JUDGMENT B.P. Jeevan Reddy, C.J.
1. The following three questions have been stated by the Income-tax Appellate Tribunal under Section 256(2) of the Income-tax Act, 1961 :
"1. Whether, on the facts and in the circumstances of the case, there was material on record justifying the Tribunal's finding that the business carried on by M/s. Chandra Katha Industries was not formed by splitting up or reconstruction of a business already in existence or by transfer of machinery or plant previously used for any purposes within the meaning of Section 80J of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the manufacturing of catechu is a chemical process and that the Income-tax Officer was justified in allowing depreciation at 10% as against the normal rate of 7% ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in quashing the order of the Commissioner of Income-tax passed under Section 263 of the Income-tax Act, 1961 ?"
2. The assessee is a registered firm. The assessment year concerned is 1969-70. The Income-tax Officer allowed deduction of Rs. 16,288 under Section 80J of the Income-tax Act. He also allowed depreciation on the machinery at the rate of 10% as against the ordinary rate of 7%. The order of the Income-tax Officer was revised by the Commissioner of Income-tax under Section 263 of the Act. The Commissioner was of the opinion that the installation of machinery and plant by the assessee was merely a reconstruction of the business already in existence, the identity of which was not lost. On this ground, he held that the assessee was not entitled to the benefit of Section 80J. The Commissioner held further that the undertaking of the assessee cannot be called "chemical works" and, therefore, was not entitled to the higher rate of depreciation. The assessee filed an appeal before the Tribunal questioning the order of the Commissioner. The Tribunal, on an examination of the material, held that the plant established by the assessee was a newly built factory on a piece of land purchased by the assessee-firm. The Tribunal recorded the following further findings :
"The assessee has started manufacturing of katha and cutch by mechanical process. Kutch is a bye-product of katha. Katha is an edible item whereas catechu is mostly used as pigments which is one of the components of painting material. The new industrial undertaking comprises new building with new plant and machinery such as boilers, refrigeration units, cold storage rooms, cold drying chambers, automatic saw machines, evaporating pans, chipping machines, wooden vats, electric meters, electrical installations, etc., etc. All these items were installed in the assessment year 1966-67 in the new premises at Kotla Road."
3. On the above factual findings, the Tribunal held that the assessee's undertaking is not formed by reconstruction of a business already in existence nor is it formed by the transfer of machinery or plant previously used for any purpose within the meaning of Sub-section (4) of Section 80J. The Tribunal also found that the process employed by the assessee is a manufacturing process.
4. So far as the second question is concerned, the Tribunal referred to the meaning of the expressions "catechine", "catechu" and "chemical" from the Shorter Oxford Dictionary and held that the process employed by the petitioner is a chemical process and, therefore, entitled to the higher rate of depreciation at 10%. The ratio of the Tribunal in this behalf is to be found in the following words :
"Moreover, so far as the objection of the Commissioner of Income-tax that the manufacture of cutch by chipping the khair wood, boiling it in water, filtering it and cooling it cannot be called a chemical process, we may observe that he is wrong in holding so. We have seen that, in the process of manufacturing catechu, a lot of processing such as giving a certain degree of temperature to the raw material is involved which is evident from the following definition given in the Shorter Oxford Dictionary which is as under :
'Catechin 1853. Chem. A substance obtained from catechu, etc., after the removal of the tannin, a white powder composed of small silky needles.
Catechu 1683. [appd. ad. Malay Kachu catechu (of acacia). See also Cachou, Cashou ] A name given to several astringent substances, containing from 40 to 55 per cent of tannin, which are obtained from Acacia Catechu and other Eastern trees and shrubs. Used in medicine, and in the arts. Called also Gambler, Terra Japonica, Cutch, etc. Hence catechu i.e., a. of or pertaining to c., as in catechuic acid = Catechin.
Chemical, a. 1576 (f. Chemic a. + AL) 1. Alchemical--1747. 2. Chemiatric as opp to 'Galenical'. 1782. 3. Relating or belonging to chemistry ; obtained by chemistry 1576. 4. Versed in chemistry 1615. 5. as sb. (esp. in pl) A substance obtained or used in chemical, operations 1747.
