1. The Income-tax Appellate Tribunal, Madras A-Bench has referred the following question to the High Court under Section 66(1) of the Indian Income-tax Act:
'Whether on the facts and in the circumstances of the case, the assessee is entitled to initial and extra depreciation under Section 10(2) (vi) and (via) in respect of the new diesel engines fitted to the buses in the place of petrol engines'.
2. The assessee is a transport operator with a fleet of eight buses. During the accounting year ending on 16-8-1954 he purchased two new diesel engines, one on 16-3-1954 for Rs. 9990/- and the other on 15-7-1954 for Rs. 9946/-. These engines were installed in two buses in replacement of the petrol engines and for the accounting year ending on 16-8-1954 she claimed normal depreciation under Section10(2)(vi) paragraph (1), initial depreciation under Section 10(2)(vi) Paragraph (2) and extra depreciation under Section 10(2)(via).
The Income-tax Officer allowed normal depreciation under Section 10(2)(vi) paragraph (1) for five months from 16-3-1954 in the case of one of the buses and for one month from 15-7-1954 in the case of the other and refused to allow initial and extra depreciations under Section 10(2)(vi) paragraph (2) and Section 10(2)(via). This order has been upheld both by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. Aggrieved by the order the assesses has got the above question referred to the High Court.
3. We would at the outset recapitulate the reasoning of the Department for not allowing the claim of the assessee for initial and extra depreciations. According to them initial and extra depreciations under paragraph (2) of Section 10(2)(vi) and under Section 10(2)(via) are admissible only on new plant. If new machinery is fitted to old plant, on such new machinery no initial or extra depreciation is allowable, unless the new machinery is such that by itself it constitutes a separate plant or unit. In this case since the assessee has not purchased new buses she is not entitled to initial and extra depreciations,
4. The argument of the learned counsel for the assessee, on the other hand, is throe-fold. Firstly, he contends that the diesel engines are machinery, and the assessee is entitled to initial and extra depreciation allowances with regard to them even if they do not constitute separate units or plants. His second contention is that, since the Department has treated those diesel engines as machinery for the purposes of normal depreciation allowance, they are bound to treat the same engines as machinery for the purpose of initial and extra depreciations also.
And his last argument is that the test in such cases should be to find out whether the expenditure incurred in purchasing these engines is revenue expenditure or capital expenditure and if it is the latter, the assessee is entitled to initial and extra depreciations on such expenditure, as initial and extra depreciations are in the nature of investment allowances. According to him the expenditure in the present case for purchasing the diesel engine is capital expenditure.
5. In support of his above contentions the assessee's learned counsel has drawn our attention to a decision of the Privy Council in Corporation or Calcutta v. Chairman of the Cossipore and Chitpore Municipality, AIR 1922 PC 27. Therein Lord Atkinson observes that
'They would be inclined to say that the word 'machinery'' when used in ordinary language prima facie means some mechanical contrivances which, by themselves or in combination with one or more other mechanical contrivances, by the combined movement and interdependent operation of their respective parts generate power, or evoke, modify, apply or direct natural forces with the object in each case of effecting so definite and specific a result'.
Even this definition is not exhaustive, for His Lordship further observes that the determination in any given case of what is or is not 'machinery' must, to a large extent, depend upon the special facts of each case.
6. Applying this test, however, the diesel engines would certainly be 'machinery'. At any rate, in the present case, there is no dispute on this question, for Mr. Rama Iyer appearing for the Department concedes, we think quite properly, that the diesel engines are 'machinery', But his contention is that that by itself is not sufficient, but the new machinery should, in addition, constitute a self contained unit by itself capable of being put to use in the business for the benefit of which it is installed. For this argument he relics on a decision of the Bombay High Court in Maneklal Vallabhdas Parekh v. Commissioner of Income-tax, Bombay North : 37ITR142(Bom) .
In this case the assessee replaced petrol engines in his motor lorries by diesel engines and he was not allowed any initial depreciation by the Department on this account under paragraph (2) of Section 10(2)(vi). Their Lordships of the Bombay High Court upheld the above decision on two grounds. The first ground is that there is a significant difference in the scheme for assessing normal depreciation on the one hand and initial depreciation on the other, Normal depreciation is to be assessed as prescribed by rules whereas, initial depreciation is to be calculated according to the percentage set out in the section itself. The second ground on which the assessee's claim was rejected is that initial depreciation is claimable on new 'machinery' only if it is a self contained unit capable of being put to use in the business or if it constitutes 'plant'.
7. The assessee's learned counsel has brought to our notice a recent decision of the Madras High Court on this question in Mir Mohd. Ali v. Commissioner of Income-tax, Madras, 1960 38 ITR 413: AIR 1960 Mad 476. In this case also the assesses replaced the petrol driven engines in two of his buses by new diesel engines and claimed in relation to those engines normal depreciation under Section 10(2)(vi) paragraph (1), initial depreciation under paragraph (2) of the same section and extra depreciation under Section 10(2)(via). The Department allowed only normal depreciation, but on reference to the High Court, their Lordships of the Madras High Court allowed both initial and extra depreciations in addition to the normal depreciation allowed by the Department.
8. After giving our careful and anxious consideration to both the decisions placed before us we are of the opinion that the view of the Madras High Court is the better and more acceptable view foe reasons to be presently stated. The expression 'plant' has obviously a far wider connotation than the expression 'machinery'. These two expressions am used in the alternative in Section 10(2)(vi) and (via), so that 'machinery', if it is new, though not it constitutes 'plant', is entitled to initial and extra depreciations.
The term 'machinery' has not been defined in the Income-tax Act and in the absence of such a statutory definition the word has to be given the ordinary meaning. It is also but reasonable that the term 'machinery' is given the same meaning throughout Section 10(2)(vi) and (via). Sub-sections (vi) and (via) of Section 10(2) indicate clearly that in certain cases an assessee is entitled to all the three classes of depreciation allowances, that is to say, allowances for normal depreciation, initial depreciation and extra depreciation. In the above circumstances we do not find any justification for restricting the application of the term 'machinery' only to a self contained unit capable of being put to use in the business as was done in the Bombay case.
We do not also find much significance in the distinction that is sought to be drawn in the method of assessing normal depreciation and initial depreciation. It may be that in the former case the Act allows rules to be framed prescribing the rates whereas, in the latter case, the section itself sets out the rates. According to us this is only a distinction without any difference, Further, we are also of the view that the expenditure incurred by the assessee in the present case is purchasing the diesel engines is capital expenditure and not merely revenue expenditure. In this connection we would refer to a decision of the Court of Appeal, referred to by Their Lordships of the Madras High Court, viz., Maden and Ireland Ltd. v. Hinton, (1958) 37 A. T. C. 317.
In that case the assessee was a manufacturer of boots, shoes and slippers and a number of heavy machines were used in the business and some knives and lasts were to be inserted into the machines. Particular types of shoe required knives and lasts of their own shape and the machines could not function without the knives and lasts. Their Lordships of the Court of Appeal held that the lasts were machinery or plant, that the expenditure incurred was capital expenditure and that the same was entitled to investment allowance. In the instant case also we are of the view, as already indicated, that the expenditure incurred in the purchase of the new diesel engines is capital expenditure and hence the assessee is entitled to initial and extra depreciation allowances which arc in the nature of an investment allowance.
9. For all the aforesaid reasons we answer thequestion referred to us in the affirmative in favourof the assessee, which answer will be sent to theDepartment. In view of the conflicting decisionsof the two High Courts we direct the parties tobear their own costs of this reference.Reference answered accordingly.