1959 (11) TMI 57 - HC - Income Tax

Court rules on interest disallowance but allows extra depreciation for diesel engines under Income-tax Act.

Mir Mohd Ali Versus Commissioner Of Income-Tax, Madras

The court ruled in favor of the tax authorities regarding the disallowance of a portion of interest payments on borrowed amounts by the assessee for ... - Issues Involved:1. Disallowance of a portion of interest payments on borrowed amounts.2. Admissibility of extra depreciation for diesel engines fitted to motor vehicles under sections 10(2)(vi) and 10(2)(via) of the Income-tax Act.Detailed Analysis:1. Disallowance of a portion of interest payments on borrowed amounts:The first issue addressed was whether the disallowance of any portion of interest payments of Rs. 12,541 in the first year, Rs. 20,851 in the second year, and Rs. 40,302 in the third year on amounts borrowed by the assessee for business purposes was correct. The Tribunal accepted that the assessee paid these amounts towards interest on loans but only allowed deductions of Rs. 8,000, Rs. 14,000, and Rs. 13,000 for the respective years. The accounts of the assessee were rejected as unreliable, necessitating an estimation of gross income under the proviso to section 13 of the Act. The Assistant Commissioner and the Tribunal overruled the Income-tax Officer's view that no deduction was allowable under these circumstances. However, the assessee failed to prove that each loan on which interest was paid was utilized for the business. With no reliable accounts for the third year and the first two years' books rejected, the Tribunal had to estimate the interest payments related to the transport business. The court found no material to support any contention that the Tribunal's estimates were unreasonable. Therefore, the court answered the first question in the affirmative and against the assessee.2. Admissibility of extra depreciation for diesel engines fitted to motor vehicles:The second issue related to whether extra depreciation is admissible under sections 10(2)(vi) and 10(2)(via) of the Income-tax Act for diesel engines fitted to motor vehicles in replacement of existing engines. The assessee replaced petrol engines in two buses with diesel engines, incurring an expenditure of Rs. 18,544. The Income-tax Officer allowed normal depreciation but disallowed claims for additional and special depreciation under sections 10(2)(vi) and 10(2)(via), a decision upheld by the Tribunal. The court amended the question to include both sections 10(2)(vi) and 10(2)(via).Sections 10(2)(vi) and 10(2)(via) provide for depreciation allowances for machinery and plant used in the business. The term 'machinery' was interpreted based on its normal meaning and the Privy Council's definition in Corporation of Calcutta Vs Chairman, Cossipore and Chitpore Municipality. The court concluded that a diesel engine qualifies as machinery.The Tribunal's reasons for disallowing the claim included irrelevant factors, such as the assessee not showing the sale price of old engines or proving the old engines were faulty. The court found it unnecessary for the assessee to prove immediate profit improvement from the diesel engines. The Tribunal's view that a diesel engine cannot be considered machinery for extra depreciation was rejected. The court disagreed with the Bombay High Court's decision in Maneklal Vallabhdas Parekh Vs Commissioner of Income-tax, which required machinery to be a self-contained unit. The court held that machinery does not lose its identity when integrated with other machinery or plant. Thus, the diesel engines were considered new machinery eligible for additional depreciation under sections 10(2)(vi) and 10(2)(via).The court concluded that the assessee was entitled to the depreciation allowances claimed and answered the second question in the affirmative and in favor of the assessee.Conclusion:The court answered the first question in the affirmative, against the assessee, and the second question in the affirmative, in favor of the assessee. Each party was ordered to bear its own costs.