Jagannadha Rao, J.:— This is a reference at the instance of the Commissioner of Income-tax and the reference reads as follows:

“Whether, on the facts and in the circumstances of the case, the bottles and shells constitute ‘plant’ and depreciation is admissible thereon under section 32(1)(ii) of the Income-tax Act, 1961, for the assessment year 1976-77?”

2. The assessee is a private limited company manufacturing soft drinks and selling the same at Hyderabad and other places. The first assessment of the company was made for the assessment year 1967-68. From the assessment year 1967-68 up to and inclusive of the assessment year 1975-76, the assessee-company was claiming breakages in bottles in the respective years as a deduction. For the assessment year 1976-77 (year ending June 30, 1975), the assessee-company has claimed deduction under the first proviso to section 32(1)(ii) of the Act in respect of the bottles and shells purchased and put to use during the year. The assessee had claimed that during the relevant year of account, it had purchased bottles to the tune of Rs. 3,25,021 and that the same should be allowed as outright deduction. It had also claimed the deduction of a further sum of Rs. 1,78,166 towards breakages out of the opening stock as on July 1, 1974. The Income-tax Officer rejected this claim for three reasons, viz., (1) Bottles cannot be treated as plant on which depreciation can be claimed; bottle and cool drinks therein put together form stock-in-trade and cannot be separated from the drink for the purpose of sale and that the assessee having manufactured the cool drinks supplied them along with bottles. (2) The assessee had all along been following a particular method of accountancy, viz., to claim the breakages as an expenditure in the year of account and that the same cannot be varied to the detriment of the Revenue. (3) The breakages that occurred on account of the assessee's own mistake only led to loss and the liability in the hands of the assessee for breakages was only contingent. On appeal, the Commissioner of Income-tax following an order passed by the Income-tax Appellate Tribunal, Jaipur Bench, in the case of Jai Drinks (P.) Ltd. (ITA No. 239 and 526 (JP) 1974-75) and referring to certain other rulings of the Supreme Court, etc., accepted the assessee's claim that the bottles constitute “plant”. He, therefore, held that the entire cost of purchase of glass bottles should be allowed as deduction under the proviso to section 32(1)(ii). He also held that the same would be the position in respect of the shells which were simple wooden equipment for carrying the bottles. He held that the cost of purchase of bottles and shells of Rs. 3,25,021 would be allowed as a deduction under the first proviso to section 32(1)(ii) but that, in view of such a deduction, no breakages could be allowed in respect of the purchases made in that year. He determined such breakages at Rs. 10,226 (Rs. 1,88,392 allowed by the Income-tax Officer— Rs. 1,78,166 being the breakages out of the opening stock as on July 1, 1974) and held that allowance for the above sum of Rs. 10,226 should be withdrawn. The Commissioner also held that the assessee could not get the deduction for container allowance and that the sum of Rs. 32,510 allowed in the assessment could also be withdrawn. On appeal to the Tribunal by the Department, the Tribunal held, after referring to the order of the Jaipur Bench above referred to and other cases, that the bottles in the case constituted “plant”. The Tribunal also held that the assessee was also entitled to claim allowance under section 32(1)(ii) in respect of the bottles purchased during the year, rejecting the arguments of the Revenue that the assessee would not be entitled to the relief as per section 32(1)(ii), proviso, read with section 34(2)(ii). Subsequent thereto, the Tribunal referred the above question to this court on reference.

