AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
Acts
  • s. 256(1) of the I.T Act, 1961,
Are you a practicing lawyer?
Enhance your digital presence and reach by creating a Casemine profile.
Upload pleading to use the new AI search
Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
Acts
  • s. 256(1) of the I.T Act, 1961,
Smart Summary

Structured Summary of the Opinion (Rastogi, J.)

Factual and Procedural Background

This matter is a reference under s. 256(1) of the Income-tax Act, 1961, concerning assessment year 1974–75 (previous year ending 31 March 1974). The assessee, a registered firm, constructed four warehouses at a cost of Rs. 2,89,064. The assessee's business involved booking space for storing potatoes on behalf of customers with M/s. Kanodia Cold Storage and then realising hire charges from those customers. In the relevant previous year the warehouses were used for temporary storage of customers' potatoes for sorting and grading before the potatoes were moved to the cold storage.

For the year in question the assessee declared a loss of Rs. 27,410 and claimed development rebate of Rs. 58,360 in respect of the warehouses. The ITO disallowed the development rebate, holding that the warehouses were merely godowns and did not satisfy the requirements of s. 33 of the Act; the ITO also took the position that machinery or plant must be installed to claim development rebate and the warehouses could not be said to have been "installed".

On appeal the AAC allowed the development rebate, relying on the Supreme Court decision in CIT v. Taj Mahal Hotel, and held that the warehouses were "buildings which were used for trade" and entitled to development rebate if other conditions were fulfilled. The revenue appealed to the Income-tax Appellate Tribunal but remained unsuccessful. The following question was referred to the court for opinion: whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the warehouses could be held to be entitled to development rebate under s. 33 of the Income-tax Act, 1961.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the warehouses constructed by the assessee could be held to be entitled to development rebate under section 33 of the Income‑tax Act, 1961 (the exact referred question quoted in the opinion).
  2. Whether the warehouses can be regarded as "plant" within the meaning of the expression as contained in s. 43(3) of the Act (this was framed by the court as the short question for consideration).

Arguments of the Parties

Revenue's Arguments

  • The term "plant" does not include the place in which business is carried on; a building used as the place of business cannot be treated as "plant" merely because it is used for business activities.
  • Section 32 (depreciation) expressly mentions "building" along with machinery, plant or furniture, whereas s. 33 (development rebate) mentions only "a new establishment or a machinery or plant" in sub‑s. (1)(a). The omission of "building" from s. 33 shows legislative intent that a building cannot qualify for development rebate unless it is treated as "plant" in the strict sense.
  • A building should be treated as "plant" only where, without such building, it is not possible for the taxpayer to carry on his business — in other words, when the building is an operational apparatus of the business rather than merely a site.

