*THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN + REFERRED CASE No.116 of 1996 INCOME TAX TRIBUNAL APPEAL Nos.20 of 1999, 124 and 149 of 2005 % 19.1.2011 # The Commissioner of Income Tax, Visakhapatnam … Petitioner Vs. $ M/s.Vijaya Enterprises, Visakhapatnam … Respondents ! Counsel for the petitioner: Sri S.R.Ashok, Senior Counsel for Sri Badri Venkat Reddy Counsel for the respondent: Sri C.Kodanda Ram, Senior Counsel Ms.Anjali Agarwal, Amicus Curiae < Gist: > Head Note: ? Cases referred 1) (1989) 175 I.T.R. 154 (AP) 2) (2008) 14 SCC 171 : (2008) 305 I.T.R. 227 (SC) 3) (2008) 17 SCC 87: (2008) 305 I.T.R. 132 (SC) 4) (1975) 3 SCC 572 : AIR 1975 SC 97 5) (1998) 229 ITR 776 (All) 6) (2003) 264 ITR 269 (Mad) 7) (2005) 273 ITR 276 (Raj) 8) (2006) 280 ITR 452 (Mad) 9) (1884) 13 QBD 583 (CA) 10) (1971) 82 ITR 44 (SC) 11) (1974) 96 ITR 672 (Guj) 12) (1989) 175 ITR 154 (AP) 13) (1887) 19 QBD 647 14) (1994) 210 ITR 668 (Kar) 15) (2000) 244 ITR 238 (Mad) 16) (1982) 55 Tax Cases 252 THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN REFERRED CASE No.116 of 1996 INCOME TAX TRIBUNAL APPEAL Nos.20 of 1999, 124 and 149 of 2005 January 19, 2011 Between: The Commissioner of Income Tax, Visakhapatnam … Petitioner And M/s.Vijaya Enterprises, Visakhapatnam ... Respondent THE HON'BLE SRI JUSTICE V.V.S.RAO AND THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN REFERRED CASE No.116 of 1996 INCOME TAX TRIBUNAL APPEAL Nos.20 of 1999, 124 and 149 of 2005 COMMON JUDGMENT: (Per Hon’ble Sri Justice V.V.S.Rao) The case referred by the Income Tax Appellate Tribunal, Hyderabad, under Section 256(1) of the Income Tax Act, 1961 (the Act), is at the Revenue’s instance. The question referred, namely, whether on the facts and circumstances of the case, the Tribunal was justified in directing to allow depreciation at 100% on centering and shuttering material (hereafter referred to as shuttering material) is also the question that arises in the three appeals; two of which are filed by the assesses and the third by the Commissioner of Income Tax, Visakhapatnam. The factual background in the referred case is as follows. The assessee firm is a civil contractor. In their return for 1986-87, they claimed depreciation at 100% on Rs.3,18,520/- towards purchase value of centering and shuttering equipment. Their plea was that the cost of each item was below Rs.5,000/-. The Assistant Commissioner-2, Visakhapatnam, allowed 15% depreciation. The Appellate Commissioner of Income Tax reversed the order of the assessing officer agreeing with the assessee that each item of centering, shuttering and scaffolding material costs less than Rs.5,000/- and, therefore, they are entitled to claim depreciation @ 100% under Section 32(1)(ii) proviso. The learned Tribunal confirmed the appellate order, dismissed the Revenue appeal, and, thereafter, a reference was sought. ITTA Nos.149 and 124 of 2005 are by M/s.Navayuga Engineering Company Ltd., (Navayuga, for short) for the assessment years 1993-94 and 1995-96 respectively. The other appeal ITTA No.20 of 1999 is by the Commissioner of Income Tax, Visakhapatnam. For completing the background of the cases, we may also refer to the facts in Revenue appeal as well as the appeal by Navayuga. The assessee is a registered firm engaged in civil contracts. For 1993-94, they filed return of income of Rs.12,85,780/-. During scrutiny, the assessing officer determined their income at Rs.65,45,360/- after disallowing 1% of the total expenditure under various heads. However, in view of the subsequent objection, the Commissioner revised the order under Section 263 of the Act directing the assessing officer to allow 25% depreciation on the value of shuttering material used for more than 180 days, and to restrict depreciation to 12.5% on the value of shuttering material used for less than 180 days. A consequential order was passed on 28.9.2007 restricting the depreciation. In the assessee’s appeal, the learned Tribunal set aside the Commissioner’s order and restored the order of the assessing officer allowing 100% depreciation on shuttering sheets. Aggrieved thereby the Revenue filed appeal. In ITTA No.149 of 2005, the assessee filed a return admitting a total income of Rs.33,94,790/-. They claimed depreciation at 100% on the shuttering material. The assessment was completed under Section 143(3) of the Act on 31.3.1994 on the total income returned. By order dated 13.2.1996, the assessment was, however, rectified under Section 154 of the Act. By yet another order dated 27.3.1998 the assessment was again rectified reducing the depreciation of shuttering material from 100% to 25%. On appeal, the Commissioner