Gokal Chand Mital, J.
1. Porritts and Spencer (Asia) Ltd., the asses-see, is a public limited company. The assessee maintained books of account on the mercantile system and for the assessment year 1972-73 filed a return declaring loss of Rs. 23,04,840 which included development rebate of Rs. 21,44,985 and deduction under Section 80J of the Income-tax Act, 1961 (herrviafter called 'the Act'), amounting to Rs. 8,01,872.
2. The assessee's case was that it had imported second hand reconditioned plant and machinery from Porritts and Spencer Ltd. (U. K.) and the reconditioning cost in relation to the value of the second hand plant and machinery in some cases exceeded 80% of their value and the second hand machines were completely knocked down, separated and rebuilt after replacement of all worn out parts by the repairers. These facts are contained in annexure.'G', printed at page 92 of the paper book, produced by the assessee before the Income-tax Officer. Annexure 'H' printed at page 94 of the paper book gives the details of the machines and its parts, the basic value of the second hand machinery, the reconditioning cost, including the total value paid by the assessee to the U. K. company. The basic value of the second hand plant and machinery was 60,780 and the reconditioning cost is shown as 55,853, which is 91 % of the cost of the second hand plant and machinery. The total value paid was Rs. 50,06,453.
3. On the aforesaid cost of the reconditioned plant and machinery, which is over Rs. 50 lakhs, the assessee claimed development rebate under Section 33(1)(a) of the Act at the rates specified in Clause (b) which is allowable for new machinery or plant. The Income-tax Officer took notice of the fact that the machinery and plant were not new and were second hand duly reconditioned at a cost which was less than the value of the second hand ones as the reconditioning and replacement cost was 91% and, therefore, concluded that it was not new machinery or plant and that Section 33(1)(a) of the Act was not applicable, and instead applied Section 33(1A)(b) under which rebate at a lower rate was permissible for used machinery or plant. So, one of the questions before us would be whether second hand machinery and plant, on renovation or reconditioning, can be considered new machinery and plant within the meaning of Section 33(1)(a) of the Act.
4. The assessee had entered into a technical know-how collaboration agreement with Porritts and Spencer Ltd., Lancashire (U. K.), under which a sum of rupees ten lakhs was paid under the following heads :
Rs.
(1) Building account
1,00,000
(2) Plant and machinery
7,00,000
(3) Books, designs and formulae
2,00,000
10,00,000
5. The assessee claimed depreciation on the entire amount of rupees ten lakhs and development rebate on the amount of rupees nine lakhs consisting of plant, machinery, books, designs and formulae. The Income-tax Officer, although he referred to the decision of the Gujarat High Court in CIT v. Elecon Engineering Co. Ltd. : [1974]96ITR672(Guj) , disallowed the relief by way of depreciation and development rebate. This is another matter which will fall for consideration.
6. Yet another point that arises for determination is whether, for purposes of computing disallowance under Section 40A(5) of the Act, the provision of Rule 3(c)(ii) of the Income-tax Rules can be invoked ?
7. The order of the Income-tax Officer was upheld by the Appellate Assistant Commissioner of Income-tax. On further appeal, the Income-tax Appellate Tribunal, Chandigarh, gave relief to the assessee on the second and third points noticed above but did not agree with the assessee on the first point. At the instance of the assessee, the Tribunal has. referred the following questions for opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the assessee was not entitled to development rebate at higher rate on reconditioned machinery worth Rs. 50,06,453 ?
At the instance of the Revenue, the following two questions have been referred for opinibn:
'(i) Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the assessee was entitled to depreciation on Rs. 1 lakh capitalised towards building, depreciation and development rebate on Rs. 7 lakhs capitalised towards plant and machinery and depreciation and development rebate on Rs. 2 lakhs treated as a book and as such a plant ?
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that for purposes of computing the disallowance under Section 40A(5) of the Income-tax Act, the provisions of Rule 3(c)(ii) of the Income-tax Rules should be invoked ?
