Citation Codes

Equivalent Citations

citation codes

Case Number

Case Referred No. 82 of 1956.

Advocates

Mr. Swaminathan for Appt.
Mr. C.S Rama Rao Sahib for Respt.

Judges

Rajagopalan
Ramachandra Iyer, JJ.

Acts

provisions of S. 10(2)(vi) and S. 10(2)(vi-a) of the Income-tax Act
S. 10(2)(vi), and S. 10(2)(vi-a) of the Income-tax Act. (6)
provision of S. 10(2)(vi-a) of the Income-tax Act
S. 66(1) of the Income-tax Act
31-3-1956. Section 10(2)(vi-a)

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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

This reference to the Court arose under S. 66(1) of the Income-tax Act and comprised two questions. The first question concerned whether the disallowance of portions of interest payments paid by the assessee in three account years was correct. The amounts actually paid were Rs. 12,541 (year ending 31-3-1949), Rs. 20,851 (second year) and Rs. 40,302 (third year). The Tribunal allowed deductions of Rs. 8,000, Rs. 14,000 and Rs. 13,000 respectively instead of the full amounts claimed.

The assessee's accounts were rejected as unreliable and gross income had to be estimated under the proviso to S. 18 of the Act for each of the three years. The Income-tax Officer took the view that under those circumstances nothing was allowable as deduction, but the Assistant Commissioner and the Tribunal overruled that view and allowed some deductions after estimation.

The second question (relating to assessment year 1950-51) concerned whether extra or special depreciation was admissible under S. 10(2)(vi) and S. 10(2)(vi-a) of the Income-tax Act for diesel engines fitted in replacement of existing petrol engines. The undisputed facts were that, in the year ending 31-3-1950, the assessee replaced the petrol engines in two buses (MDJ 593 and MDJ 723) with diesel engines at a cost of Rs. 18,544. The Income-tax Officer allowed normal (initial) depreciation but disallowed additional/extra depreciation and the S.10(2)(vi-a) claim; that disallowance was confirmed by the Tribunal.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the disallowance of any portion of the interest payments (Rs. 12,541; Rs. 20,851; Rs. 40,302 in the respective years) on amounts borrowed by the assessee for his business was correct.
Whether extra depreciation is admissible under the provisions of S. 10(2)(vi) and S. 10(2)(vi-a) of the Income-tax Act in respect of diesel oil engines fitted to motor vehicles in replacement of the existing engines.

Arguments of the Parties

Assessee's Arguments

The assessee claimed full deduction of the interest amounts actually paid in each year and contended these were incurred for the purpose of his transport business.
With respect to depreciation, the assessee claimed normal depreciation under paragraph (1) of S. 10(2)(vi), additional depreciation under paragraph (2) of S. 10(2)(vi), and additional/special depreciation under S. 10(2)(vi-a) for the cost of the new diesel engines. Counsel for the assessee drew the Court's attention to Madan and Ireland Ltd. v. Hinton ((1958) 37 ATC 317) in support of the proposition that parts integrated with machines can still be regarded as machinery or plant for allowance purposes.