3. Learned counsel for the Department, Sri M. Suryanarayana Murthy, submitted that the decision of the Tribunal is not correct and that the bottles and shells cannot be treated as “plant” in view of the principles laid down by the Supreme Court in its recent decision in Scientific Engineering House (Pvt.) Ltd. v. Commissioner Of Income-Tax., [1986] 157 ITR 86 and in its earlier decision in CIT v. Taj Mahal Hotel, [1971] 82 ITR 44. He contended that merely because the bottles and shells were not the subject-matter of sale but were retained by the assessee, the bottles and shells could not be treated as “plant”. The position was no more different from the one where such soft drinks would be sold to customers or retail dealers through plastic or other containers which did not come back to the assessee from the customers or retail dealers. On the other hand, learned counsel for the assessee, Sri M.J Swamy, brought to our notice a direct ruling of the Rajasthan High Court in Commissioner Of Income-Tax v. Jai Drinks (P.) Ltd., [1988] 173 ITR 100. He also referred to the various rulings which were relied upon by the Rajasthan High Court in the abovesaid judgment. In reply, learned counsel for the Department contended that the decision of the Rajasthan High Court is not correct and a reference was made in detail to the decision of the Gujarat High Court in CIT v. Elecon Engineering Co. Ltd., [1974] 96 ITR 672, which has since been affirmed by the Supreme Court in CIT v. Elecon Engineering Co. Ltd., [1987] 166 ITR 66, following the earlier decision of the Supreme Court in Scientific Engineering House (Pvt.) Ltd. v. Commissioner Of Income-Tax., [1986] 157 ITR 86. The meaning of the word “plant” in the context of section 32(1)(ii) of the Income-tax Act, 1961, has come up for consideration in the courts over a long period of years. The provision of section 43(3) defines “plant” as including ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession. In CIT v. Taj Mahal Hotel, [1971] 82 ITR 44, the Supreme Court stated that (at p. 47): “where the definition of a word has not been given, it must be construed in its popular sense if it is a word of every day use. Popular sense means ‘that sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it’.” Their Lordships pointed out that the very fact that even books had been included in the definition of “plant” showed that the said word should be given a “wide” meaning. But as pointed out recently by Lord Wilberforce in IRC v. Scottish and Newcastle Breweries Ltd., [1982] 2 All ER 230, 232:

“It naturally happens that as case follows case, and one extension leads to another, the meaning of the word gradually diverges from its natural and dictionary meaning. This is certainly true of ‘plant’. No ordinary man, literate or semi-literate, would think that a horse, a swimming pool, movable partitions or even a dry dock was plant, yet each of these has been held to be so; so why not such equally improbable items as murals or tapestries or chandeliers?”

4. No decision of court is complete without a reference to the classic statement of Lindley L.J in Yarmouth v. France, [1887] 19 QBD 647, 658, that:

“‘Plant’ in its ordinary sense, includes whatever apparatus is used by a businessman for carrying on his business—not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business,”

5. Though that was a case decided under the Employers' Liability Act, 1880, the meaning of “plant” given by Lindley L.J has been accepted as being applicable for the purpose of the statutes of income-tax, both in England and in India. There, the plaintiff was in the employment of the defendant, a wharfinger who, for purposes of his business, owned carts and horses and the plaintiff, while driving the cart, was injured when one of the horses, known to be a vicious one, kicked him and his leg was broken. It was held that injury to the plaintiff could be treated as having occurred due to a “defect” in the plant,—namely, the “vice” in the horse. Lindley L.J and Esher M.R considered “horse” as “plant”, which was being used in the business of the defendant, and that the vice in the horse was a “defect” in the condition of the plant. This case is now treated as the basis for applying the “functional” test.

6. Over the years, courts have developed the above principle in several respects and improved upon the same. In 1944, in J. Lyons and Co. Ltd. v. Attorney-General, [1944] 1 Ch 281, a question arose under the War Damage Act, 1943, as to whether “electric lamps and fittings” in a restaurant were “plant”. It was held that they were not. Uthwatt J. held that electric lamps and fittings were not part of the “apparatus” used for carrying on the business but were part of the “setting” in which the business was carried on, and, therefore, were not “plant”, the subject of compensation within the Act. Uthwatt J. observed (at p. 287):

“… but the presence of lamps in this building is not dictated by the nature of the particular trade there carried on or by the fact that it is for trade purposes that the building is used. Lamps are required to enable the building to be used where natural light is insufficient. The actual lamps themselves, so far as the evidence goes, present no special feature either in construction, purpose or position, and, being supplied with electricity from public suppliers, they form no part of an electric lighting plant in or on the hereditament.”

and concluded (at p. 287):

“In my opinion, these lamps are not, in these circumstances, properly described as ‘plant’ but are part of the general setting in which the business is carried on. They would not, I think, in any catalogue of this trader's assets, fall under the heading ‘machinery and plant’…”

7. This case brought in the second principle of “setting in which business is carried on” as against the principle of “apparatus with which business is carried on”, the former denying the status of “plant” and the latter affording such a status to the particular subject-matter.

