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  • K.S Paripoornan
  • K.A Nayar, JJ.
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Smart Summary

Summary of the Judgment delivered by K.A. Nayar, J.

Factual and Procedural Background

The cases arise from appeals before the Income-tax Appellate Tribunal (Cochin Bench) concerning assessment years 1975-76 and 1976-77 (I.T.A. No. 558 (Coch) of 1978-79, I.T.A. No. 567 (Coch) of 1978-79 and I.T.A. No. 319 (Coch) of 1979). I.T.A. No. 558 was by the assessee; the other two were by the Revenue. Applications R.A. Nos. 281–283 (Coch) of 1981 correspond to these ITA matters and are the subject of the reference under section 256(1) by the Tribunal at the instance of the Revenue.

The assessee operates a rubber factory and had claimed (for the assessment years in question) depreciation, extra shift allowance and development rebate on certain items of plant and machinery, specifically a water supply system (costing Rs. 74,699) and miscellaneous equipment (costing Rs. 5,977). The assessee claimed depreciation at 15% (the special rate claimed applicable to machinery in a rubber factory), while the Revenue contended that the general rate of 10% applied unless a special rate was prescribed.

The Income-tax Officer and the Appellate Assistant Commissioner denied depreciation at 15% and denied extra shift allowance and development rebate on these items. The Tribunal allowed depreciation at 15% on the water supply system and miscellaneous equipment and directed the Income-tax Officer to allow extra shift allowance and development rebate on these items. Additional issues arose concerning the allowability of depreciation on roads and fences and the quantum/periodic application of relief under section 80J. Relevant dates noted in the record: the plant was commissioned on 18 March 1974 and the accounting year ended 31 December 1974.

Legal Issues Presented

  1. R.A. No. 281 (Coch) of 1981 (assessment year 1975-76)
    1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in allowing depreciation at the rate of 15% on water supply system and miscellaneous equipment treating them as part of the general machinery and plant?
    2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing Rs. 74,699 as extra shift allowance on water supply system and Rs. 5,977 as extra shift allowance on miscellaneous equipment?
    3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that water supply system and miscellaneous equipment are entitled to get development rebate?
  2. R.A. No. 282 (Coch) of 1981 (assessment year 1975-76)
    1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in coming to the conclusion that the roads and fences are eligible for depreciation?
    2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that relief under section 80J is to be allowed at a flat rate of 6% for each assessment year irrespective of the duration of the period during which the undertaking works during the previous year?
  3. R.A. No. 283 (Coch) of 1981 (assessment year 1976-77)
    1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to the special rate of depreciation on the water supply system and the miscellaneous equipment inclusive of the weighing machine?
    2. Whether, on the facts and in the circumstances of the case, the assessee is entitled to extra shift allowance on water supply system?
    3. Whether, on the facts and in the circumstances of the case, the assessee is entitled to depreciation on roads and fences?

Arguments of the Parties

Assessee's Arguments

  • The machinery and plant as a whole are shown as an item for which depreciation is admissible at a prescribed rate; therefore items forming part of the entire plant (such as water supply system and miscellaneous equipment) cannot be excluded and should attract the rate applicable to general machinery in a rubber factory (15%).
  • The supply of water is necessary for a rubber factory and miscellaneous equipment are part of the general machinery normally used in a rubber factory; accordingly, extra shift allowance and development rebate should also be allowed on these items.

Revenue's Arguments

  • The water supply system and miscellaneous equipment are not to be considered part of the general machinery and plant in a rubber factory and therefore should attract the general rate (10%) unless a special rate is expressly applicable.
  • (Implicit in the record) The Tribunal's allowance of depreciation and related relief should be questioned, hence the referral of specific legal questions under section 256(1).