Assessee's Arguments

  • The expression "plant" should be given a wide meaning; the legislature included "books" in the definition of plant under s. 43(3), which indicates an expansive understanding of the term.
  • The warehouses were used by the assessee in the conduct of its business (temporary storage, sorting and grading of potatoes) and therefore come within the definition of "plant".
  • Reliance was placed on Commissioner Of Income‑Tax, Lucknow v. Kanodia Cold Storage [1975] 100 ITR 15 (All), where a building with insulated walls used as a freezing chamber was treated as part of the air‑conditioning plant.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
CIT v. Taj Mahal Hotel, [1971] 82 ITR 44 (SC) Use of the word "includes" in interpretation clauses to enlarge meanings; supports a wide construction of "plant". Relied on to support the proposition that the definition of "plant" is inclusive and can cover non‑traditional items; used in discussing the scope of "plant" under s. 43(3).
Yarmouth v. France, [1887] 19 QBD 647 (QB) Definition holding a horse to be "plant" because it was used by a wharfinger to carry on business; "plant" includes apparatus or instruments used by a businessman, not his stock‑in‑trade but goods and chattels kept for permanent employment in the business. Accepted as a correct exposition of the concept of "plant" and cited to illustrate the inclusive and functional approach to what constitutes plant.
Jarrold (Inspector of Taxes) v. John Good & Sons Ltd., [1963] 1 WLR 214 (CA) Movable partitions in office accommodation held to be "plant" where nature of business required rapid and inexpensive alteration of office subdivisions. Used to illustrate that structures or fittings may be plant when they perform an operational role in the business.
CIT v. Elecon Engineering Co. Ltd., [1974] 96 ITR 672 (Guj) Wide meaning of "plant": not limited to articles that diminish by wear and tear; includes articles that diminish in value by obsolescence; drawings and patterns considered. Referred to support the proposition that "plant" may include intangible embodiments of know‑how and that the term is not restricted to wear‑and‑tear subject items.
CIT v. S.L.M. Maneklal Industries Ltd., [1977] 107 ITR 133 (Guj) Workshop drawings treated as "plant". Reinforced the view that "plant" may include drawings or similar items that serve as long‑range operational aids in business.
CIT v. Caltex Oil Refining (India) Ltd., [1979] 116 ITR 404 (Bom) Fencing constructed around a processing unit held to be "plant" under the relevant definition. Illustrated that ancillary structures integral to the operation of a processing unit may qualify as plant.
CIT v. Warner Hindustan Ltd., [1979] 117 ITR 15 (A.P.) A well dug for manufacturing purposes treated as "plant". Used to show that even a well (a structure) can be plant where it is functionally integral to manufacturing operations.
Commissioner of Income‑Tax, Lucknow v. Kanodia Cold Storage, [1975] 100 ITR 15 (All) A building with insulated walls used as a freezing chamber was treated as part of the air‑conditioning plant of a cold storage. Cited by the assessee and considered by the court as an example where a building played an active, operational part in the business and so qualified as plant.
Benson v. Yard Arm‑Club Ltd., [1979] 1 WLR 347 (Court of Appeal) Distinction drawn between chattels/structures that are apparatus employed in business (plant) and structures that merely constitute the place where business is carried on; here a vessel used as a floating restaurant was held to be the place of business, not plant. Adopted as the guiding functional test: if a structure plays no part in carrying on business activities but only provides a place within which they are carried on, it is not plant. Applied to conclude the warehouses were not plant.

Court's Reasoning and Analysis

The court began by noting that s. 43(3) defines "plant" by an inclusive formula (it "includes" books and other items), which indicates a broad scope. The court reviewed authorities (including Yarmouth v. France, Jarrold, Taj Mahal Hotel, Elecon and others) to demonstrate that a wide and functional approach has been applied in deciding whether an item is "plant": items that are apparatus, instruments or chattels kept for permanent employment in the business have been treated as plant even where they are not traditional machinery.

However, the court emphasised a necessary distinction when the subject‑matter is a building or other structure. The decisive inquiry is functional: whether the building or structure is something by means of which the business activities are carried on (an apparatus or tool of the trade) or whether it merely provides a place within which the activities are carried on. The court described this as the "functional" or "operational" test.

The court examined the facts: the assessee's business consists of booking space for cold storage and charging customers; the warehouses were used for temporary storage, sorting and grading of potatoes before they were loaded into cold storage. Applying the functional test and relying particularly on the reasoning in Benson v. Yard Arm‑Club Ltd., the court concluded that the warehouses do not play an operational role in carrying on the assessee's business; they merely serve as a place where the business activity (sorting, grading and temporary custody prior to sending to cold storage) is conducted.

Because the warehouses did not constitute part of the apparatus employed in the commercial activities of the assessee, they did not fall within the definition of "plant" in s. 43(3). Consequently, the assessee was not entitled to development rebate under s. 33 in respect of the warehouses. The court therefore found that the Tribunal erred in holding otherwise.

Holding and Implications

Core Holding: The referred question is answered in the negative: the warehouses are not "plant" within s. 43(3) and the assessee is not entitled to development rebate under s. 33 of the Income‑tax Act, 1961.

Direct implications:

  • The Tribunal (which had upheld the assessee) erred in treating the warehouses as plant for the purpose of development rebate.
  • The decision is in favour of the department and against the assessee; the department was awarded costs of Rs. 200 and counsel's fee of Rs. 200 (as assessed by the court).

