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income-tax Officer Vs. Lallooji and Sons - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Allahabad
Decided On
Judge
Reported in(1985)12ITD371(All.)
Appellantincome-tax Officer
RespondentLallooji and Sons
Excerpt:
.....they were 'plant'. it was argued that there was no justification in limiting the meaning of the word 'plant' to those assets, which were used in an industrial process or industrial business only. it was alternatively submitted before the commissioner (appeals) that the structures out of gc sheets, being purely temporary erections, were entitled to 100 per cent depreciation under the heading 'building'.7. the commissioner (appeals) did not agree with the argument of the assessee that the ito, by implication, had given the finding that gc sheets were plant. in this connection, he referred to the decision of the bombay high court in cit v. bank of india ltd. [1979] 118 itr 809 for the proposition that inference about the categorisation of the asset could not be made only from the rate of.....
Judgment:
1. Since the above appeals relate to the same assessee and also involve some common contentions, they are disposed of by this consolidated order for the sake of convenience.

2. The assessee is a firm. Clause 2 of its partnership deed, dated 18-7-1965, reads as under : 2. That the parties to this deed agreed to carry on the business of tent merchants and suppliers of tents, furniture, tin hutment, contractors, and similar other businesses for the common benefit of all the parties to this deed. The firm may do such other work or business or businesses, which the partners may decide to do from time to time.

While claiming investment allowance, the assessee had also stated the nature of its business in its letter received by the ITO on 3-10-1979 as under : That we have purchased GC sheets and other materials during the previous year as per lists enclosed. We used these materials for our business. Our business is of construction of movable partitions, fences, removable fittings and installations and of hiring them out on contracted considerations. These are done for the Government departments, schools, colleges, mela authorities, conferences, etc.

3. On 30-11-1976, the assessee entered into an agreement with officer-in-charge, Kumbh Mela, 1977, representing the Government of Uttar Pradesh. The preamble of this agreement is relevant and is reproduced below : Whereas the various Government departments working for the Kumbh Mela, 1977, require the supply of tentage, furniture, GC sheets constructions, barricadings and of other miscellaneous articles on hire.

And whereas the contractor has agreed to execute, upon and subject to the conditions, hereunder stipulated (hereinafter called the said conditions) and supply on hire of tentage, furniture, GC sheets constructions, barricadings and supply of other miscellaneous articles to the various Government departments working for the Kumbh Mela, Allahabad.

Now these present witnesseth that in consideration of the payment to be made by the various hiring Government departments at the rates given in Schedules 'A'--tentage, 'B'--furniture, 'C'--GC sheet construction works, 'D'--barricading, and 'E'--supply of miscellaneous articles, the contractor shall duly execute the works or supply the said material in accordance with the specifications given in the schedules referred to above and appended hereto subject to the conditions mentioned herein, under which shall be deemed to be the part of the contract as the same have been fully set out herein and the various hiring Government departments shall, if the contractor fully supplies the said material or execute these works and observe and follows the terms and conditions given hereinunder, pay the contractor the contract sum or such other sums which shall be payable at the time and in the manner set forth in the said conditions.

Item Nos. 19 and 20 of the Schedule 'C' relating to tin constructions to the above agreement lay down the rate of Rs. 8 and Rs. 15 per 6 ft.

high and 10 ft. high tin sheets, respectively. Clause 4(C) of this agreement also stated that in the event of loss, the department concerned shall pay compensation to the assessee at the uniform rate of five times of the furniture including galvarized corrugated sheets (GC sheets). There are also clauses in this agreement to show that the assessee was bound to pitch tents, if so required, by the department on the payment of pitching and dismantling charges as given in the concerned schedule attached to it. The above agreement, therefore, shows that the assessee had agreed to hire out GC sheets to the various departments under the officer-in-charge, Kumbh Mela. It was, however, not its responsibility to pitch any tents unless it was required to do so, for which it was to be paid a separate charge.