accepted the assessee’s contention and allowed 100% depreciation. Before the Tribunal, the Revenue was successful. Aggrieved by the two orders, the assessee filed two appeals separately. The Senior Standing Counsel for Income Tax made the following submissions. The centering and shuttering material used by a civil contractor is a ‘Plant’ within the meaning to Section 43(3) of the Act. Therefore an assessee can claim depreciation at the specified rates only. But under the proviso of Section 32(1)(ii) of the Act, where the actual cost of machinery or plant does not exceed Rs.5,000/-, the actual cost thereof shall be allowed as deduction. The nature of business determines the purpose of the plant and, in other words, ‘Plant’ has to be understood keeping in view the very nature of the business and understanding the way a businessman or a contractor looks at the concept of ‘Plant’. This functional test, if applied, each and every unit forming part of centering, shuttering and scaffolding material used for different purposes by the civil contractor is not a ‘Plant’. The entire material used as such, as a whole is ‘Plant’. He would submit that CIT v Sri Krishna Bottlers Pvt. Ltd[1] does not help in determining the applicable depreciation in the case of centering and shuttering material. According to him, the subsequent decisions of the Madras and Rajasthan High Courts did not decide the nature of centering and shuttering material and merely followed Sri Krishna Bottlers. The Senior Counsel for the assessees Sri C.Kodanda Ram, and the Amicus Curiae, Ms.Anjali Agarwal, appointed in the Referred Case rely on Sri Krishna Bottlers. They contend that centering and shuttering material is put to different uses in different shapes depending on the construction taken up. Therefore each component or unit is a ‘Plant’. They would urge that, if the construction work is large, all the units are used for making scaffolding and shuttering and the same by itself is not crucial. In other situations, even each unit has utility and, therefore, the proviso to Section 32(1)(ii) of the Act is attracted. The Senior Counsel further adds that exercise of power under Section 154 of the Act is illegal and not permissible under law. He would also urge that the Tribunal was not correct in disallowing a higher rate of depreciation on the vehicles hired by it. Exercise of Power under Section 154 of the Income Tax Act The core issue is the rate of applicable depreciation on centering and shuttering material. We will take up this, after disposing of two other minor questions. The first is whether the rectification is valid under Section 154 of the Act. Section 154(1) of the Act confers power on income tax authorites, as enumerated in Section 116 of the Act, to amend any order passed by it under the provisions of the Act and/or amend any intimation under Section 143(1) of the Act. The power can be exercised, “to rectify any mistake apparent on record.” By reason of Section 116(c) of the Act such power inheres also in the Commissioner of Income Tax. Section 254(2) of the Act confers power on Income Tax Appellate Tribunal, “to rectify any mistake apparent on record at any time within four years from the date of the record in an appeal.” The exercise of power under Section 154(1) of the Act by the income tax authorites, and such power by the appellate Tribunal, are subject to the condition that there is a mistake apparent from the record. The power under the two sections is wide, and an order passed can even be amended, which means that the earlier order can also be totally modified after giving a notice to the assessee. However, by reason of Section 154(1A) of the Act, if any matter determined by the income tax authories was considered and decided in an appeal or revision relating to such an order, the income tax authority again cannot pass an order under Section 154 of the Act. In Asst. CIT v Saurashtra Kutch Stock Exchange Ltd.[2] the Supreme Court, while dealing with a case arising under Section 254 of the Act, considered the scope of the words and phrase “mistake apparent on the facts of the record.” The Supreme Court also considered the scope of Section 254(2) of the Act. It was held therein that the power conferred under Section 254(2) of the Act is not the power of review but is a power conferred, “to rectify any mistake apparent on record.” It was also observed that, while doing so, the Tribunal may set aside the earlier order and rehear the matter, and that the phrase “to rectify any mistake apparent on record” is wider in its content than the expression “mistake or error apparent on the face of record” occurring in Order XLVII