Business use proof and machinery character control interest deduction and extra depreciation on diesel engines fitted to buses

Where income was estimated after rejection of unreliable accounts, the taxpayer still had to prove that borrowed funds on which interest was claimed were actually used for business, so the interest disallowance was sustained. On depreciation, diesel engines fitted to motor vehicles in replacement of existing engines were treated as machinery within the statutory definition of plant; fitting them to buses satisfied the installation requirement, so extra depreciation was admissible. The material therefore supports a mixed result, with the interest claim rejected and the depreciation claim accepted.

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Issues: (i) Whether the disallowance of part of the interest paid on borrowed amounts used for the assessee's business was justified. (ii) Whether extra depreciation was admissible in respect of diesel engines fitted to motor vehicles in replacement of the existing engines.

Issue (i): Whether the disallowance of part of the interest paid on borrowed amounts used for the assessee's business was justified.

Analysis: The accounts were rejected as unreliable and the income was estimated under the proviso to section 13. In that situation, the assessee still had to establish that the borrowed sums on which interest was paid were in fact utilised for the business. As the materials on record did not show that the Tribunal's estimate was unreasonable, the claim for full allowance could not be sustained.

Conclusion: The disallowance was upheld and the issue was decided against the assessee.

Issue (ii): Whether extra depreciation was admissible in respect of diesel engines fitted to motor vehicles in replacement of the existing engines.

Analysis: Sections 10(2)(vi) and 10(2)(via) allow depreciation for new machinery used in the business, and section 10(5) gives an inclusive definition of plant. A diesel engine is machinery in the ordinary sense, and it does not lose that character merely because it is fitted into a bus or forms part of a larger plant. The statutory requirement of installation was satisfied when the engines were fitted to the buses for use in the business.

Conclusion: Extra depreciation was admissible and the issue was decided in favour of the assessee.

Final Conclusion: The reference succeeded only on the depreciation question, while the interest disallowance was sustained, so the overall result was mixed.

Ratio Decidendi: Machinery retains its character for depreciation purposes even when integrated into a larger plant or vehicle, and a taxpayer claiming interest or depreciation deductions must satisfy the statutory burden of proving the business use and eligibility of the asset or borrowing.

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