1966 (11) TMI 15 - HC - Income Tax

Business of plying trucks - expenditure incurred in replacing petrol engines by diesel engines - these expenditure was of a capital nature hence, not allowable u/s10(2)(xv)

Summary

Issues:
1. Capital nature of expenditure incurred in replacing petrol engines by diesel engines.
2. Allowability of initial depreciation and development rebate on the cost of the diesel engine.

Analysis:

Issue 1:
The primary question before the court was whether the expenditure of Rs. 28,027, which was incurred in replacing petrol engines with diesel engines, should be considered a capital expenditure. The court determined that the expenditure was indeed of a capital nature as it resulted in the creation of an enduring benefit and became part of the assets of the undertaking. The court relied on the principle established in Atherton v. British Insulated & Helsby Cables Ltd., emphasizing that expenditures made to bring into existence an asset or advantage for enduring benefit are typically treated as capital expenditures. The replacement of petrol engines by diesel engines was deemed to provide an advantage of enduring benefit and was considered a capital expense. The court cited the case of Rhodesia Railways Ltd. v. Income-tax Collector to support this conclusion, emphasizing that such replacements constitute material alterations and improvements to the assets of the company, thus falling under capital expenditure.

Issue 2:
Regarding the second question of whether initial depreciation or development rebate should be allowed on the cost of the diesel engine, the court ruled in favor of the assessee. The court explained that if the assessee is entitled to development rebate under section 10(2)(vib), then initial depreciation under section 10(2)(vi) would not be available. The court discussed the conflicting views on whether diesel engines could be considered machinery, with the Bombay High Court and the Madras High Court holding differing opinions. However, the Supreme Court's decision in Commissioner of Income-tax v. Mir Mohammad Ali clarified that diesel engines could be classified as machinery, thereby entitling the assessee to development rebate. The court aligned with this interpretation, ruling in favor of the assessee on the second question.

In conclusion, the court held that the expenditure on replacing petrol engines with diesel engines was of a capital nature, disallowing it as a deduction. However, the court allowed the development rebate to the assessee, as per section 10(2)(vib) of the Act. As there was partial success for both the department and the assessee, no costs were awarded.