Supreme Court Reverses High Court on Development Rebate for Road Transport Vehicles Under Income Tax Acts. Statutory Exclusion of Road Transport Vehicles from Development Rebate Bars Claim for Diesel Engines Fitted to Such Vehicles Under Section 10(2)(vi-b) Proviso of Income-tax Act, 1922 and Section 33(1)(a) of Income-tax Act, 1961.

Case Note & Summary

The respondent, a private limited company engaged in transport business and owning a fleet of lorries and buses, claimed development rebate on the cost of new diesel engines fitted to its vehicles for assessment years 1961-62 and 1962-63. For the assessment year 1961-62, governed by the Income-tax Act, 1922, the assessee fitted 11 new diesel engines and claimed a development rebate of Rs. 23,740/-. The Income-tax Officer disallowed the claim, and the Appellate Assistant Commissioner affirmed the disallowance. The Tribunal, however, allowed the claim holding that new diesel engines fitted to vehicles were 'machinery installed' under Section 10(2)(vi-b) of the 1922 Act. For the assessment year 1962-63, governed by the Income-tax Act, 1961, the assessee fitted two new diesel engines and claimed Rs. 3,144/- as development rebate. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the claim, and the Tribunal upheld the disallowance, reasoning that although a diesel engine by itself might be machinery, when fitted to a road transport vehicle it became part of the vehicle, and no development rebate was admissible on road transport vehicles under Section 33 of the 1961 Act. The High Court answered both references in favour of the assessee, relying solely on the Supreme Court decision in Commissioner of Income Tax v. Mir Mohammad, 53 ITR 165, which had allowed extra depreciation on engines fitted to buses under the old law. The Revenue appealed by special leave. The core legal issue was whether new diesel engines installed in road transport vehicles qualified for development rebate under the relevant provisions, given the statutory exclusion of road transport vehicles. The assessee argued that the diesel engines retained their character as machinery even when fitted to vehicles and that the proviso excluding road transport vehicles did not apply to engines. The Revenue contended that the engines became part of the road transport vehicle and could not be treated as separate machinery used for business, and that the statutory exclusions barred the claim. The Supreme Court analysed the provisions. For the 1961-62 assessment year, clause (vi-b) of Section 10(2) of the 1922 Act allowed development rebate on new machinery or plant wholly used for the purpose of the business, but the second proviso, inserted with effect from April 1, 1960, expressly provided that no allowance shall be made in respect of any machinery or plant which consists of office appliances or road transport vehicles. The Court held that the diesel engines were not used by the assessee for its business independently; rather, the vehicles in which the engines were fixed were used for the business. Therefore, the proviso was attracted and the claim for development rebate was barred. For the 1962-63 assessment year, Section 33(1)(a) of the Income-tax Act, 1961 expressly excluded office appliances and road transport vehicles from the scope of development rebate. This provision was materially different from the law on which the Mir Mohammad decision was based. The Court distinguished the earlier decision, noting that Section 10(2) as in force in 1950 did not contain the specific exclusion, and subsequent amendments changed the legal position. Accordingly, the Supreme Court allowed both appeals, discharged the answers given by the High Court, and answered the question in Civil Appeal No. 211 of 1970 in the negative in favour of the Revenue and the question in Civil Appeal No. 212 of 1970 in the affirmative in favour of the Revenue. The appellant was entitled to costs in the Supreme Court and in the High Court, with one hearing fee.

Headnote

Issue of Consideration

Final Decision

Both appeals allowed; answers given by the High Court discharged; in Civil Appeal No. 211 of 1970 question answered in the negative and in favour of the Revenue; in Civil Appeal No. 212 of 1970 question answered in the affirmative and in favour of the Revenue; appellant entitled to costs in Supreme Court and High Court, one hearing fee.

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