Cit v. Mewar Oil General Mills Ltd., Rajasthan High Court, Judgment, Law, casemine.com

Factual and Procedural Background

This matter arises from a reference made by the Tribunal to this Court by communication dated 10.8.93 under Section 256(1) of the Act (as then existed). The Tribunal referred four specific questions for this Court's opinion.

The underlying assessment order was for the assessment year 1984-85 and was passed on 27.3.87. The assessee appealed against that assessment; the learned Commissioner partly allowed the appeal by order dated 24.2.88. Both the assessee and the revenue further appealed to the Tribunal, which issued a common order on 12.7.91 partly allowing both appeals. The present reference is limited to the four questions posed by the Tribunal.

Relevant factual points, insofar as they are stated in the opinion: the factory and an administrative block are located within a single campus, the cluster is described as being spread over "30 to 35 sq. meters" in the impugned orders, and issues arise concerning (a) admissibility of depreciation at higher rates on the administrative block, (b) whether a generator qualifies as a "renewable energy device" for higher depreciation, (c) whether reconstruction of a boundary wall is revenue expenditure, and (d) whether certain car-related expenses must be excluded in computing disallowance under section 37(3A)/(3B) of the Income-tax Act, 1961.

Legal Issues Presented

Whether on the facts and in the circumstances of the case the Tribunal was justified in law in holding that depreciation on entire factory premises is admissible @ 10% against separate rates of depreciation provided @ 5% and 10% for non-factory and factory buildings respectively?

Whether the generator was a "renewable energy device" as per item (xiii) to Clause (10A) of III D of Appendix-1 of Rule 5 and consequently depreciation @ 30% was admissible?

Whether dismantling of the boundary wall and reconstruction thereof does not bring any new asset into existence and consequently the expenditure incurred on reconstruction of the boundary wall was a revenue expenditure?

Whether the Tribunal was justified in directing exclusion of the driver's salary, depreciation on car and repairs of car for computing disallowance under section 37(3A)/(3B) of the Income-tax Act, 1961?

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Meyyappa Chettiar (Madras High Court)	Classification of structures (studio sheds, laboratories, carpentry sections with machines) as factory buildings based on their function.	The Court cited this case as an example where functional use led to classification as factory building and accepted the functional approach when considering whether the administrative block should be treated as part of the factory premises.
CIT v. Engine Valves Ltd. ((1980) 126 ITR 347, Madras High Court)	Held that certain ancillary structures (e.g., canteen) serving worker benefit and integral to factory operations are to be regarded as factory buildings; articulated that classification requires a functional approach.	The Court relied on the principle from this decision (functional test) and agreed that the administrative block on the same campus, not shown to be functionally separate, should be treated as part of the factory for depreciation purposes.
Borad Dyeing Co. v. ITO ((1987) 27 TTJ 582)	(As relied upon by the Tribunal) a Tribunal judgment relevant to the treatment of generators/renewable energy devices for depreciation.	The opinion records that the learned Tribunal relied upon this Tribunal judgment while deciding the generator issue; the Court notes that reliance but ultimately refers to a decision of this Court for resolution.
CIT v. Agarwal Transformers P. Ltd. (this Court)	Held that the relevant entry is inclusive and that electric generator sets fall under renewable energy devices (item III-D, item (10A), Clause (xiii) of Appendix I to Income-tax Rules, 1962), entitling them to 30% depreciation.	The Court applied this decision directly to answer Question No. 2 in favour of the assessee, holding that the generator qualifies for 30% depreciation under the cited rule.
CIT v. Kalyanji Mavji and Co.	Expenditure incurred on renovating and reconditioning assets (after derequisition) in coal mining business was treated as business (revenue) expenditure.	The Court cited this authority among others to support the conclusion that reconstruction/renovation-type works can be revenue expenditure; used it in concluding Question No. 3 in favour of the assessee.
CIT v. Shree Hari Industries	Replacement of a blown-off tin roof after a storm (replacement of roof) was held to be revenue expenditure (allowable deduction).	The Court relied on this decision as an illustrative precedent supporting treatment of replacement/reconstruction works as revenue expenditure when facts are analogous, contributing to the conclusion on Question No. 3.
CIT v. B.V. Ramachandrappa & Sons (Calcutta High Court)	Replacement of earlier barbed wire fencing with a compound wall (and other remedial works) was treated as revenue expenditure.	The Court cited this case as a directly analogous authority on boundary wall replacement and used it to support the conclusion that replacement of the boundary wall is revenue expenditure.
CIT v. Raj Spinning and Weaving Mills Ltd.	Expenditure on construction of building for a training institute (constructed by assessee on land allotted free by State Government), spread over assessment years, held to be deductible as revenue expenditure in light of facts and earlier Supreme Court judgments.	The Court included this decision among authorities demonstrating that large-scale constructions can, depending on circumstances, be treated as revenue expenditure; it supported the answer to Question No. 3 in favour of the assessee.
CIT v. Udaipur Distillery Co. Ltd.	Dealt with exclusion of driver's salary, car depreciation and car repairs for computation under section 37(3A)/(3B) (specifics not detailed in the opinion excerpt).	The Court held that Question No. 4 is squarely covered by this decision and accordingly answered Question No. 4 in favour of the assessee (i.e., exclusion directed as per that authority).

