Building, furniture not 'plants' for depreciation

CHAT ROOM

Section 32 of the Income Tax Act, 1961 provides for deduction of depreciation on buildings, machinery, plant or furniture, as also for intangible assets mentioned in Section 32 (1) (ii) of the Act.

The rate for depreciation, as prescribed in the Income Tax Act, 1962, vide Appendix-I (under rule 5) is different in respect of these assets, being the lowest in case of buildings (5 per cent and 10 per cent), little higher in case of furniture and fittings (15 per cent) and relatively higher in case of plant and machinery (25 per cent).

There has been a debate whether in certain situations buildings, furniture and fittings could be brought under the category of "plant" to be entitled to the depreciation rate of 25 per cent.

Specially in case of cinema houses, hotels and nursing homes, claims were made that they were "plants" on the functional basis a higher rate of depreciation should be allowed. In a number of cases, such claims have also been accepted by courts.

The word "plant" has been defined in Section 43(3) of the Act, according to which "plant" includes "ships, vehicles, scientific apparatus and surgical equipment used for business and profession."

Since the definition in Section 43(3) is inclusive, not exhaustive, courts have said the word "plant" can include anything, which can be comprehended within its ordinary meaning, such as fixtures, machinery, tools, apparatuses or appliances, necessary to carry on any trade or business or mechanical operation or process.

The concept of "plant" has been stretched to the extent that the human heart becomes a plant and hence, expenses for its treatment could be treated as expenses on repairs.

In the Shanti Bhushan vs Income Tax Officer case, (1992) 41 ITD 562 (Delhi-Tribunal), such a claim was made before the Income Tax Appellate Tribunal.

The tribunal rejected it saying an article or object used by a taxpayer for his business or profession could be regarded as a plant within the meaning of Section 31, but for that the article or object would have to be something distinct and separate from the person using it.

Thus the heart of an assessee or his body encompassing the heart cannot be treated as plant for Section 31.

In several court decisions, buildings, furniture and fixtures have been held to be "plant". In the Deputy Commissioner of Income Tax vs Astra IDL Ltd case, (2001) 247 ITR 564 (Karnataka), a pharma building, used for manufacture of drugs, was held to be a "plant".

In the Commissioner of Income Tax vs Sibbal Cold Storage case, (1996) 135 Taxation 576 (MP), the Madhya Pradesh High Court said the word "plant" included within its ambit building in which machineries are installed for manufacturing purposes. It may be said the plant couldn't survive independent of building.

Some building has to be there to house the plant; and as such, the building which houses the plant, is a plant. Therefore, the plant included within its ambit building in which machinery is housed.

In several cases, cinema buildings have been considered a "plant". In the Patel Enterprises vs Income Tax Office, (1986) 15 ITD 114 (Ahmedabad-Tribunal) (TM), and in the Payal threatre vs Income Tax Office case, (1986) 26 TTJ (JP-Tribunal), tribunals said a theatre built according to specifications and requirements under the statute and having the structure suited for exhibition of films was something by means of which the business of the assessee was carried on and, therefore, it had to be regarded as a plant.

Similarly, hotels have been held to be "plant" in a number decisions. The Kerala High Court in the Commissioner of Income Tax vs Hotel Luciya, (1998) 2311 ITR 492 (Kerala) (FB), held that a hotel building was a "plant".

The Calcutta High Court in the SP Jaiswal Estates (P) Ltd vs Commissioner of Income Tax case, (1995) 216 ITR 145 (Calcutta), also expressed a similar view.

In the Commissioner of Income Tax vs Taj Mahal Hotel Ltd, (1971) 82 ITR 44 (SC), fixtures like sanitary fittings in bathroom of a hotel have been held to be plant.

In Commissioner of Income Tax vs Dr Venkata Rao, (1993) 202 ITR 303 (Karnataka), the court held that a nursing home was a "plant" and this view had been confirmed by the Supreme Court in appeal, (2003) 243 ITR 81 (SC).

But the Supreme Court did not approve the view that hotels and cinema halls could be plants. In the Commissioner of Income Tax vs Anand Theatres case, (2002) 244 ITR 192 (SC), it has been observed that the scheme of Section 32 envisages separate depreciation for a building, machinery and plant, furniture and fittings.

The word "plant" is given inclusive meaning under Section 43(3), which now-here includes buildings. The rules prescribing the rates of depreciation specifically provide grant of depreciation on buildings, furniture and fittings, machinery and plant and ship. Thus a building, used as a hotel or a cinema hall cannot be given depreciation as plant.

The controversy was settled by the Finance Act, 2003, which inserted the words "or buildings or furniture and fittings" after the words "but does not include tea bushes or live stock" in clause (3) or Section 43, with effect from April 1, 2004, so as to modify the term "plant".

"Plant includes ships, vehicles, books, scientific apparatus and surgical equipment used for business or profession but does not include tea bushes or live stock or buildings or furniture and fittings," the amended definition reads.

Thus, it would no longer be possible to say that such assets are plants. The Supreme Court decision on nursing homes in the B Venkata Rao case (supra) and in regard to fixtures in a building in Taj Mahal Hotel's case are no longer binding decisions after the amendment to Section 43(3).