Commissioner Of Income-Tax vs Hindustan Insecticides Ltd.
2001 Latest Caselaw 1338 Del

JUDGMENT

Arijit Pasayat, C. J.

1. Accepting the Revenue's prayer for reference under Section 256(1) of the Income-tax Act, 1961 (in short "the Act"), the following question has been referred for the opinion of this court by the Income-tax Appellate Tribunal, Delhi Bench "C", Delhi (in short "the Tribunal") :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 2,18,484 paid by the assessed as 'know-how and license fee' forms part of the cost of the new plant and machinery and as such is entitled to depreciation in the assessment year 1976-77?"

2. The dispute relates to the assessment year 1976-77.

3. The factual background in a nutshell is as follows :

The assessed-company manufactured insecticides. During the assessment year in question for which the accounting period ended on March 31, 1976, a claim was made for Rs. 2,18,484 spent on account of license fee, prior to the assessment year 1972-73, as capital expenditure. Consequently a claim for depreciation was made on the ground that it formed part of the cost of machinery and plant. As the claim was not accepted by the Assessing Officer, the assessed preferred an appeal before the Commissioner of Income-tax (Appeals) (in short "the CIT(A)"). Following the views expressed in Scientific Engineering House P. Ltd. v. CIT , the Commissioner of Income-tax (Appeals) held that the amount in question represented a capital expenditure and therefore depreciation was to be allowed. The Revenue challenged the matter in appeal before the Tribunal which upheld the views expressed by the Commissioner of Income-tax (Appeals). On being moved for reference, the question as set out above has been referred for the opinion of this court.

4. We have heard learned counsel for the Revenue. There is no appearance on behalf of the assessed. According to learned counsel for the Revenue, the amount was not to be treated as capital expenditure and, therefore, the question of granting depreciation does not arise.

5. A basic question which arises is whether the expenditure in question resulted in acquisition of any plant, machinery, etc., by the assessed. Under Section 32 of the Act the depreciation allowance is to be granted subject to the provision of Section 34 and such allowance is permissible only in respect of certain assets specified therein, i.e, building, machinery, plant and furniture, etc., owned by the assessed and used for the purpose of the business.

6. Section 43(3) defines "plant" in very wide terms. The question whether technical know-how falls within the definition of "plant" came up for con-

sideration of the apex court in Scientific Engineering House P. Ltd.'s case [1986] 157 ITR 86. It was, inter alia, held that technical know-how falls within the definition of "plant" and is a depreciable asset.

7. The classic definition of "plant" was given by Lindley L.J., in Yarmouth v. France [1887] 19 QBD 647, a case in which it was decided that a cart-horse was plant within the meaning of Section 1(1) of the Employers' Liability Act, 1880. The relevant passage occurring at page 658 of the report runs thus :

"There is no definition of plant in the Act: but in its ordinary sense, it includes whatever apparatus is used by a businessman for carrying on his business,--not his stock-in-trade which he buys or makes for sale ; but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in his business."

8. In other words, plant would include any article or object fixed or movable, live or dead, used by a businessman for carrying on his business and it is not necessarily confined to an apparatus which is used for mechanical operations or processes or is employed in mechanical or industrial business. In order to qualify as plant, the article must have some degree of durability, as for instance, in Hinton v. Maden and Ireland ltd. [1960] 39 ITR 357 (HL), knives and lasts having an average life of three years used in manufacturing shoes were held to be plant. In CIT v. Taj Mahal Hotel [1971] 82 ITR 44 (SC), the respondent, which ran a hotel, installed sanitary and pipeline fittings in one of its branches in respect of whereof it claimed development rebate and the question was whether the sanitary and pipeline fittings installed fell within the definition of plant given in Section 10(5) of the 1922 Act which was similar to the definition given in Section 43(3) of the 1961 Act and the apex court after approving the definition of plant given by Lindley L.J. in Yarmouth v. France [1887] 19 QBD 647, as expounded in Jarrold v. John Good and Sons Ltd. [1962] 40 TC 681 (CA), held that sanitary and pipeline fittings fell within the definition of plant.

9. In IRC v. Barclay, Curie and Co. Ltd. [1970] 76 ITR 62 (HL), the House of Lords held that a dry dock, since it fulfillled the function of a plant, must be held to be a plant. Lord Reid considered the part which a dry dock played in the assessed-company's operations and observed (at page 67) :

"It seems to me that every part of this dry dock plays an essential part... The whole dock is, I think, the means by which, or plant with which, the operation is performed."

10. Lord Guest indicated a functional test in these words (page 75 of 76 ITR) :

"In order to decide whether a particular subject is an 'apparatus' it seems obvious that an enquiry has to be made as to what operation it performs. The functional test is, therefore, essential at any rate as a preliminary."

11. In Scientific Engineering's case , it was, inter alia, held as follows (page 96) :

"In other words, the test would be ; Does the article fulfill the function of a plant in the assessed's trading activity ? Is it a tool of his trade with which he carries on his business ? If the answer is in the affirmative, it will be a plant.

If the aforesaid test is applied to the drawings, designs, charts, plans, processing data and other literature comprised in the 'documentation service' as specified in Clause 3 of the agreement, it will be difficult to resist the conclusion that these documents as constituting a book would fall within the definition of 'plant'. It cannot be disputed that these documents regarded collectively will have to be treated as a 'book', for, the dictionary meaning of that word is nothing but 'a number of sheets of paper, parchment, etc., with writing or printing on them, fastened together along one edge, usually between protective covers; literary or scientific work, anthology, etc., distinguished by length and form from a magazine, tract, etc.' (vide Webster's New World Dictionary). But apart from its physical form, the question is whether these documents satisfy the functional test indicated above. Obviously, the purpose of rendering such documentation service by supplying these documents to the assessed was to enable it to undertake its trading activity of manufacturing theodolites and microscopes and there can be no doubt that these documents had a vital function to perform in the manufacture of these instruments ; in fact it is with the aid of these complete and up-to-date sets of documents that the assessed was able to commence its manufacturing activity and these documents really formed the basis of the business of manufacturing the instruments in question. True, by themselves, these documents did not perform any mechanical operations or processes but that cannot militate against their being a plant since they were in a sense the basic tools of the assessed's trade having a fairly enduring utility, though owing to technological advances, they might or would in course of time become obsolete. We are, therefore, clearly of the view that the capital asset acquired by the assessed, namely, the technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature falls within the definition of 'plant' and is, therefore, a depreciable asset."

12. Considered in the light of the above position in law, the inevitable conclusion is that the Tribunal was justified in its conclusion that depreciation allowance was allowable and, therefore, the question referred is answered in the affirmative, in favor of the assessed and against the Revenue.

13. The reference is accordingly disposed of.