The order of the Bench was delivered by
Anil Chaturvediam, Accountant Member - These four appeals are filed by the Assessee against the order of CIT(A)-I, Baroda for A.Ys. 2004-05 to 2007-08.
2. Before us, at the outset, the learned A.R. submitted that in all the four appeals, the facts and issue are identical except for the amount and therefore all the four appeals can be disposed off together. We therefore proceed to dispose of all the appeals by a consolidated order.
We first take up ITA No. 3270/Ahd/2010 for A.Y. 2004-05.
3. The facts as culled out from the order of lower authorities are as under.
4. Assessee is a company engaged in the business of Tissue Culture Activities. It filed its return of income for A.Y. 2004-05 on 30.10.2004 declaring loss of Rs. 62,45,516/-. The case was selected for scrutiny and thereafter the assessment was framed under section 143(3) vide order dated 29.09.2006 and the total loss was determined at Rs. 48,00,406/-. Aggrieved by the order of Assessing Officer, Assessee carried the matter before CIT(A). CIT(A) vide order dated 22.09.2010 granted partial relief to the Assessee. Aggrieved by the aforesaid order of CIT(A) the Assessee is now in appeal before us and has raised the following effective grounds:—
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The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the Assessing Officer in disallowing an amount of Rs. 1,02,300/- being amortization of expenses. |
2. |
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The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the Assessing Officer in disallowing an amount of Rs.10,71,565/- considering the same as capital expenditure. |
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It may be mentioned that the above expenses were incurred on preliminary survey for Aqua and Agro Project and not for new business. The said project was not undertaken and therefore the appellant had claimed the said expenses in the year under consideration. |
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Without prejudice to the above the learned AO may be directed to allow the said expenses in AY 2001-02. |
3. |
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The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the Assessing Officer in disallowing an amount of Rs. 35,000/- out of legal and professional fees on the ground that the said expenses are incurred on the Aqua and Agro project and therefore not allowable under the Act. |
4. |
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The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the Assessing Officer in classifying green house as "building" instead of "plant" for the purpose of depreciation u/s. 32 of the Act and allowing depreciation @ 10% on green houses instead of 25% claimed by the appellant and thereby conforming the addition of Rs. 8,91,018/-.' |
5. Before us, at the outset it was submitted by Ld. A.R. that Ground no.1 of the present appeal is identical to Ground no. 1 of ITA No. 3271 for A.Y. 2005-06 and Ground 2 of ITA No. 3272 for A.Y. 2007-08 and the same are not pressed due to smallness of amount we therefore all these grounds are dismissed as not pressed.
Ground no. 2 and 3 are interconnected and are with respect to expenses incurred on preliminary survey for Aqua and Agro Project.
6. During the course of assessment proceedings, Assessing Officer noticed that the Assessee had incurred expenditure of Rs. 10,71,565/- for preliminary survey and other related technical matters of Aqua & Agro Project. The Assessee was asked to justify its claim. The Assessee interalia submitted that Management had taken a decision to defer the implementation of this project and was exploring the possibility of undertaking the same under separately constituted company. Since the implementation of the project and the possibility of undertaking it in under a separate company was not possible and therefore the Assessee had decided to write off the expenditure. The submissions made by the Assessee was not found acceptable to the Assessing Officer as he was of the view that the expenses incurred on the project which was abandoned was of capital in nature. He was further of the view that the capital expenditure even on abandoned project remains capital expenditure. He accordingly disallowed the claim of the assessee. Aggrieved by the order of Assessing Officer, Assessee carried the matter before CIT(A). CIT(A) upheld the order of Assessing Officer by holding as under:—
"5.3 I have carefully considered the facts of the case, the submissions of the appellant and the assessment order. It is undisputed that the expenditure was incurred on preliminary survey and other technical matters in connection with a new project. It is also an admitted fact that the expenditure was for a new project not shown to be directly connection to the business affairs of the appellant. In the case of CIT v. Maneklal Industries , 107 ITR 133 (Guj), it is held that expenditure incurred on getting expert opinion for setting up a factory is not an allowable deduction. Further in the case of Triveni Engineering Works v CIT 232 ITR, 639 (Del) it is held that the amount spent on project report is a capital expenditure. The decision in the case. of CIT v Jyoti Ltd,- 255 ITR 345 (Guj) cited by the Ld, AR is distinguishable on facts as in that case the expenditure on technical report was shown to have been incurred for expansion of business while in the current case no such intention is apparent from records. In the case of DCIT v Assam Asbestos 263 ITR 357 (Gau) relied upon by Ld AR the expenditure also was incurred in line with the existing business, Thus the AO was justified in treating the expenditure of Rs, 10,71,765/- and Rs.35,000/- as sunk cost and a capital loss. Grounds No. 2 & 3 are dismissed."
