Dr. B.P Saraf, J.:— By this reference under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following questions of law to this court for opinion at the instance of the Revenue:
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that Kasara Basin Wet Dock constituted ‘plant’ and that the assessee is entitled to depreciation 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 dock for the year under consideration?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the dredging of the sea could be treated as ‘plant’ and consequently directing the Income-tax Officer to allow development rebate of Rs. 31,71,328 on the cost of the capital dredging?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the shipway, Kasara Basin, and building berths constituted parts of the ‘plant’ and that the assessee is entitled to development rebate on such items?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is entitled to relief under section 80J of the Income-tax Act, 1961, in respect of the Frigate Project, for the year under consideration?”
2. It is agreed by learned counsel for the parties that out of the above questions, three questions, viz., questions Nos. 1, 3 and 4 are covered by a decision of this court in the assessee's own case in Commissioner Of Income-Tax v. Mazagaon Dock Ltd., [1991] 191 ITR 460, and in view of the same, these three questions should be answered in the affirmative, i.e, in favour of the assessee and against the Revenue. These questions are answered accordingly. The only question that is left for our consideration is question No. 2 which relates to the controversy whether the dredging of the sea could be treated as “plant” for the purpose of allowance of development rebate on the cost incurred thereon. We shall, therefore, state only those facts which are relevant for the decision of the above question.
3. The assessee is a public limited company fully owned by the Government of India. It was originally incorporated in the year 1934. At that time its principal shareholders were the British India Steam Navigation Company and the Peninsular and Oriental Steam Navigation Company. The company was taken over by the Government of India on April 19, 1960. Till then, the activities of the company were limited to repairs of ships and building small crafts like barges and tugs. There were two small dry docks and shops geared primarily for ship repair work with out of date machinery and unusable for building of big ships. When the Government of India took over the company, it was decided to install new and modern facilities at the docks for taking up the work of building big war ships and other ocean-going vessels. The total cost of the project was estimated at Rs. 832 lakhs. There are two steps in the construction of a ship, the first step being the construction up to the hull stage carried out on the shipway and the second step being fitting of machinery and equipment and taking of trials, etc., which is done in the wet dock. The assessee, therefore, constructed two new ship building berths capable of accommodating ships of approximately 15,000 tonnes DWT along with a plasters and assembly ship and other attendant facilities. To facilitate the second part of the construction process, the tidal Kasara Basin in Mazagaon Dock was converted into an impounded wet dock. To move the ship from the first to the second stage of construction, the vessels had to be towed from the shipways of the Kasara Basin Wet Dock. On completion of the ship building work, the vessels proceed to the outer waters and the open sea for delivery. The assessee, however, found that the sea bed in front of Mazagaon Dock was only about 1.2″ below zero datum at a normal tide of 10″. The question of provision for modern facilities for the assessee was, therefore, investigated by the assessee through a firm, Sir Alexander Gibbs and Partners. The said firm recommended dredging an approach channel which would connect Mazagaon Dock Ltd. with the main channel of Bombay Port Trust (“B.P.T”) for the purpose of bringing ships into the Kasara Basin, where the second stage of construction of the ship was to proceed. The technical consultants, Messrs. Bruce White, Wolfe Barry and Partners, who were appointed to give guidance to the assessee on the dredging work as recommended above, advised that it would be cheaper Jo carry out the work departmental instead of giving a contract to an outsider on turnkey basis. In order to obtain a minimum depth of 25″ at mean high tide, capital dredging was undertaken and an approach channel of VA mile in length was dug in the sea bed. The creation of this approach channel consisted of dredging silt, murrum and rock. The assessee, therefore, purchased a dredger at a cost of Rs. 47.35 lakhs and also constructed two Hopper Barges for removing silt. The dredging of rocks was, however, entrusted to a contractor by the name of Ivan Mulutinovic Pim Contractors for Rs. 46.21 lakhs, the work being of a specialised nature. The total cost incurred by the assessee on this capital dredging amounted to Rs. 1,26,85,312. In spite of this capital dredging, the assessee is required annually to remove silt, etc., with which, however, we are not concerned.
4. As a result of expanding the dry dock, constructing a new wet dock and joining the two by capital dredging, the assessee was in a position to undertake the work of building large size ships, destroyers, frigates, passenger ships and cargo ships, etc. As a result thereof, the ship building turnover of the assessee also went up from Rs. 36.23 lakhs in 1960–61 to Rs. 2,300 lakhs in 1973–74. The assessee claimed depreciation and development rebate on the cost of capital dredging. The Income-tax Officer disallowed the claim on the ground that by dredging the approach channel and increasing the depth of shipways, no tangible asset was brought into existence and even if the expenditure was of a capital nature still no depreciation or development rebate could be allowed, as more deepening of the sea would not amount to expenditure on provision of machinery or plant.
