Income-tax---

----Depreciation---Roads, drains, culverts, sewage lines, etc. constructed within vicinity of factory and owned by assessee and exclusively used by employees for factory purposes---Are building entitled to depreciation-- Indian Income Tax Act, 1961, S.32(1)(iv).

The assessee claimed depreciation under section 32(1)(iv) .of the Income Tax Act, 1961, of Rs.1,38,144 at the rate of 20 percent. on Rs.6,90,721 on account of addition to buildings etc. The Income-tax Officer held that the abovesaid amount was not admissible as depreciation as according to him those roads, culverts and sewage lines were not used solely by the employees drawing salary of less than Rs.7,500. The Income-tax Officer also held that the deduction admissible was only in respect of buildings under section 32(1)(iv) and not on roads, culverts, sewage lines, etc. On appeal the Commissioner (Appeals) directed the Income-tax Officer to allow depreciation under section 32(1)(iv) on the cost of roads, culverts and sewage lines, in the ratio of 250 : 1300 on the ground that out of 1,300 feet of roads 250 feet related to approach to officers' flats. On further appeal to the Tribunal, the assessee contended that depreciation should be allowed on the cost of roads, culverts and sewage lines if the same were being used for the purpose of running the factory. The Tribunal accepted contention of the assessee and held that the roads, culverts, sewage lines, etc., were constructed primarily for the benefit of the lower grade employees and if incidental benefit was also available to others, the claim of depreciation under section 32(1)(iv) could not be rejected. On a reference:

Held, (i) that where within the factory premises, i.e., within the vicinity, if roads, culverts and sewage lines are constructed for the use of the factory and are owned by the employer and exclusively used by the employees as an approach road to the factory, depreciation is allowable on such roads.

(ii) That building includes roads, culverts, sewage lines, etc., where the same are used as ancillary requirements of the building. But normally building does not include land on which it stands and depreciation is not permissible on the cost of the land. Similarly, on land owned by the assessee if roads, culverts, sewage lines, etc., are constructed and the same are being used for factory purposes as approach road, etc., the same can be construed to be part of the building and depreciation. can be granted if facts are brought on record before the Income-tax Officer. In the instant case such evidence had been brought on record and, hence, the assessee was entitled to depreciation on, the expenditure of construction incurred by the assessee on roads, culverts, sewage lines, etc.

(iii) That, where even certain buildings of the workers are located not within the factory premises but are in the vicinity. of the factory area at a short distance and for the use of the factory workers roads, culverts, sewage lines, etc., are constructed on the land owned by the assessee, the assessee is entitled for depreciation on the expenditure on construction incurred by the assessee.

CIT v. Gwallior Rayon Silk Manufacturing Co. ` Ltd. (1992) 196 ITR 149 (SC) ref.

K. K. Vidhyarthi and S. K. Sharan for the Commissioner.

K. N. Jain, Senior Advocate, Vikash Jain, Sudhir Narain, Shambhu Sharan and Dr. R. Usha for the Assessee.

JUDGMENT

This is a reference under section 256(1) of the Income Tax Act, 1961 (hereinafter to be referred to as "the Act"). The following questions have been referred for our answer:

"(i) Whether the Tribunal was correct in allowing depreciation under section 32(1)(iv) on roads, culverts and sewage lines, etc., even though these roads, culverts and sewage lines were not meant for being used solely by employees drawing salary of less than Rs.7,500 (rupees seven thousand five hundred)?

(ii) Whether roads, culverts and sewage lines, etc., could be held to be building used solely for the purpose of residence within the meaning of section 32(1)(iv)?"

The assessment relates to the year 1976-77. The assessee, Tata Robins Frazer Ltd., 'Jamshedpur, has claimed depreciation under section \32(1)(iv) of the Act of Rs.1,38,144 (rupees one lakh thirty-eight thousand one hundred forty-four only) at the rate of 20 percent. on Rs.6,90,721 (rupees six lakhs ninety thousand seven hundred twenty-one only) on account of addition to buildings, etc. According to the Income-tax Officer, the above said amount was not admissible as depreciation as according to him these roads, culverts and sewage lines were not used solely by employees drawing less than Rs.7,500 (rupees seven thousand five hundred). Besides this, the Income-tax Officer also reached the conclusion that in any case the deduction admissible was only in respect of buildings under section 32(1)(iv) and not on road, culvert, sewage lines, etc. Therefore, the first point arises is as to whether road, culvert, sewage lines, etc., can be held to be building for the purpose of depreciation within the meaning of section 32(l)(iv) of the Act.

