Poonawala Finvest & Agro (P.) Ltd. v. Assistant Commissioner of Income-tax

ORDER

Mukul Shrawat, Judicial Member. - Assessee is in appeal arising out of the order of CIT(A)-I, Pune dated 23rd Jan., 2006 and the grounds are narrative, however, the issue is in respect of depreciation whether to be allowed at the rate of 100 per cent on the components of the windmill For the sake of completeness, grounds are reproduced below :

"On the facts and circumstances of the case and in law, the learned CIT(A)-I, Pune erred in :

1(a) ignoring the test of functional use of an asset and the principle of capitalization while applying different rates of depreciation on different components of cost which bring into existence a fixed asset recognized as 'windmill'.

1(b) without prejudice to 'ground No 1(a)' above—confirming depreciation at lower rate on following components of cost incurred to bring into existence an asset, i.e., 'windmill' (entitled for depreciation at the rate of 100 per cent) :

$ (Though the learned Assessing Officer held it to be 'nil' he allowed depreciation at the rate of 10 per cent which error could be rectified any time by the Assessing Officer, the appellant has considered the depreciation granted as 'nil' while contesting the issue before the appellate authority accordingly the total and disputed amount of depreciation is calculated)."

2. Facts in brief as emerged from the corresponding assessment order passed under section 143(3) dated 14-3-2003 are that the assessee is mainly in the business of breeding of horses. In respect of the issue in hand, the relevant observations of the Assessing Officer were that during the year, the assessee company installed windmill at a village in District Satara. An investment to the tune of Rs. 1,77,00,000 was incurred for setting up of the windmill. The Assessing Officer has further noted that the appellant has claimed depreciation at the rate of 100 per cent on the entire amount. The claim of 100 per cent depreciation included the assets such as electrical items, civil works etc. The Assessing Officer was not convinced to allow the 100 per cent depreciation on such items of expenditure and proceeded to disallow the claim in respect of few items, by making following observations :

"(i) Site development expenses of Rs. 75,000
As per bills, it is noticed that Suzlon Developers (P) Ltd. has charged Rs. 75,000 for wind mill as labour cost for site development. This will be treated as expenses for improvement of land at site and therefore will be a part of acquisition of land. Therefore, it will not be entitled to any depreciation.
(ii) Cost of construction for control room and transformer Rs. 75,000
The expenses of Rs 75,000 incurred by the assessee for this work is civil in nature to protect the equipment from rain/wind etc. This will, therefore be treated as building only.
The assessee in its reply submitted that the item relates to civil work for a control room. In the control room there are 'transformer' and other equipments by which the outside electricity is used to start the functioning of the windmill at the same time the output of the energy generated from the windmill and transferred to MSEB grids through this control room. Hence, it is contended that the control room is critical for the functioning of the windmill and thus it is also a 'plant' and forms part and parcel of the windmill.
The contention of the assessee is not acceptable as the control room structure is not part of windmill but a part of building to protect the electrical machinery etc. and not entitled for 100 per cent depreciation.
(iii) Labour cost for internal road development Rs. 75.000
On going through the bill for purchase of windmill, it is noticed that M/s Suzlon Developers (P) Ltd. has charged Rs. 75,000 for windmill as labour cost for internal wind mill. These expenses of Rs. 75,000 for a wind mill are incurred for road development. Therefore it will be treated as building.
(iv) Transformer upto DP structure Rs. 7,00,000
On going through the bill, it is seen that the assessee has paid Rs. 7,00,000 for windmill to M/s. Suzlon Developers (P.) Ltd. for the purpose of supplying the electrical items like transformer upto DP structure, internal line upto metering. This expenditure is for transmission of electrical power generated after control room to sub-station of MSEB at site. The expenses of Rs. 7,00,000 is therefore for electrical item of general nature and will not qualify for depreciation at the rate of 100 per cent."

3. Though he has also made a disallowance in respect of MEDA payment of Rs. 12,15,000, however, the first appellate authority has held the same as a revenue expenditure and none of the party are stated to be further in appeal. The Assessing Officer has made a computation and on that basis held that the allowable depreciation on the items was Rs. 5,10,000 as against claimed by the assessee at Rs. 21,75,000. Rest of the amount i.e. Rs. 16,65,000 was assessed in the taxable income/loss of the assessee.

