The Commissioner of Income Tax, New Delhi vs Modi Industries Ltd.

B.N. Kirpal, J.

(1) At the instance of the Commissioner of Income Tax in respect of Assessment Years 1969-70 and 1970-71, the Income Tax Tribunal has referred the following four questions to this Court:-

"1. Whether on the facts and in the circumstances of the case. the Tribunal was justified in allowing interest of Rs. 2357.00 , Rs. 51.840.00 payable by the assessed on account of provision for interest payable on arrears of Commission to the Commission agents for purchase of sugar cane for the asstt. years 1969-70. 1970-71? 2. Whether on the facts and in the circumstances of the case, "drainage system" came within the description of building and hence entitled to depreciation allowance? 3. Whether on the facts and in the circumstances of the case, depreciation was allowable on overhead water tanks by treating the same "plant"? 4. Whether the Tribunal was right in holding that the capital employed would include not only assessed''s capital but also include capital borrowed by the assessed for the purpose of relief u/s 80J of the I.T.Act?"

(2) At the instance of the assessed in respect of the aforesaid years, the following question of law has been referred by the Tribunal:

Whether on the facts and circumstances of the case. the Appellate Tribunal erred in law in holding that for the purposes of computation of capital employed u/s 80J of the Income Tax Act, the amount of initial depreciation allowed u/s 32(1)(iv) has to be deducted from the written down value of the assets"

(3) As regards question No. 1. briefly stated the facts are that the assessed had to pay interest of Rs. 2357.00 in respect of the assessment year 1969-70 and Rs. 51840/ for the year 1970-71 on account of the late payment of commission to the commission agents. This liability arose because of the provisions of Sugarcane Regulation and Supply Purchase Act, 1953 on account of the assessed failure to pay the price of the sugarcane in accordance with the provisions of that Act. The Income Tax Officer disallowed the deduction on the ground that the same was in the nature of a penalty and was not a liability. The Appellate Assistant Commissioner, however, allowed the said claim and the Income Tax Tribunal also. while following the decision in the case of Kamlapat Motilal Vs. Commissioner of Income Tax, upheld the said allowance.

(4) The aforesaid controversy has now been set at rest with the decision of the Supreme Court reported as Mahalaxmi Sugar Mills Co. Vs. Commissioner of Income Tax , Delhi, . In this case there were arrears of payment of Cess and the assessed was obliged to pay interest on the said arrears. The question arose whether this was allowable as a deduction or not. The Supreme Court held that the payment of interest under the Cess Act was not a penalty and was allowable as a deduction. The ratio of the said decision is clearly applicable to the present case and. Therefore, the Income Tax Tribunal was right in allowing the said deduction.

(5) As regards questions 2 and 3, the assessed had claimed that "drainage system" and overhead tanks formed part of the building and depreciation was to be allowed u/s 32 of the Act. This claim was not accepted by the Income Tax Officer. An appeal was filed before the Appellate Assistant Commissioner and there again the claim was rejected. In the alternative it was also contended that both drains and the tanks should be considered as plant within the meaning of Section 32 and depreciation should be allowed thereon at the rate provided for plant. The Appellate Assistant Commissioner did not accept this contention and upheld the finding of the Income Tax Officer. The aforesaid contention was reiterated, on behalf of the assessed, before the Income Tax Tribunal. The Tribunal came to the conclusion that drainage system was part of the building and depreciation was allowable thereon. As regards the tanks, it was observed by the Tribunal as follows:

"The tanks are over-head steel Structure-Use of the tanks is connected with the working of the factory-The tanks in these circumstances are as much a plant as the factory. The assessed claimed lower depreciation on the tanks treating the same as building. The department will not suffer if depreciation is allowed at a lower rate on tanks. We, Therefore, direct the Ito to allow the depreciation claimed by the assessed in the years under consideration".

(6) On the aforesaid finding, question, 2 and 3 had been raised. In our opinion question No.3 requires reframing. As has already been observed, the contention of the assessed before the Tribunal was in the alternative. As far as depreciation on tanks was concerned, the claim was that it was allowable by treating over-head water tanks as building and/or in the alternative by treating them as part of the plant. The Tribunal no doubt held that it was part of the plant but in order to decide the controversy the Tribunal should have referred the question as to whether overhead tanks could be treated as plant or building. We, Therefore, re-frame the question No.3 as follows:

"Whether on the facts and in the circumstances of the case, depreciation was allowable on overhead water tanks by treating the same as plant or as a building?''

(7) There was some divergence of opinion amongst different High Courts as to whether drains in a factory premises constituted a building or not. This controversy has been recently set at rest with the decision of the Supreme Court in the case of Commissioner of Income Tax v. Gwalior Rayon Silk Manufacturing Co. Ltd.. Judgment Today 1992(3) Sc 158. It has been held therein that the drains are an integral part of the building and are meant for convenient enjoyment of the building. The expenditure incurred in the name of drains or written down value of the cost of construction would be entitled to depreciation u/s 32 of the Act. Following the said decision, question No.2 has to be answered in favor of the assessed.

(8) As regards overhead steel tanks, the Tribunal has accepted the claim of the assessed, to regard the same as part of plant, by observing that the tanks are connected with the working of the factory and are as much a plant as the factory. The Tribunal has not said as to which is the plant of which the tank is an integral part of plant or machinery, in which case they will be entitled to higher rate of depreciation. The question as to whether tanks are building or are part of plant and machinery is essentially a question of fact. A question of fact must be decided on the basis of evidence on record. There can be no manner of doubt that just as drains are integral parts of building, similarly water tanks would also be regarded as integral parts of the building but, in certain cases, water tanks may be part of a plant if there is a direct connection between the two. In the absence of any evidence on the record to show that such a connection existed, it is not possible for us to come to the conclusion that water tanks form part of the plant. Therefore, in answer to question No. 3. as re-framed, we hold that the assessed is entitled to depreciation on overhead water tanks by regarding the same as being part of the building.

(9) As regards question No. 4, the same pertains to the claim of the assessed with regard to relief u/s 80J. It is not in dispute that the decision of the Supreme Court in Lohia Machines Ltd. and Another Vs. Union of India (UOI) and Others, is applicable and the question of law as framed has to be answered in favor of the Department.

(10) Mr. Aggarwal on behalf of the assessed states that he does not press the aforesaid question which has been referred to this Court at the instance of the assessed relating to the initial depreciation. This question is, Therefore, returned un-answered.

(11) For the aforesaid reasons, while not answering the question referred at the instance of the assessed because the assessed does not press the same, our answers to question Nos. 1 and 2 are in favor of the assessed. Our answer to question No. 3 is that the depreciation is allowable on overhead tanks by regarding the same as part of the building and our answer to question No. 4 is in favor of the Department.

(12) There will be no order as to costs.