1992 (12) TMI 105 - AT - Income Tax

Summary

Issues Involved:
1. Whether stallions and mares used for breeding race horses are to be regarded as plant for the purpose of claim of depreciation and investment allowance.
2. Disallowance of vehicle maintenance expenses claimed by the assessee.

Detailed Analysis:

1. Whether stallions and mares used for breeding race horses are to be regarded as plant for the purpose of claim of depreciation and investment allowance:

Background:
- The assessee, running a stud farm, claimed depreciation and investment allowance on stallions and mares used for breeding, treating them as plant.
- The CIT(A) allowed the claim for depreciation but denied the investment allowance, stating that the conditions under section 32A of the Income-tax Act, 1961, were not satisfied.

Arguments by Revenue:
- The Revenue argued that horses should not be considered as plant for the purpose of depreciation or investment allowance, relying on the decision of the Tribunal's Special Bench in Ruia Stud & Agrl. Farms (P.) Ltd. v. ITO.
- The Revenue contended that if horses are not plant for depreciation, they cannot be plant for investment allowance either.

Arguments by Assessee:
- The assessee argued that the stud farm horses are specialized and highly priced, used specifically for breeding, and thus should be considered as plant.
- The assessee cited various judgments, including Yarmouth v. France, Scientific Engg. House (P.) Ltd. v. CIT, and Taj Mahal Hotel, to support the broad definition of plant.
- The assessee also referenced the Andhra Pradesh High Court decision in CIT v. Sri Venkateswara Hatcheries (P.) Ltd., arguing that the conditions for both depreciation and investment allowance should be considered independently.

Tribunal's Decision:
- The Tribunal upheld the CIT(A)'s decision to deny investment allowance, agreeing that the breeding of horses does not involve the manufacture or production of any article or thing as required under section 32A.
- The Tribunal reversed the CIT(A)'s decision to allow depreciation, relying on the Special Bench decision in Ruia Stud & Agrl. Farms (P.) Ltd., which concluded that animals do not qualify as plant under section 32 of the Income-tax Act, 1961.
- The Tribunal noted that the functional test of plant was considered by the Special Bench, and the decision was binding for uniformity.

Key Points:
- The Tribunal emphasized that the definition of plant in section 43(3) includes only inanimate objects.
- The Special Bench had considered various judgments and concluded that animals, including horses, do not qualify as plant for depreciation purposes.
- The Tribunal agreed with the CIT(A) that the breeding process does not constitute an industrial undertaking for investment allowance under section 32A.

2. Disallowance of vehicle maintenance expenses claimed by the assessee:

Background:
- The Assessing Officer disallowed vehicle maintenance expenses claimed by the assessee, stating that there was no contract for reimbursement and the expenses were not for business purposes.

Arguments by Assessee:
- The assessee argued that the stud farm is located 12 kms from the city, and the expenses were necessary for business purposes, including frequent travel by doctors and staff.

Arguments by Revenue:
- The Revenue supported the disallowance, arguing that the expenses were personal and not contractually obligated.

Tribunal's Decision:
- The Tribunal reversed the CIT(A)'s decision, allowing the vehicle maintenance expenses as a deduction.
- The Tribunal held that the expenses were incurred wholly and necessarily for business purposes, and it was immaterial whether the cars were used partly for personal purposes.
- The Tribunal emphasized that the expenses were bona fide and commercially expedient.

Key Points:
- The Tribunal recognized the necessity of the expenses for the business operations of the stud farm.
- The absence of a contractual agreement for reimbursement did not negate the business purpose of the expenses.

Conclusion:
- The Tribunal allowed the Revenue's appeals for the assessment years 1985-86 and 1986-87, denying the claim for depreciation on horses.
- The Tribunal partly allowed the assessee's appeal for the assessment year 1986-87, allowing the vehicle maintenance expenses as a business deduction.