Itta/763/2006 Of The Commissioner Of Income Tax-Iii, Hyderabad v. M/S Balaji Foods And Fees Limited

* THE HON’BLE SRI JUSTICE V.V.S.RAOANDTHE HON’BLE SRI JUSTICE RAMESH RANGANATHAN + R.C.Nos.135 of 1997, 53 AND 107 OF 2001, ANDITTA Nos.178, 186, 376, 607, 674, 763, 765, 773 OF 2006 % Dated: 03.11.2010 Between: Commissioner of Income Tax,Andhra Pradesh-I, Hyderabad. AND …. Appellant M/s.Padmavathi Hatcheries (P) Limited,Subhodaya apartment, Boggulkunta, Hyderabad,And others. …Respondents !Counsel for the Appellant: Sri B.Narasimha Sarma ^Counsel for the Respondents: Sri Y.Ratnakar <Gist: >Head Note: ?Citations: 1.(1999) 237 ITR 174 (SC) 2.(2000) 5 SCC 393 : AIR 2000 SC 2356 : (2000) 244 ITR 192 3.(2005) 274 ITR 529 (Punj & Har) 4.(2000) 243 ITR 81 5.(2001) 247 ITR 268 6.(2003) 259 ITR 661 (Ker) THE HON’BLE SRI JUSTICE V.V.S.RAOANDTHE HON’BLE SRI JUSTICE RAMESH RANGANATHAN R.C.Nos.135 of 1997, 53 AND 107 OF 2001, ANDITTA Nos.178, 186, 376, 607, 674, 763, 765, 773 OF 2006 .11.2010 Between:Commissioner of Income Tax,Andhra Pradesh-I, Hyderabad. AND …. Appellant M/s.Padmavathi Hatcheries (P) Limited,Subhodaya apartment,Boggulkunta, Hyderabad,And others. …Respondents THE HON’BLE SRI JUSTICE V.V.S.RAOAND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN R.C.Nos.135 of 1997, 53 AND 107 OF 2001, ANDITTA Nos.178, 186, 376, 607, 674, 763, 765, 773 OF 2006 COMMON ORDER: (per Hon’ble Sri Justice V.V.S.Rao) The cases referred under Section 256(1) of the Income Tax Act,1961 (the Act) and Income Tax Tribunal Appeals filed under Section260A of the Act, involve common question compelling disposal by acommon order. All the referred cases are at the instance of the Revenue.The only question referred to this Court is; “whether on the facts and inthe circumstances of the case, poultry shed should be treated as plant,thereby allowing the assessee company in a higher rate of depreciationas applicable to plant and not the rate of depreciation as applicable tobuilding”? Before considering rival contentions of the Junior Counsel forRevenue and the Counsel for assessees, it is appropriate to notice thebackground of the referred cases and ITTAs by referring to R.C.No.53 of2001 and I.T.T.A.No.376 of 2006. In R.C.No.53 of 2001, M/s.Srinivasa Hatcheries (Private) Limited,Hyderabad, which runs a hatchery and poultry farm, buys one-day oldchicks, grows them, hatches them and after incubating them, sells one-day old commercial chicks to poultry farms. In the return for theassessment year 1991-1992, they claimed depreciation at 20% onpoultry sheds treating them as ‘Plant’. The assessing officer declined toaccept the same and completed assessment treating the poultry sheds as‘Building’ allowing depreciation at 10%. In their appeal, the assesseewas successful. The Revenue unsuccessfully appealed before ITAT. TheCommissioner of Income Tax sought reference. The Tribunal by order,dated 08.07.1996 declined to do so. The matter went to Supreme Court.Their Lordships by order, dated 04.02.2000 in Civil Appeal No.841 of2000 (arising out of SLP (C) No.4847 of 1989) directed the Tribunal torefer the question to the High Court. I.T.T.A.No.376 of 2006 is filed by Revenue against the order of theLearned Tribunal, dated 28.10.2005, in I.T.A.No.550/Hyd/1999 in relationto assessment year 1992-1993. Therein, the assessment ofM/s.Venkateswara Hatcheries, Hyderabad, was completed under Section143(3) on 22.04.1993. On the ground that the deductions under Section80HH, 80HHC and 80JJ were not properly worked out, theCommissioner in exercise of revisional jurisdiction set aside theassessment order of the Deputy Commissioner of Income Tax.Consequently, there was re-assessment determining the total income atRs.1,84,93,920/-. Inter alia contending that poultry shed is a plant, withinthe meaning of Section 43(3) of the Act, the assessee successfully filedappeal. CIT allowed the same on 11.02.1999. The Revenue’s appealbefore the learned Tribunal was futile. In these referred cases and ITTAs, the Senior Counsel and JuniorCounsel for Income Tax Department relying on the decisions of SupremeCourt and Punjab and Haryana Court contend that if any business orprofession is carried on in a premises, it is to be treated as a building.They would add that if the building forms integral part or forms itself as anapparatus in the business process, it has to be treated as plant.According to them, poultry shed used for growing the chicks and,hatching and incubating their eggs, is not a plant, and therefore, does notsatisfy the functional test. They rely on CIT v Venkateswara Hatcheries (Private) Limited[[1]], CIT v Anand Theatres[[2]]and Commissioner ofIncome Tax v Shivalik Poultries[[3]]. The Counsel for assessee submits that all the