Commissioner Of Income-Tax, Madras vs Mir Mohd. Ali, Bus Owner, Vellore on 24 April, 1964
Rewritten Version Notice: This is a rewritten version of the original judgment.
Court: supreme-court
Case Number: Civil Appeal No. 145 of 1963
Decision Date: 24 April 1964
Coram: S.M. Sikri, J.C. Shah, Subba Rao
The case was styled Commissioner of Income‑Tax, Madras versus Mir Mohd Ali, a bus owner from Vellore, and the judgment was delivered on 24 April 1964 by the Supreme Court of India. The judgment was authored by Justice S M Sikri, who was joined by Justice K Shah and Justice J C Shah. The petitioner in the matter was identified as the Commissioner of Income‑Tax, Madras, and the respondent was identified as Mir Mohd Ali, who owned and operated a fleet of buses at Vellore in the North Arcot District. The judgment was recorded on the date of 24 April 1964. The bench that heard the appeal consisted of Justice S M Sikri, Justice K Shah and Justice J C Shah. The official citation of the decision is reported as 1964 AIR 1693 and also appears in the Supreme Court Reports as 1964 SCR (7) 846. The case is referenced in later citations, for example D 1975 SC 481 (3). The statutory provision that formed the subject of the dispute related to the Income‑Tax Act of 1922, specifically the provisions dealing with depreciation allowance under sections 10(2)(vi) and 10(2)(via), as interpreted in relation to the replacement of a petrol engine in a bus by a new diesel engine and whether such replacement could be characterised as the “installation of machinery” within the meaning of those subsections.
The headnote recorded that the respondent, who owned a fleet of buses, had replaced the petrol engines in two of his vehicles, identified as MDJ 583 and MDJ 723, with new diesel engines during the financial year ending 31 March 1950, incurring a total expenditure of Rs 18,544. For the assessment year 1950‑51, the respondent claimed depreciation allowance under the second paragraph of clause (vi) and clause (via) of section 10(2) of the Indian Income‑Tax Act, 1922, in addition to the normal depreciation under the first paragraph of clause (vi). However, the assessing authority allowed only a 25 percent depreciation under the first paragraph of clause (vi) and denied any extra depreciation under sections 10(2)(vi) or 10(2)(via), on the ground that the engine formed merely a part of the equipment and could not itself be regarded as machinery, and that an engine fixed in a motor vehicle did not satisfy the requirement of “installation” under the relevant subsections. The Court held, by a majority of Justices Subba Rao and Sikri, that the respondent was entitled to the extra depreciation provided in sections 10(2)(vi) and 10(2)(via) for the diesel engine that had been fitted in place of the existing engines. The Court applied the definition of “machinery” as articulated by the Privy Council in Corporation of Calcutta v Chairman, Cossipore and Chitpore Municipality (1922) L.R. 48 I.A. 435, concluding that a diesel engine falls within that definition. The Court further found that when an engine is fixed in a vehicle, it satisfies the statutory meaning of “installed” within clauses (vi) and (via). Justice Shah delivered a dissenting opinion, arguing that replacement of a petrol engine by a diesel engine did not constitute installation of machinery, because the machinery must be a self‑contained unit brought into service for the business, and a mere part with no independent use should not be treated as machinery installed for the purpose of the second paragraph of clause (vi) of section 10(2).
In this appeal, the Commissioner of Income Tax for Madras contested a judgment of the Madras High Court dated 16 November 1959, a judgment that had been issued under a certificate granted by the High Court pursuant to section 66A(2) of the Indian Income Tax Act, 1922 and recorded as Case Reference No 82 of 1956. The parties were represented by counsel, with counsel for the appellant being S K Kapur and R N Sachthey, counsel for the respondent being S Swaminathan and R Gopalakrishnan, and counsel for the intervenor being S T Desai, J B Dadachanji, O C Mathur and Ravinder Narain. The judgment was delivered on 24 April 1964 by Justices Subba Rao and Sikri; Justice Sikri authored the majority opinion while Justice Shah delivered a dissenting opinion.