4. In the year under appeal, the assessee purchased GC sheets of the total value of Rs. 10,77,807 between 23-11-1976 and 31-1-1977. They were purchased particularly in pursuance of. the agreement already referred to above. The assessee claimed before the ITO that these GC sheets were in the nature of 'plant' and since the individual value of each sheet was less than Rs. 750, it was entitled to a deduction of the entire cost in terms of the proviso to Section 32(1)(ii) of the Income-tax Act, 1961 ('the Act'). The ITO was of the view that an industrial process or business was necessary in case an item was to be treated as 'plant'. Since he found that the business of the assessee was only that of hiring, which did not involve any industrial process, he held that GC sheets could not be treated as 'plant'. In his opinion, they were in the nature of fittings entitled to depreciation at the rate of 10 per cent laid down in the relevant rules. He, accordingly, allowed the depreciation of Rs. 1,07,780 being 10 per cent of Rs. 10,77,807 only.

5. The assessee made an alternative claim before the ITO that even if the entire cost was not allowed as depreciation, still the GC sheets were eligible for investment allowance as 'plant'. The ITO observed that he had already given a finding that the GC sheets did not come within the meaning of 'plant'. He further observed that the investment allowance was available only on machinery or plant in any 'industrial undertaking'. According to him, 'industrial undertaking' was one which was engaged in manufacture or production of an article or thing. He gave a finding that the assessee was not engaged in any industrial undertaking and, therefore, it was not entitled to any investment allowance on its GC sheets.

6. The assessee appealed to the Commissioner (Appeals). The first submission before the latter was that the term 'fitting' did not find place in the Act and that it was only mentioned in the Income-tax Rules, 1962, where the rates of depreciation had been prescribed for 'furniture and fittings'. It was, thus, submitted that the ITO wanted to describe the GC sheets as furniture after having denied that they were in the nature of 'plant'. It was argued that by no stretch of imagination, GC sheets could be described as furniture. It was also argued that by applying the rate of 10 per cent of depreciation, the ITO had impliedly accepted that they were 'plant'. It was argued that there was no justification in limiting the meaning of the word 'plant' to those assets, which were used in an industrial process or industrial business only. It was alternatively submitted before the Commissioner (Appeals) that the structures out of GC sheets, being purely temporary erections, were entitled to 100 per cent depreciation under the heading 'building'.

7. The Commissioner (Appeals) did not agree with the argument of the assessee that the ITO, by implication, had given the finding that GC sheets were plant. In this connection, he referred to the decision of the Bombay High Court in CIT v. Bank of India Ltd. [1979] 118 ITR 809 for the proposition that inference about the categorisation of the asset could not be made only from the rate of depreciation allowed by the ITO. He, however, did not agree with the finding of the ITO also that there should be an industrial process or industrial business in order that the GC sheets be treated as 'plant'. In this connection, he referred to the decision of the Supreme Court in CIT v. Taj Mahal Hotel [1971] 82 ITR 44. The Commissioner (Appeals) also agreed with the stand of the assessee that GC sheets could legitimately be described as tools of its trade. However, he still did not agree that they were in the nature of plant on the short ground that the durability of the GC sheets was not high at all. He observed that they were normally fixed to the ground for erecting temporary structures, which subjected them to considerable wear and tear. According to him making of the holes for the bolts and nuts each time they were put to use also reduced their serviceability. He, therefore, held that they could not be classified as 'plant'. In this connection, the Commissioner (Appeals) strongly relied on the decision of the Gujarat High Court in CIT v. Elecon Engg.

Co. Ltd. [1974] 96 ITR 672.

7A. The Commissioner (Appeals) then examined the use to which the sheets were put as per the agreement dated 30-11-1976, referred to above, and found that they were mainly for the purpose of erecting buildings. He, thus, gave a finding that even the GC sheets were nothing but 'building' material which became converted into 'buildings', the moment the labour was expended on them and they were erected. He also observed that cost of these 'buildings' should rightly be taken as the cost of the material, i.e., GC sheets and the cost of labour and overheads. Since these structures or buildings were purely of temporary nature, the Commissioner (Appeals) held that they were entitled to depreciation at the rate of 100 per cent. He, thus, allowed a further relief of Rs. 9,70,026 (Rs. 10,77,807--Rs. 1,07,781).

8. The above findings of the Commissioner (Appeals) have not satisfied either the assessee or the department. The department has taken the following ground in its appeal : The learned Commissioner (Appeals) erred in allowing 100 per cent depreciation on the cost of galvanized corrugated sheets treating them as 'plant'.