poultry sheds areconstructed to serve the assessee’s special technical requirements andare specially designed. Poultry sheds are tools and apparatus for thepurpose of business and, therefore, they cannot be treated as ‘Building’.He would vehemently contend that poultry shed is a ‘Plant’ and assessees would be entitled to claim depreciation at 25%. He placedreliance on CIT v Dr.B.Venkata Rao[[4]],CIT v Karnataka PowerCorporation[[5]]and CIT v Dr Ganga R.Menon[[6]]. The point for consideration is whether poultry shed should betreated as ‘Plant’ thereby allowing assessees to claim higher rate ofapplicable depreciation? Sections 28 to 41 of the Act contain the procedure for computationof profits and gains of business or profession. Section 32 of the Actallows the assessee certain deductions in respect of depreciation oftangible assets like buildings, machinery, plant or furniture. Deduction inrespect of depreciation of intangible assets like know-how, patents,copyrights, trademarks, licences, franchises or any other business orcommercial rights of similar nature is also permitted. Section 43 containsdefinitions of the terms used in Sections 28 to 41. Section 43(3) defines‘Plant’. For understanding the controversy, it is necessary to readSections 32(1) and 43(3) of the Act, extracted hereunder. 3 2 . Depreciation: (1) In respect of depreciation ofbuildings, machinery, plant or furniture owned by the assesseeand used for the purposes of the business or profession, thefollowing deductions shall, subject to the provisions of Section34, be allowed - (i) in the case of ships other than ships ordinarily plying oninland waters, such percentage on the actual cost thereof to theassessee as may, in any case or class of cases or in respect ofany period or periods, be prescribed: Provided that different percentages may be prescribed fordifferent periods having regard to the date of acquisition of theship; (ii) in the case of buildings, machinery, plant or furniture, otherthan ships covered by clause (i), such percentage on the written-down value thereof as may in any case or class of cases beprescribed: Definitions of certain terms relevant to income fromprofits and gains of business or profession. 43. In Sections 28 to 41 and in this section, unless the context otherwise requires - (1)-(2) omitted (3) ‘plant’ includes ships, vehicles, books, scientific apparatusand surgical equipment used for the purposes of the business orprofession; ‘Plant’ is inclusive definition. Everything which is not building,furniture or fittings “used for the purpose of business” is a ‘Plant’. If it is a‘Building’, it cannot be a ‘Plant’. But, in certain circumstances, a ‘Plant’itself can be a ‘Building’. As per Section 32(1) of the Act, an assesseecan claim deduction of depreciation as prescribed by Rule 5 of Income Tax Rules, 1962 read with Appendix-I thereto. There is no dispute at therelevant time, the Rules permit depreciation of 10% if it is a ‘Building’ and20 or 25 % if it is a ‘Plant’. In Srinviasa Hatcheries, assessing officer came to the conclusion that poultry sheds are buildings. The reasoning is as follows. (3) ‘plant’ includes ships, vehicles, books, scientific apparatusand surgical equipment used for the purposes of the business orprofession; ‘Plant’ is inclusive definition. Everything which is not building,furniture or fittings “used for the purpose of business” is a ‘Plant’. If it is a‘Building’, it cannot be a ‘Plant’. But, in certain circumstances, a ‘Plant’itself can be a ‘Building’. As per Section 32(1) of the Act, an assesseecan claim deduction of depreciation as prescribed by Rule 5 of Income Tax Rules, 1962 read with Appendix-I thereto. There is no dispute at therelevant time, the Rules permit depreciation of 10% if it is a ‘Building’ and20 or 25 % if it is a ‘Plant’. In Srinviasa Hatcheries, assessing officer came to the conclusion that poultry sheds are buildings. The reasoning is as follows. The assessee argued that the poultry sheds are toolswith the help of which business is carried on. The assessee alsoexplained the three types poultry sheds to cater to brooding,grooving and laying of one day old chicks. The contention of theassessee is that poultry shed is a tool with the help of whichbusiness is carried on is not acceptable because poultry shed isa mere place where business activities of the assessee iscarried on. Therefore, the poultry sheds are treated as buildingsand accordingly, depreciation rate applicable to buildings isallowed. The CIT (A) did not agree with the conclusion of assessing officer.He came to the conclusion – without much reason; that poultry shed is tobe allowed depreciation at the rates of plant and machinery. The learnedTribunal did not devote much time