1. This first appeal is by the assessee and the second by the department.
2. The assessee is engaged in carrying on the business of livestock breeding, dairy farming and agricultural activities. The assessee has a stud farm. It had purchased and imported several horses from time to time with the intention of breeding horses. The horses were purchased for the permanent use in the business and not with the purpose or intention of selling them. It would appear that the assessee had mentioned in its balance sheet the horses as coming under stock-in-trade. Thus, for the year ended 31-3-1978, on the assets side of the balance sheet, the assessee showed livestock at cost of Rs. 3,31,673 as against the corresponding figure of Rs. 2,18,633 as on 31-3-1977. In its profit and loss account for that year, the company took the amount of Rs. 3,31,673 under the head 'Closing stock' livestock. The corresponding figure for the earlier year being Rs. 2,18,633 showed the same as opening stock. During the year three horses were purchased for Rs. 1,13,040. These two figures, opening and purchased together constitute Rs. 3,31,673 which was shown in the profit and loss account for the year ended 31-3-1978 as livestock, closing stock at cost. The profit and loss account showed receipts of Rs. 1,46,659 under the head milk, covering fees, etc. Deducting therefrom a sum of Rs. 1,42,082 on account of food, upkeeping of the livestock, livery charges, etc., a gross profit of Rs. 4,577 was carried down for working out the net profit for the year.
3. It would appear that during the year, the company changed the accounting treatment in the case of horses comprises in the livestock and represented as stated above in the profit and loss account and balance sheet. Earlier the company had included the cost of the horses under the head livestock and treated the same as current assets. A replenishment reserve at 30 per cent of the cost of the horses was added in the respective years. During the year under appeal, the assessee-company claimed to treat the horses as fixed assets, depreciation being provided at 10 per cent of their cost. The cost of horses as on 1-4-1978 amounting to Rs. 3,12,019 was transferred from the current assets in the balance sheet to the head fixed assets constituting plant. The company claimed depreciation at 10 per cent on this item of fixed assets. During the year, the assessee-company purchased a horse costing Rs. 18,000 which died during the previous year itself. Since this horse also did not constitute the stock-in-trade of the assessee-company, it claimed deduction under Section 32(1)(m) of the Income-tax Act, 1961 ('the Act') and alternatively under Section 36(1)(vi) of the Act. The ITO rejected both the claims. On appeal, the Commissioner (Appeals) rejected the assessee's claim for depreciation on horses treated as plant. With regard to the claim in respect of the dead horse, he directed the ITO to verify whether any amount has been realised after the disposal of the dead horse and to the extent of the difference between the actual cost and the amount realised allow the claim under Section 36(1)(vi).
4. The assessee had claimed common expenses for its businesses of agricultural activities, livestock and breeding activities totalling up to Rs. 79,048. The assessee's claim was that these common expenses should be allocated between agricultural activities and the livestock breeding in the ratio of the turnover for these two branches of its activities. The ITO, however, allowed the expenditure proportionately on the basis of the gross profit. Out of the overall claim made of Rs. 71,809, the ITO, thus, allowed only Rs. 4,326 in the livestock breeding part of the business. The assessee had claimed Rs. 44,802. The Commissioner accepted the claim of the assessee. The assessee has come up on appeal challenging the decision of the Commissioner (Appeals), not granting depreciation on the horses. The department has challenged the Commissioner (Appeals)'s order directing the ITO to allow the claim for deduction under Section 36(1)(vi) in respect of the horses owned by the assessee and also apportioning the common expenditure between agricultural and non-agricultural activities on the basis of the turnovers rather than' the gross profit.
5. The learned counsel for the assessee has pointed out that the business of the assessee is running a stud farm. The animals were not purchased for resale but only for 'coverage' and used in the livestock breeding business. By mistake, the assessee treated the cost of the horses purchased as livestock under the head Closing stock' and at their cost. Since the valuation was at cost, it did not really affect the trading account of the assessee but the horses not meant for resale being brought under closing stock was a clear mistake. In fact that this is so was clear from the fact that the assessee claimed no deduction initially and both the left and right side of the profit and loss account showed the value of the horses purchased. It was on the realisation of this mistake that the assessee claimed that the horses purchased for livestock breeding should be treated as 'plant' and depreciation granted on the same. The assessee in fact made it clear that the progenies of the horses were not to be treated as plant. As a matter of fact, during this year there were no progenies. In support of its case, reliance is placed on the English decision in the case of Yarmouth v. France  19 QBD 647 in which, a leading case, horses were held to be plant. The decision in the case of Yarmouth (supra) as expounded further in Jarrold (Inspector of Taxes) v. John Good & Sons Ltd.  1 WLR 214 (CA) was approved by the Supreme Court in the case of CIT v. Taj Mahal Hotel  82 ITR 44. Reference is also made to the decision of the Gujarat High Court in the case of CIT v. Elecon Engg. Co. Ltd.  96 ITR 672 where the scope of the expression 'plant' was clearly considered and held to include any article or object, fixed or movable, live or dead, used by a businessman for carrying on his business. Adverting to the decision in the case of Earl Derby v. Aylmer  6 TC 665 (KB) in which case grant of depreciation on stallions was not allowed, it is pointed out that this decision rested on the particular wording of U.K. Act.
