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Commissioner Of Income-Tax, Patiala-Ii v. Yamuna Cold Storage
Factual and Procedural Background
The assessee, M/s. Yamuna Cold Storage, is a registered firm operating a cold storage constructed December 1968–March 1969. For assessment year 1970–71 the dispute concerned depreciation on the building and on thermocole insulation. The ITO allowed 10% depreciation on the building and 15% on the thermocole insulation. The AAC reduced depreciation to 5% on both items treating the building as an ordinary godown. The assessee appealed to the Tribunal, which restored the ITO's view: it held the cold storage to be a factory building and the thermocole insulation to be covered by the definition of “plant” in s. 43(3) of the Income-tax Act. On the revenue's application two questions were referred to this Court under s. 256(1) of the Act for opinion.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the cold storage building of the assessee falls under the description of ‘factory building’ qualified for depreciation allowance under the Income-tax Act as such?
- Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that ‘thermocole insulation’ is covered by the definition of the term ‘plant’ as appearing in section 43(3) of the Income-tax Act, 1961?
Arguments of the Parties
Assessee's Arguments
- The Tribunal restored the ITO's finding that the cold storage is a factory building (not a mere godown) and that thermocole insulation forms part of the plant as per s. 43(3), entitling the assessee to the depreciation treatment allowed by the ITO.
Revenue's Arguments
- The revenue contested the Tribunal's classification of the cold storage as a factory building, contending that no manufacturing process is involved (i.e., it is effectively a godown).
- As to thermocole insulation, counsel for the revenue (D.N. Awasthy) did not seriously dispute that it is covered by the definition of “plant” in s. 43(3).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Kanodia Cold Storage, [1975] 100 ITR 155 | That in common parlance “plant” includes buildings and equipment used for manufacturing; s. 43(3) is inclusive and a building with insulated walls used as a freezing chamber is part of the air‑conditioning plant and entitled to special depreciation. | The court respectfully followed this rule to hold that thermocole insulation is covered by “plant” in s. 43(3) and that the assessee is entitled to 15% depreciation thereon. |
| Aggarwal Cold Storage and General Mills v. ITO, (1970) Tax XXX (6)-10 | The Tribunal's reasoning that the operation of a cold storage involves a process (treatment/preservation) amounting to a manufacturing process for purposes of classifying the premises as a factory building rather than a godown. | The court accepted the view that the cold storage's activities fall within the Factories Act definition of manufacturing process and, following the Tribunal, held the building to be a factory building for depreciation purposes. |
Court's Reasoning and Analysis
Question 2 (thermocole insulation): The court observed that counsel for the revenue did not seriously dispute the point and that the matter is not res integra. It followed the Division Bench decision in CIT v. Kanodia Cold Storage, which held that the definition of “plant” in s. 43(3) is inclusive and may encompass buildings or parts of buildings (such as insulated walls used as a freezing chamber) that form part of the air‑conditioning/plant of a cold storage. Applying that principle, the court held thermocole insulation to be covered by “plant” under s. 43(3) and concluded entitlement to 15% depreciation.
Question 1 (factory building): The court noted that “factory buildings” is undefined in the Income‑tax Act but that the Factories Act, 1948 provides a suitable definition of “factory” and of “manufacturing process.” The court considered the Tribunal's analysis in Aggarwal Cold Storage, which described the refrigeration process and held that cold storage operations constitute a process of treating/preserving goods (within cl. 2(k)(i) of the Factories Act). The court found no reason to differ, observed that cold storages are subject to control/supervision of the Factories Inspector and have been recognised as factories, and therefore concluded that the cold storage building falls within the description of a factory building.
Holding and Implications
Question No. 1: Answered in the affirmative. The court held that the assessee's cold storage building is a factory building for purposes of depreciation under the Income‑tax Act; the Tribunal's view that the building is not a mere godown was upheld.
Question No. 2: Answered in the affirmative. The court held that thermocole insulation is covered by the definition of “plant” in s. 43(3), entitling the assessee to 15% depreciation (the opinion states entitlement to 15% depreciation on bills of its costs / 15% on its written down value as described in the cited authority).
Direct effect: Both references were answered in favour of the assessee and against the revenue. No costs.