or space to this aspect. It merely reliedon its earlier decision in Srinivasa Hatcheries for the assessment year1989-1990 and agreed with the CIT (A). Therefore, insofar as finding offact is concerned, there is no reasoning by the appellate Commissioneror the Tribunal. We may recall the reasoning of the assessing officer thatpoultry shed is not a tool, with the help of which, the assessee carried onbusiness and that it is a mere place where business activity of theassessee is carried on. This is indisputable even in these referred cases,and for that matter, in all other matters. Indeed, the assessee did notdispute that whether or not a poultry shed is constructed as per thespecific needs of the particular hatcheries, a poultry shed is a place inwhich the business is carried on. It is a place from where the hatcheriescompany carries on the business of hatching, brooding and producingcommercial chicks and marketing them to needy poultry farms. With thisbackground, we may now consider the case law, relied on by both thesides. Anand Theatres involves the question whether a building usedas a hotel or cinema theatre can be considered to be an apparatus or toolfor running business, so that it can be termed as a ‘Plant’ anddepreciation can be allowed accordingly or whether it remains a‘Building’ wherein either hotel business or business for cinema could beconducted. On an analysis of relevant provisions of the Act, the decisionsof the Supreme Court and various High Courts, their Lordshipssummarized the legal position as under (para 44 of SCC). The aforesaid clauses of the Section 32 deal withdepreciation allowance in respect of assets of the specifieddescription used for the purpose of business or profession. From a careful scrutiny thereof what emerges is: (1) The scheme of Section 32 is to provide different ratesof depreciation for building, machinery, plant or furniture, ships,buildings used for hotels, aeroplanes and other items mentionedtherein. Clause (ii) of Section 32(1) specifically provides for grantof depreciation for building, machinery, plant or furniture atprescribed percentage on the written-down value thereof. Therates are prescribed under the Income Tax Rules. The aforesaid clauses of the Section 32 deal withdepreciation allowance in respect of assets of the specifieddescription used for the purpose of business or profession. From a careful scrutiny thereof what emerges is: (1) The scheme of Section 32 is to provide different ratesof depreciation for building, machinery, plant or furniture, ships,buildings used for hotels, aeroplanes and other items mentionedtherein. Clause (ii) of Section 32(1) specifically provides for grantof depreciation for building, machinery, plant or furniture atprescribed percentage on the written-down value thereof. Therates are prescribed under the Income Tax Rules. (2) Under clause (ii-a) of Section 32(1) specific provisionis made for new machinery or plant which has been installed andit provides for additional sum equal to one-half of the amountadmissible as depreciation under clause (ii) if the conditionsmentioned therein are fulfilled. Further, the proviso carves out anexception to the effect that no deduction shall be allowed inrespect of any machinery or plant installed “in office premises orany residential accommodation”. That means the legislature hasdivided building into different categories, namely, (i) buildings used for office premises; or (ii) for residential accommodation; or (iii) premises used for other purposes. Meaning to the phrase “residential accommodation” isalso given under the explanation which includes accommodationin the nature of a guest house and it specifically excludes“premises used as a hotel”. So, the legislature has notconsidered hotel building by itself as a plant. The phrase is“premises used as a hotel” where machinery or plant is installed. (3) Under clause (v) of sub-section (1) of Section 32specific provision is made for a “new building”, the erection ofwhich is completed after 31-3-1967, which is “used as a hotel”. Ifthe conditions mentioned therein are satisfied then for a buildingwhich is used for a hotel, a sum equivalent to 25 per cent of theactual cost of the erection of the building is granted asdepreciation. Further, the legislature has considered building asseparate from the hotel business and building is not consideredas a plant for running the hotel. Therefore, building and the use ofsuch building as a hotel are considered distinct. (4) All throughout Section 32 for building it is specificallymentioned that “whenever it is erected”, while for machinery andplant, the words used are “whenever it is installed” and there isno question of installing building. Section 32(1)(ii-a) uses