Commissioner of Income Tax, Tamil Nadu-III vs Engine Valves Ltd.

Balasubrahmanyan, J.—The question referred to us for decision by the Income Tax Appellate Tribunal, Madras, in this reference by way of

case stated under s. 256(1) of the I.T. Act, 1961, relates to the rate of depreciation allowance on a canteen building inside the precincts o a

factory run by the assessee, Messrs. Engine Valves Ltd., Madras. The assessee manufacture engines valves, which are components of internal

combustion engines, in a factory of its own. In the account year ended March 31, 1972, relevant to the assessment year 1972-73, the assessee

claimed depreciation allowance at the rate of 10 per cent. on the written down value of the canteen building. There was no dispute that the building

was a second class building. The ITO, however, granted depreciation allowance only at the rate of 5%. He rejected the claim of the assessee that

the canteen building must be regarded as a factory building and was entitled to a doubling of the ordinary rate of depreciation eligible for second

class buildings. The disallowance of the depreciation amounted to Rs. 12,950.

On appeal by the assessee, the AAC held that the fact that the workers employed in the factory were using the canteen building was no reason

for treating the canteen building as a factory building for allowing the higher rate of depreciation to factory building was that by reason of the nature

of the work being carried on therein, it was susceptible to extra wear and tear. On that principle, according to the AAC, a canteen building can, by

no means, be regarded as a factory building. In this view, he confirmed the disallowance made by the ITO.

On further appeal by the assessee to the Tribunal, the assessee put forward two contentions. One was that the canteen building must be

regarded as an inextricable part of the factory premises and, hence, on this ground alone, the canteen building must be given the same extra

depreciation allowance as a factory proper. The other ground was that even if a canteen attached to the factory can be viewed in isolation, since

manufacturing process of some sort was being carried on in the canteen in the production of eatables, it must be regarded as a factory building.

The Tribunal accepted these contentions. They observed that it was essential for the running of the factory that the workers employed therein

should have the facility of a canteen where they can be fed. In this view, they held that a canteen must be regarded as very much a part and parcel

of the factory premises and must obtain the same rate of depreciation as the factory building in which manufacture was carried on. Looked at from

another angle, according to the Tribunal, the canteen must also be regarded as a place where manufacturing process was carried on and, as such,

was entitled to depreciation at the rate applicable to regular factory buildings. Even looking at the matter from the point of view of wear and tear,

the Tribunal observed that the canteen building was susceptible to much depreciation since it was the eating place of a large number of workers

and was subject to all kinds of processes like cooking, cleaning, washing and the like. For all these reasons, the Tribunal held that the canteen

building was a factory building entitled to depreciation at double the rate applicable to ordinary buildings.

In this reference made at the instance of the Commissioner, it was submitted by learned counsel for the department that ""factory building"" was

not a term defined by the relevant provisions of the I.T. Rules under which rates of depreciation were prescribed for buildings. He, accordingly,

urged that the matter has got to be looked from a common sense point of view and not on the basis of what was regarded as a factory for the

purposes of any other enactment. We accept the point of view urged by the learned counsel for the revenue. We agree that the expression ""factory

building"" occurring in Appx. I of the I.T. Rules, 1962, must be construed in the context of the said Rules and the enabling provisions of the Act.

Under these Rules, buildings, for the purposes of assigning to them appropriate rates of depreciation, are found classified as first class substantial

buildings, second class buildings of less substantial construction and third class inferior to that of second class buildings. There are other

classifications of structures which are not necessary for the purposes of the present discussion. With reference to these three classes of buildings,

the depreciations allowance prescribed in Appx. I is 2.5 per cent., 5 per cent. and 7.5 per cent., respectively, of their written down value. There is

a remarks column superadded to the table of rates. The remarks as against the first, second and third class buildings are ""Double these rates will be

taken for factory buildings excluding offices, godowns, officers'' and employees'' quarters"". As earlier observed, the expression ""factory buildings

has not been defined by the Rules relating to depreciation set out in the Appendix. Learned counsel for the revenue submitted that the expression

factory buildings"" must be held to refer to factory buildings par excellence, and the conception behind this expression cannot be extended to cover

structures where no manufacturing process is carried on. Referring to the exclusory clause under which offices, godowns, officers'' and employees''

quarters stand excluded under the remarks column, learned counsel stated that this clause must be regarded as clarificatory rather than as taking

out certain specified or named classes of buildings which, but for the exclusion, might be regarded as falling within the genus ""factory buildings"".

It is unnecessary for us to speculate as to whether the clause excluding offices, godowns, officers ''and employees'' quarters is a clarificatory

clause or whether it has a deeper significance and it is intended as an indication as to the very conception of ""factory buildings"" as such. For quite

apart from the parenthesis of exclusion found in the remarks column, we believe that ""factory buildings"" must be regarded as a term which can very

well include canteen buildings which are adjuncts to a factory. 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 by the management for the benefit of the workers employed in the factory. In this

respect, therefore, the canteen must be considered as being part and parcel of the factory premises or the factory complex. If functionally and

situationally, a canteen is regarded as part of the factory system, it would follow that canteen buildings also must be regarded as factory buildings

even from a common sense point of view.

