1985 (5) TMI 77 - AT - Income Tax

Actual Cost Business Expenditure Carrying On Business Claiming Depreciation Different Businesses Livestock Breeding

Summary

Issues Involved:
1. Classification of horses as fixed assets and eligibility for depreciation.
2. Deduction claim under section 32(1)(iii) or section 36(1)(vi) for a dead horse.
3. Apportionment of common expenses between agricultural and non-agricultural activities.

Detailed Analysis:

1. Classification of Horses as Fixed Assets and Eligibility for Depreciation:
The assessee, engaged in livestock breeding, dairy farming, and agricultural activities, purchased and imported horses for breeding purposes, not for resale. Initially, these horses were incorrectly listed as stock-in-trade in the balance sheet, but the valuation at cost meant no financial impact on the profit and loss account. The assessee later corrected this by reclassifying the horses as fixed assets, claiming depreciation at 10%. The ITAT upheld this reclassification, stating that the horses used for breeding should be treated as "plant" for depreciation purposes. The tribunal referenced several legal precedents, including the case of Yarmouth v. France [1887] 19 QBD 647, and CIT v. Taj Mahal Hotel [1971] 82 ITR 44, to support the broad interpretation of "plant" to include horses used in business operations.

2. Deduction Claim Under Section 32(1)(iii) or Section 36(1)(vi) for a Dead Horse:
The assessee claimed a deduction for a horse costing Rs. 18,000 that died within the year. The ITAT ruled that the assessee is entitled to this deduction under section 36(1)(vi), which allows for the difference between the cost of an animal and any realization from its disposal if the animal was used in the business and is now dead or permanently useless. The tribunal clarified that this deduction is permissible even if the horse was treated as a fixed asset (plant) for depreciation purposes. The ITO was directed to verify if any amount was realized from the disposal of the dead horse and to deduct this from the Rs. 18,000 claimed.

3. Apportionment of Common Expenses Between Agricultural and Non-Agricultural Activities:
The assessee claimed common expenses for its agricultural and livestock breeding activities, proposing an allocation based on the turnover ratio of these activities. The ITO had allocated expenses based on gross profit, which the ITAT found incorrect. The tribunal ruled that in the absence of specific expense details for each activity, the allocation should be based on the turnover ratio, as this method is more reflective of the actual business operations and expenses incurred. The ITAT accepted the assessee's method of apportionment, thereby rejecting the department's approach.

Conclusion:
The ITAT allowed the assessee's appeal, permitting the reclassification of horses as fixed assets eligible for depreciation, granting the deduction for the dead horse under section 36(1)(vi), and approving the allocation of common expenses based on turnover. The departmental appeal was dismissed.