1.12     Query

Expenditure to be included in the installation cost of

plant and machinery.

A company is engaged in manufacturing paper. The main paper machine is normally installed on the ground floor. The company modified the production process which necessitated the installation of the machine on the first floor. The entire first floor of the building was constructed for this purpose only. This also resulted in the increased height of the building. In this context, the opinion of the Expert Advisory Committee was solicited on the following:

(i) Whether the construction of the first floor could be considered as the ‘foundation’ for the machine and consequently whether its cost could be debited to the Plant and Machinery Account?

(ii) What should be the treatment of the cost of additional height of the building?

                                                  Opinion                                                                  August 13, 1982

 1. According to the generally accepted accounting principles, the cost of an item of machinery comprises the purchase price, including import duties and non-refundable purchase taxes, and any directly attributable costs of bringing the asset to working condition for its intended use. The directly attributable costs of a machine include installation cost, e.g., the cost of laying special foundations to support and erect a machine when it is necessary. It may however, be pertinent to note that according to the prevailing accounting practice the cost of building in which the machinery is installed, is not considered as its directly attributable cost. A building is considered a separate item of asset and the cost thereof is charged to the Building Account. Thus, the cost of construction of first floor cannot be considered directly attributable to the machine; it is a consequence of the change in the production process.

2.The construction of the first floor, cannot also be classified as plant’, e.g., in a Allahabad High Court decision reported in Taxation (Vol. 7, Part I, September 1981) CIT Vs. Kanodia Warehousing Corporation (1980) it was emphasised that “in order to find out if a building or structure or part thereof constitutes plant, the functional test must be applied. According to their Lordships, it must be seen whether the building or part thereof constitutes an apparatus or tool of the taxpayer or whether it is merely a space where the taxpayer carries on his business.”

3.It is not clear from the query as to what is meant by the expression ‘increased height of the building’. It is apparent that where a first floor is constructed the height of the building naturally increases. Even if the first floor had to be vertically extended for accommodating the machine. The direct nexus between the machine and the increased height as an integral part of machine is not established. Thus, the principles discussed in Paras 1 and 2 will be equally applicable to this also.

4. In view of the above, the Committee is of the opinion that the cost of constructing the first floor, as well as the cost of increased height of the building should be debited not to the Plant and Machinery Account, but to the Building Account.

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