Department's Arguments

The Income-tax Officer took the initial view in the first issue that, since the assessee's accounts were rejected and gross income had been estimated, nothing should be allowable as deduction. That view was disapproved by the Assistant Commissioner and Tribunal.
In respect of depreciation, departmental counsel (Mr. Rama Rao Sahib) argued that the bus constituted "plant" within the meaning of the statute and that the diesel engine, once fitted, became part of that plant. Therefore no separate extra depreciation should be claimable on the engine as a distinct item; only normal depreciation on the bus as a whole would be permissible since the buses had been acquired before 1946. The Department relied on the Bombay High Court decision in Maneklal Vallabhadas v. Commissioner of Income-tax (1959-37 ITR 142).
The Tribunal had also given other reasons for disallowance (for example, that the assessee did not show sale price of the old engines or that he did not show anything was wrong with the petrol engines), but the Court treated those reasons as irrelevant to the statutory question.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Corporation of Calcutta v. Cossipore and Chitpore Municipality, ILR 49 Cal 190 (AIR 1922 PC 27)	Testual guidance on the ordinary meaning of "machinery" (Privy Council observation that "machinery" prima facie means mechanical contrivances which, by combined movement/operation of parts, generate power or apply natural forces to effect definite results).	The Court adopted this descriptive test and held that a diesel engine clearly satisfied it and therefore qualified as "machinery" for purposes of S.10(2)(vi) and S.10(2)(vi-a).
Madan and Ireland Ltd. v. Hinton ((1958) 37 ATC 317)	Authority holding that certain knives and lasts, though integrated with larger machines, were machinery/plant and capital in nature; an investment allowance analogous to extra depreciation was allowed.	The Court cited this decision to emphasise the difficulty of an exhaustive statutory definition of "machinery" and to note that integration with other machinery does not preclude an item from being machinery. The Court did not treat it as directly determinative but as supportive of the analytic approach.
Maneklal Vallabhadas v. Commissioner of Income-tax (1959-37 ITR 142, Bombay High Court)	Held that machinery must be a self-contained unit capable of being put to use on its own so as to qualify for initial/extra depreciation; applied to hold diesel engines installed in vehicles were not such self-contained machinery for allowance purposes.	The Court expressly disagreed with this test, rejected the requirement of a "self-contained unit", and declined to follow that restrictive approach when determining whether the diesel engines were "machinery".
Commr. of Income-tax v. Sri Rama Vilas Service (Pr.) Ltd. (Tax Case No. 68 of 1958)	Considered the statutory requirement of "installed" for purposes of depreciation allowances.	The Court adopted the interpretation from that consideration and held that the diesel engines were "installed" when they were fitted to the buses to run them.

Court's Reasoning and Analysis

The Court separated its treatment of the two referred questions and applied statutory interpretation and evidential principles strictly as found in the record.

First Question (Interest Deductions)

The assessee's accounts were rejected as unreliable for each of the three assessment years and gross income was estimated under the proviso to S. 18 of the Act; this required the Tribunal to estimate allowable deductions.
The Tribunal and the Assistant Commissioner correctly overruled the Income-tax Officer's view that nothing could be allowed merely because accounts were rejected; the Court endorsed that approach.
However, it remained the assessee's burden to prove that the loans on which interest was paid were borrowed and utilised for the transport business. The assessee failed to discharge that burden: no accounts for the third year and the books for the first two years were rejected as unreliable.
Given the lack of material to substantiate the full claim, the Tribunal necessarily estimated the portion of the payments representable as business interest. The Court found no basis to say the Tribunal's estimates were unreasonable and therefore upheld the Tribunal's disallowances.

Second Question (Depreciation on Diesel Engines)

The statutory provisions under consideration were paragraph (1) and (2) of S. 10(2)(vi) (normal/initial and additional depreciation) and S. 10(2)(vi-a) (additional and special depreciation). The terms "machinery" and "plant" had to be construed in this context. S. 10(5) defines "plant" inclusively to include vehicles among other things; "machinery" has no statutory definition and must bear its ordinary meaning.
The Court adopted the descriptive test for "machinery" articulated by the Privy Council in Corporation of Calcutta v. Cossipore and Chitpore Municipality: machinery prima facie means mechanical contrivances which, alone or in combination, generate power or apply natural forces to effect definite results. Applying that test, a diesel engine plainly qualifies as "machinery".
The Court observed the decision in Madan and Ireland Ltd. v. Hinton where components integrated with machines were held to be machinery/plant — this was cited to underscore that an exhaustive definition is problematic and integration does not necessarily negate "machinery" status. The Court noted, however, that it was not required to extend that specific decision to reach its conclusion in the present case.
On the statutory timing requirement, paragraph (2) of S. 10(2)(vi) required the machinery being new to have been installed between 1-4-1946 and 31-3-1956, and S. 10(2)(vi-a) applied to new machinery installed after 31-3-1948. The Court, relying on the consideration in Commr. of Income-tax v. Sri Rama Vilas Service (Pr.) Ltd., held that these diesel engines were "installed" when they were fitted to the buses.
The Tribunal's principal reason for disallowance—that an engine, though important, is merely part of equipment and cannot by itself be "machinery" for extra depreciation—was rejected. The Court held that machinery does not cease to be machinery because it must be used in conjunction with other machines or because it forms part of a larger plant (including a motor bus).
The Court expressly disagreed with the Bombay High Court in Maneklal Vallabhadas which had required the machinery to be a self-contained unit. The Court found no basis, statutory or otherwise, for such a restrictive test and gave examples (such as electric motors) to illustrate that integral parts can remain machinery.
Because the diesel engines were found to be new machinery, fitted (installed) and used in the assessee's business, the Court concluded the assessee was entitled to the normal, additional and special depreciation allowances provided by paragraphs (1) and (2) of S.10(2)(vi) and S.10(2)(vi-a).

