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TMI Blog1989 (3) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 pounds and the reconditioning cost is shown as 55,853 pounds, which is 91 % of the cost of the second hand plant and machinery. The total value paid was Rs. 50,06,453. 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 secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds 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(lA) 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion: 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 assessee 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 Foo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 (lA) 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 ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. [1989] 179 ITR 196 rendered on February 2, 1989 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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