8. A third principle was sought to be brought in by the decision in Hinton v. Maden and Ireland Ltd., [1960] 39 ITR 357 (HL), as a corrollary to the first one in Yarmouth v. France, [1887] 19 QBD 647, namely, the principle that the thing need not be part of the machine used but could be merely an apparatus used in carrying on the business but having a “degree of durability”. That case, in our view, is, in fact, nearer to the facts of the present case before us in certain respects. There, the taxpayers were shoe manufacturers who, in the course of making shoes, used a large number of knives and lasts. The knives did not form part of the machine (a press) with which they were used and the average life of a sole knife was three years, and of an upper knife, one year. The lasts similarly were not part of, the machine but were required for making the shoes. Each last would have a life of about three years or sometimes four or five years. The majority of the House of Lords held that the “knives and lasts” were plant for they had acquired a degree of durability to be regarded as appliances kept for permanent use in carrying on the business and were not stock-in-trade “made for sale”. Like Yarmouth v. France, [1887] 19 QBD 647, this decision too emphasises the “functional” test. Lord Reid referred to the dictum of Lord Lindley in Yarmouth v. France, [1887] 19 QBD 647, and also to that of Uthwatt J. in J. Lyons and Co. Ltd. v. Attorney-General, [1944] 1 Ch 281, and stressed on the “durability” of these knives and lasts in the context of the words “permanent employment in his business” used by Lindley L.J, and went on to say that these knives and lasts were not “stock-in-trade which comes and goes” (i.e, which is sold to the customer) but they were “durable” though not “permanently used”. He hastened to add that, no doubt, it may be difficult to treat as plant articles which were quickly “consumed or worn out” in the course of a few operations.

9. In the year 1962, a fourth principle based on whether the asset had a “passive” or “active” role in the business was considered in Jarrold v. John Good and Sons Ltd., [1962] 40 TC 681, by the Court of Appeal. In that case, the respondents were carrying on business as shipping agents and to satisfy its fluctuating accommodation requirements, the company made use of special “partitions” to sub-divide the floor space available, in any way it chose. The partitions were secured by screws to the structure of the building only at the floor and ceiling and it was a relatively simple operation to move them from one position to another. It was common ground that the partitioning did not form part of the structure of the building. Initially, Pennycuick J. upheld the Commissioner's decision that these “partitions” were “plant”. On further appeal, Ormerod, Donovan and Pearson L.J.J confirmed the judgment. Ormerod L.J agreed with Pennycuick J. that the conceptions of “setting” and “plant” were not mutually exclusive and observed (p. 693) that it could not be said that the equipment had merely a passive role. Donovan L.J agreed with these views and further clarified (p. 694):

“I do not understand this division of assets into passive and active, vis a vis the accomplishment of the trading purpose, followed by the argument that there can be no ‘plant’ among the passive assets.”

and gave examples of heating installations of a building which, though having a passive role—in the sense that it involves no moving machinery— would still come under the head of “Plant”. The same, he observed, could as well be said of many air-conditioning and water-softening installations. All that the Income-tax Act required in this context was that the plant should have been provided “for the purpose of the trade”—an expression wide enough to cover assets which played a passive as well as an active role in the accomplishment of that purpose. The fourth principle which thus emerged in 1962 was that the fact that the asset had a “passive” role was not an important circumstance.

10. A fifth principle was engrafted in Rose and Co. (Wallpaper and Paints) Ltd. v. Campbell, [1968] 1 All ER 405 (Ch D), which was, no doubt, decided by applying the functional test. In that case, it was claimed by a paint and wallpaper retailer, that pattern books of paint and wallpaper, whose life was two years, were “plant”. Pennycuick J. rejected the contention as follows (at p. 408):

“The books have, from the very start, no value at all as a separate asset. At the end of each period, the function of the books is spent. Then the books are scrapped and a new cycle begins… It is comparable to expenditure on sale catalogues or indeed any other advertising material.”

and concluded (at p. 409):

“One must, I think, for this purpose take into account all the circumstances including the character and the function of the chattel.”

11. The “functional test” was prominently restated by the House of Lords in 1969 in IRC v. Barclay, Curie and Co. Ltd., [1970] 76 ITR 62. That was the famous case of the “dry dock” which was claimed to be “plant” by the respondent company which carried on the trade of ship-builders repairers and engineers. The dry dock acted like a hydraulic chamber in which a volume of water (variable at will) could be used to lower a ship, so that the ship could be exposed for inspection and repair, and to raise it again to high tide level, so that it could sail away. The “dry dock” was held to be “plant”. Lord Reid observed (at p. 67):

“undoubtedly, this concrete dry dock is a structure, but is it also plant? The only reason why a structure should also be plant which has been suggested or which has occurred to me is that it fulfils the function of plant in the trader's operations. And if that is so, no test has been suggested to distinguish one structure which fulfils such a function from another. I do not say that every structure which fulfils the function of plant must be regarded as plant, but I think that one would have to find some good reason for excluding such a structure. And I do not think that mere size is sufficient.”

