Commissioner Of Income-Tax v. Mazagaon Dock Ltd.

T.D Sugla, J.:— In this departmental reference relating to the asses-see's assessment for the assessment years 1968-69 to 1970-71, the Tribunal has referred to this court the following questions of law under section 256(1) of the Income-tax Act, 1961, for opinion:

Question in respect of all the three assessment years:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to deduction under section 80J of the Income-tax Act, 1961, in respect of the Frigate Project for the three years?”

2. Question relating to assessment year 1970-71 only:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the concrete walls on three sides built after necessary excavation also constitute part of the plant in Kasara Basin Wet Dock and the assessee is entitled to depreciation and development rebate on the expenditure incurred on excavation of Rs. 77,80,000 and masonry including R.C.C work, etc., of Rs. 81,33,000 in respect of the said walls of the dock?”

3. For the sake of convenience, we propose to deal with the second question first. The assessee incurred expenditure of Rs. 1,76,35,639 in all on the Kasara Basin Wet Dock. It claimed that the entire expenditure represented the cost of plant and machinery and that it was entitled to depreciation and development rebate on that basis. The Income-tax Officer held that the assessee was entitled to development rebate on the expenditure amounting to Rs. 17,22,639 only as that amount alone represented the cost of plant and machinery. According to him, the remaining amount represented the cost of excavation and masonry including R.C.C work, etc. For this purpose, he derived support from our court's decision in the case of Jayasing-rao Piraji Rao Ghatge v. CIT, [1962] 46 ITR 1160; the decision in the case of Dumbarton Harbour Board v. Cox, [1918] 7 TC 147 (C. Sess) and the House of Lords decision in the case of Barclay, Curie and Co. Ltd., [1970] 76 ITR 62.

4. The Appellate Assistant Commissioner found that an impounded wet dock is used in the fitting out work on ships. It is essentially an enclosure which impounds sea water and consists of walls on three sides and a flap gate at the entrance. The walls are reinforced concrete walls of cellular construction. The flap gate is operated by a powerful winch for docking and undocking of ships in the basin. The dock is equipped with all equipment necessary for the supply of compressed air, salt water, etc. A pump-house with powerful pumps is also provided so as to maintain the water level in the basin. Cranes are also positioned on either side of the basin for easy fitting out work. The new ships under construction are berthed alongside the quarry walls of the basin for the fitting out work. He concluded that an impounded wet dock was, as a whole, a plant by itself used in the construction of new ships. The Appellate Assistant Commissioner, accordingly, held that the assessee was entitled to depreciation as well as development rebate on the entire cost of the Kasara Basin Wet Dock amounting to Rs. 1,76,35,639. The Department filed an appeal against the order of the Appellate Assistant Commissioner. The Tribunal discussed this issue in paragraph 12 of its judgment. It has, for more or less same reasons, concluded that the masonry including excavation formed an integral unit of the plant. Without anyone of them, the plant could not work. The concrete walls on the sides for which the excavation and the masonry work were necessary were as much parts of the plant as were the other parts like cranes, winches and other machinery. In taking this view, the Tribunal derived support from the Gujarat High Court decision in CIT v. Elecon Engineering Co. Ltd., [1974] 96 ITR 672.

