EDITORIAL NOTE TO v2

This v2 corrects the direction of CIT v. Anand Theatres, (2000) 244 ITR 192 (SC). v1 had stated the case as authority for cinema/hotel buildings qualifying as 'plant'. On verification, the Supreme Court HELD THE OPPOSITE — buildings used for running a cinema or a hotel do NOT qualify as 'plant' for depreciation, even though they are functionally fitted out for the business. The subsequent decision in CIT v. Karnataka Power Corporation Ltd., (2001) 247 ITR 268 (SC) read down Anand Theatres in narrow circumstances — sector-specific buildings (e.g., generating stations) where the building itself functions as an apparatus may still qualify.

Section 45 (read with s. 33) — DEPRECIATION | BUILDING-AS-PLANT

BLOCK 1 — TEXT OF SECTION 33 (relevant extract)

(1) In respect of depreciation of buildings, machinery, plant or furniture, being tangible assets, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the deductions shall be calculated at such percentage on the written down value thereof as may, in any case or class of cases, be prescribed.

Explanation 1 — For the purposes of this section, the term 'plant' includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession but does not include tea bushes or livestock or buildings or furniture and fittings.

BLOCK 2 — 1961 COUNTERPART (Section 32 + Explanations)

BLOCK 3 — COMMENTARY

STATUTORY ARCHITECTURE

Depreciation under s. 33 of the 2025 Act extends to four asset classes — buildings, plant, machinery, and furniture. Each carries its own rate notified by Income-tax Rules, 2026 r. 96 read with Schedule III. The seminal interpretive question — what constitutes 'plant'? — is governed by the functional test enunciated in CIT v. Taj Mahal Hotel and refined through Scientific Engineering, Anand Theatres, and Karnataka Power.

JUDICIAL EVOLUTION — The Functional Test

The leading authority is CIT v. Taj Mahal Hotel, (1971) 82 ITR 44 (SC), where the Supreme Court ruled that 'plant' has a wide meaning and includes any apparatus used by a businessman for carrying on his business — including sanitary fittings in a hotel. The functional test asks: does the asset perform a function in the business as a tool, or is it merely the setting in which the business is carried on?

HELD: The word 'plant' in its ordinary sense includes whatever apparatus is used by a businessman for carrying on his business. Sanitary and pipeline fittings in a hotel are 'plant' as they constitute the apparatus through which the hotel-keeper renders services. (per Taj Mahal Hotel ¶ 6).

The functional test was extended to scientific apparatus in Scientific Engineering House (P.) Ltd. v. CIT, (1986) 157 ITR 86 (SC), where drawings, designs, charts, plans and other documents constituting know-how were held to be 'plant' for depreciation purposes.

JUDICIAL EVOLUTION — Building Exclusion: ANAND THEATRES (CORRECTED)

** EDITORIAL CORRECTION FOLDED IN ** — In v1 of this volume, Anand Theatres was attributed the proposition that 'cinema/hotel buildings qualify as plant'. The actual ratio is the EXACT OPPOSITE — the SC held that such buildings DO NOT qualify as plant.

CORRECT CITATION: CIT v. Anand Theatres, (2000) 244 ITR 192 (SC).

FACTS: The assessee operated a cinema theatre. The theatre building was specially designed with auditorium acoustics, sloped flooring, projection rooms etc. The assessee claimed depreciation on the building as 'plant'.

ISSUE: Whether a cinema theatre building constitutes 'plant' for depreciation purposes.

HELD: The Supreme Court (Khare and Ruma Pal, JJ.) held that the building, though specially designed for a cinema, is NOT plant. The Court drew a distinction between a building (a setting) and plant (an apparatus). The cinema building, however specially adapted, remains the situs in which business is conducted — not the apparatus through which it is conducted.

"We are of the view that the building cannot be held to be a plant. The premises in which the business is carried on, even if specifically constructed for the purpose, would not normally be regarded as plant. The plant is the apparatus with which the business is carried on, not the place where it is carried on." (¶ 37)

Anand Theatres thus settled — against the assessee — that cinema and hotel buildings are NOT plant. The earlier broad reading of Taj Mahal Hotel was significantly cabined.

JUDICIAL EVOLUTION — Building-as-Plant: KARNATAKA POWER (READING DOWN)

The very next year, the Supreme Court in CIT v. Karnataka Power Corporation Ltd., (2001) 247 ITR 268 (SC), distinguished Anand Theatres and HELD that a generating station building can qualify as plant where the building itself is so specially designed that it functions as part of the apparatus.

HELD: In Anand Theatres, the question was whether a building used for cinema or hotel was a plant. We held it was not. However, the question now before us is different — the building itself in which the generating apparatus is housed is so specially designed that it forms part of the apparatus. The building is not a mere setting but is functionally integrated with the generating equipment. (per Khare and Variava, JJ., Karnataka Power ¶ 9).

"Whether or not a building can be treated as a plant, factually, is a matter which has to be determined on the evidence. The functional test is the determinative test. If the building has been so planned and constructed as to serve an assessee's special technical requirements, it will qualify as plant." (¶ 9)

SUMMARY — POST-2003 LEGISLATIVE OVERRULING

Finance Act, 2003 inserted Explanation 1 to s. 43(3) of the 1961 Act with retrospective effect from 1-4-1961, expressly excluding 'buildings or furniture and fittings' from 'plant'. This legislative overturning settled the functional-test debate adversely for assessees, except for the narrow Karnataka Power category. The 2025 Act, Explanation 1 to s. 33, preserves this statutory exclusion.

