1. This order should be read in continuation of our order dated May 3, 1971.*

2. Out of the two questions of law that were referred by the Income-tax Appellate Tribunal, Delhi Bench “C”, for our opinion, only one survives, because the other question had already been answered by us in our order dated May 3, 1971.* The question that survives could not be answered in view of the fact that the material facts had not been determined by the Tribunal and noticed in the statement of the case. We accordingly remitted that part of the case to the Tribunal to find proper facts in the light of the Supreme Court decision in Cochin Company v. Commissioner of Income-tax [1968] 67 I.T.R 199 (S.C).

3. The dispute before us is as to whether development rebate can be allowed on reconditioned machinery imported into India and used for the first time here. The Income-tax Officer, while dealing with this question, held that the development rebate would be granted in respect of the reconditioned plant and machinery of the value of Rs. 2,68,514.63 less Rs. 20,014.10, being the cost of the two items of machinery and plant ineligible for the grant of development rebate. He, however, in the operative part of his order, disallowed the development rebate in respect of the entire sum of Rs. 2,68,515. An application for rectification of this order was made to the Income-tax Officer but he passed no orders thereon inasmuch as the matter was under appeal to the Appellate Assistant Commissioner, Patiala Range. The Appellate Assistant Commissioner observed that the Income-tax Officer had not properly given effect to his own decision. However, he felt that the development rebate had been wrongly granted in respect of some other plant and machinery and according to him, if such development rebate was withdrawn, the assessee's position would remain almost unaffected. He, therefore, did not make any change in the computation of the development rebate from that made by the Income-tax Officer. The assessees by their letter No. 45 dated January 8, 1964, pointed out that the impression of the Appellate Assistant Commissioner that the development rebate had been wrongly allowed on the old plant and machinery amounting to Rs. 1,56,517 was not correct inasmuch as this item was included in the addition of Rs. 2,68,524. On verification, the Appellate Assistant Commissioner found this contention to be correct. He, however, made no change in his order because he came to the conclusion that another mistake had been committed which was also apparent from the record, namely, that the Income-tax Officer had agreed to allow development rebate on the addition of Rs. 2,68,524 in view of the Central Board of Revenue's Circular No. 40 (XLVII-16) of 1962. This circular, according to the Appellate Assistant Commissioner referred to the development rebate under sections 84 and 101(1) of the Income-tax Act, 1961. The essential conditions for allowing development rebate under the 1922 Act, which was applicable to the assessee's case for the year under consideration, were that the machinery or plant should be new and a development rebate reserve to the extent of 75% should have been created by debit to the profit and loss account of the year under consideration. The assessee did not satisfy either of the two mandatory conditions, and, therefore, was not entitled to any development rebate, in view of the mandatory provisions of section 10(2)(vib). He, therefore, rejected the assessee's application under section 154 of the 1961 Act.

4. The assessee then preferred an appeal to the Income-tax Appellate Tribunal, and the Tribunal while dealing with the development rebate observed as follows:

“Now so far as the non-allowance of development rebate on the second hand machinery is concerned, even here we find that the departmental authorities are not right in refusing it. Section 10(2)(vib) no doubt used the expression ‘new’ as qualifying the machinery or plant on which development rebate is to be allowed but the expression has not to be understood in the common sense meaning of being absolutely new without having ever been used. The expression ‘new’, in our opinion, must be understood in that context as such machinery on which no development rebate has been allowed in the past. Read in this context, the assessee's claim to development rebate even on these second-hand machineries which were imported from U.K after reconditioning has got to be allowed. Here also the decision of the Supreme Court which we have referred to above is fully applicable in the sense that they continue to be machineries for the purposes of development rebate also.”

5. The Tribunal on 17th December, 1965, passed a rectification order under section 254(2) of the Income-tax Act, 1961, in the matter of the statement of the case. This order is in the following terms:

“In the appeal before the Tribunal the assessee argued that development rebate was allowable under section 10(2)(vib) in respect of ‘new machinery or plant’ and the word ‘new’ there signifies machinery or plant which had no contact with Indian income-tax law at any earlier stage and was new so far as Indian business and Indian taxation were concerned and the machinery and plant in dispute were of this type. It was further argued that reconditioned machinery was unused and was new machinery for the purpose of section 10(2)(vib), since, on reconditioning, the identity of the old machinery was lost and this was an additional ground for allowing development rebate in respect of the machinery in question which was reconditioned.”