Agreed Position on Section 80J

  • Counsel for the Revenue conceded that the question relating to section 80J relief is covered in favour of the assessee by prior decisions (as listed by the court).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
CIT v. Simpson and Co., [1980] 122 ITR 283 (Mad) Authority bearing on the entitlement/interpretation of relief under section 80J. The court records that this decision covers the section 80J issue in favour of the assessee; it is cited as one of the cases that support allowing the relief at the rate argued by the assessee.
Commissioner Of Income Tax v. English Indian Clays Ltd., [1984] 149 ITR 112 (Ker) Authority on section 80J relief. Identified by the court as supporting the view favourable to the assessee on section 80J; relied upon to dispose of the section 80J question in favour of the assessee.
Commissioner Of Income-Tax v. Protein Products Ltd., [1987] 167 ITR 157 (Ker) Authority on section 80J relief. Also cited by the court as covering the section 80J issue in favour of the assessee; part of the body of authority leading the court to answer the relevant question affirmatively.
CIT v. Lucas-T.V.S Ltd. (No. 2), [1977] 110 ITR 346 (Mad) Held that roads should be treated as part of the building for depreciation purposes in that case. The Tribunal relied on this decision in allowing depreciation on roads; the High Court decision is noted by this court as one of the authorities the Tribunal followed when concluding roads may attract depreciation as part of a building.
CIT v. Indo-Burma Petroleum Co. Ltd., [1978] 112 ITR 755 (Cal) Authority supporting that, in some cases, roads can be treated as part of a building for depreciation. The Tribunal relied on this authority in allowing depreciation on roads; the court records it as part of the reasoning that led the Tribunal to its conclusion on roads.
CIT v. Caltex Oil Refining (I.) Ltd., [1976] 102 ITR 260 (Bom) Authority supporting allowability of depreciation on fences in appropriate circumstances. The Tribunal relied on this decision to support its conclusion that the assessee was entitled to depreciation on fences.
Commissioner Of Income-Tax v. Periyar Chemicals Ltd., [1987] 164 ITR 174 (Ker) Principle that, ordinarily, roads are not buildings; exceptional roads approximating buildings may attract depreciation; characterization of a road depends on facts and must be determined case-by-case. The court relied on this decision to determine that factual examination was required before concluding whether roads/fences qualify for depreciation. Consequently, the court declined to answer certain questions and remanded those matters to the Tribunal for further factual inquiry.

Court's Reasoning and Analysis

The court undertook a statutory and rules-based analysis for the depreciation issues and a precedential/factual analysis for the roads and fences issue:

  1. The court identified the statutory provision entitling depreciation: section 32 of the Income-tax Act, 1961, and the relevant prescription of rates in rule 5 of the Income-tax Rules, 1962, read with Appendix I, Part I, item III.
  2. On the water supply system and miscellaneous equipment, the court examined the Table in Part I of Appendix I (item III(ii) B(16)) which deals with "Rubber and plastic goods factories" and the rates prescribed there. The Tribunal had found (as fact) that supply of water is necessary for a rubber factory and that the miscellaneous equipment is part of the general machinery normally used in a rubber factory.
  3. Given those findings and the textual prescription in rule 5/Appendix I, the court concluded that the items at issue fall within the special rate applicable to machinery in rubber factories (15%). The court therefore held that the assessee is entitled to depreciation at 15% on the water supply system and miscellaneous equipment. From that conclusion, the court stated it follows that extra shift allowance and development rebate are also allowable on these items (there being no contention to the contrary and the items being new machinery).
  4. On section 80J relief, the court noted that counsel for the Revenue accepted that prior judicial decisions (listed in the judgment) cover the question in favour of the assessee. The court accepted that position and answered the relevant question in favour of the assessee.
  5. With respect to depreciation on roads and fences, the court reviewed conflicting authorities: some High Court decisions (Lucas-T.V.S and Indo-Burma) supported treating roads as part of a building; Caltex supported depreciation for fences; but the Bench of this court in Periyar Chemicals emphasized that, ordinarily, roads are not buildings and that exceptional cases depend on the degree of construction and facts, so characterization must be fact-specific.
  6. Because the facts in the instant record had not been examined in the light of the Periyar principle (i.e., no adequate factual inquiry to determine whether the roads/fences are of such character as to be treated like buildings), the court declined to answer the questions about the allowability of depreciation on roads and fences. It remanded those questions to the Tribunal for re-examination, directing the Tribunal to afford the parties an opportunity to produce further evidence on that limited issue.
  7. The court directed that the parties bear their own costs and ordered that a certified copy of the judgment be sent to the Income-tax Appellate Tribunal, Cochin Bench.