12. In the same case, Lord Guest referred to the words of Lindley L.J in Yarmouth v. France, [1887] 19 QBD 647, namely “apparatus used by a businessman for carrying on business” and explained (at p. 75 of 76 ITR and p. 244 of 45 TC):

“In order to decide whether a particular subject is an ‘apparatus’, it seems obvious that an inquiry has to be made as to what operation it performs. The functional test is therefore essential, at any rate as a preliminary,”

13. Lord Donovan directly posed the question (at p. 82): “What, however, are the tests which enable one to recognise any such case?” and concluded (at p. 82):

“At the end of the day, I find the functional test propounded by Lindley L.J and by Lord Pearson L.J to be as good as any, though, as was said in Jarrold v. John Good and Sons Ltd., [1962] 40 TC 681 (CA), some plant may perform its function passively and not actively… Thus the dry dock is, despite its size, in the nature of a tool of the Respondent's trade and, therefore, in my view, ‘plant’.”

14. The other two law Lords in the minority, however, held that the “functional test” was not decisive.

15. Therefore, Barclay, Curie's case, [1970] 76 ITR 62 (HL), decided a fifth principle that the functional test was prima facie “decisive” and that if a structure was fulfilling a function in the trader's operation or was a tool in his trade, it should be normally treated as “plant” unless there were other good reasons for excluding such a structure and the mere size of the structure was not a sufficient reason for excluding it from the category of “plant”.

16. A sixth principle was raised in McVeigh v. Arthur Sanderson and Sons Ltd., [1970] 77 ITR 557 (Ch D), for the Revenue before Cross J. regarding designs for wallpaper and furnishing fabrics. It was whether “gross materiality” was necessary to qualify the “designs” as “plant”, the trade being one of manufacture of printer patterns on wallpaper and furnishing fabrics. The “designs” were kept in the company's library and the concept behind the designs could be conveyed only to the eye and the concept itself was not tangible. Fortunately, it was conceded for the Revenue that it was “plant” and in fact, Cross J. was clear that “gross-materiality” was not necessary though he felt bound by an old decision of Rowlatt J. in Daphne v. Shaw, [1926] 11 TC 256 (KB), to the contrary which held solicitor's books was not “plant”. As we shall presently show, Daphne v. Shaw, [1926] 11 TC 256 (KB), which stood as law for over 50 years was overruled in 1976 by Lord Denning and others. Taking the principle in McVeigh's case, [1970] 77 ITR 557 (Ch D), (apart from Daphne's), it is clear that “gross materiality” is not a sine qua non for an idea incorporated in a design or a book to be “plant”.

17. The Indian scene, at the level of the Supreme Court, virtually opened in 1971 at a stage when at least six broad principles had crystallised in the corresponding field in England and this was when the case, CIT v. Taj Mahal Hotel, [1971] 82 ITR 44 (SC), was decided. That case related to sanitary fittings and pipelines in a hotel. Their Lordships referred to Yarmouth v. France, [1887] 19 QBD 647 (case of horse), J. Lyons and Co. Ltd. v. Attorney-General, [1944] 1 Ch 281 (case of electric lamps and fittings) and Jarrold v. John Good and Sons Ltd., [1962] 40 TC 681, (case of partitions), wherein the first, second and fourth principles referred to above were laid down. After stating that the Act contained only an inclusive definition as to what was “plant” and that it must be construed in the popular sense and in a “wide” manner, Grover J. observed that sanitary fittings, etc., in a bathroom were the essential amenities or conveniences which any good hotel was expected to provide and that these sanitary fittings could not, by any stretch of imagination, be said to have no connection with the business of a hotelier. He could reasonably expect to get more customers and earn larger profit by charging higher rates for the use of rooms if the bathrooms had sanitary fittings and similar amenities. The assets in question were “required by the nature of the hotel business which the assessee was carrying on. They were not merely a part of the setting in which hotel business was being carried on”. Inasmuch as the Supreme Court referred to Yarmouth v. France, [1887] 19 QBD 647, with approval along with the two other cases, it is clear that their Lordship's conclusions are more or less based on the “functional” principle, a principle which they referred to more expressly in the recent case in 1986 in Scientific Engineering House (Pvt.) Ltd. v. Commissioner Of Income-Tax., [1986] 157 ITR 86, which was decided 15 years after the above decision in Taj Mahal Hotel's case, [1971] 82 ITR 44 (SC).