Holding and Implications

Holding:

First question: The Court answered the first question in the affirmative and against the assessee — the Tribunal's partial disallowances of the interest claims were correct given the evidential shortcomings; the Tribunal's estimates were not shown to be unreasonable.
Second question (as amended): The Court answered the second question in the affirmative and in favour of the assessee — the diesel engines fitted to the buses were "machinery" and "installed" such that the assessee was entitled to the allowances under paragraphs (1) and (2) of S. 10(2)(vi) and S. 10(2)(vi-a).

Implications:

Direct effect on the parties: The Tribunal's estimates on interest deductibility are sustained (resulting in partial disallowance upheld), and the assessee is entitled to the three classes of depreciation allowances for the diesel engines purchased and fitted to the buses.
Costs: As neither side wholly succeeded, the Court ordered that each party bear its own costs.
Broader implications: The Court declined to adopt a restrictive "self-contained unit" test (as applied by the Bombay High Court in Maneklal Vallabhadas) for the meaning of "machinery" under the relevant statutory provisions and reaffirmed a broader ordinary-language conception of machinery (consistent with the Privy Council formulation). The opinion does not purport to create an exhaustive definition of "machinery" beyond the reasoning expressed here.

Order accordingly.

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Mir Mohd. Ali, Bus Owner, Vellore v. The Commissioner Of Incometax, Madras.

(1) The first of the two questions referred to this Court under S. 66(1) of the Income-tax Act was,

"Whether on the facts and in the circumstances of the case, the disallowance of any portion of payment of interest of Rs. 12541 in the first year, Rs. 20851 in the second year and Rs. 40302 in the third year on the amounts borrowed by the assessee for the purpose of his business is correct?"

That actually the assessee paid Rs. 12541 in the first year (the account year ending with 31-3-1949), Rs. 20851 in the second year and Rs. 40302 in the third year towards interest on the loans he had contracted was apparently accepted by the Tribunal. What was ultimately allowed by the Tribunal as deduction was Rs. 8000 in the first year, Rs. 14,000 in the second year and Rs. 13,000 in the third year. The question is whether the claim of the assessee should have been allowed in full.

(2) The accounts of the assessee were rejected as unreliable, and the gross income of the assessee had to be estimated under the proviso to S. 18 of the Act in each of the three assessment years. The Assistant Commissioner and the Tribunal rightly overruled the view of the Income-tax Officer, that under such circumstances nothing was allowable as deduction, though the assessee had expended the amounts in question to meet the interest charges. But how much of the loans was borrowed for the transport business of the assessee, he had to prove, and while no accounts were produced for the third year, the books produced for the first two years were rejected as unreliable.

The Tribunal had therefore necessarily to estimate how much of the payments represented interest on loans borrowed and utilised for the transport business of the assessee. It was for the assessee to prove that each of the loans on which he paid interest in the years in question was utilised for his business, and that burden the assessee did not discharge. There is really no material on record to sustain any possible contention, that the estimates ultimately upheld by the Tribunal were unreasonable. We have to answer the first question in the affirmative and against the assessee.