Precedent

Rule or Principle Cited For

Application by the Court

CIT v. Meyyappa Chettiar (Madras High Court)

Classification of structures (studio sheds, laboratories, carpentry sections with machines) as factory buildings based on their function.

The Court cited this case as an example where functional use led to classification as factory building and accepted the functional approach when considering whether the administrative block should be treated as part of the factory premises.

CIT v. Engine Valves Ltd. ((1980) 126 ITR 347, Madras High Court)

Held that certain ancillary structures (e.g., canteen) serving worker benefit and integral to factory operations are to be regarded as factory buildings; articulated that classification requires a functional approach.

The Court relied on the principle from this decision (functional test) and agreed that the administrative block on the same campus, not shown to be functionally separate, should be treated as part of the factory for depreciation purposes.

Borad Dyeing Co. v. ITO ((1987) 27 TTJ 582)

(As relied upon by the Tribunal) a Tribunal judgment relevant to the treatment of generators/renewable energy devices for depreciation.

The opinion records that the learned Tribunal relied upon this Tribunal judgment while deciding the generator issue; the Court notes that reliance but ultimately refers to a decision of this Court for resolution.

CIT v. Agarwal Transformers P. Ltd. (this Court)

Held that the relevant entry is inclusive and that electric generator sets fall under renewable energy devices (item III-D, item (10A), Clause (xiii) of Appendix I to Income-tax Rules, 1962), entitling them to 30% depreciation.

The Court applied this decision directly to answer Question No. 2 in favour of the assessee, holding that the generator qualifies for 30% depreciation under the cited rule.

CIT v. Kalyanji Mavji and Co.

Expenditure incurred on renovating and reconditioning assets (after derequisition) in coal mining business was treated as business (revenue) expenditure.

The Court cited this authority among others to support the conclusion that reconstruction/renovation-type works can be revenue expenditure; used it in concluding Question No. 3 in favour of the assessee.

CIT v. Shree Hari Industries

Replacement of a blown-off tin roof after a storm (replacement of roof) was held to be revenue expenditure (allowable deduction).

The Court relied on this decision as an illustrative precedent supporting treatment of replacement/reconstruction works as revenue expenditure when facts are analogous, contributing to the conclusion on Question No. 3.

CIT v. B.V. Ramachandrappa & Sons (Calcutta High Court)

Replacement of earlier barbed wire fencing with a compound wall (and other remedial works) was treated as revenue expenditure.

The Court cited this case as a directly analogous authority on boundary wall replacement and used it to support the conclusion that replacement of the boundary wall is revenue expenditure.

CIT v. Raj Spinning and Weaving Mills Ltd.

Expenditure on construction of building for a training institute (constructed by assessee on land allotted free by State Government), spread over assessment years, held to be deductible as revenue expenditure in light of facts and earlier Supreme Court judgments.

The Court included this decision among authorities demonstrating that large-scale constructions can, depending on circumstances, be treated as revenue expenditure; it supported the answer to Question No. 3 in favour of the assessee.

CIT v. Udaipur Distillery Co. Ltd.

Dealt with exclusion of driver's salary, car depreciation and car repairs for computation under section 37(3A)/(3B) (specifics not detailed in the opinion excerpt).

The Court held that Question No. 4 is squarely covered by this decision and accordingly answered Question No. 4 in favour of the assessee (i.e., exclusion directed as per that authority).