18. We shall go back to the development of the law in England between 1971 and 1986. In the year 1974, three cases were decided (i) the first one is the one in Cooke v. Beach Station Caravans Ltd., [1974] 49 TC 514 (Ch D). That was a case of a swimming pool equipped with filtration, etc., owned by the respondent therein which was the operator of a caravan park at the seaside report of Felixstowe. Megarry J. agreed that the “swimming pools” were plant. He said that, firstly, the two pools should be treated as one unit, with all the attendant apparatus and, secondly, they should be considered not in isolation but in relation to the business carried on by the company, namely, the running of its caravan park. The pools were provided to attract customers and they were not intended merely for a “passive” role (even if that be relevant), it was not an ornamental pool nor was it mere stored-water intended to be drawn off. It was intended to provide a pleasurable swim with safe buoyancy. The water was not as passive as the four walls of a room but was, in any event, more passive than the moveable partitions in Jarrold's case, [1962] 40 TC 681. The pools were the apparatus which were used by the company for carrying on its business as caravan park operators and were not merely the place at which it was carried on. They were, therefore, plant. No new principle was laid herein. (ii) The second case is the one in St. John's School v. Ward, [1974] 49 TC 524 (CA), relating to a “gymnasium and laboratory” constructed on prefabricated moveable panels. Each of the items, the gymnasium and the laboratory were considered to be not “plants” for the purpose of the school. Templeman J. observed (at p. 531):

“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 a building, holds plant in position does not, by some magic wand, convert the building itself into plant.”

19. It was necessary to find whether the business is carried on within the building or whether it was an apparatus used by the businessman for carrying on the business. Here, the subject-matter of inquiry were structures which always remained a building. In this school, Templeman J. pointed out (p. 533):

“Education is not carried out with these particular buildings but in these particular buildings;”

a point which was clear from Pearson L. J's observations in Jarrold's case, [1962] 40 TC 681, where a distinction was made between an asset or structure in which the business is carried on or one with which the business is carried on, the former excluding it from the category of plant and the latter, making it a plant. The case is stated to have been affirmed by the Court of Appeal (see next case). (iii) The third case decided in 1974 is the one in Schofield v. R. and H. Hall Ltd., [1974] 49 TC 538 (CA) and is also nearer to the case before us. The case related to “grain silos” built at the dockside and were transit-silos built with concrete structure in which grain was stored before delivery into vehicles of customers. The business of the company was one of import of grain for sale to millers as well as to manufacturers of animal feed-stuffs. The Court of Appeal of Northern Ireland held, that the silos were “plant”. The court referred to Barclay, Curie's case, [1969] 45 TC 221 and pointed out that the majority stated that the “functional test” was decisive while the minority stated that the test was relevant but not decisive. It was held (p. 553) that the “silos” were “in the nature of a tool in the trade”, and “much more than a convenient setting for the company's operations”. Each of the silos should be regarded as a single unit of plant and not merely a collection of bricks, mortar, paint, timber, etc., and that (p. 554), the plant did not require to be mechanically active in operation, and should be viewed in the context of the trading activities as a whole. The silos were “an essential part” of the traders' overall trade activity. “It was the harnessing of the natural element of gravity… to perform a trade function” (p. 557).

20. The second and third of these three cases of 1974 thus laid down that the structure concerned must be taken as a single unit and cannot be split up into its components. It is the function of the structure as a single unit in the context of the trading activity of the tradesman that has to be considered. That brings about the seventh important principle.

21. A decision of considerable importance to barristers was decided in 1977 in Munby v. Furlong, [1977] 50 TC 491, by the Court of Appeal. It was there held that barrister's books were plant. In his characteristic style, Lord Denning M.R opined in the case as follows (at p. 501):

“This case concerns a lawyer's library. It can be divided into three parts. First, when a young man starts at the Bar, he may, if he has enough money, buy a set of law reports. That is capital expenditure. Second, he may buy text books. They have a life of four to nine years. That too is capital expenditure. Third, he may take in the periodicals, such as Weekly. Law Reports and the All England Law Reports. They come out every week or month. He pays for them an annual subscription. That is not capital expenditure. It is revenue expenditure. He can deduct the whole of these annual subscriptions from his income for tax purposes. He can also deduct the cost of binding these weeklies at the end of each year and also the cost of repairing his sets of law reports. That third part is all revenue expenditure. We are not concerned with it today. We are only concerned with the first two parts which I have described as capital expenditure.”

and held that these two categories are “plant” and overruled Daphne v. Shaw, [1926] 11 TC 256 (KB). He pointed out (p. 503) that the word “plant” was not to be understood as an ordinary Englishman understands it but that it had acquired a special meaning in tax cases. Lord Denning M.R observed (p. 503):

“I do not think ‘plant’ should be confined to things which are used physically. It seems to me that on principle, it extends to the intellectual storehouse which a barrister or a solicitor or any other professional man has, in the course of carrying on his profession.”.