5. The Appellate Assistant Commissioner, after taking into account the facts of the case, found that the shipway constructed by dredging the approach channel was on par with the construction of roads and culverts constructed in the premises of the factory and, following the ratio of the decision of this court in Commissioner Of Income-Tax, Bombay City I v. Colour-Chem Ltd., [1977] 106 ITR 323, held that the assessee was entitled to depreciation on the shipway constructed by capital dredging in the same way as in the case of roads and culverts in the factory premises. He, therefore, directed the Income-tax Officer to allow depreciation to the assessee on the cost of capital dredging at the rate applicable to factory buildings. Both the assessee and the Revenue went in appeal before the Tribunal against the order of the Appellate Assistant Commissioner. The assessee did not go in appeal before the Tribunal against the decision of the Appellate Assistant Commissioner in regard to depreciation on the cost of capital dredging. It was, however, claimed on its behalf that capital dredging was in the nature of “plant” and the assessee was, therefore, entitled to development rebate in respect of the cost thereof. The Tribunal approved the finding of the Appellate Assistant Commissioner that the shipway constructed by dredging the approach channel was on par with construction of roads and culverts in factory premises and, following the ratio of the decision of this court in Colour-Chem Ltd., [1977] 106 ITR 323, allowed depreciation at the rate applicable to buildings in respect of the cost of dredging the approach channel. While dealing with the claim of the assessee for allowance of development rebate on the cost of construction of shipways by dredging the approach channel, the Tribunal held that by dredging the channel in the sea bed and connecting the same with the main channel of the Bombay Port Trust, a major capital asset was created by Mazagaon Dock Ltd. and the expenditure incurred was in the nature of “plant” with the help of which ship construction in Mazagaon Dock Ltd. was possible and, as such, the cost of such dredging had to be treated as capital expenditure on the acquisition of “plant” necessary for ship building. It, therefore, held that dredging which had deepened the sea bed to about 15 feet so that the ship built may be taken out, was “plant” entitled to development rebate. It may be pertinent to mention that this conclusion of the Tribunal goes counter to its own finding in the earlier part of the same order where dealing with the rate of depreciation applicable to the cost of capital dredging, it held that the shipway constructed by dredging the approach channel was on par with construction of roads and culverts in factory buildings and affirmed the finding of the Appellate Assistant Commissioner in that regard.
6. Aggrieved by the order of the Tribunal, the Revenue applied for reference under section 256(1) of the Act and the Tribunal, on being satisfied that questions of law did arise out of its order, referred the questions set out to this court, of which question No. 2 pertains to the controversy in regard to that part of the decision of the Tribunal where dealing with the claim of the assessee for development rebate on the cost of dredging the sea, it held that dredging of the sea should be treated as a “plant”.
7. We have heard both Dr. Balasubramaniam, learned counsel for the Revenue, and Mr. S.E Dastur, learned counsel for the assessee, at length. The submission of counsel for the Revenue is that the approach channel constructed by dredging the sea cannot be held to be a “plant” because it neither meets the description of “plant” as understood in commercial or industrial parlance, nor does it satisfy even the functional test laid down by the courts in some cases to determine whether a particular asset is a “plant” or not. Learned counsel stated that the approach channel constructed by dredging the sea has been rightly held by the Appellate Assistant Commissioner to be at par with the roads and culverts constructed in the factory premises as it makes no difference whether the approach road is made on the surface of the land or in the sea as in the present case. Counsel also relied on the decision of this court in Colour-Chem Ltd.'s case, [1977] 106 ITR 323, and submitted that the controversy whether “roads” could be treated as “plant”, raised by assessees from time to time despite the above decision, has now been finally set at rest by the latest decision of the Supreme Court in Cit, Bombay v. M/S Gwalior Rayon Silk Manufacturing Co. Ltd., [1992] 196 ITR 149, wherein, after discussing almost all the important decisions of the different High Courts on the point, the Supreme Court came to the conclusion that the approach roads are to be treated on par with the factory building for the purpose of depreciation and not “plant”.
8. Mr. Dastur, learned counsel for the assessee, on the other hand, submits that it is not correct to say that the roads cannot be a “plant”. In a given case, even a road may be a “plant”. In support of this contention, reference was made to some observations of the Gujarat High Court in CIT v. Mc Gaw Ravindra Laboratories (India) Ltd., [1981] 132 ITR 401. Reliance is also placed on the decision of the Andhra Pradesh High Court in the case of CIT v. Warner Hindustan Ltd., [1979] 117 ITR 15, where even a “well” has been held to be a “plant”. Reference was also made to the decision of this court in the case of CIT v. Caltex Oil Refining (I.) Ltd., [1976] 102 ITR 260 where “fencing” was held to be a “plant”. Great reliance was placed by Mr. Dastur on the decision of the House of Lords in IRC v. Barclay, Curie and Co. Ltd., [1970] 76 ITR 62, wherein the functional test has been discussed and applied. It was also submitted that the controversy as to whether the particular asset amounted to “plant” or not, has to be determined on the facts and circumstances of each individual case depending upon the function the asset is intended to perform. Reference was also made to the decision of the Supreme Court in the case of CIT v. Taj Mahal Hotel, [1971] 82 ITR 44, wherein the Supreme Court has given a wide meaning to the expression “plant” and held “furniture and fittings” also to be a “plant” in the case of a hotel. The latest decision of the Supreme Court in the case of Gwalior Rayon Silk Mfg. Co. Ltd., [1992] 196 ITR 149, according to learned counsel for the assessee, is not an authority for the proposition that the roads in all cases are to be treated at par with the factory building and not as “plant”.
