The Hindu Business Line : Plants can outgrow buildings

FOLLOWING the Supreme Court decision in the CIT vs Anand Theatres (2000 244 ITR 192 SQ), the controversy on whether a building could be considered `plant' for depreciation under the Income-Tax Act, 1961 seemed to have been settled. But the Kerala High Court ruling in CIT vs Navodaya (2004 Taxman 258 Kerala) has raked up the controversy again.

This issue will, therefore, have to be decided not on doctrinal assumptions but on the facts of each case.

Why the issue persists?

The reason is simple. By classifying building as a plant, an assessee becomes entitled to claim depreciation at a higher rate than if the asset were treated as building.

Hence, the attempt is to stretch the meaning of the term `plant' so as to encompass `buildings' as well. In making such claims, assessees have received the support of a number of court decisions.

In S. K. Tulsi & Sons vs CIT (1991 54 Taxman 100 Allahabad), the court said that the building constructed as a cinema and wherein cinema business is being carried was plant, which comprised the tube-lights and fittings as well.

Other assets which were held as plant are:

i) cold storages (in CIT vs Kanodia Cold Storage — 1981 129 ITR 155 Allahabad); ii) nursing home buildings (CIT vs Dr Venkata Rao — 1993 202 ITR 303 Karnataka); iii) hotels (CIT vs Hotel Luciya — 1998 231 ITR 592 Kerala); iv) building made for the manufacture of saccharine to maintain a captive atmospheric condition with regard to the degree of moisture, temperature, provision for filtered air, and so on (R. C. Chemical Industries vs CIT — 1982 134 ITR 330 Delhi). There are many other decisions of this nature.

The Anand Theatre case

According to the Supreme Court, the word `plant' is given an inclusive meaning under Section 43(3), which nowhere includes buildings. The Rules prescribing the rates of depreciation specifically provide for grant of depreciation on buildings, furniture and fittings, machinery and plant and ships. Machinery and plant include cinematograph and other films, and `other items and building' is further given a meaning to include roads, bridges, culverts, wells and tube wells.

For a building used as a hotel, there is a specific provision in Section 32(l)(v) for granting additional depreciation allowance at specified rates depending upon fulfilment of the conditions mentioned therein. In the context of the legislation scheme under Section 32, even though the word plant may include building or structure in certain set of circumstances as per the dictionary meaning, to say that a building used for running the business of hotel or a cinema would be plant under the Act would be inconsistent with the Section 32 and the legislative intent.

Hence, 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 is 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 merely a shelter, home or setting in which business is carried on.

Same would be the position with regard to a theatre in which cinema business is carried on. Therefore, even the functional test is not satisfied.

As regards depreciation, courts have held that, as a general principle, depreciation represents the diminution in value of a capital when applied to making profit or gain.

The object is to get the true picture of the real income of the business. Hence, it can be inferred that the legislature never intended to give such benefit of depreciation to a building, which is usually more durable than machinery or plant.

However, the Kerala High Court, by applying the functional tests in the Navodaya decision, has brought out refinements to the concept of buildings as plants as conceived by the Supreme Court.

The assessee's claim in this case before the High Court, supported by a finding of fact by the Tribunal, was that the studio (which was claimed to be a plant) was designed with wooden partition that can be removed for creating different setting and scenes.

The floor of the building can be removed to yield to cellars. The walls are made up of plywood and cardboard which can be easily removed and replaced for movement of trolley cameras.

Platforms were also artificially designed in such a manner that the floor could be converted into a cave shrine, and so on. Hence, it should be allowed depreciation at rate prescribed for `plant'.

High Court's decision

According to the court, to find out whether a building is a `plant' or not, the following would be decisive:

Functional test;

An item which falls within the category of building cannot be considered to be a plant. Buildings with particular specification for atmospheric control like moisture or temperature are not plants.

To find out as to whether a particular item is a plant or not, the meaning in the popular sense — that is, the people conversant with the subject matter would attribute to it — has to be taken.

The term `plant' would include any article or object, fixed or movable, live or dead, used by a businessman for carrying on his business and it is not necessarily confined to any apparatus which is used for mechanical operations/process or employed in mechanical or industrial business. The article must have some degree of durability.

The building in which the business is carried on cannot be considered to be a plant.

The item should be used as a tool of the trade with which the business is carried on. For that purpose, the operations it performs have to be examined.

The building and the structure can be considered to be plant provided they fulfil these conditions.

Hence, the assessee is entitled to depreciation for studio building prescribed for `plant', as it had satisfied the functional test.

Floor measuring 12,000 sq.ft. with asbestos roof, railing platforms and replaceable walls could be treated as tools with which the business of the assessee was being carried on.

The Supreme Court in the Anand Theatre case has left a window open when it said "... except in some rare cases, where it plays an essential part in the operations, which take place." (supra)

In the light of these observations, the High Court's decision seems in tune with the Supreme Court's.

However, the position is that no finality on the issue could be said to have been reached even after the Supreme Court's decision, and cases will have to be decided on the basis of facts in different cases.

(The author is a former Chairman of the CBDT.)

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