22. The above principle of “intellectual storehouse” being plant; laid down by Lord Denning M.R in 1977 has recently been accepted by our Supreme Court in 1986 in Scientific Engineering House (Pvt.) Ltd. v. Commissioner Of Income-Tax., [1986] 157 ITR 86, a principle which was originally laid down earlier in 1969 by Cross J. in McVeigh v. Arthur Sanderson and Sons Ltd., [1970] 77 ITR 557, when he said “gross materiality” was not a necessary condition for a thing to be plant. That was the case of technical ideas enshrined in designs. In other words, the barrister's books case, reiterates the sixth principle already referred to.

23. In the same year 1977 was decided Dixon v. Fitch's Garage Ltd., [1975] 50 TC 509 (Ch D), where a canopy over a petrol filling station was held to be not “plant” but merely a “setting”. Brightman J. held that the canopy did not have a “functional” purpose to enable the company to perform the activity of supplying petrol to motor vehicles. It was merely a part of the “setting” where petrol was supplied. It merely provided shelter and did not play any part in the “commercial process” of supply of petrol. It was said (at p. 515):

“The petrol pumps would deliver petrol to vehicles whether or not there was a canopy overhead… It does not help to deliver petrol. It is not part of the means by which it is supplied… This is not like… silo case, where the silo and its contents were totally interdependent.”

and concluded (at p. 515):

“That conclusion is, I think, an inevitable result of the application of the functional test.”

24. The observations, italicised above are very appropriate to the case before us. This case, however, merely applied the first principle of the “functional” test laid down by Lord Lindley in Yarmouth's case, [1887] 19 QBD 647 (QB), and which, the majority in Barclay, Curie's case, [1970] 76 ITR 62 (HL), said was “decisive”, (the fifth principle referred to above) unless special reasons existed to take it out of the category.

25. The case of a ship acquired for conversion as a floating restaurant was considered in Benson v. Yard Arm Club Ltd., [1979] 53 TC 67 in 1979 by the Court of Appeal. It was held to be not plant, but merely the premises where the business was carried on and not the apparatus employed in the company's “commercial activities”. Buckley L.J (with whom Shaw and Templeman L. JJ. agreed) pointed out that the distinction was whether the floating restaurant was one in which the business was carried on or one which plays any part “in the carrying on of those activities”. Applying the “functional test” (p. 85), he held that the floating restaurant was not “plant”. The case again turns upon the functional test laid down in Yarmouth v. France, [1887] 19 QBD 647, i.e, the first principle, read with Barclay, Curie, [1970] 76 ITR 62 (the fifth principle). Likewise, in Brown v. Burnley Football and Athletic Co. Ltd., [1980] 3 All ER 244, a stand for spectators in a football stadium was held to be not “plant” by Vinelott J. The “functional test” in Barclay Curie, [1970] 76 ITR 62 was applied. Thus, Benson v. Yard Arm Club Ltd., [1979] 53 TC 67 (CA) and Brown v. Burnley Football and Athletic Co. Ltd., [1980] 3 All ER 244, are also based on the “functional test” referred to in the first and fifth principles referred to above.

26. In 1980, two cases of considerable importance were decided by the House of Lords. The first is in IRC v. Scottish and Newcastle Breweries Ltd., [1982] 2 All ER 230 (HL). That was a case of electric light fittings, decor and murals in a hotel. They were held to be “plant”. Lord Wilber-force observed (at p. 233):

“Another much used test word is ‘functional’. This is useful as expanding the notion of ‘apparatus’; it was used by Lord Reid in Barclay Curie and Co. Ltd., [1970] 76 ITR 62 (HL). But this, too, must be considered, in itself, as inconclusive. Functional for what? Does the item serve a functional purpose in providing a setting? Or one for use in the trade?…

In the end each case must be resolved, in my opinion, by considering carefully the nature of the particular trade being carried on, and the relation of the expenditure to the promotion of the trade.”