4. The issue was carried before the first appellate authority. Learned CIT(A) has considered these four items in the following manner :

"(1) Site development expenses - It has been pleaded by the appellant that expenditure of Rs. 75,000 was incurred so as to make the site proper for installation of windmill. The expenditure was for facilitating erection of the windmill and not to develop the market value of the plot as contended by the appellant. In my considered opinion, the expenditure on site development is not an expenditure for erection of windmill. The expenditure is incurred for clearing the land for use. The subsequent use of the land for erection of windmill will not entitle the appellant to claim such expenditure as cost to the windmill. This expenditure gets embedded in the cost of the land and the cost of land is not a cost component of the windmill. The assessment order to the extent of this expenditure is upheld.
(2) Cost of construction of control room - It has been pleaded by the appellant that in the control room, transformer and other equipments have been installed and the said control room thus becomes intrinsic part of the windmill. I am of the humble opinion that the action taken by the Assessing Officer cannot be faulted as control room is a civil construction which gives protection to electrical installations. It is something like constructing a factory shed which gives protection to plant and machinery. The rate of depreciation for plant and machinery and the factory shed are different as prescribed in the Appendix to the IT Rules, 1962. The construction of the control room is not a specialized construction nor it can be said that it is a part and parcel of the plant and machinery. In the instant case, the civil construction has given rise to an ordinary room which is used as a control room where electrical installations are placed for protection. There is no specific design and the civil construction doesn't mingle with the plant and machinery. The assessment order on this issue is upheld.
(3) Labour cost for internal road development - The Assessing Officer has considered the labour cost for internal road development as building and accordingly the depreciation has been allowed as against the claim of the appellant that the same should be considered as windmill. It is the contention of the appellant that but for these roads, the erection and operation of the windmill would not have been possible. In my opinion, the stand taken by the appellant is not correct. The intention of the legislature is allow higher depreciation on the windmill and on the devices which run on windmill and not to all the incidental facilities. The internal road at the site is a facility which helps the appellant but does not mean that the facility becomes a component of the windmill. The action taken by the Assessing Officer is upheld.
(4) Transformer upto DP structure - It is the case of the appellant that the transformer is an integral part of the windmill. The appellant has submitted a sketch of the windmill and in the basic sketch the electrical transformer finds place and hence as per the appellant the same should be considered as component of the windmill. The Assessing Officer has noted that the expenditure of Rs. 7 lakhs has been incurred on the acquisition of transformer and internal line upto metering. The Assessing Officer held that the expenditure in question is for electrical items of general nature and thus not eligible for higher depreciation of 100 per cent."

5. From the side of the appellant, Shri S.U. Pathak appeared and argued that as far as the cost of labour work, construction of control room and the expenditure on internal road, being capitalized by the assessee, having identical nature of construction activity, can be argued as a group, since in the nature of civil construction. He has started his arguments by citing Commissioner Of Income-Tax v. Herdillia Chemicals Ltd. [1995] 216 ITR 742 (Bom.) , for the preposition that expenditure incurred on development, levelling of land and construction of internal roads leading to the plant and machinery to be considered as a part of the actual cost of plant and machinery, therefore be allowed higher depreciation. The learned Authorised Representative has also mentioned that in the said decision, the Hon'ble Bombay High Court has referred the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC) , Cit, Bombay v. M/S Gwalior Rayon Silk Manufacturing Co. Ltd. [1992] 196 ITR 149 (SC) , CIT v. Caltex Oil Refining (I) Ltd. [1976] 102 ITR 260 (Bom.) and Addl. CIT v. Madras Cements Ltd. [1977] 110 ITR 281 (Mad.) . The learned Authorised Representative has mentioned that the undisputed facts in the said precedents were that the expenditure was incurred on the foundation for fixing the plant and machinery which was held as forming a part of the cost of the plant and machinery. The Hon'ble Court has held that the assessee would be entitled to depreciation thereon. Next, he has cited Commissioner Of Income Tax, Karnataka v. Karnataka Power Corporation.. [2001] 247 ITR 268 (SC) for the preposition that whether a building can be treated as a plant and in that respect the observation of the Hon'ble Court was that where it is found as a fact that a building has been so planned and constructed as to serve the assessee special technical requirements, it will qualify to be treated as a plant for the purpose of investment allowance. The learned Authorised Representative has mentioned that there was a finding by the fact-finding authority in that appeal, that the assessee's generating station building was so constructed as to be an integral part of its generating system, so held as a plant entitled to investment allowance. His next citation was Commissioner Of Income-Tax v. Delhi Airport Service Service [2002] 255 ITR 91 (Delhi) wherein the air conditioner fixed in the bus was held as an integral part of the bus therefore the depreciation on air conditioner was allowed at the rate applicable to the bus and not at the rate applicable to the air conditioning plant. An another decision of the respected co-ordinate Kolkata Bench, in the case of ITO v. Samiran Majumdar [2006] 98 ITD 119 , has also been cited wherein the attachment with the computer i.e., printer and scanner were held as an integral part of the computer system. Hence entitled for higher rate of depreciation, he concluded.