In the first place, such a ground does not arise out of the order of the Commissioner (Appeals). We have already shown above that the Commissioner (Appeals) never treated the GC sheets as plant. On the other hand, he treated them as buildings of temporary erections, on which depreciation is allowable at the rate of 100 per cent. The assessee, on the other hand, has taken the following ground of appeal.

Because the learned authorities below erred on fact and in law in holding that galvanized iron sheet is not a plant and/or disallowing consequential depreciation or investment allowance.

It was, however, specifically admitted before us by the counsels of the assessee that in case GC sheets were treated as 'plant' and their entire cost was allowed as deduction, since each of them cost less than Rs. 750, then the assessee would have no claim for any investment allowance.

9. In the above background, we will now proceed to deal with these appeals. We have already stated above that the only aspect on which the Commissioner (Appeals) treated the GC sheets as plant, was that their durability was not very high and that their constant use reduced their serviceability. The issue, therefore, before us is very limited to find out whether they can be denied the status of plant on the above ground.

However, both sides put elaborate arguments not only regarding the durability of an article to categorise it as 'plant' but also whether otherwise also they were in the nature of plant except for their durability. With due deference to the parties appearing before us, we will, therefore, deal with the entire matter, though only briefly. We may also state that a large number of cases were cited at the bar, some of them laying down the original principles, while some merely repeating them and still others only to rely on them for holding a particular article as a plant. In our opinion, it is not necessary to refer to each and every case in our this order. We will refer only to some of them which, in our opinion, bring out the controversy clearly and are helpful in deciding the present appeals.

10. The term 'plant' as such has not been defined in the Act. Only an inclusive definition is given in Section 43(3) of the Act stating that 'plant' includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession.

The nature of the above inclusive definition came up for the consideration of the Supreme Court in the case of Taj Mahal Hotel (supra) in the following words : Now it is well settled that where the definition of a word has not been given, it must be construed in its popular sense if it is a word of everyday use. Popular sense means 'that sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it'. In the present case, Section 10(5) enlarges the definition of the word 'plant' by including in it the words which have already been mentioned before. The very fact that even books have been included shows that the meaning intended to be given to 'plant' is wide. The word 'includes' is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. When it is so used, these words and phrases must be construed as comprehending not only such things as they signify according to their nature and import, but also those things which the interpretation clause declares that they shall include. The word 'include' is also susceptible of other constructions which it is unnecessary to go into.

11. It is, therefore, necessary to go to the decided authorities to look to the meaning of the term 'plant'. We will now first refer to the decision of Hinton (Inspector of Taxes) v. Maden & Ireland Ltd. [1960] 39 ITR 357 (HL). In this case, the question was whether the knives and lasts were 'plant' within the meaning of Section 16(3) of the Finance Act, 1954 of England. We will quote below as under : It is not disputed that plant is also used in the Act as an ordinary English word. It is not altogether an easy word to construe : it may have a more or less extensive meaning according to its context. As a general statement of its meaning I would adopt the words of Lindley L.J. in Yarmouth v. France [1887] 19 QBD 647, 658 ; 4 T.L.R. 1, 'in its ordinary sense it includes whatever apparatus is used by a businessman for carrying on his business--not his stock-in-trade which he buys or makes for sale ; but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in his business". I would also refer to the judgment of Uthwatt J. in J. Lyons & Co. Ltd. v. Attorney General [1944] Ch. 281, 286 ; 60 T.L.R. 313/[1944] All. ER 477: 'I do not think that the use throughout Section 24 of the Act [Rating and Valuation Act, 1925] of the word 'plant' as part of the phrases 'plant or machinery' and 'machinery and plant' has the effect of confining the meaning of the word to such plant as is used for mechanical operations or processes. Next I find it unnecessary for the purposes of a decision in this case to enter on the question whether any particular limitation should be placed on the general sense borne by the word 'plant' by reason that the Act in which it appears is a Rating Act, I propose to assume that no such limitation should be placed...Confining my attention to trade plant I am content to accept the general description in Yarmouth v. France 19 QBD 647 that plant includes whatever apparatus or instruments are used by a businessman in carrying on his business. The term does not include stock-in-trade nor does it include the place in which the business is carried on. Whether any particular article more properly falls within 'plant' as thus understood, or in some other category, depends on all the circumstances of the case'.

