1985 (5) TMI 77 - AT - Income Tax

ITAT allows horse reclassification, depreciation deduction, and expense allocation based on turnover ratio.

The ITAT upheld the reclassification of horses as fixed assets eligible for depreciation, allowed the deduction for the dead horse under section ... Plant - depreciation on plant - deduction under section 36(1)(vi) - apportionment of common expenditure - allocation on basis of turnover - correction of accounting treatmentPlant - depreciation on plant - correction of accounting treatment - Horses used for breeding in the assessee's stud farm are plant and eligible for depreciation. - HELD THAT: - The assessee purchased and retained horses for the permanent purpose of breeding and not for resale; although the books initially treated their cost as closing stock, that entry did not affect profit because valuation was at cost on both sides. A mistake in classification can be corrected and where an asset is the basic apparatus by which the business earns income it is within the scope of 'plant'. Having regard to authorities recognising a wide meaning of 'plant' and the functional enquiry whether the apparatus performs an operation in the business, horses kept solely as a medium for procreation and to carry on livestock-breeding activity qualify as plant. Accordingly the assessee is entitled to treat such horses as fixed assets and claim depreciation at the admitted rate. [Paras 9, 11]Assessee's claim for depreciation on horses treated as plant is allowed.Deduction under section 36(1)(vi) - Deduction under section 36(1)(vi) is allowable for the horse that died during the year, subject to adjustment for any realisation on disposal. - HELD THAT: - Section 36(1)(vi) permits deduction where animals used in the business die or become permanently useless, by allowing the difference between cost and realisation. Even though a surviving horse treated as plant would attract depreciation, that does not preclude allowance under section 36(1)(vi) for a horse that died during the year. The ITO is to verify whether any corpse or other realisation was obtained and, if so, reduce the allowable amount accordingly. [Paras 12]Deduction for the dead horse is allowed under section 36(1)(vi), subject to adjustment for any amount realised.Apportionment of common expenditure - allocation on basis of turnover - Common expenses between agricultural and livestock-breeding businesses must be apportioned on the basis of actual expenditure if ascertainable, or otherwise on the basis of turnover, and not on the basis of gross profit. - HELD THAT: - Where details exist to allocate actual common expenditure to each business, that method is preferred as most accurate. In the absence of such particulars, a pragmatic apportionment by turnover of the respective businesses is appropriate. Apportionment on the basis of gross profit is unsound because it may be distorted by variables (for example, when one branch makes a loss yet incurs necessary expenses); thus allocation by turnover better reflects the relationship between revenues and the expenses incurred to earn them. [Paras 13]Assessee's method of apportionment (actuals if available, otherwise turnover) is accepted and apportionment on gross profit is rejected.Final Conclusion: The assessee's appeal is allowed on all contested points: horses used for breeding are to be treated as plant with depreciation admissible; deduction under section 36(1)(vi) is allowable for the dead horse subject to adjustment for any realisation; and common expenses are to be apportioned by actuals or, failing that, by turnover. The departmental appeal is dismissed. Issues Involved:1. Classification of horses as fixed assets and eligibility for depreciation.2. Deduction claim under section 32(1)(iii) or section 36(1)(vi) for a dead horse.3. Apportionment of common expenses between agricultural and non-agricultural activities.Detailed Analysis:1. Classification of Horses as Fixed Assets and Eligibility for Depreciation:The assessee, engaged in livestock breeding, dairy farming, and agricultural activities, purchased and imported horses for breeding purposes, not for resale. Initially, these horses were incorrectly listed as stock-in-trade in the balance sheet, but the valuation at cost meant no financial impact on the profit and loss account. The assessee later corrected this by reclassifying the horses as fixed assets, claiming depreciation at 10%. The ITAT upheld this reclassification, stating that the horses used for breeding should be treated as 'plant' for depreciation purposes. The tribunal referenced several legal precedents, including the case of Yarmouth v. France [1887] 19 QBD 647, and CIT v. Taj Mahal Hotel [1971] 82 ITR 44, to support the broad interpretation of 'plant' to include horses used in business operations.2. Deduction Claim Under Section 32(1)(iii) or Section 36(1)(vi) for a Dead Horse:The assessee claimed a deduction for a horse costing Rs. 18,000 that died within the year. The ITAT ruled that the assessee is entitled to this deduction under section 36(1)(vi), which allows for the difference between the cost of an animal and any realization from its disposal if the animal was used in the business and is now dead or permanently useless. The tribunal clarified that this deduction is permissible even if the horse was treated as a fixed asset (plant) for depreciation purposes. The ITO was directed to verify if any amount was realized from the disposal of the dead horse and to deduct this from the Rs. 18,000 claimed.3. Apportionment of Common Expenses Between Agricultural and Non-Agricultural Activities:The assessee claimed common expenses for its agricultural and livestock breeding activities, proposing an allocation based on the turnover ratio of these activities. The ITO had allocated expenses based on gross profit, which the ITAT found incorrect. The tribunal ruled that in the absence of specific expense details for each activity, the allocation should be based on the turnover ratio, as this method is more reflective of the actual business operations and expenses incurred. The ITAT accepted the assessee's method of apportionment, thereby rejecting the department's approach.Conclusion:The ITAT allowed the assessee's appeal, permitting the reclassification of horses as fixed assets eligible for depreciation, granting the deduction for the dead horse under section 36(1)(vi), and approving the allocation of common expenses based on turnover. The departmental appeal was dismissed.