Rule 1 of the Code of Civil Procedure, 1908 (CPC). The relevant observations are as follows. Sub-section (2), thus, covers two distinct situations: (i) It enables the Tribunal at any time, within four years, from the date of the order, to amend any order passed under sub-section (1) with a view to rectify any mistake apparent from the record; and (ii) It requires the Tribunal to make such amendment if the mistake is brought to its notice by the assessee or the assessing officer. It was submitted that so far as the first part is concerned, it is in the discretion of the Tribunal to rectify the mistake which is clear from the use of the expression “may” by the legislature. The second part, however, enjoins the Tribunal to exercise the power if such mistake is brought to the notice of the Tribunal either by the assessee or by the assessing officer. The use of the word “shall” directs the Tribunal to exercise such power. There is, however, no dispute by and between the parties that if there is a “mistake apparent from the record” and the assessee brings it to the notice of the Tribunal, it must exercise power under sub-section (2) of Section 254 of the Act. Whereas the learned counsel for the Revenue submitted that in the guise of exercise of power under sub-section (2) of Section 254 of the Act, really the Tribunal has exercised the power of “review” not conferred on it by the Act, the counsel for the assessee urged that the power exercised by the Tribunal was of rectification of “mistake apparent from the record” which was strictly within the four corners of the said provision and no exception can be taken against such action. Yet again it was held as follows. In our judgment, therefore, a patent, manifest and self- evident error which does not require elaborate discussion of evidence or argument to establish it, can be said to be an error apparent on the face of the record and can be corrected while exercising certiorari jurisdiction. An error cannot be said to be apparent on the face of the record if one has to travel beyond the record to see whether the judgment is correct or not. An error apparent on the face of the record means an error which strikes on mere looking and does not need long-drawn-out process of reasoning on points where there may conceivably be two opinions. Such error should not require any extraneous matter to show its incorrectness. To put it differently, it should be so manifest and clear that no court would permit it to remain on record. If the view accepted by the court in the original judgment is one of the possible views, the case cannot be said to be covered by an error apparent on the face of the record. … … Though the learned counsel for the assessee submitted that the phrase “to rectify any mistake apparent from the record” used in Section 254(2) (as also in Section 154) is wider in its content than the expression “mistake or error apparent on the face of the record” occurring in Rule 1 of Order 47 of the Code of Civil Procedure, 1908 (vide Kil Kotagiri Tea & Coffee Estates Co. Ltd. v. Income Tax Appellate Tribunal, (1988) 174 ITR 579 (Ker)), it is not necessary for us to enter into the said question in the present case. It is no doubt true that, in ITTA No.149 of 2005, assessment for 1993-94 was completed and the same was rectified vide order JAR No.N-1/93-94, dated 13.2.1996 disallowing the amount under Rule 6(d) of the Income Tax Rules, 1962 (the Rules). By yet another order No.1/97-98, dated 27.3.1998, the assessment for the year 1993-94 was again rectified by the Assistant Commissioner after it being noticed. The reasons therefor in the order of the Assistant Commissioner are as below. …A perusal of the bills for purchase of Shuttering material reveals that the assessee purchased MS Pipe and MS Sheets of the value of more than Rs.1 Lakh. The assessee has not furnished the total quantity of material used in obtaining the independent units, cutting, welding and assembling charges incurred, number of units obtained etc., to arrive at the value of each unit. The concept of shuttering material can have only functional definition i.e., it is defined by what it does. Though each nut or bolt in this material (which may cost less than Rs.5000) may have individual identity, it looses its identity in the organic whole of the shuttering material. Therefore, it is the cost of the organic whole viz. the shuttering material that should be regarded for the purposes of depreciation. Such composite unit can only be treated as Plant & Machinery and would accordingly be entitled for depreciation at 25% but not at 100% as claimed. In similar other cases, the depreciation was allowed