thephrase “machinery” or “plant” installed in any premises used asa hotel and Section 33(1)(b)(B)(ii) provides in case of“machinery” or “plant” is installed for the purposes of business orconstruction etc. which indicates that “plant” is to be installed andthere is no question of erection. Further, the apex Court also laid down that even if special fittingsor equipment to control atmospheric affects are permitted in a building, itwould not make ‘Building’ a ‘Plant’ although special fittings andequipments would be ‘Plant’. It was further observed (para 62):Further for running almost all industries or for carrying on Further, the apex Court also laid down that even if special fittingsor equipment to control atmospheric affects are permitted in a building, itwould not make ‘Building’ a ‘Plant’ although special fittings andequipments would be ‘Plant’. It was further observed (para 62):Further for running almost all industries or for carrying on any trade or business building is required. On occasionsbuilding may be designed and constructed to suit therequirement of a particular industry, trade or business. Butthat would not make such building a plant. It only sheltersrunning of such business. For each and every business,trade or industry, building is required to carry on suchactivity. That means building plays some role and in otherwords, its function is to shelter the business, but it has noother function except in some rare cases such as dry dockwhere it plays an essential part in the operations which takeplace in getting a ship into the dock, holding it squarely andthen returning it to the river. Building is more durable. If thecontention of the assessee is accepted, virtually all suchbuildings would be considered to be a plant and thedistinction which the legislature has made between“building” and “machinery” or “plant” would be obliterated. (emphasis supplied) In Shivalik Poultries, a Division Bench of Punjab and HaryanaHigh Court held that (para 7 of ITR). The word ‘plant’ is given an inclusive meaning in section43(3) of the Act which nowhere includes buildings. There is awell-established distinction between the premises in which thebusiness is carried on and the apparatus with which thebusiness is carried on. The latter category would fall within theambit of the phrase ‘plant’. The premises cannot be termed as‘plant’. The building in which the business is carried on might bewell suited to the business or have been built for the businessbut it would not be a plant. The suitability is the reason why thebusiness is carried on there but it does not make it a thing withwhich the business is carried on. If a building is merely a settingor place to accommodate some apparatus, then that cannot betermed as plant but if that plays an important role in carrying onthe business then it will fall within the definition of the term ‘plant’. It would be a plant if it is a tool of the trade with which one carrieson his business. The poultry shed cannot be considered as anapparatus or tool for running the poultry business but is merely ashelter or home or setting in which the business is carried on. Thus, the poultry shed cannot be termed as plant but would fallunder the term ‘building’. Karnataka Power Corporation is a case wherein it was held thatthe question whether a place is a ‘Building’ or a ‘Plant’ is a question offact and that, “where it is found as a fact that the building has been soplanned and constructed as to serve an assessee’s special technicalrequirements, it will qualify to be treated as a Plant …”. The SupremeCourt therein held that, “power generating station is a Plant eligible forinvestment allowance under Section 32A of the Act”. Dr B.Venkat Raoand Ganga R Menon are the cases of Nursing Home and Hospitalrespectively. It was held therein that, “in case of Nursing Home orHospital, the building with sterilization plants, operation theatres plays animportant part in the business and therefore, can be treated as ‘Plant’”. Karnataka Power Corporation is a case wherein it was held thatthe question whether a place is a ‘Building’ or a ‘Plant’ is a question offact and that, “where it is found as a fact that the building has been soplanned and constructed as to serve an assessee’s special technicalrequirements, it will qualify to be treated as a Plant …”. The SupremeCourt therein held that, “power generating station is a Plant eligible forinvestment allowance under Section 32A of the Act”. Dr B.Venkat Raoand Ganga R Menon are the cases of Nursing Home and Hospitalrespectively. It was held therein that, “in case of Nursing Home orHospital, the building with sterilization plants, operation theatres plays animportant part in the business and therefore, can be treated