Functional test for windmill depreciation and voucher-based expense disallowance; integral components and unsupported estimates were rejected.

An ad hoc disallowance of wages and packing-related expenses is unwarranted where books, bills and vouchers are produced and no specific defects are identified in the supporting records. On the depreciation issue, civil construction and electrical fittings integrally connected with a windmill were treated as part of the windmill under the functional test, because the asset could not operate as intended without those components. The commentary therefore reflects two settled tax principles: suspicion alone is insufficient to sustain a percentage-based disallowance, and component assets essential to the working of a windmill may qualify for the higher depreciation rate applicable to the windmill itself.

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Issues: (i) Whether the ad hoc disallowance of 2% of wages and packing-related expenses was justified in the absence of specific defects in the vouchers; (ii) Whether civil construction and electrical fittings forming part of a windmill were eligible for the higher rate of depreciation applicable to windmills.

Issue (i): Whether the ad hoc disallowance of 2% of wages and packing-related expenses was justified in the absence of specific defects in the vouchers.

Analysis: The assessee had produced books of account, bills and vouchers. The disallowance was made only on a general observation that some vouchers were defective, without identifying any specific defect. The nature of the business and the character of the payments made to largely illiterate recipients supported the explanation that such expenses would ordinarily be supported by vouchers rather than printed receipts. In the absence of pointed defects, an ad hoc disallowance was held to be unwarranted.

Conclusion: The disallowance was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether civil construction and electrical fittings forming part of a windmill were eligible for the higher rate of depreciation applicable to windmills.

Analysis: The disputed items were civil construction and electrical fittings integrally connected with the installation and functioning of the windmill. Applying the functional test, such items were treated as part of the windmill and not as separable assets. The reasoning proceeded on the basis that the windmill could not operate as intended without these components, and therefore they formed part of the eligible windmill asset for depreciation purposes.

Conclusion: The higher depreciation claim was allowed and the issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded in full, with both disallowances set aside and the assessee obtaining complete relief on the issues decided.

Ratio Decidendi: An ad hoc disallowance cannot be sustained without identifying specific defects in the supporting vouchers, and components integrally connected with the functioning of a windmill are to be treated as part of the windmill for depreciation purposes under the functional test.

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