(3) The second question, which related only to the assessment year 1950-51 ran:

"Whether extra depreciation is admissible under the provision of S. 10(2)(vi-a) of the Income-tax Act in respect of a diesel oil engine fitted to a motor vehicle in replacement of the existing engine."

The relevant facts were not in dispute. In the year of account ending 31-3-1950, the assessee replaced the petrol driven engine in two of the buses MDJ 593 and MDJ 723 by new diesel engines and he incurred an expenditure of Rs. 18,544 on the purchase of these two diesel engines. He claimed deduction for the depreciation allowances permitted by paragraph (1) of S. 10(2)(vi) of the Act (normal or initial depreciation), paragraph (2) of S. 10(2)(vi) of the Act (additional or extra depreciation) and by S. 10(2)(vi-a) (additional and special depreciation).

The claim for normal depreciation was allowed by the Income-tax Officer himself, but he disallowed the claims under the other two heads, and that disallowance was ultimately confirmed by the Tribunal. The question as it has been framed by the Tribunal would appear to refer only to the disallowance of the claim under S. 10(2)(vi-a) and not the disallowance of the claim under paragraph (2) of S. 10(2)(vi). Quite obviously it was an accidental slip, because what the Tribunal stated in its order on appeal was:

"In our opinion the assessee is not entitled to extra depreciation under S 10(2)(vi) or 10(2)(vi-a) ..................."

So we amended the question, and the amended question runs:

"Whether extra depreciation is admissible under the provisions of S. 10(2)(vi) and S. 10(2)(vi-a) of the Income-tax Act in respect of the diesel oil engines fitted to the motor Vehicles in replacement of the existing engines."

Section 10(2)(vi) and 10(2)(vi-a) of the Act provided for allowance for depreciation of machinery and plant among other things which belonged to the assessee and which he utilised for his business. While S. 10(5) of the Act defines the expression plant, "plant includes vehicles, books, scientific apparatus, and surgical equipment purchased for the purposes of the business, profession or vocation", the term "machinery" itself has not been given any statutory definition. It should however be obvious that the word machinery must be given the same meaning with reference to each of the three statutory provisions we have now to consider, paragraphs (1) and (2) of S. 10(2)(vi) and S. 10(2)(vi-a). If the diesel engine was machinery for the normal depreciation for which the first paragraph of S. 10(2)(vi) provided, it would continue to be machinery also for the additional allowances for depreciation under the second paragraph of S. 10(2)(vi) and S. 10(2)(vi-a). In the absence of a statutory definition the normal meaning of the word machinery has to be accorded to it.

(4) In Corporation of Calcutta v. Cossipore and Chitpore Municipality, ILR 49 Cal 190: (AIR 1922 PC 27), their Lordships of the Privy Council stated at p. 201 (of ILR Cal): (at p. 32 of AIR):

"Their Lordships concur with Lord Davey in thinking that there is great danger in attempting to give a definition of the word 'machinery' which will be applicable in all cases. It may be impossible to succeed in such an attempt. If their Lordships were obliged to run the hazard of the attempt, they would be inclined to say that the word 'machinery' when used in ordinary language prima facie means some mechanical contrivances which, by themselves or in combination with one or more other mechanical contrivances, by the combined movement and interdependent operation of their respective parts generate power, or evoke, modify, apply or direct natural forces with the object in each case of effecting so definite and specific a result."

That may not be an exhaustive test. But even judged by that test a diesel engine is certainly machinery.

(5) The learned counsel for the assessee drew our attention to the decision of the Court of Appeal in Madan and Ireland Ltd. v. Hinton, (1958) 37 ATC 317. The headnote runs:

"The appellant carried on business as a manufacturer of boots, shoes and slippers. A number of of heavy machines were used in the business, and the knives and lasts were inserted into the machines. The knives wear out quickly and have to be replaced frequently. Every type of shoe requires its own shape of knife and last. The machines cannot function without the knives and lasts, and the knives and lasts are useless except when placed in the appropriate machines............. it was contended on behalf of the respondent that the expenditure on the knives and lasts was not expenditure on capital account, but on revenue account; and that they were not parts of the machines, but were chattels. It was contended on behalf of the appellant that the expenditure was on capital account, since it was expenditure on machinery or plant, and so was entitled to an investment allowance..............."

