ORDER--Pre-operational expense--Computation--Unexplained investment Ratio:
Non-consideration of issues not raised before the Tribunal does not raises question of law.
Held:
The question of pre-operational expenses was not at all raised. Further the Tribunal did not consider the question of pre-operational expenses. If had, while upholding the deletion of unexplained expenses in the construction of factory building, held that the cost of construction worked out by the Valuation Officer cannot by any means be called scientific and marginal error of about 5 per cent by such way cannot be ruled out. Thus, the question of law does not arise out of the Tribunal's order.
Application :
Also to current assessment year.
Dt. Ord.:
15-3-1999 Decision:
In favour of assessee Income Tax Act 1961 s.256(2) Reference--MIXED QUESTION OF LAW AND FACT--Depreciation--Plant Ratio: The question whether foundation for installation of plant, machinery and water storage tank will constitute plant or not is a mixed question of law and facts, hence Tribunal is directed to refer the same.
Held: In order to decide as to whether a particular item constitutes plant or not, the functional test is to be applied. If on the application of this test, it is found that the subject-matter involved, that is, the building or apparatus or a part thereof is employed in carrying on activity of business, then it shall be treated as a plant, no matter that it consisted of some structure or building which is attached to the soil. If on the other hand, it is found that the structure or building or part thereof does not constitute a part of the apparatus employed in carrying on the activities of the business then it cannot be regarded as a plant.
Application: Also to current assessment year.
A.Y.: 1982-83 Dt. Ord.: 15-3-1999 Decision:
In favour of revenue Income Tax Act 1961 s.256(2) JUDGMENT R.K. Agarwal, J.
1. By means of the present application filed under Section 256(2) of the Income-tax Act, 1961, the Commissioner of Income-tax, Meerut, has prayed that the following two questions of law, which are said to arise out of the order dated May 3, 1995, of the Income-tax Appellate Tribunal, Delhi Bench (B), New Delhi, passed in the departmental appeal bearing No. 1TA No. 6361 of Delhi of 1990, relating to the assessment year 1982-83, be called and the Income-tax Appellate Tribunal, Delhi, be directed to draw up a statement of the case, and to refer the following questions of law for opinion to this court :
"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was legally justified in holding that the pre-operational expense of Rs. 2,08,100 should be taken into account to work out the unexplained investment in the construction of factory building ?
(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was legally correct in holding that civil works expenses on foundation and water storage tank amounting to Rs. 6,16,963 were plant and machinery to be eligible for the claim of investment allowance ?"
2. We have heard Shri Prakash Krishna, learned standing counsel appearing for the Commissioner of Income-tax, and Shri Rakesh Ranjan Agrawal, learned counsel for the asses see-respondent.
3. The facts giving rise to the present case are that the assessee-respondent is engaged in the business of manufacture and sale of craft paper. It started production on November 1, 1981. It capitalised the expenses up to October, 1981, and claimed the balance expenses as revenue expenses. The Assessing Officer referred to the Valuation Officer for determining the cost of construction of the factory and non-factory buildings of the assessee-respondent. The Valuation Officer submitted his report on February 23, 1985, and valued the cost of the factory at Rs. 32,18,000 as against Rs. 20,87,714 shown by the assessee. The Assessing Officer added the difference of Rs. 11,30,286 to the total income of the assessee as income from other sources being unexplained investment in the building. In appeal, the Commissioner of Income-tax (Appeals) set aside the assessment order with the direction that the assessment should be redone after allowing reasonable opportunity for filing its defence to the assessee. The Assessing Officer once again referred the matter for valuation to the Valuation Officer. The Valuation Officer determined the value at the same figures, i.e., Rs. 32,18,000.