27. A week later, the Lord Chanceller (Lord Hailsham) in Cole Bros. Ltd. v. Phillips, [1982] 2 All ER 247 (HL), while holding that electrical installations consisting of trunking, transformer, switchgear, switchboard and lighting system, were not “plant” observed that now the word “plant” is used “in an artificial and largely judge-made sense”, in the Act. It was Mrs. Piozzi in 1789, who first came across the word “plant” in its present signification when applied to “a large portion of ground in Southwark… destined to the purposes of extensive commerce” and who added “but the appellation of a plant gave me much disturbance from my inability to fathom the meaning of it” (Hester Lynch Piozzi Observations and reflections made in the Course of a Journey through France, Italy and Germany (London, 1789, Vol. 1, pp. 132-133). The word “plant”, said the Lord Chancellor, was not a term of art but was used in a highly analogical and metaphorical sense, borrowed, perhaps, from the world of botany. The word “plant”, he said (at p. 250):

“can mean a vegetable organism deliberately placed in an artificially prepared setting… If ‘plant’ is to be contrasted with the place in which the business is carried on, the line must be drawn somewhere… If the ‘plant’ is to be distinguished from the housing of the plant (‘the place where the business is carried on’ as distinct from the means by which it is carried on) it is necessary… to look at it in order to see what it is and then consider what, in the context of the business actually carried on, is its function… the housing is to be distinguished from the plant which it houses.”

28. Having emphasised the distinction between the house and the plant which it houses, their Lordships then referred to the “single unit” approach advocated by Lord Reid and Lord Donavan in Barclay Curie's case, [1970] 76 ITR 62 (HL), and by Templeman J. in St. John's School's case, [1974] 49 TC 524 (CA), as against the “piecemeal approach”. But, on the special facts relating to these components carrying electricity, they held that it was an exceptional case where the Commissioners were right in taking each component separately as each was serving a “different purpose” and held that each of them was not “plant”.

29. In 1982, in Leeds Permanent Building Society v. Procter, [1982] 56 TC 293 (Ch D), Goulding J. held that advertisement screens placed in windows of branch offices of a society whose business was to supply finance to help people buy their own houses were “plant” and not merely the setting because these screens had a function connected with the business. The learned judge said (p. 308) that the “functional test” led him to that conclusion.

30. It is in 1986 that our Supreme Court decided Scientific Engineering House (Pvt.) Ltd. v. Commissioner Of Income-Tax., [1986] 157 ITR 86. That case related to drawings, designs, plans, processing data, etc., of a company manufacturing scientific instruments and apparatus under an agreement with a Hungarian Company which agreed to supply the “technical know-how” required for manufacture. The assessee paid for these drawings, etc., and claimed depreciation on the ground that the drawings, etc., were plant. After referring to Yarmouth v. France, [1887] 19 QBD 647; Hinton v. Maden and Ireland Ltd., [1960] 39 ITR 357 (HL); Jerrold v. John Good and Sons Ltd., [1962] 40 TC 681 (CA); IRC v. Barclay, Curie and Co. Ltd., [1970] 76 ITR 62 (HL) and CIT v. Taj Mahal Hotel, [1971] 82 ITR 44 (SC). Tulzapurkar J. observed that the definition of “plant” was “very wide” and that plant was not necessarily confined to an apparatus which is used in mechanical operations or processes or in industrial business. The article must have a degree of durability and (at p. 96),

“the test would be. Does the article fulfil the function of a plant in the assessee'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,”

even though the articles had no part in the mechanical operation though, owing to technological advances, they might or would, in course of time, become obsolete, and approved the exhaustive judgment of P.D Desai J. sitting with Diwan C.J in CIT v. Elecon Engineering Co. Ltd., [1974] 96 ITR 672 (Guj), a decision which was also directly affirmed by the Supreme Court in 1987 in CIT v. Elecon Engineering Co., [1987] 166 ITR 66.

31. From the aforesaid rulings, the following principles can be gathered: (1) “Plant” in section 43(3) of the Act is to be construed in the popular sense, namely, in the sense in which people conversant with the subject-matter with which the section is dealing, would attribute to it. The word “plant” is to be given a “very wide” meaning. In its ordinary sense, it includes whatever “apparatus” is used by a businessman for carrying on his business but it does not include his stock-in-trade which he buys or makes for sale. It, however, includes all goods and chattels, fixed or movable, live or dead which the tradesman keeps for permanent employ-. ment in his business. (2) But the building or the “setting” in which the business is carried on cannot be plant. (3) 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”. (4) Merely because the asset has a passive function in the carrying on of the business, it cannot be said that it is not plant. It may have a passive or an active role. (5) 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. (6) 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”. (7) 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 a 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. (8) The functional test is a decisive test.