We first take up the question referred at the instance of the assessee. Legal data :
Under the 1922 Act, there was a provision contained in Section 10(2)(vib) which is similar to the provision contained in Section 33(1)(a). As already seen, this provision talks of new machinery or plant. In the 1922 Act, there was no parallel provision for allowing development rebate for acquiring used machinery or plant and such a provision was inserted in the Act by the Finance Act of 1964 with effect from April 1,1964.
It appears that before Section 33(1A) was inserted with effect from April 1, 1964, the matter of granting development rebate under Section 33(1)(a) arose before the Central Board of Direct Taxes to give relief to newly established industrial undertakings on purchase of reconditioned machinery or plant and by Circular No. 40(XLVII-16) of 1962 dated December 3, 1962, of the Central Board of Revenue printed as annexure 'J' in the paper Book, it was decided that second hand machinery and plant which have 6een newly imported into India from abroad by an assessee may be treated as being new for purposes of grant of development rebate under Section 33, subject to the conditions mentioned therein. Obviously, the decision contained in the circular was arrived at before the Finance Act of 1964, i.e., before the insertion of Section 33(1A), whereunder on buying used machinery and plant also, development rebate has been allowed but at a rate less than the development rebate allowable on purchase of new machinery and plant.
Precedents :
The first decision on the subject is that of the Supreme Court in Cochin Co. v. CIT : [1968]67ITR199(SC) . The assessee had imported two reconditioned machines from England and claimed initial and additional depreciation thereon. The suppliers had completely stripped the machines ; replaced worn out parts and incorporated the latest modifications before shipping the same to the assessee and the reconditioned machines had not been used from the time of reassembly to the date of their arrival in India. The Income-tax Officer and the other statutory appellate authorities had disallowed the deduction as they were not new. However, the Supreme Court noticed that the only facts appearing on the record were that the machines had been in use, but had, immediately before import, been completely stripped and rebuilt after including replacement of worn out parts and incorporating the latest modifications and gave the following verdict (at page 202) : 'The question presented for determination in this appeal is whether the two reconditioned 'Jackstone Junior Frosters Mark II' purchased by the appellant are new machines within the meaning of Section 10(2)(via) of the Income-tax Act and whether the appellant is entitled to depreciation under that sub-section. The word 'new' is not denned in the Income-tax Act. According to the Shorter Oxford Dictionary, the word 'new' means 'not existing before ; now made, or brought into existence, for the first time'. In the context of the language of the statute, particularly in its application to a machinery, we are of the opinion that the expression 'new' must be construed in this sense and in contradistinction and antithesis to the word 'used'. According to the statement of the suppliers, there is no room for doubt that the machines were used after they were first made. Subsequently, the machines were taken into parts and were reassembled after replacing worn out parts and after incorporating the latest modifications. But the question still remains is whether the two machines, after being reconditioned, were entirely different from the old machinery and whether the latest improvements incorporated into them made the machines substantially new within the meaning of the sub-section. In other words, the question is whether the reconditioning of the two 'Jackstone Junior Frosters Mark II' in this case was reconstruction or substitution of the entire machinery, meaning, by entirety, not necessarily the whole, but substantially the whole subject-matter of the machinery. The question of law arising in this case must be tested in the background of this principle, but having heard learned counsel for the parties, we are not satisfied that the statements in the case are sufficient to enable us to decide the question of law raised therein. In its order dated July 1, 1959, the Appellate Tribunal has, for instance, stated that 'what had really happened was that machines of an anterior date are stripped and rebuilt incorporating the latest available technical improvements'. It is not mentioned in the Tribunal's order or in the statement of the case what exactly were 'the latest available technical improvements' which were incorporated into the reconditioned machines. It is also not specified what were the dates on which the machines were first manufactured, for what period they were previously used, what were the latest technical improvements incorporated in the machines, what is the nature and cost of these improvements in relation to their nature and total cost and so on. In the absence of this material, it is not possible to decide the question whether the two machines were 'new' within the meaning of Section 10(2)(via) of the Income-tax Act.'
8. In view of the above, the matter was remitted to the High Court to call for a supplementary statement of the case to decide the matter afresh. According to the aforesaid dictum, certain facts have to be kept in view to find out whether reconditioned machinery can be termed 'new' and in order to do so, it has to be seen as to when the machines were first manufactured ; for what period they were previously used ; what were the latest technical improvements incorporated in the machines ; what is the nature and cost of these improvements in relation to their nature and total cost and so on.