Court's Reasoning and Analysis

The Court answered each of the four referred questions by applying legal principles drawn from prior decisions and the facts as found in the impugned orders. The Court's reasoning, in the sequence of questions, is summarized below based strictly on the material in the opinion:

For Question No. 1 (depreciation at 10% on entire factory premises including administrative block):

The Tribunal and Commissioner had previously considered related issues in earlier years, but their orders did not contain reasoning accessible to this Court; therefore the Court heard counsel on the merits.
The factual position accepted by the Court was that the factory and the administrative block are located in a single campus and spread over "30 to 35 sq. meters" (as recorded in the impugned orders), and it was not shown that the administrative block was functionally separate from the factory operations.
The Court adopted the functional test for classifying a structure as a factory building (as propounded by Madras High Court decisions such as CIT v. Meyyappa Chettiar and CIT v. Engine Valves Ltd.), concluding that if the administrative block is functionally integral or not shown to be separate, it should be treated as part of the factory premises.
On that basis the Court answered Question No. 1 in favour of the assessee and against the revenue, allowing depreciation at 10% on the administrative building for the relevant year.

For Question No. 2 (whether generator is a "renewable energy device" attracting 30% depreciation):

The Tribunal had relied upon a Tribunal judgment (Borad Dyeing Co. v. ITO), but the Court noted that this matter is covered by a decision of this Court in CIT v. Agarwal Transformers P. Ltd.
In Agarwal Transformers the Court held the relevant rule entry to be inclusive such that electric generator sets fall within renewable energy devices (item III-D, item (10A), Clause (xiii) of Appendix I to the Income-tax Rules, 1962) and therefore are entitled to 30% depreciation.
As no contrary higher authority was shown to the Court, the Court applied the Agarwal Transformers holding and answered Question No. 2 in favour of the assessee, allowing 30% depreciation on the generator under the cited entry.

For Question No. 3 (reconstruction of boundary wall as revenue expenditure):

The Tribunal had considered rival contentions and various judgments, and upheld the assessee before this Court.
The Court examined several precedents where renovation, replacement or reconstruction works (renovating collieries after derequisition, replacement of roofs after storm damage, replacement of fencing by compound walls, construction of buildings for specified purposes) were held to be revenue expenditure.
Relying on these precedents (including Kalyanji Mavji & Co., Shree Hari Industries, B.V. Ramachandrappa & Sons, and Raj Spinning & Weaving Mills), the Court concluded that the expenditure incurred in reconstruction of the boundary wall should be treated as revenue expenditure.

For Question No. 4 (exclusion of driver's salary, car depreciation and repairs in computing disallowance under section 37(3A)/(3B)):

The Court found this issue to be "squarely covered" by a decision of this Court in CIT v. Udaipur Distillery Co. Ltd.
Thus, applying that authority, the Court answered Question No. 4 in the same manner (i.e., directing exclusion as per that decision).

Holding and Implications

CORE RULING: The Court answered all four questions referred by the Tribunal in favour of the assessee and against the revenue for the reasons set out in the opinion.

Question 1: Depreciation at 10% allowed on the administrative building as part of the factory premises.

Question 2: The generator qualifies as a "renewable energy device" under item (xiii) of Clause (10A) of III D of Appendix-1 to the Income-tax Rules, 1962, and is entitled to 30% depreciation.

Question 3: Expenditure on reconstruction of the boundary wall is to be treated as revenue expenditure.

Question 4: Driver's salary, depreciation on the car and repairs of the car are to be excluded in computing the disallowance under section 37(3A)/(3B), as per the cited authority.

Implications: The direct effect of this opinion is to direct the Tribunal (by informing it of these answers) that the four questions be resolved in the assessee's favour on the specific issues described above. The opinion applies existing judicial authorities to the facts before the Court; it does not purport to state that a new legal precedent is being laid down beyond the application of those authorities to these facts.

The contents of this summary are confined to and derived exclusively from the text of the provided opinion.

Cit v. Mewar Oil General Mills Ltd.

1. This is a reference, made to this Court, by the Tribunal, vide communication dated 10.8.93, referring four questions, for opinion of this Court, under Section 256(1) of the Act, as it then existed. The questions being as under:

Whether on the facts and in the circumstances of the case the Tribunal was justified-

1. in law in holding that depreciation on entire factory premises is admissible @ 10% against separate rate of depreciation provided@5% and10% for non-factory and factory buildings respectively?

2. in law that generator was a renewable energy device as per item (xiii) to Clause (10A) of III D of Appendix-1 of Rule 5 and consequently depreciation @ 30% was admissible?