The Court of Appeal held (1) that the knives and lasts were machinery or plant; (2) that the expenditure was capital expenditure; and (3) that an investment allowance should be made in respect of that expenditure. The investment allowance the Court of Appeal had to allow was something analogous to the additional depreciation allowance for which S. 10(2)(vi-a) provided. We have referred to this case only to emphasise what their Lordships of the Privy Council pointed out in ILR 49 Cal 190: (AIR 1922 PC 27), that it may not be possible or desirable to give an exhaustive definition of the word "Machinery". It may not however be necessary to extend the principle laid down by the Court of Appeal in (1958) 37 ATC 317, to decide whether diesel engines constituted machinery within the meaning of S. 10(2)(vi), and S. 10(2)(vi-a) of the Income-tax Act.

(6) The further requirement of the second paragraph of S. 10(2)(vi) is that the machinery being new must have been installed between 1-4-1946 and 31-3-1956. Section 10(2)(vi-a) applies to new machinery installed after 31-3-1948. We had to consider in Tax Case No. 68 of 1958: , Commr. of Income-tax v. Sri Rama Vilas Service (Pr.) Ltd., the scope of the statutory requirement of "installed" and judged by that term we have to hold that the diesel engines were "installed" when they were fitted to the buses to run them.

(7) Of the reasons given by the Tribunal for disallowing the claim for additional depreciation only one requires consideration. The other were really irrelevant, for example, that the assessee did not show in his books the sale price of the old engines, or that he did not show that anything was wrong with the old petrol driven engines. While it was not necessary that the assessee should prove that the installation of diesel engines improved immediately the profit earning capacity of the buses, even that was satisfied in this case. The Tribunal stated.

"In our opinion, the assessee is not entitled to extra depreciation under Ss. 10(2)(vi) or 10(2)(vi-a) because however important the engine might be for the running of a motor car, it is after all part of an equipment and it cannot by itself become 'machinery' for the purpose of claiming extra depreciation as envisaged in those two sub-sections."

Virtually the same idea was put in different words by Mr.Rama Rao Sahib, learned counsel for the Department. He pointed out that the bus was a plant within the meaning of Ss. 10(2)(vi) and 10(2)(vi-a). He urged that, when the diesel engine became part of that plant, no separate depreciation could be claimed on a part of that plant, that is, the diesel engine fitted to that vehicle, and the assessee's only right thereafter was to claim depreciation on the plant as a whole. On the plant, that is, the bus, only the normal depreciation would be permissible, and not the additional depreciation for which the second paragraph of S. 10(2)(vi) and S. 10(2)(vi-a) provided; the buses had been acquired anterior to 1946.

(8) The contention of the learned counsel for the Department was backed by the authority of the decision of the Bombay High Court in Maneklal Vallabhadas v. Commissioner of Income-tax, 1959-37 ITR 142. With all respect to the learned Judges, we are unable to share the view they took o the scope of Ss. 10(2)(vi) and 10(2)(vi-a). At p. 144 of the report the learned Judges observed.

"We are also unable to agree with the alternative contention........... that these diesel engines constitutes 'machinery being new which has been installed'. In our view, in order that initial depreciation should be allowable on machinery, it must be a self-contained unit capable of being put to use in the business, profession or vocation for the benefit of which it is installed. In the present case, the diesel engines installed by the assessee do not satisfy that test."

In our opinion, machinery does not cease to be machinery merely because it has to be used in conjunction with one or more machines. Nor does it cease to be machinery merely because it is, for instance, installed as part of a manufacturing or industrial plant. We have already referred to the observations of their Lordships of the Privy Council in ILR 49 Cal 190: (AIR 1922 PC 27), a portion of which is worth repetition at this stage,

".........machinery.... means some mechanical contrivances which, by themselves or in combination with one or more other mechanical contrivances, by the combined movement and interdependent operation of their respective parts generate power."