6. Since the horses purchased during the year likewise did not constitute stock-in-trade of the assessee itself it was eligible for deduction under Section 32(1)(iii) or alternatively under Section 36(1)(vi). Referring to the question of common expenses, it is pointed out both on principle as well as common sense, the bifurcation based on gross profit of the two activities was incorrect. This would be clear, according to the learned counsel, from the very fact that difficulties would arise if there was a gross loss under any head. Even when there was such a loss, for carrying on that part of the business activity expenses have certainly to be incurred. Ultimately, therefore, all expenses have actually to be related to the gross revenue earned for which the expenses have to be incurred. The bifurcation, therefore, should be based only on the gross revenue and not on gross profit. The reallocation was done on a scientific basis and even if it involved a change over in accounting, it constituted correcting as well as achieving a refinement in the proper allocation of common expenses.
7. For the department, stress is laid on the orders of the authorities below. The assessee itself had treated the horses as stock-in-trade.
The cost of the horses had been passed to the trading account from year to year. This would straightaway negate the claim for depreciation.
There was no question of animals being treated as plant even otherwise.
Even though the Gujarat High Court decision based on other decisions have laid down that the word 'plant' should be given a wide connotation, that decision indicated that it would depend on the particular facts of the case. Neither the Supreme Court, nor any of the High Courts have specifically observed that horse is a plant. In fact, the decision in London & Eastern Countries Loan & Discount Co. v.Creasey and Earl of Derby referred to by the Commissioner (Appeals) clearly holds a different view. Stress is laid in this context on the provisions of Section 36(1)(vi) which specifically deals with animals which have been used for the purpose of the business or profession otherwise than as stock-in-trade and have died or become permanently useless for such purposes. This clearly indicated that the Legislature intended that in respect of animals not treated as stock-in-trade the difference between the actual cost and realisation on disposal of the dead would only be deductible. Section 36(1)(vi) in the present case, however, would not apply, since the assessee has treated the horses as stock-in-trade in the books of account. On the question of allowance of Rs. 18,000 for the dead horse, no such deduction is admissible since the horse constituted stock-in-trade. The apportionment of common expenses on the basis of overall turnover is also objected to. Support for this is sought from the fact that in some of the cases, the actual expenses incurred for the particular part of the business can itself be found out.
8. The facts lie in a small compass. The assessee has the business of livestock breeding. For this purpose, it purchases and imports horses.
These horses it keeps for 'coverage'. The horses are not sold. During the year under appeal, there were no progenies from these horses. The question, therefore, of selling the progeny also did not arise. On the basis of the above factual position, the assessce claimed that the horses constitute its permanent assets by making use of which it carried on the business. By mistake, the costs of the horses were treated as part of the livestock-in-trade. But since the valuation was at cost there being entries on both sides of the profit and loss account no excess or deficit in the value of the horses came to be included in the profit and loss account. In other words, even though the horses utilised as the base apparatus for livestock breeding were shown under the head 'Stock-in-trade', as a matter of fact, they did not in any way, affect the financial statement as they would have done if they were really treated as stock-in-trade. This may be by accident but the result is the same. During the year under appeal, the assessee thought that the method of entry adopted for the value of the horses in the statement was incorrect. The horses being capital and fixed assets and the means of its earning the income, the assessee treated that as plant and claimed depreciation at 10 per cent. This is the field of controversy before us.
9. In our view, the mere fact that some entries were made under the head 'Closing stock', should not deprive the assessee of the benefit of depreciation if it was otherwise entitled to it. A mistake can always be corrected. In the present case, no advantage had also been gained on account of the above mistake. If, therefore, we come to the conclusion on a factual basis that horses could be treated as plant, it would be proper to so treat them and grant the assessee the claimed depreciation.
10. In respect of horses as in the case of other assets, they become only the basic material with the help of which income is earned. One method of arriving at the correct annual profit would be to debit the profit and loss account with the cost of the horses every time they are purchased. Any recovery on the sale of the horses after their use is exhausted could be treated as profit to be credited to the profit and loss account. This would be a correct method, but the assessee has not adopted the same. The amounts spent for the horses and lost on account of their deterioration or death certainly has to find a place in the profit and loss account and computation of the profit. The other method of doing this is to find out whether the horses constitute in these circumstances 'plant' entitled to depreciation. The reference made by the Commissioner (Appeals) and the learned departmental representative to Section 36(1)(v;') in this connection is noteworthy. The section provides that where animals are used in the business and die or become useless, the difference between the cost of the animals and realisation from the corpse when dead, etc., can be treated as expenditure allowed.
This is only a refinement over the first method noted above. The fact that the statute deals with this method cannot, in our opinion, rule out as the Commissioner (Appeals) has pointed out any other method of taking into account the deterioration of a fixed asset like the horses in computing the profit.
