant and the only ground on which the allowance of development rebate in respect of these assets was disallowed could be under sub-s. (6) of s. 34. In our opinion, workshop cannot be considered as office building. A office building is one where administrative functions in relation to factory are discharged. But a workshop which is kept for maintenance and repairs of the plant and also being used for training the workers, the machinery and plant kept in the workshop cannot be considered to be an office building and therefore the Tribunal has rightly come to conclusion that the development rebate cannot be denied only because the plant and machinery has been installed on the workshop. As an ancillary to this question, it was argued before the Tribunal which has not been made part of the question in that the some part of the assets were claimed to be office appliances on behalf of the Revenue before the Tribunal from the order we find that the only reference to a particular item is to exclude is screw conveyor model, a prototype which has been used in the workshop real of which was in the factory. A prototype of machinery used in the workshop for the purpose of demonstration to the trainee cannot be considered to be an office appliance in any sense of the word. We are, therefore, of the view that the claim of the Revenue that some of the assets, namely, screw conveyor model used in workshop for training purpose is an office appliance has rightly been rejected by the Tribunal. We accordingly answer question No. 2 by holding that roads, culverts and compound walls form part of the factory building and is not a plant and therefore not eligible for development rebate, unless the factory premises itself can be treated as plant. The pumps and drainage pipes and medical equipments and asset of training centre are, in the circumstances of the present case, eligible for development rebate under s. 33.
19. Regarding question No. 3, it has been submitted by both the learned counsel that the assessment year with which we are concerned is prior to the amendment in s. 80J w.e.f. 1st April, 1972, answer to the question is squarely governed by a decision in the case of CIT vs . Elecon Engineering Co. Ltd. : [1987]167ITR639(SC) in favour of assessee and against the Revenue. Accordingly, we answer this question in favour of the assessee and against the Revenue by holding that the Tribunal was right in allowing the claim of the assessee for computing the capital employed for the purpose of section 80J on the basis that the capital in the beginning of the year should not be taken.
20. Coming to question No. 4, the dispute relates to the question whether while computing capital employed deduction should be made of liabilities on account of borrowed capital, answer to this question is concluded by a decision of the Supreme Court in Lohia Machines Ltd. vs . Union of India : [1985]152ITR308(SC) in favour of the Revenue and against the assessee by which the apex Court held the validity of r. 19A which provided computation of capital employed by excluding the borrowed monies and debts and particularly long term borrowing in the computation of the capital employed by a new industrial undertaking for the purpose of tax exemption as valid piece of subordinate legislation. Accordingly, question No. 4 is answered in favour of the Revenue and against the assessee by holding that the Tribunal was in error in allowing the liability in its debts representing the borrowed capital to be included in considering the capital employed for granting of relief under s. 80J of the Act.
21. Accordingly, the reference stands disposed of with no order as to costs.