7. Aggrieved by the order of CIT(A) the Assessee is now in appeal before us.
8. Before us, the learned A.R. submitted that the expenditure was incurred in A.Y. 2001-2002 which constituted expenses on travelling of Rs. 10,59,780/-, on telephone Rs. 412/- printing and stationary Rs. 3136/-and survey of Rs. 8237/-. These expenses were incurred for the Aqua Agro Project . The learned A.R. further submitted that the Assessee was already into the business of Tissue Culture activities and Open Fill Activities relating to Agriculture Projects. Aqua Agro Project was considered as part of the existing business as the proposed line of business was same as that of existing business. The project was abandoned in the year under appeal and therefore, the Assessee has claimed the entire expenditure in the current year. He further submitted that there was no enduring benefit or addition in commercial sense as now new asset had come into existence and therefore no benefit accrued to the assessee. He further placed reliance on the decisions in the case of CIT v. Jyoti Electric Motors Ltd. [2002] 255 ITR 345/121 Taxman 519 (Guj.), CIT v. Priya Village Roadshows Ltd. [2011] 332 ITR 594/[2009] 185 Taxman 44 (Delhi), Indo Rama Synthetics (I) Ltd. v. CIT [2011] 333 ITR 18/[2009] 185 Taxman 277 (Delhi) and Dy. CIT v. Assam Asbestos Ltd. [2003] 263 ITR 357/132 Taxman 808 (Gau.). He thus urged that the expenses written off be allowed to the Assessee.
9. The learned D.R. on the other hand relied on the order of Assessing Officer and CIT(A).
10. We have heard the rival submissions and perused the material on record. It is an undisputed fact that the Assessee is engaged in the business of Tissue Culture Activities and Open Fill Activities relating to agriculture projects. The Assessee has stated to have incurred the expenditure in A.Y. 2001-02 towards preliminary survey and other related technical matters for Aqua and Agro Project. Since the Assessee could not proceed with the Aqua and Agro Project, the entire expenditure was claimed as a Revenue expenditure. It is also a fact that no capital asset come into existence. The Assessee has stated that the new proposed business was an expansion of the existing business. In the present case the Assessee has proposed to set up Aqua Agro Project which was admittedly an expansion of the existing project. The proposed new project is stated to have inextricable linkage with the existing business of the assessee. It is also a fact that no new asset has come to be created by the incurring of expenses. Before us, the Revenue could not bring any material on record to controvert the submission of the assessee.