Broader implications: The court applied and reiterated the functional test for distinguishing between a structure that is part of the "plant" of a business and one that is merely the place where business is carried on. The opinion does not purport to lay down a novel legal principle beyond the application of established authorities to the facts; the outcome is a fact‑specific conclusion that these particular warehouses were not plant.

    Commissioner Of Income-Tax, Lucknow-Ii v. Kanodia Warehousing Corporation.

    Rastogi, J.:— This is a reference under s. 256(1) of the I.T Act, 1961, and it relates to the assessment year 1974–75, the corresponding previous year ended March 31, 1974. The assessee, a registered firm, had constructed four warehouses at a cost of Rs. 2,89,064. In the relevant previous year its main business was to book space for storing potatoes on behalf of its customers on rent agreed to with M/s. Kanodia Cold Storage and thereafter realise hire charges from the customers for storage of potatoes. The nature of the business was that the assessee stored the potatoes of its customers in its warehouses for sorting and grading and thereafter loaded the same in the cold storage. For the year under consideration, the assessee declared a loss of Rs. 27,410. It had charged development rebate at Rs. 58,360 in respect of those warehouses. The ITO did not accept the assessee's claim in regard to the development rebate since in his opinion the warehouses of the assessee were merely godowns and did not fulfil the requirement of s. 33 of the Act. Further, in his opinion, the machinery or plant must be installed so as to claim development rebate and since it could not be said that the warehouses of the assessee had been installed, he disallowed the claim.

    2. On appeal, the AAC took a contrary view and relying on the decision of the Supreme Court in CIT v. Taj Mahal Hotel, [1971] 82 ITR 44, held that the warehouses of the assessee were “buildings which were used for trade and they were entitled to development rebate if other conditions are fulfilled”. Since the ITO had not given any other ground for not allowing development rebate except that the warehouses did not amount to installations, the AAC accepted the assessee's claim and allowed the claim for development rebate. Being aggrieved, the revenue preferred an appeal before the Income-tax Appellate Tribunal but remained unsuccessful and now at its instance the following question has been referred to this court for its opinion:

    “Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the warehouses constructed by the assessee could be held to be plai??? entitled to development rebate under section 33 of the Income-tax Act,???961?”

    3. It would be seen that there???e certain undisputed facts and they are that the assessee had constructed???ertain warehouses. In the relevant pre vious year its main business wa???to book space for storing potatoes on behalf of its customers with M/s. ???lanodia Cold Storage and for that it had collected hire charges from the??? So far as these warehouses are con cerned, they were used for tern???rary storage of the potatoes for the pur pose of sorting and grading t???u. Thereafter it was loaded in the cold storage. In other words, the v???rehouses were used by the assessee in connection with its business. The short question that falls??? or our consideration on these facts is as to whether these warehouses can???2 regarded as “plant” within the meaning of its definition as contained ??? s. 43(3) of the Act. According to this definition, “plant includes vehia ??? books, scientific apparatus and surgical equipments used for the purpos ??? of business or profession”. It is an inclusive definition and the very ??? ct that even books have been included, shows that the meaning intende???o be given to plant is wide. As observed in the case of Taj Mahal Hotel, [1???1] 82 ITR 44 (SC) at page 47:

    “The word ‘includes’ is oft??? used in interpretation clauses in order to enlarge the meaning of the w???s or phrases occurring in the body of the statute. When it is so us???, these words and phrases must be con strued as comprehending noif on??? such things as they signify according to their nature and import, but ???D those things which the interpretation clause declares that they shall ir???ide.”

    4. The meaning of plant as gi???n in Yarmouth v. France, [1887] 19 QBD 647 (QB), where a horse was hel??? to be a plant because it was used by a wharfinger to carry on his busine???, was accepted as correct. According to that meaning “plant” includes w??? tever apparatus or instruments are used by a businessman in carrying on??? s business “not his stock-in-trade which he buys or makes for sale, bu???ill goods-and chattels, fixed or movable, live or dead, which he keeps for??? rmanent employment in his business”, In Jarrold (Inspector of Taxes) v. ???hn Good & Sons Ltd., [1963] 1 WLR 214, 223 (CA), movable partitions in ??? office accommodation were held to be plant because the nature of the b???iness required the operator of the busi ness to be able, rapidly and chea ??? and without much interruption of busi ness, to alter the sub-divisions the office building. Similarly, in Taj Mahal Hotel, [1971] 82 ITR 44 (SC) ???sanitary fittings in the bath rooms in a hotel were treated as plant.