The respondent, Mir Mohd Ali, who was thereafter referred to as the assessee, operated a fleet of buses as a transport operator in Vellore, North Arcot District. During the financial year ending 31 March 1950, which corresponded to assessment year 1950‑51, the assessee replaced the petrol engines in two of his buses, identified as MDJ 583 and MDJ 723, with new diesel engines, thereby incurring an expenditure of Rs 18,544 in connection with that replacement. Before the Income Tax Officer, the assessee claimed the ordinary depreciation allowed under the first paragraph of clause (vi) of section 10(2) and additionally claimed depreciation under the second paragraph of the same clause as well as under clause (via) of the Indian Income Tax Act, 1922.
The Income Tax Officer, however, allowed only a 25 percent depreciation under the first paragraph of clause (vi) and refused the additional depreciation claimed under the other provisions. The assessee appealed this decision to the Appellate Assistant Commissioner, but that appeal was dismissed. Although other issues were raised in that appeal, they were not relevant to the present appeal and consequently were not discussed further.
Upon further appeal, the Income Tax Appellate Tribunal held that the assessee was not entitled to the extra depreciation sought under section 10(2)(vi) or section 10(2)(via). The Tribunal reasoned that, although the engine was important for the operation of a motor vehicle, it was merely a part of equipment and could not, by itself, qualify as “machinery” within the meaning of the relevant subsections. Consequently, the Tribunal concluded that the installation of the new engines amounted only to a capital addition and therefore the assessee was correctly denied the extra depreciation claimed.
Subsequently, on the application of the assessee, the Appellate Tribunal referred a specific question to the High Court for determination. The question framed by the Tribunal was: “Whether extra depreciation is admissible under the provisions of section 10(2)(via) of the Income Tax Act, in respect of a diesel oil engine fitted to a motor vehicle in replacement of the existing engine.” The Tribunal also referred a separate question concerning the disallowance of interest, but that question was not pertinent to the present appeal and was therefore omitted from further consideration.
The High Court observed that an accidental slip had occurred in the original formulation of the question and accordingly amended it. The amended question read: “Whether extra depreciation is admissible under the provisions of section 10(2)(vi) and section 10(2)(via) of the Income Tax Act in respect of the diesel oil engines fitted to the motor vehicles in replacement of the existing engines.” The High Court answered this amended question in the affirmative, granting the relief sought by the assessee. The Commissioner of Income Tax, having obtained a certificate under section 66A(2) of the Income Tax Act, subsequently filed the present appeal before the Supreme Court.
The High Court answered the amended question affirmatively, that is, in favour of the assessee. The Commissioner of Income Tax, after obtaining a certificate under section 66A(2) of the Income Tax Act, filed the present appeal. Before addressing the issue, the Court set out the relevant provisions of the Income Tax Act as they stood at the relevant time. Section 10(2) provided that profits or gains shall be computed after making certain allowances. Sub‑clause (v) allowed a deduction for amounts paid on account of current repairs to buildings, machinery, plant or furniture. Sub‑clause (vi) dealt with depreciation of such assets owned by the assessee. For ships other than those ordinarily plying on inland waters, the allowance was a prescribed percentage of the original cost. In other cases, the allowance was a prescribed percentage of the written‑down value. Where buildings had been newly erected, or machinery or plant newly installed after the thirty‑first day of March 1945, an additional sum could be claimed for the year of erection or installation. This additional sum was not deductible in determining the written‑down value for the purposes of clause (vi). The additional percentage was fifteen per cent of the cost for buildings whose erection began and was completed between the first day of April 1946 and the thirty‑first day of March 1952 inclusive; ten per cent of the cost for other buildings; and twenty per cent of the cost for machinery or plant. The proviso (via) further provided that, in respect of depreciation of buildings newly erected or of machinery or plant newly installed after the thirty‑first day of March 1948, a further sum, which was deductible in determining the written‑down value, could be claimed. This further sum was equal to the amount admissible under clause (vi) exclusive of the extra allowance for double or multiple shift working of the machinery or plant and exclusive of the initial depreciation allowance for the first year of erection or installation. The amount could be claimed in the assessments for the five years commencing on the first day of April 1949 and ending on the thirty‑first day of March 1954. Where, for such machinery or plant, the assessee established that the market value of similar machinery or plant on the thirty‑first day of March 1953 was lower than the original cost, then, subject to the provisions of clause (vi), a further allowance was to be made in the assessment for the year commencing after that date. This further allowance, deductible in determining the written‑down value, was the amount by which the written‑down value of the machinery or plant as on that date, without deduction of the initial depreciation admissible in the first year, would have exceeded the corresponding written‑down value if the market price had been taken as the actual cost of the assessee. Sub‑clause (vii) provided that, in respect of any building, machinery or plant that had been sold, discarded, demolished or destroyed, the amount by which the written‑down value exceeded the amount for which it was actually sold or its scrap value could be claimed, subject to the proviso that the term “plant” includes vehicles, books, scientific apparatus and surgical equipment purchased for the purpose of the business, profession or vocation.