Quite apart from the view-point of regarding canteen buildings as being a necessary adjunct of factories, even considering the canteen as a

purposive structure in itself, we must accept the opinion of the Tribunal that it should be regarded as a factory. Two reasons were assigned by the

Tribunal for this conclusion and we accept the validity of both of them. The first is that 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 urged by the

Tribunal, which also meets with our approval, 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 forms of energy in that part of the canteen, would have the same damaging effect on the life of the

building as 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.

These considerations definitely point to the conclusion that a canteen building is, in the proper sense of the term, a factory building for the

purpose of depreciation allowance. We are, therefore, in entire agreement with the Tribunal''s conclusion that the assessee''s canteen building to

entitled to depreciation at the rate of 10 per cent. by doubling the rate of 5 per cent. to which ordinary, non-factory second class buildings, are

entitled.

During the course of arguments at the bar, there was citation by both sides to decided cases. We may preface the discussion of the case law by

observing that excepting for a case or two, the references to authorities had little or nothing to do with the interpretation and application of the

depreciation provisions in the I.T. Rules, 1962. A few cases cited at the Bar dealt with the definition of the expression ""factory"" occurring in the

United Kingdom Factories Act, 1937, and our own Factories Act, 1948 : Luttman v. Imperial Chemical Industries Ltd. [1955] 3 All ER 481

raised a question whether a canteen building used for feeding and entertaining people working in a factory can be regarded as falling within the

expression ""factory"". The United Kingdom Factories Act, 1937, lays down what places shall be deemed to form part of a factory for the purposes

of that Act and what shall not be. A relevant provision in that statute enacted that where within the close, the curtilage or the precincts, forming a

factory, any place was solely used for some purpose other than the process carried on in the factory, then that place shall not be deemed to form

part of the factory. The question was whether a canteen meant for and used by the works people employed in the factory can be brought within

this section. It was held in that case that since the canteen was not solely used for a purpose other than the processes carried on in the factory, it

must be regarded as being part of the factory, particularly when it was used for the purpose of feeding and entertaining people working in the

factory which must be regarded as a purpose incidental to the process of manufacture carried on in the factory.

The same provision in the United Kingdom Factories Act came up for consideration in Thomas v. British Thomson-Houston Co. Ltd. [1953] 1

All ER 29. In this case, however, it was held that where there was a restaurant run within the curtilage of a factory exclusively for executive and

administrative employees, then it must be regarded as being solely used for a purpose other than the process in the factory and hence it was not to

be deemed to be a part of the factory.

In Wood v. London County Council [1941] 2 KB 232 the question arose whether a canteen where there was preparation of food for the

patients and staff of a hospital and where electrically operated mincing machines were being used, can be regarded as a factory within the meaning

of the United Kingdom Factories Act, 1937. Section 151(1) of the Act defined a ""factory"" as meaning any premises in which persons are

employed in manual labour in any process incidental to any of the purposes, namely, making of any article or part of any article, the altering,

repairing, ornamenting, cleaning, washing or breaking up or demolishing of any article. The definition laid down the stipulation that the premises

must be a place in which the work is carried on by way of trade or for purposes of gain. The matter came up before the Court of Appeal.

MacKinnon L. J., who delivered the judgment of the court, was inclined to regard a kitchen, functionally as answering the description of a place

where an article or part of an article is made or altered and/or where the process of cleaning or washing is performed. The learned Lord Justice,

however, held that it cannot be regarded as a factory. The reason which the learned judge gave for his conclusion was that holding the kitchen in a

hospital to be a factory would be to bring all the provisions of the Factories Act, 1937, for relentless application to the said building. According to

the learned judge, holding a hospital kitchen would be subject to all the restrictions and regulations relating to the set hours of work, relations

between the management and workers and the like all of which were strictly provided for in the Factories Act. To avoid this curious and

unintended result, MacKinnon L.J. held that a kitchen cannot be brought within the definition of ""factory"" under the United Kingdom Factories Act.

The decision last cited gives an indication as to how even where the expression ""factory"" has been defined in so many words in a statute, the

courts have, for the purpose of construction, tended to look not only to the words of the section, but also to the consequences of giving to the

words a meaning which would be destructive of the very purpose for which the Act had been brought in. Applying that the test to the rule relating

to depreciation in our I.T. Act and Rules, we are satisfied that the proper view-point from which we must approach the question of interpretation

of the expression ""factory building"" would be to look at the operative words functionally as intending to provide for wear and tear of depreciable

assets. By the same token, we must exclude from consideration judicial interpretations of the expression ""factory"" occurring in other enactments,

such as the Factories Act and other Acts. In our Factories Act, 1948, the expression ""factory"" is defined more or less in the same terms as in the