    5. In CIT v. Elecon Engineering??? o. Ltd., [1974] 96 ITR 672, where the question before the Gujarat High???urt was whether drawings and patterns received by an assessee from a???reign company under a collaboration agreement can be said to be plant on which depreciation is allowable under s. 32 of the Act, a large number of English and Indian cases were considered and it was ultimately held (p. 710):

    “It appears to us, therefore, that it would not be correct to limit the meaning of the word ‘plant’ in section 32 to only such articles as are capable of diminution in value year after year by reason of wear and tear in the course of their application for the purposes of the assessee's business or profession. It would also take in other articles which diminish in value on account of other known factors such as obsolescence.”

    6. On this view of the matter “know-how” was held to be a peculiar kind of asset and an accumulated fund of knowledge acquired by years of observation, research, experiment and experience. It was observed that when books which one consults to inform one's mind and thereby uses them in the course of one's business or profession are expressly included within the meaning of the word “plant”, there is no reason to exclude from the wide meaning of the term objects of similar nature such as drawings, patterns, designs, etc., which, like books, are the embodiments of know-how and serve the purpose of teaching in the long range. Again, in CIT v. S.L.M Maneklal Industries Ltd., [1977] 107 ITR 133 (Guj), the same, court treated the workshop drawings as coming within the definition of “plant”.

    7. Fencing constructed around the processing unit under the Petroleum Rules, 1937, was held to be a plant by the Bombay High Court in CIT v. Caltex Oil Refining (India) Ltd., [1979] 116 ITR 404. The Andhra Pradesh High Court in CIT v. Warner Hindustan Ltd., [1979] 117 ITR 15 has treated a well dug for the purposes of carrying on the business of manufacturing pharmaceutical as a plant within the definition of this expression as given in s. 43(3).

    8. Learned counsel for the revenue contended that plant does not include the place in which business is carried on and thus even if it be accepted that these warehouses are used by the assessee as a place for carrying on its business, they cannot be treated as a plant. According to the counsel, s. 32 of the Act, which provides for depriciation, makes mention of building along with machinery, plant or furniture in sub-s. (1) thereof while s. 33, which makes provision for development rebate, does not mention building, but provides only for a new establishment or a machinery or plant in sub-s. (1)(a). It was submitted that this omission was indicative of the fact that a building cannot qualify for development rebate unless it is treated as “plant” and that can only be when without such building it is not possible for a taxpayer to carry on his business.

    9. On the other hand, according to counsel for the assessee, the expression “plant” should be given a wide connotation and such was the intention of the legislature when it m???e provision in the definition of “plant” that even books would be treatec???is plant. It was also emphasised that the use to which these warehouse???were admittedly put by the assessee would bring them within the d???tiition of “plant”. Our attention was invited to Commissioner Of Income-Tax, Lucknow v. Kanodia Cold Storage.???orage, [1975] 100 ITR 155 (All). In that case the view expressed was that???n common parlance the word “plant” includes within its ambit buildin???and equipment used for manufacturing purposes and the definition of p???at in s. 43(3) is inclusive and does not exclude things normally included??? it. A building with insulated walls used as a freezing chamber, thou;???not machinery or a part thereof, was treated as part of the air-cond ???oning plant of the cold storage of the assessee.