5. It is submitted before us by Shri Jetley, learned counsel for the Revenue, that the Tribunal wrongly followed the Gujarat High Court decision in CIT v. Elecon Engineering Co. Ltd., [1974] 96 ITR 672. The House of Lords decision in IRC v. Barclay, Curie and Co. Ltd., [1970] 76 ITR 62, he pointed out, was based on the fact that there was no definition of the word “plant” in the British Act and, in any event, the dry dock under consideration of the House of Lords is materially different from the wet dock involved in the present case. He then referred to the inclusive definition of the word “plant” in section 43(3) to show that the word “plant”, though not defined as such, has to take colour from the subsequent items included in its definition. This is what is required to be done in view of the principle of interpretation ejusdem generis. In particular, he pointed out that all items included in the definition are movable items. That would indicate that only movable items are to be included in the expression “plant”. Lastly, he pointed out that the House of Lords decision was rendered on the basis of certain facts found by the Commissioners in the light of evidence led before the Commissioners. Similar facts have not been found by the Tribunal in the present case and, therefore, even if it is assumed that the principle laid down by the House of Lords in that case is applicable, it cannot be applied to this case. In this context, Shri Jetley submitted that the place where a plant is located can never be a part of the plant because it is only a location where it is housed. In this regard, he placed strong reliance on our court's judgment in Jayasingrao Piraji Rao Ghatge v. CIT, [1962] 46 ITR 1160. He also relied on our court's decision in the case of CIT v. Sandvik Asia Ltd., [1983] 144 ITR 585 where our court held that roads within the factory premises were not plant.

6. Shri Dastur, learned counsel for the assessee on the other hand, stated that the House of Lords decision is squarely applicable to the facts of the case before us. He invited our attention to the assessment order in which the Income-tax Officer himself had stated that the case in IRC v. Barclay, Curie and Co. Ltd., [1970] 76 ITR 62 (HL) was similar to the assessee's case. Shri Dastur then pointed out that the House of Lords decision has been quoted with approval both by the Supreme Court and by our court. The Supreme Court has, in the case of Scientific Engineering House P. Ltd. v. CIT, [1986] 157 ITR 86, it was pointed out, after referring to a number of decisions including the aforesaid House of Lords decision, observed at page 96:

“In other words, 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.”

7. Our court, in CIT v. Sandvik Asia Ltd., [1983] 144 ITR 585, after referring to the House of Lords decision in IRC v. Barclay, Curie and Co. Ltd., [1970] 76 ITR 62, at page 596 and at page 598, stated that the judgment in that case clearly indicated that a dry dock was treated as a tool of the trade with which the business was carried on and since the excavation and concrete work were absolutely necessary for the construction of the dry dock, the expenditure incurred on excavation and concrete work was held to have attracted the initial allowance under section 279(1) of the Income-tax Act, 1952 (U.K).

8. Shri Dastur then pointed out that it is not as if the Supreme Court in Scientific Engineering House P. Ltd. v. CIT, [1986] 157 ITR 86 or our court in CIT v. Sandvik Asia Ltd., [1983] 144 ITR 585, was not aware of the fact that the word “plant” has been defined in section 43(3). He pointed out that the definition was only an inclusive definition and the items included were such as books, etc., and yet the word “plant” was held to have a wider meaning rather than a restricted one. It was also pointed out that the House of Lords decision was a majority decision. In the minority decision, reliance was placed on the judgment of Lord Hodson who preferred to rely on the case of Margrett v. Lowestoft Water and Gas Co., [1935] 19 TC 481. The majority decision, it was further pointed out, has placed reliance on the decision in Jarrold v. John Good and Sons Ltd., [1963] I WLR 214, 225 (CA). The majority observed that, in view of the decision in Jarrold v. John Good and Sons Ltd., [1963] 1 WLR 214, the case of Margrett v. Lowestoft Water and Gas Co., [1935] 19 TC 481, though not specifically overruled, was no longer to be considered an authority to look at. The decision in Jarrold's case, he further stated, was approved by our court and the Supreme Court.

9. The minority judges in the case decided by the House of Lords proceeded, it was pointed out, on the assumption that a dam could never be a plant. The majority has not said anything specific about a dam. However, referring to our court's decision in the case of CIT v. Tata Hydro Electric Power Supply Co. Ltd., [1980] 122 ITR 288, he pointed out that expenditure on a dam has also been considered as constituting the cost of the plant. The sum and substance of Shri Dastur's argument has been that in view of the Supreme Court decision and our court's decision, there can be no dispute that even a building can, in an appropriate case, be plant. What requires to be considered is whether the building or the structure is the tool or means of carrying on the business or a mere location for so doing.