Subject to one point, I have no doubt that these knives and lasts are plant in the ordinary sense of the word. It is true that they are numerous, small and cheap. But one trader may have to use a few large articles while another may have to use a large number of small articles, and I see no good ground for distinguishing between them as regards investment allowance. The one point is the durability of these articles. When Lindley L.J. used the phrase 'permanent employment in the business' he was using it in contrast to stock-in-trade which comes and goes, and I do not think that he meant that only very long lasting articles should be regarded as plant. But the word does, I think, connote some degree of durability and I would find it difficult to include articles which are quickly consumed or worn out in the course of a few operations. There may well be many borderline cases, but these articles have an average life of three years, and if their cost can fairly be called capital expenditure I cannot refuse to them the description of 'plant' unless the Act discloses some special reason for doing so. The word 'investment' may indicate a rather longer duration than what might be sufficient in other cases, but it seems to me that machinery could not be disqualified for investment allowance because it only had a life of three years, and I see no reason why a stricter test as to durability should be applied to plant than to machinery when the Act appears to treat them on an equal footing. I am therefore of opinion that the respondents are entitled to investment allowance and that this appeal should be dismissed.

In our opinion, the above passages are sufficient to decide the present case also. The question was also considered elaborately by the Gujarat High Court in Elecon Engg. Co. Ltd.'s case (supra). We quote below from the head-note of this case : The word 'plant' in its ordinary meaning is a word of wide import and it must be broadly construed having regard to the fact that articles like books and surgical instruments are expressly included in the definition of plant in Section 43(3) of the Act. It includes any article or object, fixed or movable, live or dead, used by a businessman for carrying on his business. It is not necessarily confined to an apparatus which is used for mechanical operations or processes or is employed in mechanical or industrial business. It would not, however, cover the stock-in-trade, that is, goods bought or made for sale by a businessman. It would also not include an article which is merely a part of the premises in which the business is carried on. An article to qualify as 'plant' must furthermore have some degree of durability and that which is quickly consumed or worn out in the course of a few operations or within a short time cannot properly be called plant. But an article would not be any the less plant because it is small in size or cheap in value or large quantity thereof is consumed while being employed in carrying on business. In the ultimate analysis the inquiry which must be made is as to what operation the apparatus performs in the assessee's business. The relevant test to be applied is : does it fulfil the function of plant in the assessee's trading activity Is it the tool of the taxpayer's trade If it is, then it is plant, no matter that it is not very long-lasting or does not contain working parts such as a machine does and plays a merely passive role in the accomplishment of the trading purpose.

This case was followed by the Delhi High Court in CIT v. National Air Products Ltd. [1980] 126 ITR 196. The Allahabad High Court in CIT v.Kanodia Warehousing Corpn. [1980] 121 ITR 996 also referred to this case. It was held by our High Court that in order to find out if a building or structure or part thereof constituted 'plant', the functional test must be applied. It must be seen whether the subject-matter involved, i.e., the building or structure or part thereof, constituted an apparatus or a tool of the taxpayer or whether it was merely a space where the taxpayer carried on his business. If the building or structure or part thereof was something by means of which the business activities were carried on, it would amount to a plant but where the structure played no part in the carrying on of those activities, but merely constituted a place within which they were carried on, it could not be regarded as a plant.

12. There is no doubt that GC sheets are used by the assessee for carrying on its business. It fulfils the function of a plant in the assessee's trading activities. It is, in fact, in the nature of a tool to the assessee. It was admitted before us that its durability varied between two and a half years to four years. In this connection, we have already referred to the agreement, dated 30-11-1976, to point out that in case of loss, the Government was bound to pay five times of its rental value as compensation, suggesting that its durability was considered of five seasons. In the case of Maden & Ireland Ltd. (supra), the average life of knives was only one year or three years according to the type and that of the lasts only three years. We have also quoted above to point out that the use of the phrase 'permanent employment in the business' by Lindley L.J. was only in contrast to stock-in-trade, which comes and goes. That means quickly consumable articles or stock-in-trade cannot be included in the term 'plant'. It was in this case that it has been stated that it connotes some degree of durability. We, therefore, do not agree with the finding of the Commissioner (Appeals) that the GC sheets did not command enough durability to be categorised as 'plant'. In our opinion, they are nothing but plant. Since it was at no point disputed before us that the value of each of them did not exceed Rs. 750, the entire cost has to be allowed as deduction in computation of the assessee's income.

