1989 (3) TMI 69 - HC - Income Tax

Court rules reconditioned machinery not new for development rebate.

The court held that reconditioned machinery did not qualify as new machinery for development rebate under section 33(1) of the Income-tax Act. The court ... Business Expenditure, Depreciation, Developement Rebate, Plant, Rebate At Higher Rate Issues Involved:1. Whether second-hand reconditioned machinery qualifies as new machinery for development rebate under section 33(1)(a) of the Income-tax Act, 1961.2. Entitlement to depreciation and development rebate on capitalized amounts for technical know-how, plant, machinery, books, designs, and formulae.3. Applicability of rule 3(c)(ii) of the Income-tax Rules for computing disallowance under section 40A(5) of the Income-tax Act.Issue-wise Detailed Analysis:1. Second-hand Reconditioned Machinery:The assessee imported second-hand reconditioned machinery and claimed development rebate under section 33(1)(a) of the Income-tax Act, asserting that the reconditioning cost was 91% of the machinery's value. The Income-tax Officer denied this claim, applying section 33(1A)(b) for used machinery, which offers a lower rebate rate. The Tribunal upheld this decision, and the High Court examined whether reconditioned machinery could be considered new.Legal Data and Precedents:The court referred to section 33(1)(a) and section 33(1A) of the Income-tax Act, noting that section 33(1A) allows development rebate for used machinery at a lower rate. The Supreme Court's decision in Cochin Co. v. CIT [1968] 67 ITR 199 was pivotal, where it was held that reconditioned machinery could only be considered new if it was substantially different from the old machinery, incorporating significant technical improvements. The court also cited CIT v. Hindustan Milk Food Manufacturers Ltd. [1974] 96 ITR 278, where relief was granted only if the reconditioning cost was significantly higher than the original machinery's value.Discussion:The court found that the assessee's reconditioning cost was less than the machinery's original value, and no substantial technical improvements were documented. Consequently, the machinery could not be considered new under section 33(1). The court upheld the Tribunal's decision, allowing development rebate at the rate for used machinery under section 33(1A).Answer:The court answered in favor of the Revenue, holding that the Tribunal did not err in law by allowing development rebate at the rates permissible for used machinery and plant.2. Depreciation and Development Rebate on Capitalized Amounts:The assessee claimed depreciation and development rebate on amounts spent on technical know-how, plant, machinery, books, designs, and formulae. The Tribunal allowed these claims, and the High Court examined their validity.Definitions and Precedents:Section 43(3) of the Act defines 'plant' to include books. The Supreme Court in Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86 held that technical know-how, books, designs, and formulae constitute 'plant,' making them eligible for development rebate and depreciation.Discussion:The court upheld the Tribunal's decision, allowing depreciation and development rebate on Rs. 7 lakhs for plant and machinery, Rs. 2 lakhs for books, designs, and formulae, and depreciation on Rs. 1 lakh for building account technical know-how. The court rejected the Revenue's argument against treating technical know-how as capital expenditure, noting that the assessee chose to capitalize it and claim lesser benefits.Answer:The court answered in favor of the assessee, allowing the claimed deductions.3. Applicability of Rule 3(c)(ii) for Section 40A(5) Disallowance:The Tribunal held that rule 3(c)(ii) of the Income-tax Rules should be invoked for computing disallowance under section 40A(5). The High Court examined this issue.Precedents:The court referred to its decision in CIT v. Nuchem Plastics Ltd. [1989] 179 ITR 196, which followed the Calcutta High Court's decision in CIT v. Britannia Industries Co. Ltd. [1982] 135 ITR 35, supporting the Tribunal's view. Despite a contrary view from the Gujarat High Court in CIT v. Rajesh Textile Mills Ltd. [1988] 173 ITR 179, the court preferred its earlier stance.Answer:The court answered in favor of the assessee, affirming the Tribunal's decision to invoke rule 3(c)(ii) for section 40A(5) disallowance.Conclusion:The references were disposed of with no order as to costs, affirming the Tribunal's decisions on all issues.