3. C. Affinity, attraction, etc. : see affinity, attraction, etc, The C. composition of plants Sir H. Davy of the atmosphere Huxley Chemically, adv.
This would indicate that the manufacturing of catechu is a chemical process and the Income-tax Officer rightly allowed depreciation on account of this."
5. Thereupon, the Revenue applied for and obtained the present reference. So far as question No. 1 is concerned, we must state straightaway that there was material on record before the Tribunal justifying its finding. We have already referred to the finding of the Tribunal. A fresh piece of land was purchased, a new factory was established and new machinery was installed apart from new cold storage rooms, refrigeration units, cold drying chambers and other infrastructure. All these were installed in the new premises and the manufacturing process was also different. In the circumstances, it would' be idle to say that the industrial undertaking established by the assesses is formed by the reconstruction of a business already in existence or that it is using old machinery or plant. May be that the partners of the assessee partnership firm (father and sons) were carrying on the business of manufacture of katha but it would be evident from the facts found by the Tribunal that the industrial undertaking in question is a new one. Accordingly, we must answer question No. 1 in the affirmative, i.e., in favour of the assessee and against the Revenue.
6. So far as question No. 2 is concerned, it is necessary to notice the legal provisions first. Section 32 of the Act provides for depreciation. Rule 5 of the Income-tax Rules read with Appendix I prescribes the rates of depreciation in the case of different assets. Rule 5 says that in respect of building, machinery and plant, depreciation shall be calculated at the percentages specified in the second column of the table in Part I of Appendix I to the Rules. Item No. 3 of Appendix 1 deals with machinery and plant. Under this item, special rates are mentioned alphabetically. Under alphabet 'C', entry No. 3 relates to "chemical works". It reads as follows (See [1962] 45 ITR (St.) 56, 57) :
Class of asset Rate.
Number on the basis of which the percentage is to be calculated on the written down value except where otherwise indicated in the case of ocean-going steamers.
Remarks 1 2 3 (3) Chemical works :
(a) Machinery and plant coming into contact with corrosive chemicals ...
(b) Other machinery and plant like boilers, filtration plant, etc.
10"
7. It is relevant to notice the heading of the entry. It says "chemical works". In other words, the machinery and plant upon which the depreciation is claimed must be installed in a unit or plant which can be called "chemical works". Merely because a certain chemical process is gone through, it cannot be said that it is a chemical works. For that matter, a chemical process is probably gone through in most of the manufacturing processes. To wit, even in a steel plant, some chemical process may be involved but, on that account, a steel plant cannot be called a chemical works. We, however, agree that if the product is a chemical, the plant or factory producing the same can be called a chemical works.
8. Now, coming to the approach adopted by the Tribunal, we are not satisfied that it is the proper one. The Tribunal thinks that because the manufacture of catechu involves chipping of wood, boiling it in water, filtering and cooling it, it can be called chemical process. Another approach of the Tribunal is that since manufacturing of catechu involves a lot of processing such as giving a certain degree of temperature to the raw material, it must be called a chemical, process. We cannot agree. The above processes by themselves cannot constitute a chemical process much less do they convert the works into a chemical works. The Tribunal has further referred to the dictionary meaning of catechin and catechu. We have perused the Shorter Oxford Dictionary where the above expressions are defined. It appears that while "catechin" which substance is obtained from catechu after removal of tannin is described as a chemical, catechu is not described as a chemical. No authority is also cited for holding that catechu is a chemical. We make it clear that we should not be understood as expressing any opinion on the question whether catechu is a chemical or not. We are merely pointing the defect in the approach or the reasoning of the Tribunal. Since the very approach adopted by the Tribunal is wrong, we are inclined to remit question No. 2 back to the Tribunal for fresh determination in the light of the principles indicated hereinabove.
9. Since we have dealt with questions Nos. 1 and 2 on merits, it is unnecessary to go into question No. 3. Question No, 3 merely pertains to the merits of the decision of the Tribunal.
10. For the above reasons, question No. 1 is answered in the affirmative, i.e., in favour of the assessee and against the Revenue. Question No. 2 is remitted for reconsideration. We decline to answer question No. 3 as it is unnecessary. No costs.