13. We will now deal with some of the objections raised on behalf of the department. The first objection was that the assessee was not aggrieved with the order of the Commissioner (Appeals) inasmuch as it had been granted full depreciation equal to the cost of the asset and, therefore, no appeal lay to the Tribunal. There is no substance in this contention. The department had also filed an appeal against full depreciation equal to the cost allowed by the Commissioner (Appeals) and the appeal by the assessee must be taken to safeguard its own interest, even though it can raise the same issue before us in the departmental appeal also.

14. The next contention of the learned departmental representative was that it was not correct to take each sheet separately and hold it as a 'plant'. He submitted that the sheets were purchased by the assessee in weight and the discarded sheets were also sold in weight. As an illustration, he invited our attention to page 16 of his paper book to point out the sale of some of the sheets in weight. His contention was that the sale of the sheets by weight went to show that they could not be treated as separate units. His further plea was that if they were treated as plant then the provisions of Section 41(2) of the Act would have no application and to that extent, there will be loss to the revenue. His other objection was that since depreciation was to be allowed under Section 32 only on articles of permanent nature, the sheets could not be treated as plant. His final submission was that a sheet, by itself, was not self-contained, which was another ingredient of a plant. In this connection, he also referred to the decision of the Allahabad High Court in CIT v. Indian Turpentine & Rosin Co. Ltd. [1970] 75 ITR 533.

15. In our opinion, there is no merit in either of the above contentions. We have already pointed out above that in the agreement, dated 30-11-1976, hire charges of each sheet were separately shown at the rate of Rs. 8 per sheet on supply of 6 ft. high tin sheets and Rs. 15 per sheet on 10 ft. high tin sheets. This goes to show that the assessee was free to use any single sheet itself in its business. We do not think that merely because for convenience sake, the purchase and sale of the sheets was by weight, they could be denied the benefit of plant nor the plea of non-application of Section 41(2) can guide us in deciding the nature of an asset for the purpose of Section 32. We are also unable to understand the argument of the learned departmental representative that merely because Section 32 refers to depreciation on articles of permanent nature, a sheet cannot be called 'plant'. It is under the proviso to Section 32(1)(ii) that the assessee is making its claim and the plant is included in this proviso. In Indian Turpentine & Rosin Co. Ltd.'s case (supra), it was held that the definition of 'plant' was very wide and poles, cables, conductors and switch-boards for distribution of electricity could be treated as plant, We fail to understand how in view of this enlargement of the definition, a tin sheet can be held not to be a plant.

16. The learned departmental representative by pointing out to the definition of 'stock-in-trade' in Stroud's Judicial Dictionary, Third edn., Vol. 4, p. 2869, submitted that it also included all such chattels which were used for letting on hire in a person's trade. By this, his submission was that since the tin sheets were used by the assessee for hire to Mela authorities, they were its stock-in-trade, therefore, they could not be treated as plant. He, however, very fairly admitted before us that this view was not acceptable to the Gujarat High Court in the case of H. Mohmed & Co. v. CIT [1977] 107 ITR 637. It was held by the Court that one of the indications for deciding as to what a stock-in trade is, is whether a particular assessee is buying or selling the goods or commodity or whether he has merely invested his money with a view to earn further income or with a view to carrying on his other business. Stock-in-trade cannot, therefore, include a commodity, which is acquired for the purpose of being let on hire. In view of this decided authority, we reject the contention of the learned departmental representative that tin sheets could be treated as stock-in-trade of the assessee.

17. Our finding, therefore, is that each GC sheet is in the nature of a plant. Since its value did not exceed the sum of Rs. 750, the assessee was entitled to the deduction of its actual cost in the year under appeal in the computation of its income. We have already stated above that the Commissioner (Appeals) had allowed such a deduction though as a depreciation equal to 100 per cent of its cost. We, therefore, confirm his finding, though for different reasons. On our this finding, the assessee on its own admission is not entitled to any investment allowance.

18. to 27. [These paras are not reproduced here as they involve minor issues.)


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