Holding and Implications

Core Rulings:

  • R.A. No. 281 (Coch) of 1981 (assessment year 1975-76): Questions 1, 2 and 3 answered in the affirmative — in favour of the assessee and against the Department. The court held that the water supply system and miscellaneous equipment are entitled to depreciation at the 15% rate applicable to machinery in a rubber factory; consequent allowance of extra shift allowance and development rebate on these items was affirmed.
  • R.A. No. 282 (Coch) of 1981 (assessment year 1975-76): Question 2 (concerning the allowance of section 80J relief at a flat rate of 6% for each assessment year irrespective of duration) answered in the affirmative in favour of the assessee. Question 1 (whether roads and fences are eligible for depreciation) was not answered and was remitted for further factual determination.
  • R.A. No. 283 (Coch) of 1981 (assessment year 1976-77): Questions 1 and 2 (special rate of depreciation on water supply system and miscellaneous equipment inclusive of the weighing machine; and extra shift allowance on water supply system) answered in the affirmative for the assessee. Question 3 (entitlement to depreciation on roads and fences) was not answered and was remitted for further factual inquiry.

Implications and immediate effects:

  • Direct effect: The assessee is entitled to depreciation at the 15% rate on the specified water supply system and miscellaneous equipment for the assessment years in question, and to related allowances (extra shift allowance and development rebate) in respect of those items, subject to the Income-tax Officer determining development rebate and the assessee meeting necessary conditions.
  • Section 80J relief: The court accepted prior authority cited and answered the related question in favour of the assessee (i.e., the relief as claimed is covered by precedent).
  • Roads and fences: The court did not resolve eligibility for depreciation on roads and fences on this record; it remanded those issues to the Tribunal for fact-finding (with opportunity to produce further evidence). Thus no final ruling on roads/fences was made by this court in these references.
  • Costs: Each party to bear its own costs in these matters.
  • Precedential impact: The court applied existing authorities and principles (including Periyar Chemicals for the fact-specific approach to roads). The judgment affirms the Tribunal on the items treated as part of the rubber factory's machinery and remands fact-sensitive questions; it does not purport to lay down a novel general principle beyond applying and distinguishing earlier authorities.

Administrative direction: A certified copy of the judgment was ordered to be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

Show full summary ...

    Commissioner Of Income-Tax v. Heaveacrumb Rubber (P.) Ltd.

    The Judgment of the Court was delivered by

    K.A Nayar, J.:— These income-tax referred cases arise out of the appellate order of the Income-tax Appellate Tribunal for the assessment years 1975-76 and 1976-77 in I.TA No. 558 (Coch) of 1978-79, I.T.A No. 567 (Coch) of 1978-79 and I.T.A No. 319 (Coch) of 1979. The appeal in I.T.A No. 558 (Cochin) of 1978-79 was by the assessee and the other two by the Revenue before the Tribunal. Application No. R.A 281 (Coch) of 1981 arises out of I.T.A No. 558 of 1978-79 and R.A No. 282 (Coch) of 1981 arises out of I.TA No. 567 of 1978-79 whereas RA. No. 283 (Coch) of 1981 is from I.T.A No. 319 (Coch) of 1979. The facts as disclosed from the statement of case are as under:

    The assessee is running a rubber factory and claimed depreciation, extra shift allowance and development rebate, among other items, on water supply system and miscellaneous equipment as under:

    Water supply system Rs. 74,699 Miscellaneous equipment Rs. 5,977

    2. The assessee claimed depreciation on these items at the rate of 15% which is the rate applicable to general machinery and plant in a rubber factory. The Income-tax Officer and the Appellate Assistant Commissioner did not agree with the assessee and denied depreciation at the rate of 15%, the extra shift allowance and development rebate on these items. On appeal to the Tribunal, the assessee contended that the machinery and plant as a whole is shown as the item for which depreciation is admissible at a certain rate, and, therefore, there is no justification for excluding some items forming part of the entire plant. The Revenue contended that these items of plant cannot be considered to be part of the general machinery and plant in a rubber factory. The Tribunal agreed with the assessee that the water supply system and the miscellaneous equipment would form part of the general machinery and plant of a rubber factory. It considered that the supply of water would be necessary for a rubber factory and the miscellaneous equipment would also be part of the general machinery. The Tribunal, therefore, directed the Income-tax Officer to allow depreciation at 15% on the water supply system costing Rs. 74,699 and miscellaneous equipment costing Rs. 5,977. The Tribunal also directed the Income-tax Officer to allow extra shift allowance and development rebate on these items of plant and machinery. In respect of Application No. R.A 282 (Coch) of 1981, the points raised related to the eligibility of the assessee for depreciation on roads and fences and also on the quantum of the relief available to the assessee under section 80J. The Income-tax Officer held that the assessee is not entitled to depreciation on the cost of roads and fences. The Appellate Assistant Commissioner allowed the claim of the assessee against which the Revenue appealed and lost. The Appellate Tribunal held that the roads should be treated as part of the building and, therefore, eligible for depreciation. The Appellate Tribunal also held that the assessee is entitled to depreciation on fences as well.

    3. The plant of the assessee was commissioned on March 18, 1974, and the accounting year of the assessee ended on December 31, 1974. Therefore, while allowing the relief under section 80J, the Income-tax Officer took into consideration the fact that the plant was commissioned only on March 18, 1974, and restricted the relief for the proportionate period. On appeal by the assessee, the Appellate Assistant Commissioner held that the assessee was entitled to the relief at 6% of the capital without reference to the period. On appeal by the Revenue, the Tribunal upheld the conclusion of the Appellate Assistant Commissioner. On the above facts, the following questions of law are referred by the Income-tax Appellate Tribunal at the instance of the Revenue under section 256(1):

    “In R.A No. 281 (Coch) of 1981 for the assessment year 1975-76:

    (1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in allowing depreciation at the rate of 15% on water supply system and miscellaneous equipment treating them as part of the general machinery and plant?

    (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing Rs. 74,699 as extra shift allowance on water supply system and Rs. 5,977 as extra shift allowance on miscellaneous equipment?

    (3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that water supply system and miscellaneous equipment are entitled to get development rebate?

    In R.A No. 282 (Coch) of 1981 for the assessment year 1975-76:

    (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in coming to the conclusion that the roads and fences are eligible for depreciation?

    (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that relief under section 80J is to be allowed at a flat rate of 6% for each assessment year irrespective of the duration of the period during which the undertaking works during the previous year?

    In R.A No. 283 (Coch) of 1981 for the assessment year 1976-77:

    (1) Whether, on the facts and in the circumstances of the case, the assessee is entitled to the special rate of depreciation on the water supply system and the miscellaneous equipment inclusive of the weighing machine?

    (2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to extra shift allowance on water supply system?

    (3) Whether, on the facts and in the circumstances of the case, the assessee is entitled to depreciation on roads and fences?”

    4. Depreciation is allowable to the assessee under section 32 of the Income-tax Act, 1961. It says that in respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business, deduction is allowed at such percentage on the written down value thereof as may in any case or class of cases be prescribed. The prescription is contained in rule 5 of the Income-tax Rules, 1962, read with Appendix I, Part I, item III, which contains rates at which depreciation is admissible. The contention of the Revenue is that water supply system and miscellaneous equipment are machinery and plant to which the general rate is applicable, namely, 10%. Admittedly, the said rate is applicable if no special rate has been prescribed. But the assessee's contention is that a special rate has been prescribed under item III(ii) B(16) of Part I of Appendix I to the Income-tax Rules, 1962, under the head “Rubber and plastic goods factories”. The assessee runs a rubber factory and water supply system and miscellaneous equipment are general machinery and plant in the factory and, therefore, the assessee claims 15% depreciation thereon. The Tribunal found that the supply of water is necessary for the rubber factory and the miscellaneous equipment is also part of the general machinery normally used in a rubber factory. In that view of the matter, the Tribunal allowed depreciation at 15%. There is no contention that if water supply system and miscellaneous equipment are part of the rubber factory, extra shift allowance and development rebate are not allowable. There is also no dispute that the items of machinery and plant are new machinery. The Tribunal directed the Income-tax Officer to determine the development rebate on these items of machinery and allow the same to be carried forward subject to the assessee satisfying the necessary conditions.