6. The Commissioner of Income-tax being dissatisfied with the order of the Tribunal moved an application on the 3rd of December, 1964, under section 66(1) of the Indian Income-tax Act, 1922, requiring the Tribunal to state certain questions of law for the opinion of the High Court. The Tribunal allowed the application and referred the following two questions of law:

“1. Whether, on the facts and in the circumstances of the case, the assessee's industrial undertaking was not formed by the transfer to its business of machinery or plant previously used in any other business within the meaning of section 15C(2)(i) of the Indian Income-tax Act, 1922, for the purpose of tax exemption in accordance with section 15C(1) of the said Act?

2. Whether, on the facts and in the circumstances of the case, the machinery worth Rs. 2,68,515 was new machinery within the meaning of section 10(2)(vib) of the Indian Income-tax Act, 1922?”

7. When the reference came before us on May 3, 1971, we answered the first question of law in favour of the assessee. However, on the second question of law, we came to the conclusion in view of the decision of the Supreme Court in Cochin Company's case [1968] 67 I.T.R 199 (S.C), that in certain circumstances reconditioned machinery can be new machinery. As the material facts had not been determined and noticed in the statement of the case, we found ourselves unable to determine the question satisfactorily. We, therefore, remitted the case to the Tribunal to find proper facts in the light of the Supreme Court decision in Cochin Company's case [1968] 67 I.T.R 199 (S.C) and submit a supplementary statement of facts to us. The Tribunal has now submitted an agreed statement of the case.

8. In the agreed statement of the case, the Tribunal dealt with as many as twelve items of machinery for the purpose of development rebate and came to the conclusion that only six items of machinery which had been reconditioned could be treated as new within the meaning of the rule laid down in Cochin Company's case [1968] 67 I.T.R 199 (S.C). Before us, the controversy relates to items (a) to (f) and (h). Item (h) has been held by the Tribunal not to be a new machinery. The relevant part of the statement of the case on these items is set out below for facility of reference:

“(a) Two vacuum pumps for use in production in the evaporator section were purchased. Invoice No. 296 dated 23-5-1959, being item 1 in exhibit B shows that the said pumps were purchased from Henry Butcher and Co. Ltd., England, for £ 175. The reconditioning cost was £ 859-5-7 made up as follows:

Materials £ 213-15-0 (as per bill of Dawson and Downie Ltd., exhibit C, hereto) £ 35-19-3 (as per bill of Drayton Regulator & Instrument Co. Ltd., exhi-bit D) £ 0-8-1 Labour and material 609-3-3 £ 859-5-7

Including the packing and delivery and freight and insurance expenses of £ 208-0-9 the c.i.f value of the pumps came to Rs. 16,564.22. The charges incurred in India prior to installation of the machinery, being direct and general expenses, amounted to Rs. 5,663.02 making up a total cost of the two vacuum pumps of Rs. 22,227.24 as per item 1 of the general statement being exhibit A hereto. From the above it would be seen that the reconditioning of the pumps involved a substantial change as a sum of £ 859-5-7 was spent as reconditioning charges on the pumps originally bought for £ 175.

(b) From Horlicks Ltd., the assessee acquired one second stage evaporator for £ 100 as per invoice No. 296. dated 23-5-1959, being item 2 of exhibit B. For reconditioning the evaporator a sum of £ 649-0-8 was spent as follows:

On pipe work: £ 3-10-0 On labour & materials £ 620-10-8 On motor (being part of invoice No. 159 for £ 31-14-8 appearing as item 3, exhibit B). £ 25-0-0

On this evaporator by way of packing and delivery and freight and insurance charges the sum of £ 337-4-11 was spent making a total c.i.f value of Rs. 14,483.72, which together with Indian expenses of Rs. 3,448.78 makes up a total cost of Rs. 17,932.50 as per item 2 of exhibit A. The reconditioning of this machine is of an extensive nature as £ 649-0-8 were spent for this purpose on an evaporator costing £ 100.

(c) From Henry Butcher & Co., the assessee acquired a first stage evaporator for £ 150 as per invoice No. 296 dated 23-5-1959, being item 4 of exhibit B hereto. The said invoice also shows that on the dismantling and packing and reconditioning of the said evaporator £ 643-11-4 were spent as follows:

Dismantling and packing £ 101-11-7 Reconditioning charges £ 357-16-0 (bill of John Dore & Co. Ltd. enclosed as exhibit E. hereto) Labour and sundry materials £ 184-3-9

On packing and delivery of the reconditioned machinery and on the insurance and freight thereof a sum of £ 343-5-0 was spent, making up all a total c.i.f value of Rs. 15,157.55, which together with the Indian cost of Rs. 10,549.39 makes up a total cost of Rs. 25,706.94 for the first stage evaporator as per item 3 of exhibit A. As reconditioning charges of £ 643-11-4 were incurred on the evaporator costing £ 150, it is obvious that the reconditioning was a thorough one.

