1. The only issue in this appeal is whether certain building put up by the assessee has to be treated as a plant for the purpose of investment allowance under Section 32A of the Income-tax Act, 1961 ('the Act').
2. The assessee is a public limited company. They are engaged in the manufacture of ayurvedic tonics and preparations. During the accounting year concerned, the assessee-company had put up a unit at Bangalore.
This consisted of a structure with ground floor and three floors above plus a water tank, sump tank, and pump house. This unit has been designed to produce mainly Asawarishtas. It is designed with a view to have mechanisation and modernisation of operations. The process involves extraction of herbs in aqueous medium dissolution. The entire process is done at five different levels, starting at the fifth level or the top level. The description of the process at the various levels is given below: Fifth Level: Water forms the vehicle for the Asawarishtas. This water is treated at the fifth level to make it germ free and to settle the suspended matter, so that the water is suitable for the processing of herbs.
Fourth Level: This level is the 'Extraction Level'. Water is fed from the fifth level to this by gravity feed and after it is duly treated. The herbs of various types are hoisted up after they are prepared to required mash size and cleaned thoroughly. The herbs and water are charged to extraction vats which are installed on a platform to facilitation draining of the extract.
The herbs are extracted in aqueous medium for a period of about 4 hours till the desired standard of dissolved solids are obtained.
The extract is strained into receptacles kept below. The herbal marc is centrifuged and the liquid obtained is mixed with the extract strained earlier. The extract is treated with sacchariferous materials to obtain specific refractive index of the liquid. The liquid is fed by gravity to the third level.
Third Level: The fermentation room where the liquid received from the fourth level is subjected to alcoholic fermentation under controlled conditions of temperature, pH, humidity and oxygen pressure. At regular intervals the broth is sampled and various parameters are monitored, the refractive index, specific gravity, dissolved solids, pH, titrable acids temperature are some of the criteria used. The broth is then fed to the second level.
Second Level: Vat Hall. The broth received from the third level is then taken to predetermined vat. Certain herbal ingredients are added and the vat sealed to allow the secondary fermentation to progress slowly. The vats are supported on concrete beams keeping some part of the bottom exposed to air in order to minimise the effects of temperature variation. The alcoholic fermentation generates several other alcohols besides ethanol which are responsible for the pleasant flavour of the end product. The liquid are sampled periodically to monitor refractive index, pH, ethanol, specific gravity, dissolved solids, etc.
First Level: The liquids syphoned from vats at second level are stored in smaller vats for further sedimentation wherein in fine silt sediments and the liquid is syphoned again. It is then passed on to the ground level.
Ground Level: The processing undertaken on this level are bottle washing, drying, filling, capping and labelling. The liquid is received in tanks from the first level and then filled in bottles after being treated with certain ingredients. The entire process is automatic and on conveyrised line.
Quality control and inspection section monitors quality at various stages.
3. According to a certificate issued by an architect, the factory has been designed similar to a chemical plant making full use of the gravitational flow for conveying the product use of the process from the top floor to the gro und level. The halls have beed fitted with extra height considering the size of the vats and the requirements to provide sufficient air circulation. The floors have been devised as to hold heavy vats on parallel beams leaving open space at the bottom for transferring material by gravity flow to the lower areas and also to enable free air circulation to ensure constant temperature. Areas have been designed at the immediately lower level to permit sedimentation and filtration. Since it was expected that about 100 vats, each having a tare weight ranging from 500 to 1500 kgs., and gross weight up to 6000 kgs., together with the overhead water tank would be housed at the upper levels to facilitate gravity flow, a heavy structure had to be made with sound foundation. These are claimed to be akin to machineries in other industries.
4. Before the ITO, the assessee claimed that the entire expenditure for putting up this structure should be considered as expenditure on putting up a plant and, therefore, the assessee would be entitled to investment allowance under Section 32A. The ITO, on the other hand, felt that it was only a building and could not be considered as a plant or machinery. He, therefore held that the assessee was not entitled to the benefit under Section 32A. Since it was considered as a first class building, the assessee could get depreciation at the rate of 2 1/2 per cent.
5. The assessee came on appeal before the Commissioner (Appeals). The Commissioner (Appeals), agreeing with the ITO, held that it was not a plant. It was only a factory building. Merely because the factory is a little better designed and takes care of the special requirements of the manufacturing process, it does not follow that the building has to be classified as plant.
6. The assessee is on further appeal before us. Shri Mahajani, appearing for the assessee, submitted that on the facts noted the structure subserves a part of the manufacturing process and, therefore, should be treated as a plant. He pointed out that the top structure is water tank. If the water tank was made of any other material, there would be no difficulty for the department to say that it was a plant.