at 25% only for the above reasons. The A.P.High Court decision relied on by the assessee is not applicable to the assessee’s case, since the facts and circumstances in that case are different. Though there are some Tribunal decisions and of Commissioner’s of Income Tax (Appeals), they were not accepted by the Department and the matter is pending before higher judicial authorities. As such, in conformity with the stand taken by the Department in this regard, the depreciation on shuttering material is restricted to 25% in the assessee’s case also… The CIT (A) passed orders on 14.9.1998 allowing the appeal. As noticed supra, the learned Tribunal reversed the Commissioner’s order upholding the order of assessing authority holding that the assessee had purchased MS pipes and sheets which were converted into shuttering material and, therefore, depreciation at 100% under the first proviso to Section 32(1)(ii) of the Act cannot be allowed. It was also held that the assessee had not purchased any centering material, but had purchased raw material to convert it into shuttering material. The Tribunal did not advert to the question of exercise of power under Section 154(1) of the Act by the assessing officer. As rightly pointed out by the Senior Standing Counsel for Revenue, this is justified because the assessee did not raise any ground, which is now sought to be raised before us. An appeal, under Section 260A of the Act, is only on a question of law. A mixed question of fact and law, which has not been praised before the Tribunal, may in certain situations be permitted to be raised. But in this case no such plea was raised and we are afraid we cannot permit the assessee to raise this ground for the first time before us. Further the question stands concluded by the decision of the Supreme Court in Saurashtra Kutch Stock Exchange Ltd. The question is, therefore, answered against the assessee. Higher Rate of Depreciation on Vehicles used in Contract Works The next question relates to ITTA No.124 of 2005 (assessment year 1995-96) wherein the assessee claimed higher rate of depreciation at 40% on the vehicles hired out to Navayuga as per item 2(ii) of Heading III of Appendix of Income Tax Rules. The assessing officer disallowed on the ground that a higher rate of depreciation can be availed in a business of running vehicles on hire, and that the assessee is not engaged in such a business. The appellate Commissioner allowed the appeal of the assessee holding that the business of the assessee did not change the character of hiring the vehicle for consideration. Accordingly the disallowance of excess depreciation was deleted. The Tribunal, however, agreed with the assessing officer and held that the assessee, as a civil contractor, used buses, taxis and lorries on hire but did not use them for giving on hire. Though a plea is raised, finding fault with the assessing officer and the finding of the Tribunal, Senior Counsel for the assessee does not pursue the argument in view of the binding precedent in CIT v Gupta Global Exim P. Ltd[3]. In Gupta Global Exim P. Ltd the question before the Apex Court was whether the assessee was entitled to depreciation at 40% on the trucks, which were put to use on hire. Referring to item 2(ii) of heading III of the Income Tax Rules, it was held. Under item 2(ii) of heading III, the higher rate of depreciation is admissible on motor trucks used in a business of running them on hire. Therefore, the user of the same in the business of the assessee of transportation is the test. ... In the present case, none of the authorities below (except the Assessing Officer) has examined the matter by applying the above test. The Assessing Officer has given his finding that the assessee was not in the business of transportation as he was only in the business of trading in timber logs. That, the burden was on the assessee to establish that it is the owner of motor lorries and that it used the said motor lorries/trucks in the business of running them on hire. ... What is relevant for consideration under sub-item 2(ii) of Item III of Appendix I to the Income Tax Rules, 1962, is whether the assessee was in the business of hiring out his trucks in addition to his business of trading in timber. Depreciation on centering material Each unit, be it as a single shutter or plurality of shutters, is a ‘Plant’ and if the value is less than Rs.5,000/- it would qualify for 100% depreciation under the proviso to Section 32(1)(ii) of the Act. Whether this contention can be countenanced by the Court? We start considering the issue by quoting Sections 43(3) and 32(1)(ii) proviso of the Act. 43. Definitions of