(d) The assessee bought from John Thompson, super economic boiler No. 9051 as per invoice No. 12159, dated 18-2-1960, being exhibit G. hereto, for £ 2,800. On it proportionate insurance and freight of £ 851-6-4 was incurred making up a total c.i.f cost of £ 3,651-6-4, equal to Rs. 48,684.22. The said machinery was reconditioned in India at a cost of Rs. 27,037.65, being charges of John Thompson India Private Ltd. of Calcutta, for reconditioning (as per exhibit F). Together with other Indian costs of freight, etc., amounting to Rs. 10,371.39, the total cost comes to Rs. 86,093.26. The reconditioning involved was of a substantial nature as reconditioning charges of Rs. 27,037.65 were incurred on a machine costing about Rs. 37,000. The said item of machinery appears as item 4 in exhibit A.

(e) The company also acquired a reconditioned Roby Malt Grinding Mill for malt grinding, being item 5 of exhibit A, at a cost of £ 139-1-10 (as per invoice No. AUS-96, being part of exhibit H, which specifically refers to it having been reconditioned) which together with shipping and insurance to Calcutta resulted in a c.i.f cost of £ 196-18-5, equal to Rs. 2,628.67. Together with expenses in India of Rs. 582.92, freight from Calcutta of Rs. 500.60 and Indian material and labour of Rs. 1,785.24, this gave a total cost of the machinery at Rs. 5,497.43.

(f) The assessee acquired a reconditioned copper mash tun of a capacity of 500 gallons used for mashing being item 6 of exhibit A at a cost of £ 123-1-10 as invoice No. AUS-96, dated 10-7-59, being part of exhibit H. In the said invoice the machinery is referred to as ‘reconditioned complete with stirrer drive’. The packing and delivery and insurance and freight cost £ 55-19-2, making up a total c.i.f value of £ 179-1-0 equal to Rs. 2,387.33 which together with the Indian cost of clearing, freight, labour and materials gave a resultant total of Rs. 4,870.75.

(h) The assessee acquired two Roller Driers reconditioned, being item 8 of exhibit A, for making milk powder for £ 2,418-15-0 as per invoice No. 139, dated 20-3-1959. being exhibit I hereto. On dismantling and tropicalising and reconditioning the motors of the said driers a sum of £ 139-6-8 as per exhibit J hereto, being the bill of E.V Williams and Co. was incurred. Together with insurance and freight of £ 473-17-4, this gave a total c.i.f cost of £ 3,031-19-0, equal to Rs. 40,426, which together with the cost of freight, duty, clearing, materials and labour gave a total cost of Rs. 53,923.10.”

9. It may be mentioned that all the above items of machinery excepting item (d) were reconditioned abroad before being despatched to India to the assessee. Item (d) was reconditioned in India. All the reconditioned machinery was installed in the assessee's factory at Nabha. It had never been used in India prior to its installation. In accordance with the terms of the circular of the Central Board of Direct Taxes bearing No. 40 (XLVII-16) of 1962 dated December 3, 1962 (exhibit K) (not circular No. F. 10/10/62-IT-(AI) dated August 16, 1962), the assessee-company was requested by the Income-tax Officer during the course of its assessment to furnish certificate on the following lines:

(i) that no part of the machinery or plant had been used in India previously for any purpose at any time, and

(ii) that no part of the machinery and plant had been previously used abroad for any purpose at any time by any person (assessees) in India.

10. Therefore, the Tribunal concluded that “looking to the extent, type and manner of reconditioning, the following machines fulfilled the test laid down in Cochin Company's case [1968] 67 I.T.R 199 (S.C).” These are items (a) to (f), the value of the same being Rs. 1,62,328.12. Regarding the other items, which were also reconditioned to a substantial extent, the Tribunal took the view that “after a lapse of so many years it is not possible to indicate with complete certainty whether all the tests laid in Cochin Company's case [1968] 67 I.T.R 199 (S.C) are fulfilled.”

11. The learned counsel for the Commissioner of Income-tax has urged that the Tribunal is in error in holding that the six items (a) to (f) in exhibit A, which have been set out above, be termed as new machinery within the rule laid down in Cochin Company's case [1968] 67 I.T.R 199 (S.C). On the other hand, the learned counsel for the assessee has maintained that item (h) clearly falls within the rule laid down in Cochin Company's case [1968] 67 I.T.R 199 (S.C) and has been ruled out without any basis. According to him, it does answer the test laid down in Cochin Company's case [1968] 67 I.T.R 199 (S.C).

