Kalpesh Classes

In CIT v. Sandoz India Ltd. [1994] 206 ITR 385,theBombay High Court has held that expenditure on laying approach road to research laboratories is capital expenditure qualifying for deduction under section 35(1)(iv) of the Income-tax Act, 1961. In the absence of a finding that the roads are integrally connected with the conduct of research, the correctness of the decision is doubtful.​​ 

Controversy - Whether expenditure on road is expenditure on scientific research

There is no dispute that the expenditure on the construction of the approach road to the research laboratories of the assessee is expenditure of a capital nature. The controversy was whether it was expenditure on scientific research related to the business carried on by the assessee, within the meaning of section 35(1)(iv). There could be no dispute about the reiteration of the well-established principle of law that where the whole and exclusive purpose of the expenditure is the purpose of the expender's trade, and the object which the expenditure serves is the same, the mere fact that, to some extent, the expenditure enures to a third party's benefit cannot in law defeat the effect of the finding as to the whole and exclusive purpose. But the question is, whether the expenditure on construction of road is expenditure on scientific research related to the business.

Whether road is a 'plant' ?

Whether a road is a building or plant has been a controversial matter. No hard and fast rule is laid down that every road is a plant or every road is a building. That must depend on the facts and circumstances of each case. If the roads in question are integral parts of the factory and are the means by which the business of the assessee is carried on, then they constitute 'plant', notwithstanding that they may also constitute building for some other purposes. One must, however, make it clear whether a road constitutes building or plant or neither, depends upon the particular situation of the road, the use to which it is put and, in particular, whether it is an integral part of the factory by which the business is carried on - CIT v . Coromandel Fertilizers Ltd. [1985] 156 ITR 283 (AP). Roads are not plants if they are not something with which the business is carried on but provides the setting or the place from which the business is carried on - CIT v. Sandvik Asia Ltd. [1983] 144 ITR 585 (Bom.).

RC Chemical Industry's case

The decision of the Delhi High Court in R.C. Chemical Industries v. CIT [1982] 134 ITR 330 laid down certain principles to determine as to when a building could be considered plant. The assessee in that case was carrying on business of manufacture of saccharine and other allied chemicals, erected a factory comprising many buildings. In one building he installed machinery and plant for the manufacture of saccharine in which certain atmospheric controls, e.g., moisture, temperature and provision for filtered air, were required. The building was constructed with particular specifications and standards to install the machinery and plant and portions of the building had to be built with fire bricks and lined with asbestos sheet and also made air-tight to conserve the temperature and preserve filtered air so that saccharine could be manufactured properly. The question was whether that building was a 'plant'. The Court laid down, inter alia, the following principles:

• All buildings are not plant despite the dictionary meaning which includes buildings; but a building or structure is not per se to be excluded from the ambit of the expression 'plant'.

• If the concrete construction or building is used as the premises or setting in which the business is not carried on, in contradistinction to the fulfilling of the function of a plant, the building or construction or part thereof is not considered a plant. The true test is whether it is the means of 'carrying on the business' or the location for doing so.

• order, for a building or the concrete structure to qualify for inclusion in the term 'plant', it must be established that it is impossible for the equipment to function without the particular type of structure.

Applying these principles, the Delhi High Court concluded that the building of the assessee could not qualify as a 'plant'. It was a mere setting, albeit a convenience, where the business of manufacturing saccharine was not possible without the particular features said to have been incorporated in the building.

Approach road cannot be 'plant'

As for the roads, the same principle could be applied. Roads within a factory building could be plant if these are adjuncts to the building, not used by others, and are as such necessary for the purpose of the assessee's business as the factory building or machinery itself - Coromandel Fertilizers Ltd 's case (supra) . Such roads within the factory building will not constitute plant if these are not something with which the business is carried on - Sandvik Asia Ltd. 's case (supra). But surely, an approach road cannot be said to be a plant. The road which is constructed for approach to the factory, cannot form part of the plant - Kaira Distt. Coop. Milk Producers Union Ltd. v. CIT [1986] 162 ITR 496 (Guj.).​​