11. The direct decision in Yarmouth's case ((supra), holds horses to be plant. Even though in the case of London & Eastern Countries Loan & Discount Co. (supra), stallions used to serve mares were not held to be plant, this should be understood as obtaining under the particular wording of the statute. On the contrary, the Gujarat High Court in the case of Elecon Engg. Co. Ltd.'s case (supra) has gone in detail into the nature of the word 'plant'. Its meaning is to be held to be a word of wide import. The enquiry which is to be made in this connection is noted by their Lordships in that case as to what operation the apparatus in question performs in the assessee's business. The case of Jayasingrao Piraji Rao Ghatge v. CIT  46 ITR 1160 (Bom.) defined the primary meaning of the word 'plant' as machinery, apparatus, fixtures, etc., employed in carrying on a business or trade or a mechanical or other industrial business. For its wider meaning it should represent capital investment in the trade or business. Courts have held the cases of building-R.C. Chemical Industries v. CIT  134 ITR 330 (Delhi) ; Fencing around Oil refinery, CIT v. Caltex Oil Refining (I) Ltd.  102 ITR 260 (Bom.) ; Technical know-how- CIT v. Festo Elgi (P.) Ltd.  129 ITR 499 (Mad.), CIT v. Vac Met Corporation (P.) Ltd.  115 ITR 550 (Guj.), CIT v. Emco Electro (P.) Ltd.  118 ITR 864 (Bom.), CIT v. McGaw Ravindra Laboratories (India) Ltd.  132 ITR 411 (Guj.); Books-Catalysts & Chemicals India (West Asia) Ltd. v. CIT  137 ITR 110 (Ker.); Concrete structure Add!. CIT v. Madras Cements Ltd.  110 ITR 281 (Mad.); Well-CIT v. Warner Hindustan Ltd.  117 ITR 15 (AP); Cables for distribution of electricity-CIT v. Indian Turpentine & Rosin Co. Ltd.  75 ITR 533 (All.) ; Sanitary and pipeline fittings- Taj Mahal Hotel's case (supra); Safe Deposit vault-CIT v. Union Bank of India Ltd.  102 ITR 270 (Bom.), Air-conditioning equipment-CIT v.Central Bank of India Ltd.  103 ITR 196 (Bom.) and Cold storage-CIT v. Kanodia Cold Storage  100 ITR 155 (All.) and CIT v. Yamuna Cold Storage  129 ITR 728 (Punj. & Har.) as plant entitled to depreciation on that basis. In the case of Ambala Bus Syndicate Ltd. v. CIT  49 ITR 480, the Punjab High Court held that even though 'plant' includes vehicles, a part of a vehicle such as the body of a vehicle would not come within the definition. In some cases, however, e.g., CIT v. Kanodia Warehousing Corporation  121 ITR 996 (All), Warehouse-Jayasingrao Piraji Rao Ghatge's case (supra) ; Water storage tank in the case of CIT V. Bank of India Ltd.  118 ITR 809 (Bom.), Electrical installations, the assets were not treated as plant. Taking the overall view of the decided cases, what is normally utilised as the apparatus or base which is itself not a stock-in-trade but which could be utilised as the basic item with which profits can be earned, has been regarded as plant. Our popular conception as to what these would look like or do not prejudice the issue so long as they are utilised as the basic asset without selling which and by working of which or with the help of which other trading or business activities are carried on and the income earned. Applying these decisions even though a horse could be a stock-in-trade in certain circumstances ; could be a personal effect or some other capacity in other circumstances, in the present case where it is used only as a medium for procreation of horses and livestock breeding, it could very well be understood as plant. Asa matter of fact, therefore, the assessee's stand in this regard has to be accepted. If, therefore, the assessee has not been granted deduction of the value of the horses purchased from time to time in the year when they are purchased with the price debited to the profit and loss account, it is clearly entitled to treat the value of the horses as plant and claim depreciation on that basis. The assessee's appeal on this point is allowed.
12. As regards the claim of Rs. 18,000 on .account of the death of a horse purchased during the year irrespective of what is stated earlier, the assessee would be entitled to the benefit of Section 36(1)(vi). The fact that if this horse had continued living in the succeeding year on the basis of being treated as a plant, depreciation would be granted, would not disentitle the assessee to the relief under Section 36(1)(vi), insofar as, there is no restriction on such grant noted in this section. The sum of Rs. 18,000 is, therefore, to be allowed as deduction. The ITO could, however, check up whether in respect of this horse any corpse value is realised, if so, that has to be deducted from the above Rs. 18,000.
13. On the last question of apportionment of common expenses between agricultural and non-agricultural businesses, we have no hesitation in accepting the assessee's claim. If, as a matter of fact, the actual expenditure out of the common expenditure pertaining to each of the business could be worked out, adopting that figure would be the most correct method of allocation. In the absence of these details a rough and ready method of apportionment would be on the basis of the turnover in the different businesses. We find that apportioning the expenditure on the basis of the gross profit is positively incorrect since there are several variables the applicability of which is to be considered in working out this computation. The assessee's claim is accepted on this point also.
14. The assessee's appeal is allowed and the departmental appeal is dismissed.