(9) We are unable to see anything in the concept of machinery as that word is understood in the English language or in the statutory provisions S. 10(2)(vi) and 10(2)(vi-a) of the Act, that justifies the adoption of the test formulated by the learned Judges of the Bombay High Court in 1959-37 ITR 142, that the machinery must be a self contained unit. Does an electric motor which provides power cease to be machinery because it is part of an industrial plant, and except to provide power for that plant the electric motor would be needless for the business of the assessee? All that the statute (S. 10(2)(vi) and 10(2)(vi-a)) requires is that it must be new machinery, and that that machinery must be used in the business of the assessee. If integration with other pieces of machinery, all of which together may constitute an industrial or manufacturing plant, does not divest that item of machinery of its character of machinery, we fail to see why any difference should be made when the integration of the machinery is with a motor bus, which was a vehicle in a plant for the purposes of S. 10(2)(vi) and 10(2)(vi-a). It must be remembered that it is an inclusive definition of plant that has been given in S. 10(5) of the Act. We can see no basis, statutory or otherwise, for the view, that machinery loses its identity as machinery for the purpose of S. 10(2)(vi) and 10(2)(vi-a) if it is made part of a "plant".

(10) Another of the main contentions rejected in 1959-37 ITR 142 (Bom), was apparently that the diesel engine fitted into the bus was itself a plant within the meaning of S. 10(2)(vi) and 10(2)(vi-a). The learned Judges observed.

"Evidently, the assessee has purchased diesel engines for his business and he has installed them in vehicles. Though by the definition of 'plant' vehicles are included, we would not, especially in interpreting a taxing statute, be justified in holding that what is installed in a vehicle which in substance forms part thereof would also be regarded as included in the connotation of that expression. We are therefore unable to accept the contention.......... that because the diesel engines are installed in the vehicles, initial depreciation is allowable to the assessee in respect of those engines."

We feel that it should not be necessary for the disposal of the case before us to consider whether a claim for depreciation could be founded on the basis, that the diesel engine was plant within the meaning of S. 10(2)(vi) and 10(2)(vi-a). The statutory provision for depreciation is in the alternative. Whether it is plant or whether it is machinery without its being itself a plant, the assessee is entitled to claim the statutory allowance for depreciation. We have held that the diesel engine was machinery, and that it continued to be machinery even after it was made an integral part of the bus. That should suffice to uphold the claim of the assessee, that he was entitled to all the three classes of depreciation allowances for which provision was made in paragraphs 1 and 2 of S. 10(2)(vi) and S. 10(2)(vi-a) of the Act.

(11) We should like to refer again to (1958)-37 ATC 317. The concentration there was on the question, whether the knives and lasts constituted machinery or plant. It was apparently taken for granted that if they could be brought within the scope of statutory expression "machinery" or "plant", the fact that they were integrated with other machinery did not bar the grant of the allowances to which new machinery was entitled. Of course, that decision is not authority as such for the conclusion we have reached, that the diesel engines of the assessee came within the scope of the statutory expression "new machinery", and the fact that they were made parts of vehicles was not relevant in deciding whether the assessee was entitled to the further allowances for depreciation for which paragraph (2) of S. 10(2)(vi) and S. 10(2)(vi-a) provided.

(12) We answer the second question as amended by us in the affirmative and in favour of the assessee.

(13) As neither side has wholly succeeded in this reference, each party will bear its costs.

(14) Order accordingly.

Mir Mohd. Ali, Bus Owner, Vellore v. The Commissioner Of Incometax, Madras.

Structured Summary of the Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Department's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

First Question (Interest Deductions)

Second Question (Depreciation on Diesel Engines)

Holding and Implications

Mir Mohd. Ali, Bus Owner, Vellore v. The Commissioner Of Incometax, Madras.

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