certain terms relevant to income from profits and gains of business or profession. In Sections 28 to 41 and in this section, unless the context otherwise requires – (3) “plant” includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession: 32. Depreciation (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed – (i) this is omitted by Tax Laws Amendment Act, 1986. (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed. Provided that where the actual cost of any machinery or plant does not exceed five thousand rupees, the actual cost thereof shall be allowed as a deduction in respect of the previous year in which such machinery or plant is first put to use by the assessee for the purposes of his business or profession. (emphasis supplied) ‘Plant’ is described with an inclusive definition. Anything, “used for the purpose of business or profession” is a ‘Plant’. Whether a thing, a building, a vehicle, a contrivance or a contraption is a plaint – at least in Tax jurisprudence – is a vexed question. The term “Plant” appears in many places in Sections 28 to 41 of the Act, which deal with computation of profits and gains from business or profession. Determination of “Plant” is relevant in computing the chargeable income from business or profession in allowing depreciation (Section 32), investment allowance (Sections 32-A and 32-AB), development rebate (Section 33) and rehabilitation allowance to industrial undertaking in the event of damage or destruction due to calamities (Section 33B). The precedents are galore which distinguish between a “building” and a “Plant”. If the business or industrial process is carried on “with something”, it is a ‘Plant’ and if “business activity or industrial process” is carried on in a place or at a place, it is a ‘building’. Ramanatha Aiyar’s Advanced Law Lexicon contains about 30 definitions/descriptions of the term ‘Plant’ with reference to dictionaries, precedents and statutes. The best possible way is to understand the nature of the business, and the purpose of a thing in such a business. If one single individual unit itself is sufficient to carry on any business it is a ‘Plant’. But if one single individual thing or item is not, by itself, fully useful to carry on business or advance trade, it is certainly not a “plant”. Even if such a thing, associated with many other similar or dissimilar things, is of immense utility for the business, it is in plurality and is to be considered as ‘Plant’. In other words, the way a businessman understands the term ‘Plant’ is the most relevant because it would carry natural and proper sense. In Challapalli Sugars Ltd v CIT[4], the Supreme Court held that the expression “actual cost” should be construed in the sense no commercial man would misunderstand and the accepted accountancy rule should be adopted “for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary.” Referring to Challapalli Sugars Ltd in the ‘Principles of Statutory Interpretation’ Justice G.P.Singh elucidates as under. The principle that in statutes directed to commercial men, words having definite commercial sense must be understood in that sense as that would be “the natural and proper sense” in that context has been applied in the construction of Income-tax Acts. It was, therefore, held that the words ‘profits and gains’, when used in an Income-tax Act should be understood in a sense which no commercial man would misunderstand. Applying the same principle the expression ‘borrowed money’ or ‘capital borrowed’ when used in an Income tax Act has to be understood in its ordinary commercial usage implying a transaction of loan with relationship of borrower and lender. Similarly the word ‘investments’ in Section 23A of the Income-tax Act, 1922 was construed in the ordinary popular sense of the word as used by businessmen and it was held that it is not limited to investments in shares, debentures, stocks etc. but also covers investments in house property or other income yielding property. In determining the commercial sense of an expression in a statute directed to commercial men but not containing any definition of that expression, it may be relevant to refer to the normal rules of accountancy prevailing in commerce and industry. In the building engineering construction industry, how does a businessman, or one connected with construction, understands shuttering material. For this purpose, it is necessary to indicate engineering and other aspects of shuttering material in the construction industry. The word ‘centering’ or ‘shuttering’ is a false work erected to give temporary support to ‘concrete structure’ and it is removed after the concrete structure gains