He submitted that merely because the water tank is made of concrete, it cannot cease to be a plant. He pointed out that because of the heavy weight which the lower floors will have to carry, extra strong foundation and floorings had been given. This had also been modified to suit the requirements. Because of these modifications, he submitted, it cannot be treated as an ordinary building and it has become a plant. He then relied on the decision of the Madras High Court in the case of Addl. CIT v. Madras Cements Ltd.  110 ITR 281 to show that the structure has to be considered as a plant. Shri Mahadeshwar, for the department, relying on the finding of the Commissioner (Appeals), submitted that the structure has to be considered as a building only.
7. We have considered the facts of the case. Before we give a finding as to whether the structure is a building or a plant, it is necessary to give the tests which have to be applied in order to determine the issue. These tests have been given in CIT v. Sandvik Asia Ltd.  144 ITR 585 (Bom.). The essence of the test to determine whether an asset can be called a plant is to ascertain whether it can be treated as an apparatus which is used by a businessman for carrying on business and whether with that asset he carries on the trade as opposed to the place where and the setting in which the trade was carried on. We have, therefore, to consider the structure could be considered as an apparatus which is used for carrying on the business. The business of the assessee is preparation of ayurvedic tonics. Instead of considering the structure as one unit, it will be better to consider each storey and find out whether it fulfils the functions as an apparatus or whether it is merely a setting.
8. We will first take up the top level. At the top level, we have already indicated that the structure is in the shape of a water tank.
Now, it is fairly well settled that a water tank made of aluminium would be in the nature of a plant. Please see the decision of the Calcutta High Court in the case of Indian Aluminium Co. Ltd. v. CIT  140 ITR 114. Therein, they have held that the water storage tank is an aluminium plant has to be treated as an aluminium plant itself.
Since the user of the structure is the determining factor, it is immaterial whether the structure is made out of aluminium or out of concrete. In our opinion, therefore, the top structure in only an apparatus and, therefore, has to be treated as a plant.
9. The level below the top structure contains extraction vats which are installed in a platform. The herbs are fed into this extraction plant by a hoist. Water from the water tank is fed into this by gravity. The walls and the floors of the fourth level are so designed as to facilitate the holding of the vats and the percolation of water from the top. In our opinion, this would also constitute an apparatus. So, this part has also to be treated as a plant.
10. The department's contention is that the fourth level, which we are now considering, is part of a building and, therefore, it is a setting in which the business is carried on. Now an identical ground had been taken up by the department in an English case which had been considered by the Bombay High Court in the case of Sandvik Asia Ltd. (supra). In Schofield v. R. & H. Hall Ltd.  49 TC 538 (CA) the assessee had constructed silos which the court of appeal held to be a plant insofar as operation was carried on by the assessee therein. The company therein carried on the business of importers of grain. It purchased grain and resold it ex-silo. The silos consisted of large concrete structure into which were built concrete bins, a small structure which was in effect the lift shaft and plant and machinery consisting of conveyor belts, mobiles chutes, etc. The grain was sucked up from the ship into the bins and from there released as required and permitted to descend by gravity. The walls of the bins were either party walls with the next bin or the exterior walls of the silo. It was the case of the assessee that the silos as a whole qualified for capital allowances as plant. Their Lordships applied the fundamental test and found that the silos were an apparatus with which the business was carried on. In the case before us also, the position is more or less the same. The entire fourth level has to be treated as extraction vats notwithstanding the fact that such vats were placed within the four walls. The four walls themselves have a function to perform other than holding the vats. In para 2 of this order, it has been explained what process takes place at the fourth level. Considering the process therein, we have no doubt that this level is also to be treated as a plant.
11. We next consider the third level. Herein, the liquid received from the fourth level is subjected to alcoholic fermentation under controlled conditions of temperature, humidity and oxygen pressure. The walls have a role to perform in the control of the temperature, humidity, etc. Therefore, they also form part of the functioning of the manufacturing process. Therefore, the third level has also to be considered as part of the plant.
12. In the second level, the broth received from the third level is taken to predetermine the vats. The vats here are huge structures and when full, each one weighs nearly 6 tonnes. The support for such weight are the concrete beams. Some parts of the bottom are exposed to air in order to minimise the effects of temperature variation. This structure also answers to the description of an apparatus only. So, we have no doubt that the second level is also part of the plant. The same is the position with the first level.
13. However, we are satisfied that the structure in the ground level is not part of the plant. This structure is used only for bottle washing, drying, filling, cleaning, etc. This is a setting in which the business is being done.
14. Therefore, on consideration of the facts, we are satisfied that a part of the structure has to be considered as plant. Now, the total expenditure incurred by the assessee is Rs. 13,31,378, out of which the following expenditure referring to ground level and other structures would not be eligible for being considered as plant.
Rs. The expenditure on these items will not be eligible for being considered] as plant. The rest of the expenditure is in respect of a plant and the assessee is entitled to investment allowance thereon. As a consequence, in respect of expenditure to be treated as part of the plant, the assessee would be entitled to depreciation thereon at the rate of 10 per cent.