    10. In our opinion in a case wh??? the subject-matter is the building or some other kind of structure a di???nction is to be made with a view to find out whether the building or the s???ticture is something by means of which the business activities are carriec???n or the building or structure is such that it does not play any part in???le carrying on of those activities, but is merely a place within which they???re carried on. In order to decide this question, what is said to be the fi???;tional test, is to be applied. If on the application of this test it is found???iat the subject-matter, a building or apparatus or a part thereof, is er???loyed in carrying on the activity of the business, then it shall be treated???a plant, no matter that it consisted of some structure or building whicl??? attached to the soil. If on the other hand it is found that the structui???or a building or a part thereof does not constitute a part of the apparatus???mployed in carrying on the activities of the business, then it cannot be re???ded as a plant. In the case of Kanodia Cold Storage, [1975] 100 ITR 15???(All) itself it would be seen that the subject-matter of the case, that???the building, had insulated walls and was being used as a freezing chan???r and hence it was treated as a part of the air-conditioning plant. It ot???r words, that building played an active role in the business of the as;???see and was not merely a passive spectator.

    11. It would be useful to refer tc???recent decision of the Court of Appeal rendered in Benson v. Yard Arm-Cl??? Ltd., [1979] 1 WLR 347, where the question involved was whether the ta???ayer company was entitled to capital allowances in respect of certain ???pital expenditure incurred in acquiring a vessel and the cost of its convi???ion into floating restaurant, together with a barge which provided ser???es to it. The facts of that case were that in 1962, the taxpayer comp;??? purchased and converted a vessel which was moored at a permane???site on the Thames where, together with a barge, she was used as a???ating restaurant. Between 1962 and 1973 expenditure of £75,862 was???curred by the taxpayer company in respect of the cost of the vessel, hull alterations, equipment and fixtures. The taxpayer company appealed against assessments to Sch. D income-tax for the years from 1963 to 1966 and corporation tax for the years from 1966 to 1973 claiming capital allowances in respect of the capital expenditure. The General Commissioners held that the vessel was plant used in the taxpayer company's trade and the cost of conversion was capital expenditure that qualified for the allowance. On appeal, it was held that as the shop was the place where the taxpayer company carried on its business it did not fall within the definition of plant. On appeal by the taxpayer company before the Court of Appeal the view taken by Buckley L.J, with which the other two judges constituting the Bench concurred, was that the vessel and the barge “although chattels and although used in connection with the business of the taxpayer company as restaurateurs, were not part of the apparatus employed in the commercial activities of those businesses, but were the structure within which the business was carried on.” (p. 357) It would be seen that the test is whether the subject-matter involved, that is, a building or a structure or a part thereof, constitutes an apparatus or a tool of the trade of the taxpayer or it is merely a space where the taxpayer carries on his business. For this purpose the use which is made of the subject-matter under consideration is to be kept in view. If, as noted above, the building, structure or a part thereof is something by means of which the business activities are carried on, it would amount to a plant but where the structure plays no part in the carrying on of those activities but merely constitutes a place within which they are carried on, it cannot be regarded as a plant. If we apply this decision to the facts of the instant case, the only inference at which we can arrive is that the warehouses cannot be treated as a structure by means of which the assessee carries on its business. They only serve as a place within which the business is being carried on. We have already stated above the nature of the assessee's business. It books space in the cold storage on behalf of its customers and when the customers bring their - potatoes for keeping in the cold storage for a short while, that potatoes are kept in the assessee's warehouses where it is sorted and graded and then it is loaded in the cold storage. This being the business activity of the assessee it cannot be said that the warehouses are something by means of which this business activity is being carried on. They do not play any part whatsoever in the carrying on of its business activity, but merely provide a place within which this business activity is carried on. On this view of the matter we are not prepared to hold that the warehouses of the assessee fall within the definition of “plant” as contained in s. 43(3) of the Act and that being so the assessse wa???aot entitled to any development rebate thereon under s. 33 of the Act.

    12. Our answer to the questio???therefore, is that the Tribunal erred in holding that the warehouses co???tructed by the assessee can be treated as “plant” entitled to any dev???opment rebate under s. 33 of the Act. The question is answered in t???; negative, in favour of the department and against the assessee. The??? epartment is entitled to its costs which we assess at Rs. 200 and counsi???s fee in like amount.

    Use AI to get other relevant cases.

    Comments

    Commissioner Of Income-Tax, Lucknow-Ii v. Kanodia Warehousing Corporation.
    (Nov 15, 1979)