6. On the other hand from the side of the Revenue, learned Departmental Representative Shri D.S. Kothari appeared and supported the orders of the Revenue authorities. He has argued that the site development expenses were for the purpose of clearing of the land to be used for erection of windmill. There was a construction of control room which was a civil construction to give protection to electrical installation. It was not a specialized construction hence could not be treated as a part and parcel of the machinery. Likewise, the cost of labour for construction of internal road development was not in any manner related with the operation of the windmill, hence should not be held as a device for running the windmill. In support various decisions have been cited to be discussed hereinbelow :

7. We have heard the submissions of both the sides at length, carefully perused the order of the authorities below in the light of compilation filed and case laws cited. As observed by the Assessing Officer and also mentioned in the statement of facts that the appellant company has incurred a capital expenditure on "windmill" cost at Rs. 1,77,00,000. The windmill is eligible for depreciation as per IT Rules at the rate of 100 per cent. Therefore, the Assessing Officer has held that as per Appendix I of IT Rules clause (III)(3)(xiii )(l), the assessee is entitled for 100 per cent depreciation towards investment made in installing windmill, accordingly the depreciation was allowed. The dispute was in respect of the expenditure which was capitalized and incurred towards other construction and structure. The argument from the side of the assessee was basically that those structures were an integral part of the windmill hence also entitled for 100 per cent depreciation. On the other hand the stand of the Revenue was that the said construction was not an integrated part of the windmill therefore, not entitled for higher rate of depreciation but entitled for the rate of depreciation as particularly prescribed in the depreciation schedule of IT Rules.

7.1 It was explained during the course of hearing that M/s. Suzlon Developers (P.) Ltd. undertook the process of erection, commissioning and execution of windmill. The power so generated was agreed to be supplied to MSEB department. It was also explained that a wind turbine generator consists of rotor consisting of blade, the hub assembly, gear box, steel tower, foundation and grid assembly i.e., the transformer unit for delivering power to the grid network. The functioning of the windmill was first to generate the power and thereafter the transmission of electric power to MSEB. For this structure, the specified rules have been provided in IT Rules and as per Appendix I as applicable for assessment year 2002-03 under the head "Machinery and plant (iii) there is a sub-clause (xiii) remarked as "Renewal energy devices being renewal energy windmills of any special design devices which run on windmills and the depreciation rate prescribed at 100 per cent. As far as this appeal is concerned there is no dispute upto this stage of claim of depreciation on the cost of windmill as the depreciation at the rate of 100 per cent was allowed by the Assessing Officer. The question before us is in respect of allied construction whether also entitled for 100 per cent or not.

8. Before we proceed to deal with the issue in hand, we may like to quote an observation of the Hon'ble Supreme Court in the case of Indian Hotels Co. Ltd. v. ITO [2000] 245 ITR 538 (SC) with the approval "A statute cannot always be construed with the dictionary in one hand and the statute in the other. Regard must also be had to the scheme, context and to the legislative history of the provision".

9. We may also like to mention that in the landmark decision of CIT v. Anand Theatres [2000] 244 ITR 192 (SC) , the Hon'ble Supreme Court has opined that there is a well established distinction in general terms, between the premises in which the business is carried on and the plant with which the business is carried on. In that decision, the Hon'ble Court has distinctly held that the premises are not the plant. For the sake of clarity, we are reproducing important observation from the held portion:

"Dictionary meanings however helpful in understanding the general sense of the words cannot control where the scheme of the statute or the instrument considered as a whole clearly conveys a somewhat different shade of meaning. Words have to be so construed as to fit in with the idea which emerges on a consideration of the entire context. The meanings of the words 'building' and 'plant have to be gathered in the context of the scheme of section 32 and it is not necessary to adopt a judge-made sense, which is artificial and imprecise in application."