10. Referring then to the facts found by the departmental authorities and the Tribunal in the present case, Shri Dastur stated that it cannot but be held that the concrete walls on the sides for which the excavation and the masonry work were necessary formed an integral part of the plant and it is inconceivable that a ship-manufacturing unit or a wet dock can come into existence without having the type of structure the assessee has for the purpose of carrying on its business.

11. We have carefully gone through the House of Lords decision in IRC v. Barclay, Curle and Co. Ltd., [1970] 76 ITR 62, our court's judgments in CIT v. Tata Hydro Electric Power Supply Co. Ltd., [1980] 122 ITR 288, CIT v. Sandvik Asia Ltd., [1983] 144 ITR 585, the Allahabad High Court decision in the case of CIT v. Kanodia Cold Storage, [1975] 100 ITR 155, the Delhi High Court decision in the case of R.C Chemical Industries v. Commissioner Of Income-Tax, New Delhi., [1982] 134 ITR 330, and the Supreme Court decisions in the cases of CIT v. Taj Mahal Hotel, [1971] 82 ITR 44 and Scientific Engineering House P. Ltd. v. CIT, [1986] 157 ITR 86. The Delhi High Court, in its decision in the case of R.C Chemical Industries v. Commissioner Of Income-Tax, New Delhi., [1982] 134 ITR 330, has referred to certain principles that emerge from all these decisions. We are in respectful agreement with the Delhi High Court when it states (p. 336):

“From a perusal of the above decisions and the provisions of the 1961 Act, certain principles emerge:

1. The definition of ‘plant’ is section 43(3) should be given a wide meaning as it is an inclusive definition.

2. All buildings are not ‘plant’ despite the dictionary meaning which includes buildings; but a building or structure is not per se to be excluded from the ambit of the expression ‘plant’.

3. If the concrete construction or building is used as the premises or setting in which the business is carried on in contradistinction to the fulfilling of the function of a plant, the building or construction or part thereof is not considered a plant. The true test is whether it is the means of ‘carrying on the business’ or the location for so doing.

4. In order for a building or concrete structure to qualify for inclusion in the term ‘plant’, it must be established that it is impossible for the equipment to function without the particular type of structure.

5. The particular apparatus or item must be used for carrying on the assessee's business and must not be his stock-in-trade. The matter has to be considered in the context of the particular business of the assessee, e.g, books are a lawyer's plant but a bookseller's stock-in-trade.”

12. The majority judgment of the House of Lords in IRC v. Barclay, Curie and Co. Ltd., [1970] 76 ITR 62 has been, if not approved as such, quoted with approval both by the Supreme Court and our court in the cases supra. We also agree with Shri Dastur that the fact that the expression “plant” has been defined in section 43(3) will not make any difference for the reason that the definition has been noticed both by our court and the Supreme Court in the above judgments and it was held that the definition did not in any way restrict the purport and the scope of the expression “plant”. On the other hand, it widened it. Therefore, the mere fact that, in the English Act, the word “plant” was not defined will not, in our view, make any difference. This would mean that all buildings are not plant, but certain buildings or structures can be plant. The test to be applied is the functional test, that is, whether the structure is the means of carrying on the business or the mere location for so doing. For this purpose, it is necessary to refer to the facts as found by the Tribunal and the facts relied upon by the House of Lords in its decision. The findings in the House of Lords case, as pointed out by Shri Jetley, were (see [1970] 76 ITR 62, 66)—

“The function of the No. 3 dry dock was neatly summed up by Mr. Geddes who, giving evidence before us, said that the dock was similar to an hydraulic tank which was used for taking ships out of their element, exposing them and then returning them. We accepted this and found further that the dock acted like a large vice for holding ships in position while they were repaired or cleaned. The dry dock was in our view not the mere setting or premises in which ships were repaired. It was different from a factory which housed machinery, for in the operation of the dock, the dock itself played a part in the control of water and enabled the valves, pumps, and electricity generator, which were an integral part of its construction, to perform their functions. The dock was not a mere shelter or home but itself played an essential part in the operations which took place in getting a ship into the dock, holding it securely and then returning it to the river.”