S.P Goyal, J.:— The assessee, M/s. Yamuna Cold Storage, a registered firm, is engaged in the business of cold storage the construction of which was started in December, 1968, and completed in March, 1969. The assessment year in question is 1970-71. The dispute in this reference relates only to the depreciation to be allowed on the building and the cost of thermocole insulation. The ITO allowed 10% depreciation on the building and 15% on the rmocole insulation treating it to be machineay. The A AC during the course of the hearing of the appeal filed by the assessee reduced the depreciation to 5% on both the items treating it to be a godown and as such an ordinary building. Aggrieved thereby,. the assessee went in appeal before the Tribunal which restored the order of the ITO holding that the cold storage was a factory building and that the thermocole insulation was covered by the definition of “plant” as defined in s. 43(3) of the I.T Act. However, on an application by the revenue, the following two questions were referred under s. 256(1) of the Act for the opinion of this court i
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the cold storage building of the assessee falls under the description of ‘factory building’ qualified for depreciation allowance under the Income-tax Act as such?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that ‘thermocole insulation’ is covered by the definition of the term ‘plant’ as appearing in section 43(3) of the Income-tax Act, 1961?”
2. So far as the second question is concerned, D.N Awasthy, learned counsel for the revenue, has not seriously disputed that the thermocole insulation would be covered by the definition of the term “plant” as appearing in s. 43(3) of the Act. Otherwise also, the matter is not res Integra and a Division Bench of the Allahabad High Court in CIT v. Kanodia Cold Storage, [1975] 100 ITR 155 held that in common parlance the word “plant” includes within its ambit buildings and equipment used for manufacturing purposes. The definition of “plant” in s. 43(3) is inclusive and does not exclude things normally included in it. Where a building with insulated walls is used as a freezing chamber, though it is not machinery or part thereof, it is part of the air-conditioning plant of the cold storage of the assessee and will be entitled to special depreciation at 15% on its written down value.
3. Respectfully following the rule laid down in the said case, we also hold that the thermocole insulation would be covered by the definition of plant in s. 43(3) and the assessee, therefore, is entitled to 15% depreciation on bills of its costs. Question No. 2 is accordingly answered in the affirmative.
4. As regards the first question, the Tribunal did not record any reasons to opine that the cold storage building was a factory building and relied upon its earlier decision in Aggarwal Cold Storage and General Mills v. ITO, (1970) Tax XXX (6)-10.
5. The word “factory buildings” is not defined in the Act but under the Factories Act, 1948, the word “factory” is defined to mean any premises including the precincts thereof—
2.(m)(i) whereon ten or more workers are working, or were working on any day of the preceding twelve months, and in any part of which a manufacturing process, is being carried on with the aid of power, or is ordinarily so carried on, or
(ii) whereon twenty or more workers are working, or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on without the aid of power, or is ordinarily so carried on
6. The essence of the factory, therefore, lies in the manufacturing process carried thereon which term is again defined as under (Factories Act, 1948):
“2.(k) ‘Manufacturing process’ means any process for—
(i) making, altering, repairing, ornamenting, finishing, packing, oiling, washing, cleaning, breaking up, demolishing, or otherwise treating or adapting any article or substance with a view to its use, sale, transport, delivery, or disposal, or
(ii) pumping oil, water, or sewage, or
(iii) generating, transforming or transmitting power, or
(iv) composing types for printing, printing by letter press, lithography, photogravure or other similar process or book binding,
(v) constructing, reconstructing, repairing, refitting, finishing or breaking up ships or vessels.”
7. The Tribunal in Aggarwal Cold Storage's case did not refute the contention of the revenue that the definition of factory as contained in the Factories Act would serve as the best guidance, in the absence of any definition in the Act, to determine whether the building of cold storage would be a factory building or not. However, after noticing the working of the cold storage it rejected the contention of the revenue that no manufacturing process is involved in a cold storage in the following terms:
“Now, what is done in a cold storage? It is a big hall where a refrigeration plant is installed to circulate cold air at a temperature varying from 34° F to 36° F. This reduction in temperature is achieved by the refrigeration plant and the necessary requirement is that the temperature of the hall should not be less than 34° F and should not be more than 36° F. It is said that a thermostat is also used to control the temperature This brief description of the ‘plant’ and process is enough to show that it is not a case of ‘godown’ as the revenue would have it. It is a case of complicated process of modern science which is yoked for the preservation of valuable food material. It is not the case of storage but a cold storage. If this is not ‘manufacture’, then we do not know what else would be.”
8. We find no reason to differ with the view of the Tribunal which has stood the test of time for all these years and more so because no decision to the contrary has been brought to our notice. Otherwise also, we are of the opinion that the process undertaken in the cold storage would be fully covered by cl. (k)(i) because it would certainly be a process of treating the articles Of goods with a view to preserve them for their use or sale. It may also be mentioned here that the cold storage is subject to the control and supervision of the Factories Inspector and has been always recognised as a “factory” under the Factories Act. Consequently, the first question is also answered in the affirmative, in favour of the assessee and against the revenue. No costs.
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