10. The Court has also observed that a characteristic of plant is it is an adjunct to the carrying on of a business and not the essential site or core of the business itself. Since the question before the Hon'ble Court in those appeals was whether the building which is used as hotel or cinema theatre can be considered to be a tool for running the business, so that it can be termed as a plant, with the result depreciation could be allowed accordingly or whether it remains a building wherein either hotel business or business for cinema could be conducted? So the Court has held that a hotel or cinema building cannot be stated to be an adjunct to the carrying on of the business, that is to say, something added to another, or which is in a subordinate, auxiliary or dependent position. It was further observed by the Hon'ble Court as under :

"Moreover, to differentiate between buildings for grant of additional depreciation by holding one to be a plant where the building is specially designed and constructed with some special features to attract customers and another where the building is not so constructed, but used for the same purpose, namely as a hotel or theatre, would be Unreasonable."

11. The Court has also observed that the depreciation as a general principle represents the diminution in value of a capital when applied to the purpose of making profit or gain. The object is to get the true picture of the real income of the business. An inference was drawn that the legislature never intended to give such benefit of depreciation to a building which is usually more durable than machinery or plant. The Court has finally held as under :

"The fact that the building in which a business is carried on is, by its construction particularly well-suited to the business, or indeed was specially built for that business, does not make it plant. Its suitability is simply the reason why the business is carried on there. But it remains the place in which the business is carried on and is not something with which the business carried on, except in some rare cases where it plays an essential part in the operations which take place. Hotel premises are not considered to be an apparatus or tool for running the hotel business but are merely a shelter or home or setting in which business is carried on. The same would be the position with regard to a theatre in which cinema business is carried out. Therefore, even the functional test is not satisfied."

12. So the emphasis for granting higher rate of depreciation as far as civil construction work is concerned, the necessity is to examine the functional test of the said structure. A categorical evidence has to be placed that the structure is not a building but it is an integral part of plant and machinery. Such an evidence or finding is absent in this appeal. Even in the case of CIT v. Abad Hotels India (P.) Ltd. [2001] 251 ITR 204 (SC) , the Hon'ble Supreme Court has held that the hotel building was not a plant so the assessee was held as not entitled to extra-shift depreciation allowance. In the present appeal nothing is on record to establish that on the touchstone of functional test the control room or site development expenditure or even internal roads were so designed that they can only be used for power generation as done by the wind mill and meant for no other use. There is nothing on record, such as a report from .a qualified person to establish that the site construction of control room, internal road etc. were designed in such a manner to facilitate the power generation and distribution of windmill. Naturally a machinery does not require protection so installed in a building but such a building cannot be said to be a part and parcel of the machinery. Resultantly the claims fail on functional test.

13. We have examined the decisions as cited by learned Authorised Representative however they are very much distinguishable. In respect of Herdillia Chemicals Ltd.'s case (supra), the company was a chemical industry. For the purpose of erection of plant and building, a huge land admeasuring about 360 acres was taken on lease from Maharashtra Industrial Development Corporation. The entire factory was stated to be constructed in the said large tract of land. To protect the property, which covered a wide area and also to isolate from the surrounding wilderness, the assessee erected fencing enclosing the property. The said decision was on the basis of certain findings on facts that the foundation was meant for fixing the machinery hence formed a part of the cost of plant and for that purpose levelling of the land was required so held that a distinction was difficult to segregate the expenditure. According to the Hon'ble Court, the issue was covered by few decisions as cited therein, so decided in favour of the assessee. The distinction is that the premises was very large area of land which required proper protection and the factory could not be installed without such levelling of land and internal roads therein. On the other hand, it is not so in the present case because no such factual finding is on record that the windmill could not have been run without such civil construction. Their usage and purpose is functionally independent of each other.