The provision states that for the assessment year immediately following the relevant date, the taxpayer may claim an additional allowance that is deductible when computing the written‑down value of the machinery or plant. This allowance equals the amount by which the written‑down value of the machinery or plant on that date—calculated without deducting the initial depreciation allowed in the first year—would exceed the written‑down value that would have resulted if the market price of the machinery or plant on that date had been taken as the actual cost incurred by the assessee. Clause seven further provides that where any building, machinery or plant has been sold, discarded, demolished or destroyed, the excess of its written‑down value over the amount for which the asset was actually sold, or over its scrap value where applicable, may be taken into account. Additionally, subsection five clarifies that, for the purposes of sub‑section two, the term “plant” embraces vehicles, books, scientific apparatus and surgical equipment that are purchased for use in the assessee’s business, profession or vocation.
The issue currently before the Court has been examined by three High Courts. The Bombay High Court and the Andhra Pradesh High Court have each ruled against the assessee, whereas the Madras High Court, in the judgment under appeal, has decided in favour of the assessee. The Andhra Pradesh High Court, in the case of B. Srikantiah v. Commissioner of Income‑Tax (Andhra Pradesh), expressly followed the Bombay decision and dissented from the Madras ruling. In the appealed judgment, reported as Mr Mohd Ali v. Commissioner of Income‑Tax (Madras), the Court reached its conclusion through a series of analytical steps. First, it held that the word “machinery” must be given the same meaning in each of the statutory provisions, specifically sections 10(2)(vi) and 10(2)(via). Second, it affirmed that a diesel engine qualifies as “machinery” according to the test laid down in the case of Corporation of Calcutta v. Chairman, Cossipore and Chitpore Municipality. Third, the Court observed that machinery does not cease to be classified as such merely because it is used together with other machines, nor because it is installed as part of a larger manufacturing or industrial plant. Fourth, it noted that the statutory provision for depreciation operates on an alternative basis: regardless of whether the asset is described as “plant” or as “machinery” that is not itself “plant,” the assessee is entitled to claim the statutory depreciation allowance.
The Court then posed the question of which interpretation is correct. It began by tracing the history of paragraph two of clause (vi). The Income Tax (Amendment) Act, 1946 (Act VIII of 1946), which first introduced the provisions for extra depreciation, was enacted with the purpose of encouraging the modernization and rehabilitation of industry and trade. The Act was framed in the aftermath of the Second World War, a period during which machinery and plant had not been replaced or modernized and had instead suffered excessive wear and tear, creating a need for rehabilitation. Moreover, the war years had witnessed significant advances in technology. Consequently, the legislative intent behind the amendment was to provide incentives that would promote the replacement of worn‑out equipment with newer, more efficient assets, thereby supporting the post‑war economic recovery and industrial advancement.