9. We have carefully considered the rival submissions. It is true that the courts have laid down different tests from time to time to determine whether an asset can be treated as “plant” or not. Functional test is one of them. It is also true that this court in the assessee's own case in Commissioner Of Income-Tax v. Mazagaon Dock Ltd., [1991] 191 ITR 460 has held a wet dock to be a “plant”. We do not find anything wrong in this finding. There can be no dispute that a dry dock and a wet dock are both docks under the water level, the only material difference being that in a dry dock water is excluded by means of gates or caissons after the dock has been emptied whereas in a wet dock water is impounded at a suitable level by means of dock gates and entrance is generally effected by means of locks. There is no material difference between a dry dock and a wet dock from the point of view of application of the functional test for determining whether a wet dock is a “plant” for allowance of depreciation and development rebate or not. This decision does not in any way help us in resolving the controversy before us. In this case also, there was a controversy whether the wet dock is a “plant”. That controversy is also the subject-matter of this reference, which we have already answered in favour of the assessee following the above decision. We have also been called upon to consider in this case the position of the approach channel constructed by dredging the sea. The question for determination is whether such an approach channel can also be held to be a “plant”. The assessee's contention is that the approach channel is necessary for carrying on its business and, as such, it would be a part of “plant” and the Tribunal rightly held it to be so. This submission is vehemently opposed by counsel for the Revenue; according to him, the present controversy is fully covered by the latest decision of the Supreme Court in Gwalior Rayon's case, [1992] 196 ITR 149. On a careful consideration of the rival submissions of counsel for the parties, we find ourselves in agreement with counsel for the Revenue that the approach channel made by dredging the sea is more akin to “road” than “plant”. We are not impressed by the submission of learned counsel for the assessee that, judging from the functional test, the approach channel constructed by dredging the sea can be treated as a “plant”. In our opinion, the functional test has to be applied rationally. Too liberal an application of this test may bring in everything including the roads within the factory, which have already been held by the Supreme Court to be “building”, within the expression “plant”. On such liberal interpretation, even the “factory building” itself may have to be held to be a “plant” because, without it, the “plant” cannot be operated in the open. But that is not so. Structures which fall within the expression “building” or pathways like roads, etc., required for providing approach to the factory have been held to be buildings or roads and not “plant”. This controversy, as rightly pointed out by counsel for the Revenue, has now been set at rest by the Supreme Court in Gwalior Rayon Silk Mfg. Co. Ltd.'s case, [1992] 196 ITR 149. In that case, the Supreme Court considered the decisions of various courts, some of which had treated roads as “plant” and it was held that (at page 159):
“We have no hesitation to hold 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 section 32 of the Act. The capital expenditure incurred thereon is admissible to depreciation on written down value. It has to be worked out for the purpose of depreciation as per the provisions of the Act read with the Rules in the Appendix.”
10. To our mind, there is no material difference between an approach road to the factory which has been treated as a building or an approach road or a channel to a dry dock or wet dock from surface or the sea. Learned counsel for the assessee tried to get out of the above Supreme Court judgment by pointing out that in the instant case, there is a. “finding of fact” by the Tribunal that the channel is necessary for the purpose of working of the dock and, as such the functional test is satisfied. We find it difficult to accept this submission because, in our opinion, the ratio of the decision of the Supreme Court squarely applies to the present case. It makes no difference whether the approach road is for a dry dock, wet dock or a factory or for any other premises because the basic fact that it provides approach to the dock or the factory remains the same. The Supreme Court has clearly held that such approach road should be treated at par with a factory buildings and not as “plant”. In that view of the matter, we do not find any force in the submission of counsel for the assessee that the approach channel should be treated not as “road” but as “plant”. In our opinion, the distinction sought to be made between the Supreme Court case and the present case is not well-founded. Accordingly, we hold that the approach channel constructed by dredging the sea is on par with the roads and culverts constructed in the factory premises and the depreciation allowable at the rates applicable to the factory will be allowable thereon. It cannot be held to be “plant” as contended by the assessee. In that view of the matter, question No. 2 referred to us is answered in the negative, i.e, in favour of the Revenue and against the assessee. The other three questions have already been answered in favour of the assessee and against the Revenue by us earlier. This reference is, therefore, disposed of accordingly. Under the facts and circumstances of the case, we make no order as to costs.