14. The next decision which was cited is Karnataka Power Corpn.'s (supra). However, in this case the Hon'ble Supreme Court has given a clear observation that the question whether a building can be treated as a plant, basically is a question of fact and where it is found as fact that a building has been so planned and constructed as to serve the assessee special technical requirements, it will qualify to be treated as a plant for the purpose of investment allowance. Since in that case there was a finding by the fact-finding authority that the assessee's generating station building was so constructed as to be an integral part of its generating system, therefore, it was held as "plant". Therefore, in each case such type of question is basically a question of facts and where it was factually recorded that the building is so planned and constructed to serve a special technical requirement, then only can be treated as a plant. This is a point of differentiation in the present appeal because no such fact has been brought on record by the assessee that the windmill could not generate the power without the impugned civil construction work. As far as the decision of Delhi Airport Service's case (supra) as stated by the learned Authorised Representative, the question involved in this precedent itself was somewhat different and facts were also distinguishable since the air conditioner was installed in the bus and on that basis it was held that the two could not be segregated and the air conditioner had become an integral part of the bus. The distinction is that no such fact is applicable in the present appeal. Almost identical is the situation in the case of Samiran Majumdar (supra) as cited by learned Authorised Representative since in that case as well the printer and scanner were undisputably a part of the computer system therefore held as entitled for higher rate of depreciation as it was applicable to computer.

15. It is an accepted principle of interpretation that it is not always a safe way to construe the statute by dividing it by a process of etymological dissection and after separating words from the context to give each word some particular definition given by lexicographers and then to reconstruct the instrument upon the basis of those interpretation. The correct method is that when particular meaning is attached to a word as is given in an instrument is to be gathered from the context, the nature of the subject-matter, the purpose or the intention of the author and the effect of giving to them one or more other permissible meaning on the object to be achieved. Applying this test, we have to gather the meaning of the words such as 'plant and machinery'. For interpreting the scheme of depreciation as prescribed under section 32 it is not necessary that we should adopt a judge-sense meaning, which is sometimes artificial and imprecise in application by giving a meaning altogether different from the statutory provisions. The scheme of section 32 unequivocally leads to the conclusion that on one hand "plant" and on the other hand "machinery" are to be treated as separate for the purpose of allowance of depreciation. Moreover, how one can ignore the block of assets as prescribed in the table of rates for the purpose of allowance of depreciation in Appendix I of IT Rules. As per this Appendix Part 'A' contains building in a separate head, furniture and fittings in another head and machinery and plant in a different head by prescribing different rates of depreciations. The scientific reason is often discussed as the period of diminution for tangible assets. If the period of diminution or wear-tear is very fast than higher rate of depreciation is granted. Naturally the speed with which a machinery gets discarded due to wear and tear, the buildings do not get were and tear so fast. On this basis, as well, we cannot hold that building of control room, internal roads being civil construction work in nature are not at par with the "windmill" as far as the period of diminution is concerned Moreover sometimes to promote a particular activity the statute provides certain incentives in the shape of higher depreciation. We have to keep in mind such an intention of the legislature as well. However no such intention has ever been expressed in the legislature to provide higher ate of depreciation in respect of structure surrounding the windmill. Rather the Appendix and the depreciation schedule has categorically worded that "windmills and any specially designed devices which run on wind mills" are qualified for 100 per cent rate of depreciation. Since the civil work of control room, the site development and the internal road development are not specially designed devices hence in our considered opinion, as per the discussion made herein above, are not entitled for 100 per cent depreciation. The claim in this regard is disallowed.

16. As far as the question of depreciation in respect of "transformer upto DP structure" is concerned, the appellant had paid a sum of Rs. 7,00,000 for the purpose of supplying of electrical items like transformer upto DP structure, internal line upto metering. The said payment was made to Suzlon Developers (P) Ltd. This gadget is for transmission of electrical power generated upto sub-station of MSEB at site In our humble opinion the electrical energy so produced by the wind mill is a waste if it is not transmitted to MSEB sub-station. The function of such unit is that the electricity so generated is required to be transferred and transmitted to cable line upto sub-station, where the actual units so generated are stored and metered. Since this is the function of transformer upto DP structure, hence ought to be held as an integral part of the windmill. The other reasons such as the period during which a machinery gets depreciated, as discussed hereinabove, does also apply in case of this machinery. Since we have held so, therefore, the appellant is consequently entitled for higher rate of depreciation as prescribed in IT Rules.

17. In the result, as per the grounds of appeal the claim of depreciation in respect of items (i) to (iii ) are rejected and claim of depreciation in respect of item No. (iv ) is allowed. Resultantly, this appeal is partly allowed.