Whether when assessee is engaged in business of Tissue Culture, 'Green House' can be treated as machinery for purpose of depreciation - YES: ITAT

THE issues before the Bench are - Whether expenditure incurred by the assessee for preliminary survey and other related technical matters of a Project which was not implemented is capital expenditure and Whether the “green houses” can be classified as "building" or “machinery” for the purpose of allowing depreciation. And the verdict partly goes in favour of the assessee.

Facts of the case

Assessee is a company engaged in the business of Tissue Culture Activities. 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 AO 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. CIT(A) upheld the order of AO.

AO also 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%. AO 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. CIT(A) upheld the order of AO.

On further appeal, the ITAT held that,

++ expenditure incurred on preliminary survey 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. The Revenue could not bring any material on record to controvert the submission of the assessee;

++ in the case of CIT Vs. Priya Village Roadshows Limited, the High court relying on the decision in the case of Triveni Engineering Works Limited vs. CIT and in the case of CIT Vs. Modi Industries has held that "A harmonious reading of the aforesaid two judgments of this court namely Triveni Engineering Work Limted (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.";

++ Considering the aforesaid facts and relying on the aforesaid decision of the High Court, 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;

++ classifying greenhouse as "building" instead of "plant" for the purpose of depreciation 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;

++ Various High Courts have held that "functional test" has to be applied to determine as to whether the building is a plant or is a building simpliciter;

++ Seen in the light of the functional test laid down by decision of High Court in the case of CIT vs. Victory Aqua Farms Ltd, 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, 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.