3. in holding that dismantling of boundary wall and reconstruction thereof does not bring any new asset in existence and consequently expenditure incurred on reconstruction of boundary wall was a revenue expenditure?

4. in directing to exclude Driver's salary, depreciation on Car and repairs of Car for computing disallowance under Section 37(3A)/(3B) of I.T. Act, 1961?

2. The necessary facts are, that the assessment order was made for the assessment year 1984-85 on 27.3.87, against which order appeal was filed by the assessee, and the learned Commissioner vide order dated 24.2.88 partly allowed the appeal. Then the matter was further carried to the Tribunal by both the parties, being assessee, and the revenue, and both the appeals were decided by the common order dated 12.7.91, whereby both the appeals were partly allowed. We have not detailed the aspects on which the appeals were partly allowed, or what additions were made, or deletions were made, as we are not concerned with all those aspects, for the simple reason, that our opinion is sought, only on the four questions, quoted above.

3. We now take up the first question, which relates to the admissibility of depreciation@10%, against the separate rate of depreciation provided at5% and10% for non-factory, and factory building, respectively. The finding of the learned Tribunal in this regard has been given in the appeal of the revenue in para 4, wherein it has been found, that the question has been decided by the Tribunal against the revenue, and in case of the assessee itself, in earlier years, and even application for reference, made by the revenue, has already been rejected, and therefore, the objection of the revenue was rejected. The learned Commissioner in his order had also recorded the finding, on the basis of previous judgments of the Tribunal, regarding earlier years, and in case of the assessee itself. Thus, since no reasonings are available to us from the order of the learned Tribunal, or the learned Commissioner, we have heard learned Counsel for either side, on the merits of the admissibility of depreciation on the administrative block also @ 10%. So far factual part is concerned, it is not in dispute, that the entire establishment, viz. the actual building, wherein the factory is operated, and the said administrative block, is in one campus only. Then in that view of the matter, we have gone through certain judgments, with the assistance of learned Counsel for the parties, and find, that identical controversy did come up before different High Courts of the country, being High Courts of Bombay, Calcutta, and Madras, and examining the controversy, with respect to different natures of construction, the matters had been decided in favour of the assessees.

4. In CIT v. Meyyappa Chettiar decided by Madras High Court, the matter related to a cinema studio building, which consisted of studio sheds, painting and make-up work, a laboratory for editing films, synchronising sound, etc. and a carpentry section, where lathes, sawing machines, etc. were installed, which were operated by the electric motors, were all held to be factory building. Then in case of CIT v. Engine Valves Ltd. reported in (1980) 126 ITR 347 again by Madras High Court, where the canteen was subject matter of consideration, and it was found, that canteen building must be regarded as factory building, being run for the benefit of the workers employed therein, and must be considered as part and parcel of the factory premises. This judgment in Engine Valves Ltd.'s case, relied upon the other judgments of Bombay, and Madras High Court, which considered the roads, fencing, culverts, and drainage etc. to be factory building, and after considering all these judgments, the principle was laid down, being, that to find out, whether a particular structure of construction falls within the category of factory building, or not, the question is required to be approached from the functional point of view. With this, the construction involved in that case was held to be factory building.

5. We are in agreement with the principle, propounded by the Madras High Court in the above judgment, being, that the question is required to be considered by approaching the question from functional point of view.

6. In the present case, the entire cluster is a one campus, and as has come in the impugned orders, it is spread over to 30 to 35 sq. meters, and it is not shown, that functionally the administrative block building is not for the purposes, as are required to be considered for the purpose of considering it as a factory building, as considered in the above judgments of Calcutta, Bombay, and Madras High Courts.

7. It could be understood that the administrative block would have been situated at a different, or distant place, where-from only administrative control was being undertaken, having nothing to do with the day to day, or keeping constant eye on, the regular production of the factory. In that view of the matter, in our humble view, the question No. 1 is required to be answered in favour of the assessee, and against the revenue, to the effect, that on the facts, and in the circumstances of the present case, the depreciation on the alleged administrative building, is also admissible @ 10%, during the relevant year.