9. The next case is CIT v. Hindustan Milk Food . , decided by this court. Here also data was not available to find out whether the reconditioned machinery could be treated as new and a supplementary statement of the case was called for as was done by the Supreme Court in the aforesaid case. On receipt of the supplementary statement of facts, the matter was again taken up by this court and the decision was rendered- in CIT v. Hindustan Milk Food . . Wherever the cost of renovation or reconditioning did not exceed the cost of the used machinery, relief was not granted to the assessee but wherever the reconditioning cost was five, six or seven times of the cost of the old machinery, relief was granted to the assessee, considering the reconditioned machinery as new machinery.
10. The aforesaid cases arose for consideration under the 1922 Act.
Discussion:
It is the admitted case of the assessee, as is clear from its letter, a copy of which is annexure 'G' in the paper book, that it had purchased second hand reconditioned plant and machinery and before reconditioning, the machines were completely knocked down, stripped and rebuilt after replacement of all worn out parts by the repairers. Again from their document, copy of which is annexure 'H' in the paper book, it is clear that the cost of reconditioning, replacement of all worn out parts, etc., was 91% of the cost of the second hand used machinery and plant. That means if the value of the second hand used machinery was Rs. 100, Rs. 91 were spent in reconditioning and replacement of all worn out parts. No other data has been furnished by the assesses as to when the machines were first manufactured ; for what period they were previously used and what were the latest technical improvements, if any, incorporated in the machines. In the absence of this data and keeping in view that the cost of replacement of all worn out parts and reconditioning was less than the value of the second hand used plant and machinery and on the basis of the decision of this court in Hindustan Milk Food ,'s case , the reconditioned machinery cannot be termed new. This court, in the aforesaid case, had considered only those machinery and plant to be new in which the cost of replacement of all worn out parts and reconditioning was five to seven times the cost of the second hand used machinery and wherever the cost was equal to or less than the cost of the second hand machinery, that machinery or plant was not treated as new and deduction was not allowed.
11. On the basis of a departmental circular dated December 3, 1962, referred to above, counsel for the assessee wanted us to hold that all reconditioned machinery or plant, irrespective of the guidelines laid down by the Supreme Court in Cochin Co. 's case : [1968]67ITR199(SC) , should be treated as new machinery and development rebate should be granted under the provisions claimed by the assessee. Under the circular, reconditioned machinery or plant could be considered as new for the purpose of granting of development rebate under Section 33, as it stood at that time, and this decision was taken keeping in view the guidelines laid down by the Supreme Court in Cochin Co.'s case : [1968]67ITR199(SC) . With effect from April 1, 1964, a new provision was inserted and that new provision is Section 33(1A). This provision provides for the grant of development rebate even on purchase of used machinery or plant but at a lesser rate. Learned counsel for the assessee, at best, could argue that for used machinery or plant which is not reconditioned, Section 33(1A) would apply and for new as well as reconditioned plant and machinery, Section 33(1) would continue to apply in view of the departmental circular referred to above. Learned counsel may be right in this submission of his, but again it cannot be laid down that every reconditioned or rebuilt second hand machinery and plant would be considered new irrespective of the guidelines laid down by the Supreme Court which were accepted by the Department in view of the circular issued by it. Therefore, we have to test the facts of this case on the premise whether it can be held that the machinery on reconditioning acquired the character of a new machinery and rebate is permissible under Section 33(1) of the Act
12. Again adverting to the guidelines laid down by the Supreme Court, out of the four, three are missing here and we have only the cost of the second hand machinery and the cost of reconditioning which includes the cost of replacement of all worn out parts, which is in the ratio of 100 : 91. In view of the decision of this court, if the cost of reconditioning is equal to or less than the cost of the second hand machinery, the machinery cannot be termed new. Wherever the cost of reconditioning and replacement of worn out parts was five to seven times the cost of the second hand machinery, the reconditioned machinery was considered as new machinery. That not being the facts of the case here, we are constrained to hold that the machinery could not be considered new so as to be eligible for development rebate under Section 33(1) of the Act. Since the assessment year in question is after the insertion of Sub-section (1A) in Section 33, whereunder the assessee is entitled to development rebate for used machinery, the assessee could be allowed development rebate under that provision and the Tribunal was right in allowing the development rebate at the rate permissible for used machinery and plant under that sub-section.