32. Bearing these principles in mind, we shall approach the facts of the present case. The bottles containing the soft drink cannot be stock-intrade inasmuch as the bottle by itself is not the subject of sale. The customer or the retailer returns back the bottle to the assessee after the soft drink is consumed. Likewise, the shells which are sent to the customer or dealer also come back with the empty bottles and they cannot also be stock-in-trade. What is the function these bottles and shells perform in the assessee's trade? Are they essentially tools in the assessee's business? In our opinion; yes. The bottles are essential tools of the trade for it is through them that the soft drink is passed on from the assessee to the customer. Without these bottles, the soft drink cannot be effectively transported, like the silos in Schofield v. R. and H. Hall Ltd., [1974] 49 TC 538 (CA), which are used to store grain and to empty the same, performing a trade function. As pointed out in Dixon v. Fitch's Garage Ltd., [1975] 50 TC 509 (Ch D), the bottles and the contents are “totally interdependent”. So are the shells. The bottles and shells also satisfy the durability test for it is nobody's case that their life is too transitory or negligible to warrant an inference that they have no function to play in the assessee's trade. They are therefore “plant” for the purposes of the Act.

33. The principle that a “setting” in which the trade is conducted is not attracted to the facts of the case at all. The bottles and shells have nothing to do with the building in which the trade is conducted nor with the “setting” in which it is conducted. Each bottle and each shell is an entity by itself and they cannot be broken down into pieces for considering whether they have any part to play in the business of the assessee. The bottles and shells are gross matter and, in fact, gross materiality is not a requirement at all for a thing to be treated as plant.

34. For the aforesaid reasons, we agree with the decision of the Rajasthan High Court in Commissioner Of Income-Tax v. Jai Drinks (P.) Ltd., [1988] 173 ITR 100. That case also related to bottles and shells, the assessee being a seller of soft drinks. The learned judges, after referring to the two Supreme Court judgments referred to above, also referred to the decision of the Delhi High Court in Commissioner Of Income Tax…Applicant v. M/S. National Air Products Limited…/Assessee, [1980] 126 ITR 196 and of the Calcutta High Court in CIT v. Steel Rolling Mills of Hindusthan (P.) Ltd., [1987] 164 ITR 633, wherein it was held that “gas cylinders” fall within the definition of “plant”. The fact that in the latter two cases, gas could not otherwise be transported especially by cylinders made for that purpose makes no difference. The cylinders are not stock-in-trade and are returned back to the trader as are the bottles and shells in the present case. They too satisfy the “functional” test and answer the definition of “plant”.

35. It may be, as suggested for the Revenue, that, some day, soft drinks might be conveyed by plastic or other material which may also be the subject-matter of sale. In such an event, they may partake of the character of stock-in-trade. But that does not affect the position here because it is nobody's case that the bottles and shells are stock-in-trade.

36. Before parting with the case, we may refer to the observations of Lord Wilberforce in Scottish and Newcastle Breweries' case, [1982] 2 All ER 230 (HL) in 1982 that, “as case follows case”, and one extension leads to another, the meaning of the word “plant” diverges from its natural and dictionary meaning. But as long as we are concerned with its popular meaning in the context in which the word is used in the Act, and as long as we are guided by the principles laid down by our Supreme Court and the other cases referred to above, there should be no difficulty in deciding what are “plant” and what are not “plant”,. From the doubts raised by Mrs. Piozzi in 1789 over two hundred years ago, we have come a long way in understanding what is “plant”. It may indeed be of interest to lawyers to note the following from [1977] British Tax Review (P. 200):

“Once upon a time, there was a newly called barrister who bought a wig and gown in case anyone should think of briefing him to appear in the High Court. Having incurred this expenditure, he claimed a first year allowance on the ground that it was capital expenditure on the provision of machinery or plant for the purposes of his profession. The Inland Revenue, regarding a wig and gown as a kind of law-book, disallowed the claim but on appeal last autumn, the Special Commissioners distinguished Daphne v. Shaw (which had not then been overruled by the Court of Appeal) and decided that the wig and gown were at least plant and therefore the barrister was entitled to 100 per cent. first year allowance.

The Inland Revenue have decided to acquiesce in the decision.”

37. In the result, we answer the reference in the affirmative and in favour of the assessee and against the Department.