11. In the case of Priya Village Roadshows Ltd. (supra) the Hon. High court relying on the decision in the case of Triveni Engg. Works Ltd. v. CIT [1998] 232 ITR 639/100 Taxman 19(Delhi) and in the case of CIT v. Modi Industries [1993] 200 ITR 341/68 Taxman 114 (Del.) has held as under:—
"10 A harmonious reading of the aforesaid two judgments of this court namely Triveni Engineering Work Limited (supra) on the one hand and Modi Industries (supra) on the other would clearly demonstrate that one has to keep in mind. the essential purpose for which such an expenditure is incurred. If the expenditure is incurred for starting new business which was carried out by the assessee earlier, then such expenditure is held to be of capital nature. In that event it would be irrelevant as to whether project really materialized or not. However, if the expenditure incurred is in respect to the same business which has already carried on by the Assessee, even it is for the expansion of the business , namely, to support new unit which is same as the earlier business and there is unity of control and a company found then such expense is to be treated as a business expenditure. In such a case whether new business/asset comes into existence or not would not become a relevant factor if there is no creation of new asset then the expenditure would be of Revenue in nature. However, if the new asset comes into existence which is of enduring benefit then such expenditure would be of capital nature."
12. Considering the aforesaid facts and relying on the aforesaid decision of the High Court, we are of the view that the expenditure in the present case cannot be considered to be of capital nature and therefore, the claim of the Assessee needs to be upheld. Thus this ground of the Assessee is allowed.
Ground no. 4 is with respect to classifying greenhouse as "building" in stead of "plant" for the purpose of depreciation.
13. Before us the ld. A.R. submitted that the facts in the present ground is similar to Ground no. 2 for A.Y. 2005-06, Ground no. 1 for A.Y. 2006-07 and Ground no. 1 for A.Y. 2007-08 except for the amounts and therefore all can be considered together. We therefore proceed with the facts of A.Y. 2004-05.
14. During the course of assessment proceedings, Assessing Officer noticed that the Assessee has claimed depreciation @ 25% on green houses. The Assessee was asked to justify its claim of higher depreciation. The Assessee interalia submitted that the green houses were required to carry out the hardening process of Tissue Culture Plant under the controlled condition to enable the plant to have value addition in the same manner as done in the manufacturing process. It was further submitted that the green houses was not a simple structure to be called a "building" but was part and parcel of various machinery and therefore the Assessee has rightly claimed depreciation at 25%. Assessing Officer did not accept the contention of the assessee. He was of the view that the "green houses" are in the nature of "factory building" and are part of the "building" block and they cannot be considered as plant and machinery. He accordingly granted depreciation at 10% instead of 25% as claimed by the assessee. He thus worked out excess claim of depreciation of Rs. 8,91,018/- and added to the income. Aggrieved by the order of Assessing Officer, Assessee carried the matter before CIT(A). CIT(A) after considering the submissions of the Assessee upheld the order of Assessing Officer by holding as under:
"7.3.1 From above exposition it is apparent that the Greenhouses are in the nature of building which features as walls doors, frames gutters, roof, etc,, as in normal building even if it is expected that light or humidity are controlled in a Greenhouse, the features are also available in the smart buildings of today. Further the appellant has not been able to show as to what are the specialized machineries used for temperature/light/humidity control. If there are such separate machineries they would be eligible for depreciation at higher depreciation but the structure per se would be eligible for depreciation at 10%. The decision cited by the appellant are distinguishable on facts as in the case of Venkateshwara Farms the Hon. ITAT has relied on the report of the technical expert to hold that the potter farm are in the nature of plant. Similarly in the decision in the case CIT v Gopikishan it has been clarified that only that part of the cold storage building which is used and utilized as chamber for storing the goods in cold storage that would be treated as plant and rest of building would not be a plant. It is also relevant to mention that Punjab & Haryana High Court in the case of CIT v Yamuna Cold Storage 6 Taxman 146 has held that the cold storage is a factory building entitled to 10% depreciation. Anyhow in the present case there are no specialized chambers but the plants/tissues are in a covered premises without chambers. In my view thus greenhouse is a building eligible for 10% depreciation. Ground No.5 is dismissed."
