Depreciation entitlement for replacement diesel engines upheld; interest deductions limited where books are rejected and proof is lacking.

Where the assessee's books were rejected and gross income estimated, the burden remained on the assessee to prove loans and business use of borrowed funds; the Tribunal's apportioned allowance of interest was upheld as reasonable and the assessee's claim for full deduction was rejected. Separately, diesel engines fitted as replacements in buses were held to be machinery in ordinary meaning, capable of being part of a larger plant, and when new and properly installed within the statutory period qualify for initial, additional and special depreciation; the depreciation claims were allowed in the assessee's favour.

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Issues: (i) Whether the disallowance of portions of interest payments claimed by the assessee in three assessment years was correct; (ii) Whether extra or additional depreciation under section 10(2)(vi) (paragraph (2)) and section 10(2)(via) is admissible in respect of diesel engines fitted in replacement of existing engines in motor vehicles.

Issue (i): Whether the Tribunal correctly disallowed parts of the interest payments claimed by the assessee for the three assessment years.

Analysis: The assessee's books were rejected as unreliable and gross income was estimated under the proviso to section 13 of the Income-tax Act. Where accounts are rejected, the burden remained on the assessee to prove that loans on which interest was paid were borrowed and utilized for the transport business. The Tribunal estimated the portions allowable as business-related interest; there is no material to show those estimates were unreasonable. The Income-tax Officer's view that nothing was allowable despite payments being made was rightly overruled, but the assessee failed to discharge the evidential burden to claim full deduction.

Conclusion: The disallowance of portions of the interest payments is affirmed; the assessee's claim for full deduction is rejected.

Issue (ii): Whether diesel engines fitted as replacements in buses qualify for initial, additional and special depreciation under section 10(2)(vi) (paragraphs (1) and (2)) and section 10(2)(via) of the Income-tax Act.

Analysis: The statutory terms require that the item be machinery or plant used in the assessee's business and, where applicable, that new machinery be installed within specified periods. In the absence of a statutory definition, the ordinary meaning of machinery applies. Authorities and principles confirm that machinery may be a part of a larger plant and need not be a self-contained unit. The diesel engines, when fitted to the buses, were installed and, by ordinary meaning and precedent, constitute machinery. Accordingly they satisfy the requirements for initial, additional and special depreciation under the cited provisions.

Conclusion: The diesel engines fitted in replacement are machinery installed for the business and the assessee is entitled to initial depreciation, additional depreciation under paragraph (2) of section 10(2)(vi), and special/additional depreciation under section 10(2)(via); the claim is allowed in favour of the assessee.

Final Conclusion: The reference is answered partly against the assessee on the interest deduction issue and partly in favour of the assessee on the depreciation issue; overall the decision results in a mixed outcome with the Tribunal's interest estimates upheld and the depreciation claims allowed.

Ratio Decidendi: A diesel engine fitted as a replacement in a motor vehicle is machinery within the ordinary meaning and, when new and properly installed within the statutory period, qualifies for initial, additional and special depreciation under sections 10(2)(vi) and 10(2)(via) of the Income-tax Act.

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