12. Before proceeding to deal with the respective contentions of the learned counsel, it will be proper to set down the relevant observations of their Lordships of the Supreme Court in Cochin Company's case [1968] 67 I.T.R 199 (S.C). They are in the following terms:

“The word ‘new’ is not defined 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 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 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.”

13. We are of the view that the test is definitely satisfied so far as the first three items (a) to (c) are concerned. We have been forced to this conclusion on the basis of the facts found by the Tribunal and particularly the fact that the cost of acquiring the plant or machinery, so far as these three items are concerned, is insignificant compared to the amounts spent on reconditioning it. Therefore, we do not see that any legitimate objection can be taken to the first three items. So far as the remaining three items are concerned, in our opinion, the Tribunal has gone wrong and we propose to deal with these items individually.

14. If a reference is made to exhibit A, it will be found that the cost of acquiring item (d) was £ 2,800. Including the freight and insurance the value of this item comes to Rs. 48,684.22. The cost of reconditioning it was incurred in India and the cost was Rs. 27,037.65. This amount was spent on accessories which would show that there was no substantial change or replacement of the used boiler that was acquired and in the subject-matter of item (d).

15. So far as items (e) and (f) are concerned, their cost, as mentioned in exhibit H, is as follows:

Cost of item (e) including cost of export packing £ 139-1-10 Cost of item (f) including cost of export packing £ 123-1-10 The railage, insurance and freight on these two items was £ 108-12-7

The figures stated above represent the price of the reconditioned machinery comprised in items (e) and (f). There is no evidence as to what was paid to acquire these machines before they were reconditioned. In this situation, it cannot be said that the reconditioning was of such a nature as to bring the case of these items within Cochin Company's case [1968] 67 I.T.R 199 (S.C), In India, only an amount of Rs. 1,785 was spent on material and labour and this does not seem to have any connection with the reconditioning of the plant.

16. We, therefore, accept the contention of the learned counsel for the Commissioner of Income-tax that items (d), (e) and (f) do not answer the test laid down in Cochin Company's case [1968] 67 I.T.R 199 (S.C).

17. This brings us to the case of item (h). The contention of the learned counsel for the assessee is that this item definitely answers the test laid down in Cochin Company's case [1968] 67 I.T.R 199 (S.C). This item was acquired for £ 473-17-4. It was dismantled and tropicalised and adding the proportionate shipping and insurance, the total amount on reconditioning it came to £ 3,031-19-0 (see in this connection annexure “A”, item 8). If a reference is made to exhibit I, it will be found that two unused Escher-Wyss Type Twin-Roll Spray Driers were acquired at the cost of £ 2,200. The transport cost of these roller driers came to £ 196-15-0. Another item of eight knives for roller drying machine cost £ 22. The electric motors that were to operate these roller driers were also reconditioned and the cost incurred in this behalf was £ 139-6-8. Thus, the total amount on the new items came to £2,418-15-0.

18. It will appear from what has been stated above that this item was practically a new item and it fully answers the test in Cochin Company's case [1968] 67 I.T.R 199 (S.C). The Tribunal was in error in ruling this item out of consideration.

19. The net result, therefore, is that items (a) to (c) and (h) have to be treated as new machinery. Their value as found by the Tribunal is as follows:

Rs. (a) 22,227.24 (b) 17,932.50 (c) 25,706.94 (h) 53,923.10 Total 1,19,789.78

Therefore, development rebate was admissible on the aforesaid items.

20. We, accordingly, answer the second question in favour of the assessee and against the department as indicated above. Mr. Awasthy, learned counsel for the department, urged that the second test laid down in section 10(2)(vib) of the Indian Income-tax Act, 1922, namely, that the assessee had not created an adequate reserve required under the provisions of section 10(2)(vib), proviso, is not satisfied in this case. Therefore, the development rebate cannot be allowed. This contention cannot be accepted for two reasons. Firstly, this question has not been referred for our opinion by the Tribunal though it was noticed by the Tribunal in its orders dated 11th of September, 1964. Mr. Awasthy's contention that this matter is included in the second question and, therefore, he can urge the same is untenable. In the second place, this matter was not agitated when the department made an application under section 66(1) of the Indian Income-tax Act, 1922, to the Tribunal. In the original statement of the case, at page 4 of the paper book, it is observed:

“He (the Appellate Assistant Commissioner) added a further ground in his rectification order for maintaining the disallowance that adequate reserve as required under the provisions of section 10(2)(vib) had not been created. In this reference application, however, we are not concerned with this aspect of the matter.”

21. As this matter has not been referred to us, we cannot, therefore, give an opinion thereon. We accordingly repel the contention of Mr. Awasthy.

22. In view of the divided success, we make no order as to costs.