Kalpesh Classes

Depreciation is not allowable on the cost of the land on which a building is erected but only on the cost of the superstructure.​​ The word "building" means structures and does not include the site. [1967] 065 ITR 0377- ​​ CIT VS. ALPS THEATRE (SUPREME COURT OF INDIA)

"Buildings" include roads, bridges, culverts, wells and tube-wells. The buildings may be factory buildings or non-factory buildings, that is, building used for office, storage, employees' quarters or welfare of employees, e.g., workers' canteen or sports pavilion, etc. Building include a part of a building.

Building constructed on leasehold land is eligible for depreciation even if the building may be handed over to the lessor after the expiry of lease. It is not necessary that building should have a roof for claiming depreciation. A large stadium or an open swimming pool would be a building as it is a permanent structure and designed for a useful purpose. It would quality for depreciation.

The proper view-point from which one must approach the question of interpretation of the term "factory building", with respect to depreciation allowable under the Income-tax Act and Rules, would be to look at the operative words functionally as intending to provide for wear and tear of depreciable assets. Therefore, one must exclude from consideration judicial interpretation of the term "factory", occurring in other enactments such as the Factories Act, 1948. A canteen, by virtue of its purpose and function, is susceptible to a higher rate of wear and tear than ordinary buildings, although the wear and tear may not approach the high rate which would affect parts of a building where plant and machinery and other moving parts engaged in the process of manufacture are fixed. This is because, a canteen as such is a place, which a large assemblage of people who might be described as a floating population, constantly put to use. It is also subject to recurrent cleaning, washing and other processes which inevitably bring about a higher rate of wear and tear. The second reason is that a canteen where cooking and other preparations are carried on either in the kitchen or elsewhere, can be regarded in the strictest sense of the term, as a place where manufacture is carried on, although, in normal parlance, we do not refer to the process of cooking as a process of manufacture. But, whatever expression we might employ to describe the culinary process, there is no doubt whatever that the use of fuel and other reforms of energy in that part of the canteen, would have the same damaging effect on the life of the building as a regular manufacturing process would by the use of plant or machinery. In cases where modern mechanical processes are adopted in a kitchen or canteen for the purpose of cooking meals and making other preparations, the analogy of a manufacturing process would be more apparent. Moreover, it is common knowledge and also part of the statute law governing the running of factories, that every factory has within its precincts a canteen run for the benefit of the workers employed therein. In this respect, the canteen must be considered as a part and parcel of the factory premises and the canteen building must be regarded as a factory building.​​ A canteen building is, therefore, in the proper sense of the term, a "factory building" for the purpose of depreciation allowance.​​ [1980] 126 ITR 0347- ​​ CIT vs. Engine Valves Ltd. (Madras High Court)

Roads laid within factory premises as links or providing approach to the buildings to carry on the business activity of the assessee are "buildings" within the meaning of section 32. Depreciation is admissible on the capital expenditure incurred thereon as "building". Equally, drains also would be an integral part of the building for convenient enjoyment of the factory. Depreciation would be available in the same manner on expenditure incurred in laying drains. [1992] 196 ITR 0149A ​​ CIT vs. Gwalior Rayon Silk Manufacturing Co. Ltd. (Supreme Court of India)

Depreciation was allowable in respect of the temple building constructed within the premises of the assessee. [1996] 221 ITR 0123B ​​ CIT vs. Associated Flour Mills P. Ltd. (Gauhati High Court)

SCOPE OF “BUILDING” FROM DEPRECIATION POINT OF VIEW.

Building​​ generally would mean​​ walled roofed structure:​​ a structure with walls and a roof, for example, a house or factory or​​ making large structures​​ the business or task of constructing houses, factories, bridges, and other large structures.​​ 

[1967] 065 ITR 0377- ​​​​ CIT vs. Alps Theatre (Supreme Court of India)

Depreciation is not allowable on the cost of the land on which a building is erected but only on the cost of the superstructure. The word "building" means structures and does not include the site.

[1996] 218 ITR 0511- ​​​​ Commissioner of Income-tax vs. Indian Oil Corporation Ltd. (Bombay High Court)​​ 

The assessee included the premium paid by it on the leasehold land in the cost of the building constructed thereon for the purpose of allowance of depreciation under section 32 of the Income-tax Act, 1961. The Tribunal allowed the depreciation claimed by the assessee. Held, that no depreciation was allowable in respect of premium paid by the assessee for the lease-hold land because the premium was not includible in the cost of the superstructure constructed thereon. CIT v. Alps Theatre [1967] 65 ITR 377 (SC) followed.