It was noted that the term “machinery” appeared in clauses (iv), (v), (vi) and (via) of section 10(2). The Court observed that, on its face, the same meaning should be given to the word “machinery” in each of those clauses. Consequently, if a machine qualified as machinery for the purpose of granting an allowance with respect to insurance, repairs, normal depreciation, or for the purpose of paragraph one of clause (vi), the same machine must also qualify as machinery for the purpose of the second paragraph of clause (vi) and for clause (via). Nevertheless, it was submitted that the scheme of paragraph two of clause (vi) and of clause (via) differed from that of paragraph one of clause (vi) because, for a claim of extra depreciation, the machinery had to be new, had to be installed, and the rate of depreciation was fixed by the Act itself. In view of that scheme, the argument urged that the word “machinery” should be given a restricted meaning in paragraph two of clause (vi) and in clause (via). The meaning proposed was that “machinery” should be understood as a “self‑contained unit capable of being put to use in the business, profession or vocation for the benefit of which it was installed.” It was further contended that this interpretation was supported by the definition of “plant” in section 10(5). The counsel argued that, for the purposes of paragraph two of clause (vi) and clause (via), “plant”, including a vehicle, should be regarded as a unit, with its component parts excluded, and that “machinery” ought to be viewed in the same way. The Court then examined these contentions. It held that nothing in the scheme of the second paragraph of clause (vi) and clause (via) illuminated the construction of the word “machinery” in those provisions. While it accepted that the machinery must be new, must be installed, and that the rate of allowance was prescribed in the Act, the Court said that the requirement of newness did not define what “machinery” meant. Assuming, for illustration, that a diesel engine was “machinery,” the Court explained that if a taxpayer purchased and installed a second‑hand diesel engine, the extra allowance would be denied because the engine was not new, not because a second‑hand engine ceased to be machinery. Likewise, if the engine were purchased but not installed, the denial would be based on the lack of installation, not on any loss of the character of machinery. Even where a new piece of machinery was bought but left uninstalled, the Court stated that the refusal of extra depreciation would rest on the fact that it had not been installed, not on any conclusion that it had ceased to be machinery. The Court further observed that the fact that the Act provided the rate of depreciation also did not shed light on the meaning of “machinery.”
The Court observed that the fact that the Act specified a depreciation rate did not influence the interpretation of the term “machinery.” This fact merely showed that the legislature had decided the degree of encouragement it wished to extend to industry and therefore chose not to delegate that determination to the rule‑making authority. The Court further noted that the definition of “plant” found in section 10(5) did not clarify the meaning of “machinery.” Although the term “plant” has a broad scope, it could still be argued that items such as vehicles, books, scientific apparatus and surgical equipment are not considered “plant” in every business, profession or vocation. The legislature had apparently resolved any potential dispute concerning “plant,” yet it had left the true meaning of “machinery” unexplained. Consequently, the Court asked what test should be applied to decide whether a mechanical device qualifies as machinery for the purposes of the second paragraph of clause (vi) and clause (via). To answer this, the Court referred to the definition offered by the Privy Council in Corporation of Calcutta v. Chairman, Cossipore and Chitpore Municipality (1922) I.L.R 49 Cal 190, which described “machinery” in ordinary language as follows: “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 inter‑dependent 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.” The Privy Council had already observed that “machinery” must signify more than a mere collection of ordinary tools. Although that decision was not a tax case, the Court held that the ordinary meaning of the term, unless the context indicated otherwise, should also govern its interpretation in the Indian Income Tax Act because “machinery” is an ordinary rather than a technical word. Applying this definition, the Court concluded that a diesel engine clearly falls within the meaning of “machinery.” The Court further pointed out that rule 8 of the Income Tax Rules treats aero‑engines separately from aircraft, indicating that components of an aircraft, which are machinery, can be dealt with independently. While this rule does not directly interpret the statutory clauses, it demonstrates that machinery components may be considered separately. The Court then considered the factual situation where the assessee had purchased diesel engines that had not yet become part of any plant because they had not been installed in any vehicle. According to the Privy Council’s definition, these engines were machinery but not yet plant. Consequently, the Act allowed the assessee to claim an allowance of twenty per cent of the cost of the engines, and all statutory conditions were satisfied. Looking at the moments of purchase and installation, the Court found that what was purchased and later installed qualified as machinery. The learned counsel for the respondent argued that the assessee was not entitled to the extra depreciation because a diesel engine could not be said to be “installed,” asserting that the term “installed” was wholly inappropriate for describing the fixing of a diesel engine in a motor vehicle. The Court rejected this contention, holding that the argument lacked merit.