However, on appeal, the Commissioner of Income-tax found that out of the total length of roads of 1,300 ft., 250 ft. related to the branch roads for the approach of the officers' flats. He, therefore, directed the Income-tax Officer to allow depreciation under section 32(1)(iv) on the cost of roads, culverts and sewage lines in the ratio of 250: 1300.

The order of the Commissioner of Income-tax became the subject matter of appeal before the Appellate Tribunal. According to the Revenue, no depreciation could have been allowed on the cost of roads, culverts and sewage lines as these were not solely used for the purpose of residence of employees getting salary of less than Rs.7,500 (rupees seven thousand five hundred). However, the assessee claimed that the depreciation should be allowed on the cost of roads, culverts and sewage lines, if the same are being used for the purpose of running the factory.

The Appellate Tribunal accepted the case of the assessee holding that the roads, culverts, sewage lines, etc., were constructed primarily for the benefit of the lower grade employees and if incidental benefit was also available to others, the claim of depreciation under section 32(1)(iv) could not be rejected.

Thus, at the instance of the Revenue, this reference has been made on the questions as referred to above.

As discussed above, a short question arises as to whether the roads; culverts, sewage lines, etc., can be held to be building for the purpose of depreciation within the meaning of section 32(1)(iv) and besides this the other question also arises that if the roads, culverts and sewage lines are held to be building whether depreciation can be allowed if the said construction is carried out "within the factory premises" as links or providing approach road to carry on business activities of the assessee and if the roads, culverts, sewage lines, etc., are constructed outside the factory premises but within the factory area, i.e., within the vicinity where the factory is located-the depreciation can be allowed.

The road constructed in the factory premises to connect several factory buildings adjunct to the factory building or part of the building- and by constant use the road deteriorates and this entitles to depreciation. This legal position is not disputed. But where within the factory premises, i.e., in the vicinity if roads, culverts and sewage lines are constructed for the use of the factory and indeed evidence is there that such roads, culverts and sewage lines are being exclusively used by the employees of the assessee as an approach road to the factory and the same is indeed exclusively owned and used for4actory purpose depreciation certainly can be allowed.

It is not disputed, as interpreted by the judicial pronouncements, that building includes roads, culverts, sewage lines, etc., where the same are used as ancillary requirements of the building. But normally building does not include land on which it stands and depreciation is not permissible on the cost of land. Similarly, on land owned by the assessee if roads, culverts, sewage lines, etc., are constructed and the same are being used for factory purposes as approach road, etc. indeed the same can be construed to be part of the building and .depreciation can be granted if facts are brought on record before the Income-tax Officer. In the instant case, such evidence has been brought on record and, therefore; we are of the opinion that depreciation has rightly been claimed.

No doubt learned counsel appearing for the Revenue has strongly contended that on roads, culverts, sewage lines, etc., constructed outside the factory area, i.e., not within the factory premises but within the vicinity, the concession of depreciation under section 32 of the Act cannot be granted.

Normally, what learned counsel has argued, would have some force; but where it is proved that land on which the roads, culverts, sewage lines, etc., are constructed is owned by the assessee and the same is being used exclusively for the factory purposes, we are of the opinion that depreciation certainly can be allowed.

The apex Court in CIT v. Gwalior Rayon Silk, Manufacturing Co Ltd. (1992) 196 ITR 149 has occasion to consider similar questions as involved in this reference and the questions have been set at rest wherein it is held that roads laid within factory premises as links or providing approach to the building to carry on the business activity of the assessee are "buildings" within the meaning of section 32 of the Act and depreciation is admissible on the capital expenditure incurred thereon as "building". Equally, drains roads, culverts would be integral parts of the buildings for convenient use of the factory. In the same judgment at page 157 the apex Court has further discussed that 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. Therefore, they must be regard as forming part of, the factory building. The expenditure incurred, therefore, will be regarded as expenditure on buildings and depreciation must be allowed.

Learned counsel for the assessee, therefore, laid much emphasis on "factory area" and contended that the concession under section 32 of the Act can be extended to the assessee.

Therefore, as discussed above, if within the vicinity of factory roads, drains, culverts, sewage lines, etc., have been constructed by the assessee and the same are being exclusively owned and used for factory purposes alone indeed such concession must be extended to the assessee and to this extent the ratio, laid down in the case of CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. (1992) 196 ITR 14.9 (SC) helps the assessee.

Thus, we are of the opinion that even where certain buildings of the workers are located riot within the factory premises but are in the vicinity of the factory are at a short distance and for the factory workers roads, culverts, sewage lines, etc., are constructed on the land owned by the assessee, indeed the assessee is entitled for depreciation on the expenditure of construction incurred by the assessee.

Thus, the reference is answered in favour of the assessee.

M.B.A./4126/FC Reference answered.