15. Aggrieved by the order of CIT(A), the Assessee is now in appeal before us.
16. Before us, the learned A.R. submitted and explained the production process. He submitted that the buds are purchased as raw material. These buds are cut and reduced into small tissues and these cut tissues are kept in cultures ( small glass bottles containing mixture of various chemicals). These cultures are maintained in air-conditioned laboratory. The tissues are constantly under observation and further processed for multiplication purpose in the laboratory itself under special environment. After the tissues attains the specified growth they are transferred to Green Houses, first to primary green house and then to secondary green house for hardening process. He further submitted that green houses are developed with special technology by technically qualified person so as to adhere to the exact requirement of hardening process. The hardening process increases the value of the product in same way as manufacturing process in case of manufacturing company and this hardening process is done by green houses. Green houses are not simple structures fit to be called building. Green houses perform a manufacturing process that is hardening which is an integral part of the manufacturing activity of the assessee. It is an apparatus with which the process of hardening is carried out. He further submitted that all functional test for treating the green houses are satisfied. He further placed reliance on the decision in the case of CIT v. Karnataka Power Corpn. [2001] 247 ITR 268/[2000] 112 Taxman 629 (SC)Ramdeo Tiles v.CIT [1997] 227 ITR 463/93 Taxman 184 (MP)Nowrangroy Metals (P.) Ltd. v. CIT [2003] 262 ITR 231/[2004] 134 Taxman 460 (Gau.) & CIT v. Dr. Ganga R. Menon, Palghat Poli Clinic [2003] 259 ITR 661/[2002] 125 Taxman 957 (Ker.).
17. The learned D.R. on the other hand relied on the order of Assessing Officer and CIT(A).
18. We have heard the rival submissions and perused the material on record. It is an undisputed fact that the Assessee is engaged in the business of Tissue Culture activities. Before us, it has been stated that the green house are not used as shelter but green house performs a manufacturing process (hardening) and it is an integral part of the manufacturing process. It has been further stated that after the tissues of the plants attains specified growth in the laboratory first they are shifted to primary green house and then to secondary green house for hardening process. It is further stated that the green houses are developed with special technology by technically qualified person so as to adhere to the exact requirement of hardening process. Only after the hardening process is complete, the hardened and developed plants are put in the market for sale. It is further stated that the hardening process increases the value of product in the same way as manufacturing process and this hardening process is done by green houses. CIT(A) in his order at para 7.3 has explained the green house as under:—
"7.3 I have carefully considered the facts of the case, the submissions of the appellant and the assessment order. As per internet site http://en.wiklpedia.org/wiki/Greenhouse;
A greenhouse is a structure with a different types of covering materials, like glass or plastic roof and frequently glass or plastic walls; it heats up because incoming visible solar radiation from the sun Is absorbed by plants, soil, and other things inside the building. Glass is transparent to this radiation. The warmed structures and plants Inside the greenhouse re-radiate this energy In the infra-red, to which glass is partly opaque, and that energy is trapped inside the glasshouse, Although there is some heat loss due to conduction, there is a net increase In energy (and therefore temperature) inside the greenhouse. Air warmed by the heat from hot interior surfaces is retained in the building by the roof and wall. These structures range in size from small sheds to very large buildings."
19. Various High Courts have held that "functional test" have to be applied to determine as to whether the building is a plant or is a building simpliciter.