The Court observed that the argument presented by the respondent had no merit. It noted that the Bombay High Court, in Commissioner of Income‑Tax v. Saraspur Mills Ltd., had held that the word “installed” does not strictly require a component to be fixed in a permanent position; the term may also be understood in the sense of “inducted or introduced.” Likewise, the Madras High Court, in Commissioner of Income‑Tax, Madras v. Sri Ram Vilas Services (Pvt) Ltd., explained that “installed” means “to place an apparatus in position for service or use.” Applying these definitions, the Court concluded that the fixing of a diesel engine in a motor vehicle satisfies the meaning of “installed” under clauses (vi) and (vii) of the Income‑Tax Act, and therefore the engine qualifies for the depreciation allowance contemplated by those provisions.
The Court then turned to the statutory language of clause (vi). The first paragraph of that clause grants a right to claim normal depreciation at a prescribed percentage on the valuation of buildings, machinery, plant or furniture that belong to the assessee and are employed in the course of his business, profession or vocation. The second paragraph adds that, where a building has been newly erected or a new piece of machinery or plant has been installed after 31 March 1945, an additional sum may be claimed in the year of erection or installation, although that sum shall not be deducted in computing the written‑down value for subsequent years. Clause (vi)(a), inserted by Act 67 of 1949, extended this special allowance to buildings erected or machinery/plant installed after 31 March 1948, permitting the extra depreciation for no more than five successive assessments. Clause (vii) further allowed a deduction equal to the difference between the written‑down value and the sale, scrap or demolition proceeds of such assets when they are disposed of, discarded or destroyed. All three clauses therefore relate to depreciation allowances on assets of the specified description that are used for business, profession or vocation. The normal allowance under the first paragraph applies to every such asset, while the initial allowance under the second paragraph is available only if the asset was newly erected or installed after the specified date and is also used in the assessee’s business. Consequently, to qualify for the initial allowance the building must be newly constructed or the machinery or plant must be newly installed after 31 March 1945. The Court noted that these statutory provisions give rise to two competing interpretations, which it was called upon to resolve.
The Commissioner argued that the buildings, machinery or plant for which an initial allowance could be claimed had to constitute a self‑contained unit that could be employed directly in the assessee’s business, profession or vocation. It was submitted that the second paragraph of clause (vi) had been enacted to give a boost to industry, which had suffered a shortage of new machinery and building activity during the war years. Accordingly, the provision was meant to apply only to wholly new buildings, newly erected machinery or plant that had been installed after 31 March 1945, and not to items that were merely replacements, additions or repairs to existing units. In contrast, the assessee contended that the legislature had placed no such limitation on the scope of the second paragraph. Consequently, any building or any part of a building that was newly erected, as well as any new machinery or plant or any part thereof that was installed, should qualify for the initial allowance. The Court identified the central issue as the legislative intention behind the clause. It considered whether the addition of a room or even an extra floor to an existing building could be treated as a “building newly erected.” The Court held that such an addition merely became part of the existing structure and could not be described as a newly erected building. If every alteration or addition to an existing building fell within the second paragraph, then merely repairing a building would also qualify for the initial allowance, which would erode the distinction intended by the provision. Similarly, if a minor addition could be regarded as an erection contemplated by the clause, it would be difficult to maintain that the definition of machinery or plant should extend to parts of machinery or plant.