Answer :
In view of the above discussion, we answer the referred question in favour of the Revenue and against the assessee in the negative and hold that the Tribunal did not err in law in allowing the development rebate at the rates permissible for used machinery and plant.
Questions referred at the instance of the Revenue : Question No. 1 :
Definitions of certain terms used in Section 33, with which we are concerned, and certain other sections, is given in Section 43 of the Act. Subsection (3) defines 'plant' as follows :' 'Plant' includes ships, vehicles, books, ...'
13. Here, one item is purchase of books, designs and formula for Rs. 2,00,000 and they all constitute books within the meaning of 'plant' and the Supreme Court in Scientific Engineering House P. Ltd, v. CIT : [1986]157ITR86(SC) , has held that they all constitute 'plant' and the assessee is entitled to development rebate as also depreciation on the value of the same. The Tribunal rightly allowed deductions to the assessee.
14. The next item is Rs. 7,00,000 spent on obtaining technical know-how on plant and machinery. This value is also to be capitalised in the value of plant and machinery and the assessee is clearly entitled to development rebate and depreciation on the value of the plant and machinery including the amount spent on the technical know-how of the same and the Tribunal was right in allowing the deductions.
15. The next item is the amount of Rs. 1,00,000 spent in technical know-how in the building account. On this amount, the amount of technical know-how has been added to the value of building and on the total value, only depreciation is allowable and this has been rightly allowed by the Tribunal.
16. Before parting, one argument raised by counsel for the Revenue may be noticed. He referred to our decision in Income-tax Reference No. 90 of 1981, CIT v. Super Steels , rendered on March 1, 1989, for disallowing relief on the amount spent on technical know-how. In the aforesaid case, the assessee had claimed the amount spent for technical know-how as a revenue expenditure and the same was allowed. Learned counsel for the Revenue is not prepared to accept that the amount spent in obtaining technical know-how would be revenue expenditure and, according to him, it would be of a capital nature and yet he wants that the relief should be disallowed to the assessee in hand.
17. To claim it as a revenue expenditure, the whole of the amount of Rs. 10,00,000 would have been excluded, whereas what the assessee wants is that the amounts be added in the capital account and he be allowed development rebate and depreciation on the first two items, and depreciation on the third item. In the Supreme Court case referred to above, the assessee had not claimed deduction as a revenue expenditure and had considered the expenses incurred for obtaining technical know-how as being of a capital nature and claimed depreciation and that was allowed. In this case also, the assessee has claimed the amount spent in obtaining technical know-how to be of a capital nature and has claimed the deductions. As already said, to claim deduction as revenue expenditure would have been more beneficial to the assessee but in case he wants to take lesser benefit on the basis that it was in the nature of capital expense, the deduction cannot be disallowed and the argument raised on behalf of the Revenue is rejected.
18. For the reasons recorded above, we answer this question in favour of the assessee, in the negative.
Question No. 2 :
This matter is covered by our decision in Income-tax Reference No. 5 of 1983, CIT v. Nuchem Plastics Ltd. rendered on February 2, 1989, in favour of the assessee. We had followed the decision of the Calcutta High Court in CIT v. Britannia Industries Co. Ltd. : [1982]135ITR35(Cal) , in coming to the conclusion that in computing the disallowance under Section 40A(5) of the Act, the provisions of Rule 3(c)(ii) of the Income-tax Rules should be invoked. Today, a new judgment of the Gujarat High Court in CIT v. Rajesh Textile Mills Ltd. : [1988]173ITR179(Guj) , taking a contrary view has been cited by counsel for the Revenue. On a consideration of the matter, we prefer to follow our view recorded earlier and answer this question in favour of the assessor, in the affirmative.
19. The references stand disposed of with no order as to costs.