4. After considering the explanation of the assessee, the Assessing Officer found that the unexplained investment came to Rs. 1,76,374. Further, the Assessing Officer, while considering the question of investment allowance found that the assessee had included civil works amount of Rs. 6,16,963 under the heading of plant and machinery. He was of the opinion that no investment allowance is admissible on such civil work. In appeal, the Commissioner of Income-tax (Appeals), Meerut, held that there is no question of any unexplained expenses in view of the nature of public limited companies where projects are financed by borrowings from financial institutions or from share capital. The claim of the assessee for considering proportionate pre-operational expenses was held to be justified. He further held that civil work such as foundation of various machines, etc., is essential for installation of the machinery and it was definitely a part and parcel of the plant and machinery. He, therefore, allowed the assessee's claim for investment allowance. The Department preferred an appeal before the Tribunal. After considering the material on record, the Tribunal concluded that on the facts of the case, it was not possible to hold that the assessee-respondent made undisclosed investment to attract the provision of Section 69 of the Income-tax Act. So far as the question of claim of investment allowance on the following items :
(i) Machinery foundations Rs. 3,20,299.37
(ii) Water storage tank Rs. 1,80,563.39
(iii) Diagester foundation Rs. 48,417.13
(iv) Pulp mill foundation Rs. 48,462.20
(v) Beater foundation Rs. 9,821.71 Rs. 6,07,563.81 are concerned, the Tribunal held that the above mentioned items were rightly treated as part of plant and machinery for the purposes of investment allowance. The plant as a whole could not function without the above items. The Tribunal, therefore, dismissed the appeal. The Commissioner of Income-tax, Meerut, filed a reference application under Section 256(1) of the Income-tax Act, 1961, seeking reference on the aforementioned two questions of law. The Tribunal, vide its order dated September 8, 1995, had rejected the reference application and had declined to make any reference to this court.
5. So far as the first question of law proposed by the Commissioner of Income-tax, Meerut, is concerned, we find that before the Tribunal, the question of pre-operational expenses was not at all raised. Further, the Tribunal did not consider the question of pre-operational expenses. It had, while upholding the deletion of unexplained expenses in the construction of factory building, held that the cost of construction worked out by the Valuation Officer cannot by any means be called scientific and marginal error of about five per cent. by such way cannot be ruled out. Thus, the first question of law proposed by the Commissioner of Income-tax does not arise out of the Tribunal's order. So far as the second question of law proposed by the Commissioner of Income-tax, Meerut, is concerned, we find that the claim of investment allowance in question is related to two types of items :
(i) foundation for installation of various machinery and plants ; and
(ii) water storage tank.
6. In order to decide as to whether a particular item constitutes plant or not, the functional test is to be applied. If on the application of this test, it is found that the subject-matter involved, that is, the building or apparatus or a part thereof is employed in carrying on the activity of business, then it shall be treated as a plant, no matter that it consisted of some structure or building which is attached to the soil. If, on the other hand, it is found that the structure or building or part thereof does not constitute a part of the apparatus employed in carrying" on the activities of the business then it cannot be regarded as a plant.
7. The Madras High Court in the decision rendered in Addl CIT v. Madras Cements Ltd, [1977] 110 ITR 281, had held the special reinforced concrete foundation for the purpose of installing the machinery to be covered within the expression "plant".
8. Similarly, the Delhi High Court in the case of CIT v. Pure Ice Cream Co. [1981] 129 ITR 394, had held that the expenditure incurred on cold storage room, platform for machines, observation and cooling tower were expen-
diture incurred towards the installation of plant and machinery and were entitled to development rebate and depreciation applicable to the plant and machinery.
9. The Rajasthan High Court in the case of CITv. R.G. Ispal Ltd. [1994] 210 ITR 1018 had held that the massive reinforced concrete structure specially designed to take loads constitutes plant.
10. So far as the water storage tank is concerned, the Bombay High Court in the case of CIT v. Electro Metallurgical Works (P.) Ltd. [1994] 207 ITR 494, had in somewhat similar circumstances held that the tanks and reservoirs which were concrete structures formed an integral part of the filtration plant, hence they had to be treated as plant.
11. The question as to whether the foundations for installation of machinery and plant in the factory of the assessee-respondent and the water storage tank will constitute plant or not is a mixed question of fact and law. Learned counsel for the parties, however, agree that there is no direct decision of the Supreme Court or this court on this point.
12. We, therefore, direct the Income-tax Appellate Tribunal, Delhi Bench (C), New Delhi, to draw up a statement of case and refer the following question of law for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was legally correct in holding that civil work expenses on foundations and water storage tank amounting to Rs. 6,16,963 were plant and machinery to be eligible for the claim of investment allowance ?"
13. In view of the divided success, we direct that the parties shall bear their own costs.