20. In the case of CIT v. Victory Aqua Farms Ltd. [2004] 271 ITR 530/[2005] 142 Taxman 392 (Ker) the issue before the Hon. High Court was that the Assessee was a company doing business in aqua culture. Prawns are grown in specially designed ponds. According to the assessee, prawn ponds were tools to the business of the assessee and hence the same constitute "plant" eligible for depreciation at the rates applicable to plant and machinery. The Assessing Officer disallowed the claim of the assessee. Hon. High Court after relying on the decision in the case of CIT v. Anand Theatres [2000] 244 ITR 192/110 Taxman 338 (SC), Karnataka Power Corpn. (supra) noted as under:-
The question that arises is whether the pond is a plant. In Anand Theatres (supra), the Supreme Court held as follows (headnote) :
"Section 32 provides different rates of depreciation for building, machinery, plant or furniture, ships, buildings used for hotels, aero-planes and other items mentioned therein. The word 'plant' is given an inclusive meaning under section 43(3) which nowhere includes buildings. The Rules prescribing the rates of depreciation specifically provide for grant of depreciation on buildings, furniture and fittings, machinery and plant and ships. Machinery and plant include cinematograph films and other films and other items and 'building' is further given a meaning to include roads, bridges, culverts, wells and tube wells. Fora building used as a hotel, there is a specific provision in section 32(1)(v) for granting additional depreciation allowance at specified rates depending upon fulfillment of the conditions mentioned therein. In the context of the legislative scheme under section 32, even though the word 'plant' may include building or structure in certain set of circumstances as per the dictionary meaning, to say that a building used for running the business of hotel or a cinema would be 'plant' under the Act would be inconsistent with the provisions of section 32 and the legislative intent."
The Supreme Court further held as follows (headnote) :
"There is well-established distinction, in general terms, between the premises in which the business is carried on and the plant with which the business is carried on. The premises are not plant. It is proper to consider the function of the item in dispute. If it functions as part of the premises it is not plant. The fact that the building in which a business is carried on is, by its construction particularly well-suited to the business, or indeed was specially built for that business, does not make it plant. Its suitability is simply the reason why the business is carried on there. But it remains the place in which the business is carried on and is not something with which the business is carried on, except in some rare cases where it plays an essential part in the operations which take place. Hotel premises are not considered to be an apparatus or tool for running the hotel business but are merely a shelter or home or setting in which business is carried on. The same would be the position with regard to a theatre in which cinema business is carried on. Therefore, even the functional test is not satisfied."
In another decision reported in Karnataka Power Corpn. (supra), the Supreme Court held as follows (headnote) :
"The question whether a building can be treated as plant, basically, is a question of fact and where it is found as a fact that a building has been so planned and constructed as to serve an assessee's special technical requirements, it will qualify to be treated as a plant for the purposes of investment allowance. Held accordingly, that there was a finding by the fact-finding authority that the assessee's generating station building was so constructed as to be an integral part of its generating system. It was 'plant' entitled to investment allowance."
In Victory Acqa Farm Ltd. (supra), a Division bench of this court held that pond cannot be treated as plant and is not eligible for depreciation at the rate applicable to plant and machinery. This was stated following the decision in Anand Theatres (supra).
"In order to keep the water at the required level for the purpose of breeding shrimps or prawns the pond is a must. The breeding of fish cannot be carried on within the ponds. As referred to by the Tribunal, water plays the role of a machine just like a timber merchant. If the timber merchant requires a sawing machine to cut and shape the log such sawing machine constitutes a plant for him. Water in the case of the assessee plays same role. Water has to be stored within the ponds. Therefore, the ponds also constitute part of the machinery in the business of the assessee. Learned counsel for the Revenue submitted that it was only a natural pond. It is not correct. According to us, the decision in CIT v. Victory Acqa Farm Ltd. [2004] 271 ITR 528 (Ker) was presumed to be covered as per the decision of the Supreme Court in CIT v. Anand Theatres [2000] 244 ITR 192. According to us, in the facts and circumstances of the case, the Tribunal was right in holding that the pond is a plant and hence, entitled to statutory depreciation.
The appeal is dismissed."
21. Seen in the light of the functional test laid down by decision of High Court cited above, we are of the view that in the peculiar facts of the present case the "green house" is an essential part for a company engaged in the business of Tissue Culture. It cannot be considered as a simple "building" but has to be considered as a plant. In view of the aforesaid facts, we are of the view that the Assessee was right in considering the "green house" as part of "plant and machinery" and claiming depreciation of 25%. Thus this ground of the Assessee is allowed for all the years in which the Assessee is in appeal before us.
22. In the result all the appeals of Assessee are partly allowed.
The order pronounced in the open court on