United Kingdom statute. The definition of ""factory"" in our Act, briefly stated, relates it to any premises including the precincts thereof, where ten or

more workers are working and in any part of which a manufacturing process is carried on with the aid of power or where twenty or more persons

are working and in any part of which manufacturing process is carried on with the aid of power or where twenty or more persons are working and

in any part of which manufacturing process is carried on without the aid of power. In Ardeshir H. Bhiwandiwala Vs. The State of Bombay, , the

Supreme Court had occasion to examine this definition in the Factories Act. They observed that the expression ""premises"" is a generic term

meaning open land or land with buildings or buildings alone and the use of the expression ""including the precincts thereof"" was intended to enlarge

the scope of the meaning of the expression ""premises"". It might be observed that neither our Factories Act nor its United Kingdom counterpart

employs the expression ""factory building"". It may further be observed that the objective behind our factories'' legislation was to consolidate and

amend the law ""regulating labour in factories"". Having regard to this object, the expression ""factory"" was given a fairly wide connotation, in the case

decided by the Supreme Court. It is not appropriate to apply the decisions of courts interpreting and applying the term occurring in the Factories

Act as aids to the construction of ""factory building"" occurring in the depreciation provisions relating to Income Tax. We, therefore, do not find any

assistance from decisions rendered under that Act, such for instance as New Taj Mahal Cafe Ltd. v. Inspector of Factories [1956] 9 FJR 117;

AIR 1956 Mad 600, which was one of the cases cited before use in the course of the hearing.

Some decisions having to do with the relevant depreciation rule under the I.T. Rules, 1962, were also cited at the hearing. Three of them, viz.,

Commissioner of Income Tax, Bombay City-I Vs. Colour-chem Ltd., , Commissioner of Income Tax Vs. Lucas-T.V.S. Ltd. (No. 2), and

Hukamchand Mills Ltd. Vs. Commissioner of Income Tax (Central), Bombay, may be dealt with together, for they raise more or less a common

question. That question was whether a road inside a factory complex, laid out for the purpose of aiding and assisting the manufacturing processes,

can be regarded as a building. Two of the decisions were by the Bombay High Court and one was by this court. All the three decisions held that

the road laid out and constructed inside the factory premises must be regarded as a building for the purposes of depreciation. It may be observed

that no question arose in those cases as to what is the meaning to be attached to the expression ""factory"". Apparently, the only point at issue in

these cases was whether a road situate within the factory premises or precincts was a building at all.

In Commissioner of Income Tax Vs. M.M. Palanisami Nadar and Sons, , the question arose whether a workshop run by a bus-operator

wherein there were installed mechanical equipment such as air-compressors, electric welders, battery charger, electric grinders and electric drills

could be regarded as a factory building. The Tribunal answered the question in the affirmative. The matter came before a Bench of this court for

consideration under s. 256(2) of the I.T. Act, 1961, to find out whether any question of law arose from the Tribunal''s decision. While dismissing

the petition filed by the Commissioner under that provision, the learned judges, however, expressed the view that the expression ""factory buildings

must take its ordinary, natural, dictionary meaning and, in that sense, the workshop run by the bus-operator in that case was rightly held by the

Tribunal to be a factory building within the meaning of the I.T. Rules, 1962.

It may be observed that, historically speaking, the expression ""factory"" was employed to denote farflung outposts of merchant companies such

as the East India Company''s foreign branches at Madras, Calcutta and Bombay which in those times were called factories. However, the present-

day meaning of the expression would cover a place where things are produced or manufactured and also a workshop or a machine shop. We,

therefore, agree with respect, with the views expressed in Commissioner of Income Tax Vs. M.M. Palanisami Nadar and Sons, .

In INDIAN ALUMINIUM CO. LTD. Vs. COMMISSIONER OF Income Tax, WEST BENGAL-II., , one of the questions which arose

before the Calcutta High Court was as respects the rate of depreciation to be allowed on constructions relating to fencing, culverts and drainage

inside an aluminium manufacturing factory. The dispute in that case between the taxpayer and the department was not whether those structures

should be regarded as part of the factory building, but whether they were buildings at all. The Calcutta High Court had no hesitation in holding that

they were buildings. This decision, it may be observed, does not really throw light on the question which we have decided in the present case.

One other case which was cited at the hearing was that of the Kerala High Court in Commissioner of Income Tax Vs. Casino (Pvt.) Ltd., .

That was a case where the assessee was the owner of a hotel, but the question which the Kerala High Court had to decide did not pertain to the

application of the appropriate rate of depreciation to the building in question. The learned judges had to decide whether the activity of food in their

hotel would constitute ""manufacturing or processing of goods"" within the meaning of s. 2(6)(d) of the Finance Act, 1968. This case also is not a

direct decision on the question of depreciation allowances.

For the reasons which we have earlier set out in this judgment, we are satisfied that the Tribunal has come to a correct conclusion in applying

the higher rate of depreciation to the canteen building. The question of law referred to us is accordingly answered in the affirmative and in favour of

the assessee. The assessee will be