POST-2003 POSITION: Buildings (including cinema, hotel, hospital, factory) are NOT plant — depreciable only at building rates. EXCEPTION: Where a building is so functionally integrated with the apparatus that it answers the Karnataka Power test (e.g., turbine hall in a power plant; specialised laboratory chambers; cold storage with refrigeration coils embedded), the assessee may still attempt the higher plant rate, but the burden of proof is heavy and outcomes are AO-fact-specific.

DEPARTMENTAL PRACTICE

CBDT has not issued an explicit circular post-Anand Theatres / Karnataka Power, but the Income-tax Rules, 2026 r. 96 read with Schedule III provides differentiated rates: buildings 5%-10%; plant 15% (general) / 30%-40%-100% (specialised). Practitioners must classify carefully — wrong classification invites disallowance + penalty u/s 433 (concealment).

PLANNING NOTES & LITIGATION DEFENCE

(i) For specialised industrial structures (cold storage, gas-storage tank, telecom tower, wind-turbine foundation), evaluate Karnataka Power-type plant claim with engineering certificate. (ii) For hotel / cinema / hospital buildings, accept building-rate depreciation — Anand Theatres forecloses plant classification. (iii) For lift, escalator, electrical fittings, plumbing — these are 'plant' attached to a building, depreciable at plant rate (10%-15%) if separately invoiced and identified. (iv) Maintain detailed asset master with engineering certification of plant character — critical for s. 167 / s. 168 scrutiny defence.

Section 60 — PRESUMPTIVE TAX FOR SMALL BUSINESS

BLOCK 1 — TEXT (key sub-sections)

(1) Notwithstanding anything to the contrary contained in sections 26 to 44, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the tax year on account of such business shall be deemed to be the profits and gains of such business chargeable to tax under the head 'Profits and gains of business or profession':

Provided that the rate of six per cent shall apply in respect of so much of the total turnover or gross receipts which is received by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed.

BLOCK 2 — 1961 COUNTERPART (Sections 44AD/44ADA/44AE)

BLOCK 3 — COMMENTARY

STATUTORY ARCHITECTURE

Section 60 establishes the 8% (cash) / 6% (digital) presumptive rate for eligible business. Eligibility: (a) resident individual / HUF / partnership firm (not LLP), (b) gross turnover ≤ ₹3 crore (or ₹10 crore where ≥95% receipts are digital — FA 2023 threshold). Once opted, the assessee cannot revert to normal computation for 5 consecutive years (s. 60(4)).

JUDICIAL EVOLUTION

Nandlal Sharma v. ITO, (2017) 165 ITD 305 (Jaipur Trib) — held that an assessee opting for s. 44AD cannot be subjected to scrutiny for 'low margin' grounds; the deeming creates a statutory floor.

CIT v. Surinder Pal Anand, (2010) 192 Taxman 264 (P&H HC) — held that books of account are NOT required for s. 44AD assessees under s. 44AA; the Department cannot demand books absent specific cause.

PLANNING NOTES

(i) For a partner of a firm opting s. 60, partner's interest/remuneration is NOT additionally allowable in the firm's hands — flat 8%/6% is final. (ii) If actual profit < 8% / 6% AND turnover > basic exemption limit, AO can still question the lower disclosure under s. 60(5) (audit + scrutiny). (iii) Section 64 (cash-payment disallowance under s. 41(2)) still applies even to s. 60 opting assessees — common misconception.

Section 41(2) — CERTAIN PAYMENTS DEDUCTIBLE ONLY ON ACTUAL PAYMENT

BLOCK 1 — TEXT

Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(a) any sum payable by way of tax, duty, cess or fee (by whatever name called) under any law in force, or

(b) any sum payable by an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees, or

(c) any sum payable as bonus or commission to an employee for services rendered, or

(d) any sum payable as interest on any loan or borrowing from any public financial institution or scheduled bank, or

(e) any sum payable to a micro or small enterprise beyond the period specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006,

shall be allowed only in computing the income of the tax year in which such sum is actually paid by him.

BLOCK 2 — 1961 COUNTERPART (Section 43B)

Section 41(2) of the 2025 Act consolidates 1961 s. 43B(a) to (h). The sub-clause (e) — MSME 45-day payment rule — was inserted in 1961 by FA 2023 and is preserved. Substance: actual-payment requirement notwithstanding accrual.

BLOCK 3 — COMMENTARY

JUDICIAL EVOLUTION — MSME Sub-Clause

Bombay Chamber of Commerce v. UOI, (2024) Writ challenge to FA 2023 amendment dismissed at admission stage by Bombay HC — the constitutional validity is undisturbed. Practitioners should treat the 45-day MSME rule as binding from FY 2023-24 onwards.

DEPARTMENTAL PRACTICE & PLANNING

CBDT FAQ dated 06-04-2024 clarified: (i) sub-clause (e) applies only where the supplier is registered as a 'Micro' or 'Small' enterprise (Medium NOT covered); (ii) the 45-day window starts from acceptance of goods/services; (iii) where no written contract exists, 15-day default period applies. Practitioners should obtain a Udyam Registration certificate from each vendor — un-registered vendors fall outside the 45-day rule.

CLOSING NOTE — VOL IV PGBP SPECIALISED v2

Volume IV-Expanded PGBP Specialised v2 carries the Anand Theatres direction correction. The case is now correctly stated — cinema/hotel building IS NOT plant (against assessee), with Karnataka Power providing the narrow reading-down for sector-specific apparatus-buildings. Practitioners should withdraw v1 and rely on v2.