The Court noted that counsel for the assessee agreed that replacing a petrol engine with a diesel engine in a motor‑transport vehicle did not amount to the installation of plant. The remaining question was whether such a replacement could be characterised as the installation of a machine. The Court opined that substituting a petrol engine with a new diesel engine in a motor‑car could not be described as the installation of machinery within the meaning of the relevant clause. For a piece of machinery to be considered “installed,” it must be a new item that is brought into service as a self‑contained unit for the purpose of the business. If the assessee’s argument were accepted, then every bolt, nut, rod or flywheel forming part of a machine would qualify for the initial allowance, thereby blurring the line between an allowance for repairs and an initial allowance. Finally, the Court observed that counsel for the assessee did not, as understood, claim that the replacement of a mere part of machinery constituted the installation of machinery within the meaning of the second paragraph of clause (vi).
In this case the Court examined the meaning of the expression used in the second paragraph of clause (vi) of section 10(2). The Legislature had not supplied any definition for that expression, and the word “machinery” was noted to be somewhat difficult to define. The Court referred to the decision of the Judicial Committee in Corporation of Calcutta v. Cossipore and Chitpore Municipality, where the judges were asked to decide whether a tank supported on columns and capable of being filled by pumping from a municipal reservoir could be described as machinery within the Bengal Municipal Act, 1884. The judges observed that, if they were forced to define the term, they would describe “machinery” in ordinary language as mechanical devices which, either alone or together with other devices, by the combined movement and inter‑dependent operation of their parts generate power or otherwise evoke, modify, apply or direct natural forces in order to achieve a specific result. The Court stressed, however, that it was not required to determine whether a diesel engine fell within the abstract concept of machinery. Instead, the question before the Court was whether a diesel engine, installed to replace a petrol engine in a vehicle used by a transport operator for his business, qualified as “machinery installed” within the meaning of paragraph 2 of section 10(2)(vi). The Court considered whether “machinery” could be viewed merely as a contrivance supplying motive power to another device that directly produces an article, or as a mechanical device that produces or assists in the production of an article. It concluded that introducing a mere part that has no independent use in the assessee’s business could not be treated as machinery installed for the purposes of the second paragraph of clause (vi). The Legislature had already provided for ordinary depreciation under paragraph 1 of clause (vi) and had created an initial allowance for newly installed machinery, with the purpose of encouraging entrepreneurs to start new enterprises or expand existing ones by erecting new buildings or installing new machinery or plant. The Court acknowledged that a diesel engine, by itself, could certainly be used in a business other than transport—such as operating a pump to draw underground water—and in that context could be regarded as a self‑contained unit. Nevertheless, this possibility was not decisive for the present issue, which was whether, in the specific business of a transport operator, a diesel engine replacing a petrol engine could be treated as installed machinery. The Court explained that “machinery installed” under paragraph 2 of section 10(2)(vi) is qualified by the phrase “used for the purposes of the business”. Consequently, unless the machinery is a self‑contained unit that is actually used for the business, an initial depreciation allowance could not be granted. The fact that the same engine might be usable as a self‑contained unit in another business by the same or a different assessee was held to be irrelevant to the determination of eligibility for the initial allowance in the transport operator’s business.
The Court examined whether depreciation on the asset could be taken as an initial allowance when the asset was actually employed in the business concerned. It held that consulting the schedule contained in Rule 8 of the Income‑tax Rules would be unproductive for determining the allowance under section 10(2)(vi) because the schedule merely lists categories of assets and the rates at which depreciation may be claimed. The Court explained that the eligibility of a particular item for an initial allowance depended on two essential conditions: first, that the allowance relates to the year in which the asset was erected or installed; and second, that the building or machinery is actually used for the purposes of the business. It further observed that if the rule required the machinery to be new and to constitute a self‑contained unit within the specific business for which the initial allowance was claimed, then the possibility that the same machinery might, under different circumstances, be regarded as self‑contained for another enterprise would provide no guidance in deciding the claim for the business actually using it. Consequently, the Court concluded that the appeal ought to be allowed and that the referred question should be answered in the negative. Accordingly, following the majority opinion, the Court ordered the dismissal of the appeal with costs and recorded that the appeal stood dismissed.