8. The second question is about admissibility of depreciation on generator, as "renewable energy device", as per item (xiii) to Clause (10A) of IIID of Appendix-1 of Rule 5. This question has been dealt with by the learned Tribunal, while deciding revenue's appeal in para 5 of the judgment, against the revenue, and for that purpose, has relied upon a judgment of the Tribunal, in Borad Dyeing Co. v. ITO reported in (1987) 27 TTJ 582. However, it is pointed out by the learned Counsel for the assessee, that the matter is now covered by a judgment of this Court in the case of CIT v. Agarwal Transformers P. Ltd. . We have gone through that judgment, and find that in that case, it was held as under:

that a reading of the entry showed that it was inclusive, it referred to two different items, namely, electric generators and, secondly, pumps running on wind energy. Therefore, electric generator sets fall under renewable energy devices and the Tribunal rightly allowed depreciation at the rate of 30 per cent. On the basis of entry III-D, item (10A), Clause (xiii) of Appendix I to the Income-tax Rules, 1962.

9. No contrary judgment has been cited on the side of the revenue, and it is not shown, that this matter was further carried to Hon'ble the Supreme Court, or that this judgment does not hold good.

10. In view of the said judgment in Agarwal Transformers' case, this question No. 2 is also, accordingly, answered against the revenue, and in favour of the assessee, and it is held that according to item (xiii) Clause (10A) of III D of Appendix-1, 30% depreciation would be applicable in case of generator.

11. The third question relates to admissibility of expenditure incurred in reconstruction of the boundary wall, as revenue expenditure. This aspect has been considered by learned Tribunal in para 9 & 10, therein after noting the rival contentions of the parties, and the judgment cited at the bar, the learned Tribunal has simply held, that after carefully considering the arguments of both side, and after examining the material on record, and orders of the authorities below, the arguments of the counsel for the assessee is upheld.

12. However, we have heard learned Counsel, and have examined the matter. One of the judgments cited on behalf of the assessee, before the learned Tribunal was, in CIT v. Kalyanji Mavji and Co. in which case the assessee was carrying on coal mining business, with several collieries. One of the collieries was requisitioned for many years, and derequisitioned. The assessee incurred expenditure for renovating building, reconditioning machinery, and clearing debris, and all that was held to be business expenditure, and not capital expenditure. Then another judgment relied upon on behalf of the assessee before the learned Tribunal was of this Court, in CIT v. Shree Hari Industries wherein the assessee was carrying on business of crushing oil seeds, and for that purpose, he was having tin shed factory stores. On account of storm, the roof of the factory was blown off, the expenditure were incurred on replacement of the roof, which was held to be a 'revenue expenditure', an allowable deduction. Then there is a judgment of Calcutta High Court, in CIT v. B.V. Ramachandrappa & Sons where precisely the boundary wall was replaced, inasmuch as, earlier existing barbed wire fencing around the compound was replaced by compound wall, apart from other works undertaken, being thatched roof of shed was removed, and asbestos sheets put in its place, and all that was held to be admissible as revenue expenditure. Then the glaring case is, that in CIT v. Raj Spinning and Weaving Mills Ltd. . In that case, the assessee company was engaged in business of manufacturing of different kinds of synthetic yard, and fabrics. The assessee was desirous of setting up an institution in textile technology, and to train persons, so that the mill could get skilled technical personnel at that place itself, which was otherwise a remote place. The State Government proposed to set up a modern training institute, and for that purpose, agreed to allot land for setting up the institution, free of cost. While the assessee-company was to construct the required building thereon, at its own cost. For that purpose, an agreement was entered into, about the name of the institution, certain outwardly appearance, and about the subsequent recurring expenditure etc., the courses to be brought, for syllabus, and so on, 9 and advisory committee was also contemplated. It is, in these circumstances, that the assessee raised construction of the building, which cost was incurred, spreading over several assessment years, inasmuch as, in assessment year 1987-88, Rs. 15,05,007/- was spent, while in assessment year 1990-91, Rs. 2,16,000/- was spent, and in those facts, considering various other judgments of Hon'ble the Supreme Court, it was held it to be deductible revenue expenditure.

13. In our view, in view of the above judgments, this question No. 3 is also required to be answered in favour of the assessee, and against the revenue, to the effect, that the amount incurred in reconstruction of the boundary wall is required to be considered as revenue expenditure.

14. Then, the last question remains is, about exclusion of Driver's salary, depreciation on Car and repairs of Car, for computing disallowance under section 37(3a)/(3b). In our view, this question is also squarely covered by a decision of this Court in CIT v. Udaipur Distillery Co. Ltd. . Thus, for the same reason, this question is also answered accordingly.

15. The learned Tribunal be informed about the aforesaid answers.

IT REFERENCE NO. 53 OF 1995

Cit v. Mewar Oil General Mills Ltd.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Cit v. Mewar Oil General Mills Ltd.

Comments