    5. We have heard counsel for the Revenue as well as the assessee. The question relating to section 80J relief, it is agreed by counsel for the Revenue, is covered in favour of the assessee, by the decisions in CIT v. Simpson and Co., [1980] 122 ITR 283 (Mad), Commissioner Of Income Tax v. English Indian Clays Ltd., [1984] 149 ITR 112 (Ker) and in Commissioner Of Income-Tax v. Protein Products Ltd., [1987] 167 ITR 157 (Ker).

    6. Admittedly, the assessee owns a rubber factory and a water supply system and miscellaneous equipment, are installed in the factory. Therefore, on a fair reading of rule 5 of the Income-tax Rules, 1962, and the second column of the Table in Part I of Appendix I to the Rule, namely, item III(ii) B(16), it is clear that water supply system and miscellaneous equipment are entitled to depreciation at 15%. The finding of the Tribunal is that supply of water is necessary for a rubber factory and miscellaneous equipment is also part of the general machinery normally used in rubber factories. Therefore, the conclusion is irresistible that the assessee is entitled to depreciation on the machinery used in the water supply system and miscellaneous equipment at 15%. From this, it would follow that the assessee is entitled to extra shift allowance as also development rebate.

    7. The Appellate Assistant Commissioner, for the year 1975-76, stated that it is well-settled in law that roads are entitled to depreciation and so are fences. And the Commissioner of Income-tax (Appeals) for the year 1976-77, following the order of the Appellate Assistant Commissioner for the year 1975-76, directed the Income-tax Officer to allow the claim for depreciation on roads inside the factory and compound fence. The Tribunal, in view of the decision of the Madras High Court in CIT v. Lucas-T.V.S Ltd. (No. 2), [1977] 110 ITR 346 and of the Calcutta High Court in CIT v. Indo-Burma Petroleum Co. Ltd., [1978] 112 ITR 755, which have held that roads should be treated as part of the building, found that the assessee would be entitled to depreciation on roads. Similarly, following the decision in CIT v. Caltex Oil Refining (I.) Ltd., [1976] 102 ITR 260 (Bom), the Tribunal held that the assessee was entitled to depreciation on fences. The Tribunal also held that the assessee erected fences for protecting its property and, therefore, the assessee is entitled to depreciation on fences as well. But a Bench of this court in Commissioner Of Income-Tax v. Periyar Chemicals Ltd., [1987] 164 ITR 174 (Ker), considering the above decisions, held that (at p. 177):

    “Ordinarily, roads are not understood as buildings. There may, however, be exceptional roads such as a viaduct or a like structure of a permanent character involving such a degree of construction and expense as to be approximated to a building. Such roads, when owned and used by the assessee for the purposes of business, attract depreciation at the rates specified in Part I of Appendix I to the Income-tax Rules, 1962.

    The character of a road in the context of a claim for depreciation has to be determined in each case on the basis of relevant facts and with reference to the principle stated…”

    8. It would appear that facts have not been gone into or examined in the light of the above decision. Therefore, the question whether roads and fences are eligible for depreciation has to be re-examined by the Tribunal. The answer to the question relating to this would depend upon the determination of the relevant facts. Therefore, we do not answer question No. 1 in R.A No. 282(Coch) of 1981 and question No. 3 in R.A No. 283(Coch) of 1981. In the light of the above discussion, we answer all the questions in R.A No. 281(Coch) of 1981 for the assessment year 1975-76 and question No. 2 in R.A No. 282(Coch) of 1981 for the assessment year 1975-76 and questions Nos. 1 and 2 in R.A No. 283(Coch) of 1981 for the assessment year 1976-77 in the affirmative, i.e, in favour of the assessee and against the Department and we decline to answer question No. 1 in R.A No. 282(Coch) of 1981 and question No. 3 in R.A No. 283 (Coch) of 1981. The Tribunal shall hear the parties after affording an opportunity to produce further evidence relating to question No. 1 in R.A No. 281 (Coch) of 1981 for the assessment year 1975-76 and question No. 3 in R.A No. 283(Coch) of 1981 for the assessment year 1976-77 regarding the eligibility to depreciation on roads and fences. We direct the parties to bear their respective costs in these cases.

    9. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

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    Comments

    Commissioner Of Income-Tax v. Heaveacrumb Rubber (P.) Ltd.
    (Jan 19, 1989)