13. In the present case, the facts found by the Appellate Assistant Commissioner which were more or less accepted by the Tribunal have already been summarised by us earlier. Apart from the fact that we do not see any material difference between the facts in the two cases, it has to be borne in mind that the Tribunal has found, after enumerating all those facts, that the concrete walls on the sides for which excavation and masonry work were necessary were as much a part of the plant as were the cranes or winches. The Tribunal has gone on to say that these are integral parts of the plant as such. Without any one of them, the plant could not have worked. Under the circumstances, it is not possible to accept that the Tribunal was not correct in concluding that the entire expenditure incurred on the Kasara Basin Wet Dock did constitute a plant. It may not be out of place to observe that Shri Jetley had contended that the case of a dry dock would be different from that of a wet dock. A dry dock, according to him, would be a floating dock. In the case of a floating dock, different considerations would arise. However, he has not been able to point out any authority for the proposition that there was really any material difference between dry dock and wet dock in this regard. Shri Dastur had, on the other hand, invited our attention to the Chambers' Dictionary of Science and Technology in which the words dry dock, floating dry dock and wet dock were defined. As per the definition, it was only the floating dry dock which could be said to be floating or movable. Both dry docks and wet docks are docks under water level. The only material difference appears to be that whereas in a dry dock water is excluded by means of gates or caissons after the dock has been emptied, in the wet dock water is impounded at a suitable level by means of dock gates, and entrance is generally effected by means of locks. In our opinion, there is, thus, no material difference between a dry dock and a wet dock from the point of view of application of functional tests laid down by the Supreme Court and other courts. Accordingly, we answer the second question in the affirmative and in favour of the assessee.

14. The facts pertaining to the first question are that the assessee-company was taken over by the Central Government in the year 1960. After it was taken over, it was decided that there should be new and modern facilities at the dock for taking up warships and other vessels. For that purpose, consultants were engaged and feasibility reports were obtained from them in November, 1961. Eventually, the frigate project for which a separate licence was required and obtained was commissioned in the year 1966. It is in respect of this project that the assessee claimed relief under section 80J. The Income-tax Officer rejected the claim by placing reliance on a Calcutta High Court decision in the case of CIT v. Textile Machinery Corporation, [1971] 80 ITR 428. He also observed that, in the absence of separate accounts maintained in respect of this project, it was not possible to compute the capital employed in it for working out the relief under section 80J. In appeal, the Appellate Assistant Commissioner, after a study of the historical background and the nature of the assessee's activities, came to the conclusion that the frigate project was a new undertaking and that the assessee was entitled to relief under section 80J. The Tribunal confirmed the order of the Appellate Assistant Commissioner. From annexure A-1 to the assessment order for the assessment year 1968-69, it can be reasonably inferred that the frigate project was a new project. As already stated, a new licence for the project was required and was obtained. The capital outlay in the new project was many times the assessee's capital. The only reason that seems to have led the Income-tax Officer for not granting the relief under section 80J is the Calcutta High Court decision in CIT v. Textile Machinery Corporation, [1971] 80 ITR 428 which now stands overruled. In fact, another decision of the Calcutta High Court which is nearer to the assessee's case is the case of CIT v. Indian Aluminium Co. Ltd., [1973] 88 ITR 257, which was confirmed by the Supreme Court in CIT v. Indian Aluminium Co. Ltd., [1977] 108 ITR 367. As regards non-maintenance of separate accounts, our court has already held in the case of Mahindra Sintered Products Ltd. v. Commissioner Of Income-Tax., [1989] 177 ITR 111, that maintenance of separate accounts is not a prerequisite for granting relief under section 80J. In the above view of the matter, we answer the first question also in the affirmative and in favour of the assessee.

15. No order as to costs.