as ‘Plant’”. The brief analysis of the precedents would show that if a buildingitself is the place with which the business is carried on, it is a ‘Plant’. But,if the building is a place from where the business is carried on it is only a‘Building’ notwithstanding special arrangements like temporary controlsystems, humidity control systems, air-conditioners etc., being fitted tosuch building. As held in Shivalik Poultries, a poultry shed “is merely ashelter or home or setting in which the business is carried on” andtherefore, it is only a ‘Building’ and not a ‘Plant’. The submission of thecounsel for the assessee that the poultry shed of hatchery is builtaccording to specific technical requirements does not change thesituation nor legal position. That a poultry shed is not a ‘Plant’ stands concluded – in our view;by the decision of the Supreme Court in Venkateswara Hatcheries.Therein, the assessee claimed to be industrial undertaking engaged inthe business of producing articles or things entitled to, and that it wasentitled to development allowance under Section 32A of the Act anddeductions under Sections 80HH, 80HHA and 80J of the Act. The claimwas rejected by the Tribunal on the ground that the chicks are not articlesor things within the meaning of Section 32A to or Section 80J(4) of theAct. It was also held that assessee is not an industrial undertaking. But,the High Court held that hatchery business comes within the meaning ofexpression of an industrial undertaking producing article or thing andthus, allowed the claim of assessee. Before the Supreme Court, in theirappeals, Revenue contended that chicks being animate creatures cannotbe permitted as articles or things, that producing of chicks being naturalprocess, it cannot be said that the asseessee is producing the chicks.These contentions weighed with the apex Court. While allowing appeals,it was held (para 14 of ITR). From a perusal of the self-stated steps taken by theassessee for the alleged production of chicks, it is clear that theassessee does not contribute to the formation of chicks. Theformation of chicks is a natural and biological process overwhich the assessee has no hand or control. In fact, what theassessee is doing is to help the natural or biological process ofgiving birth to chicks. The chicks otherwise can also beproduced by conventional or natural method and in that processalso, same time is taken when the chicks come out from theeggs. What the assessee by application of mechanical processdoes in the hatchery is to preserve and protect the eggs at aparticular temperature. But the coming out of chicks from theeggs is an event of nature. The only difference seems to be that,by application of mechanical methods, the mortality rate ofchicks is less and the assessee may get chicks more innumber. This, however, would not mean that the assesseeproduces chicks and that chicks are ‘articles or things’. We are,therefore, of the opinion that the assessee is neither an industrial undertaking nor does the business of hatchery carried out by theassessee fall within the meaning of Section 32A and Section80J. undertaking nor does the business of hatchery carried out by theassessee fall within the meaning of Section 32A and Section80J. After the Judgment of the Supreme Court in VenkateswaraHatcheries, a Division Bench of this Court disposed of the ReferredCase No.148 of 1996, wherein the question referred was similar to theone in these cases. Following Venkateswara Hatcheries, the DivisionBench in its order, dated 10.10.2007, answered the Reference in favourof the Revenue, holding that assessee is not entitled to investmentallowance of poultry sheds treating them as ‘Plant’. Although, a case wasdecided in a different context, the ruling that a poultry shed is not a ‘Plant’is binding on this Court. We, therefore, hold that a poultry shed is not a‘Plant’ enabling the assessee at higher rate of depreciation as applicableto a ‘Plant’ and that it is entitled to claim depreciation as applicable to a‘Building’ only. In the result, for the above reasons, the reference is answered inthe negative in favour of Revenue and against assessees. All theappeals filed by Revenue are accordingly allowed without any order asto costs. __________________ (V.V.S.RAO, J) .11.2010 Pln ______________________________ (RAMESH RANGANATHAN, J) Note: LR copy be marked. (By order) pln [1](1999) 237 ITR 174 (SC)(1999) 237 ITR 174 (SC) [2](2000) 5 SCC 393 : AIR 2000 SC 2356 : (2000) 244 ITR 192(2000) 5 SCC 393 : AIR 2000 SC 2356 : (2000) 244 ITR 192 [3](2005) 274 ITR 529 (Punj & Har)(2005) 274 ITR 529 (Punj & Har) [4](2000) 243 ITR 81(2000) 243 ITR 81 [5](2001) 247 ITR 268(2001) 247 ITR 268 [6](2003) 259 ITR 661 (Ker)(2003) 259 ITR 661 (Ker)