[1992] 196 ITR 0149A ​​​​ CIT vs. Gwalior Rayon Silk Manufacturing Co. Ltd. (Supreme Court of India)

The word "building" in its connotation is referable to something that is a constructed one as a structure or super-structure on land with walls and roof. Since ​​ the Act did not give a definition of its own, the dictionary meaning of "building", which means "a house or anything which is built, a structure", is to be adopted.

The roads laid within the factory premises as links or providing approach to the buildings are necessary adjuncts to the factory buildings to carry on the business activity of the assessee and would be building within the meaning of section 32 of the Act. The capital expenditure incurred thereon is admissible to depreciation on written down value. Equally, the drains also would be an integral part of building for the convenient enjoyment of the factory.​​ 

In other words Roads laid within factory premises as links or providing approach to the buildings to carry on the business activity of the assessee are "buildings" within the meaning of section 32. Depreciation is admissible on the capital expenditure incurred thereon as "building". Equally, drains also would be an integral part of the building for convenient enjoyment of the factory. Depreciation would be available in the same manner on expenditure incurred in laying drains.​​ 

[1980] 126 ITR 0347- ​​​​ CIT vs. Engine Valves Ltd. (Madras High Court)

The proper view-point from which one must approach the question of interpretation of the term "factory building", with respect to depreciation allowable under the Income-tax Act and Rules, would be to look at the operative words functionally as intending to provide for wear and tear of depreciable assets.​​ Therefore, one must exclude from consideration judicial interpretation of the term "factory", occurring in other enactments such as the Factories Act, 1948. A canteen, by virtue of its purpose and function, is susceptible to a higher rate of wear and tear than ordinary buildings, although the wear and tear may not approach the high rate which would affect parts of a building where plant and machinery and other moving parts engaged in the process of manufacture are fixed.​​ This is because, a canteen as such is a place, which a large assemblage of people who might be described as a floating population, constantly put to use. It is also subject to recurrent cleaning, washing and other processes which inevitably bring about a higher rate of wear and tear. The second reason is that a canteen where cooking and other preparations are carried on either in the kitchen or elsewhere, can be regarded in the strictest sense of the term, as a place where manufacture is carried on, although, in normal parlance, we do not refer to the process of cooking as a process of manufacture. But, whatever expression we might employ to describe the culinary process, there is no doubt whatever that the use of fuel and other reforms of energy in that part of the canteen, would have the same damaging effect on the life of the building as a regular manufacturing process would by the use of plant or machinery. In cases where modern mechanical processes are adopted in a kitchen or canteen for the purpose of cooking meals and making other preparations, the analogy of a manufacturing process would be more apparent. Moreover, it is common knowledge and also part of the statute​​ law governing the running of factories, that every factory has within its precincts a canteen run for the benefit of the workers employed therein. In this respect, the canteen must be considered as a part and parcel of the factory premises and the canteen building must be regarded as a factory building. A canteen building is, therefore, in the proper sense of the term, a "factory building" for the purpose of depreciation allowance.​​ 

[1996] 221 ITR 0123B ​​​​ CIT vs. Associated Flour Mills P. Ltd. (Gauhati High Court)

Depreciation was allowable in respect of the temple building constructed within the premises of the assessee. ​​ 

[2001] 247 ITR 0803- ​​ INDORE MUNICIPAL CORPORATION VS. CIT (SC)

Question before the court was, Whether, the expenditure incurred by the assessee towards construction of the metal ​​ roads on trenching grounds was an item of revenue deduction ? and Whether, the ​​ assessee was entitled to depreciation on the amount of the cost of construction of metal roads on the trenching grounds ?

Learned counsel for the assessee has ​​ invited attention to the decision of this SC ​​ in CIT v. Gwalior Rayon ​​ Silk Manufacturing Co. Ltd. Where ​​ the roads were constructed to approach about 500 trenches for dumping waste and night soil ​​ in the trenches and transporting the processed manure. The High Court ​​ while answering the said question has said that the roads could not be ​​ treated as “building”. In CIT v.​​ Gwalior Rayon Silk Manufacturing Co. Ltd. (SC), while construing the expression “building” in section ​​ 32, has observed that the roads and roadways ​​ are adjuncts of the building lying within the factory area linking them ​​ together and are being used for carrying on its business by the assessee. And thus qualifies for the purpose of depreciation.

However Held in this case that the expenditure incurred by the assessee towards construction of the metal roads on trenching grounds was not revenue expenditure. That the roads were not buildings. As there was no other construction except the roads, the roads by themselves could not constitute buildings, and the assessee was not entitled to depreciation on the cost of construction of the roads.