Commissioner of Income Tax vs Gangotri Tube Wells Pvt. Ltd.

J.G. Chitre, J.—Both these matters are interconnected and are similarly revolving around a common topic and, therefore, they are being decided by this common judgment.

The Commissioner of Income Tax, Bhopal, has submitted these petitions for the purpose of making prayer that the following two questions be directed to be referred to this court for recording the opinion :

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in allowing 30 per cent, depreciation on rig and compressor used in boring the wells, in accordance with entry D(4) of the Depreciation Schedule under the Income Tax Rules ?

(2) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that the asses-see-firm which carries on the business of drilling borewells is an industrial undertaking engaged in manufacturing or producing articles or things and is entitled to relief u/s 32A of the Income Tax Act (hereinafter referred to as ''the Act'' for convenience) ?"

The events need to be mentioned chronologically as indicated below :

(1) The original assessment was made on December 21, 1987, as indicated by annexure R/1.

(2) The said order was set aside by the Commissioner of Income Tax, Bhopal, by his order dated October 31, 1989, as indicated by annexure R/2 in view of the provisions of Section 263 of the Income Tax Act.

(3) Against this order passed by the Commissioner of Income Tax, Bhopal, the assessee went in appeal to the Income Tax Appellate Tribunal and by its order dated January 3, 1991, in I. T. Appeal No. 243/Ind. of 1991 which also disposed of Appeal No. ITA 244/Ind. of 1991, allowed the appeal and set aside the order passed by the Commissioner of Income Tax dated October 31, 1989, by restoring the original assessment order dated December 21, 1987, as indicated by annexure R/3.

(4) Against this, the Department asked for a reference to the High Court raising the very two questions mentioned above.

Shri R. L. Jain vehemently submitted that the drilling machines and accessories used in drilling the tubewells and borewells, drilling companies fall under the category indicated by entry D(4) and the assessee can claim depreciation at 15 per cent. He submitted that in view of that the Tribunal was in error of law in allowing the appeal of the respondent and restoring the order passed by the. Assessing Officer.

Shri Chaphekar, senior counsel appearing for the respondents, submitted that the two questions mentioned above have been answered by this court in the matter of M. C. C. No. 16 of 1993 by judgment dated July 31, 1996 ( COMMISSIONER OF Income Tax Vs. GANGOTRI TUBE WELLS (P.) LTD., ). He referred to annexure R/5. Shri Chaphekar submitted that now the same questions have been answered by the Division Bench of this High Court. There is no need to answer them again. He prayed that these petitions be dismissed.

After perusing annexure R/5, this court finds that the Division Bench of this court has answered these two questions by the judgment mentioned above. Bearing this, this court concurred with the view taken by the Andhra Pradesh High Court in the matter of Commissioner of Income Tax Vs. Super Drillers, . Thus, this court does not find any reason for allowing these petitions.

However, the Division Bench has not dealt with the subject which has been raised for appreciation. For avoiding the flow of such matters to the High Court, this court finds it necessary to deal with the subject elaborately. In this judgment posing them as moot questions they have to be answered.

Old Appendix I to the Income Tax Rules, 1962 (hereinafter referred to as "the Rules"), points out various entries described against the description and points out that the assessee is entitled to get depreciation at 30 per cent. Item No. D(7) includes Mineral oil concerns--Field operations (above ground)--Portable boilers, dritling tools, well-head tanks, rigs, etc. (N.E.S.A.). Thirdly of the said Appendix points out machinery and plant (not being a ship)-

(i) General rate applicable to machinery and plant (not being a ship) for which no special rate has been prescribed under item (ii) hereinbelow.

(ii) Special rates : . . .

C. (1) Cinematograph films--Machinery used in the production and exhibition of cinematograph films (N.E.S.A.),

(a) Recording equipment, reproducing equipment, developing machines, printing machines, editing machines, synchronisers and studio lights except bulbs ;

(b) Projecting equipment of film exhibiting concerns.

(2) Cycles (N.E.S.A.),

(3) Data processing machines including computers (N.E.S.A.),

(4) Electrical machinery--Batteries ; x-ray and electro-therapeutic apparatus and accessories thereto (N.E.S.A.),

(5) Glass manufacturing concerns except direct fire glass melting furnaces--Recuperative and regenerative glass melting furnaces,

(6) Juice boiling pans (karhais) (N.E.S.A.),

(6A) Machinery used in the manufacture of electronic goods or components,

(7) Motor-cars, motor cycles, scooters and other mopeds (N.E.S.A.),

(8) Sugarcane crushers (indigenous kolhus and belans) (N.E.S.A.).

In the present case, the Assessing Officer permitted the respondents to get the benefit of depreciation at 30 per cent. rate. However, the Commissioner of Income Tax, Bhopal, reduced it to 15 per cent. Therefore, now it is to be seen whether the respondents were entitled to get the said depreciation at 30 per cent. rate or at 15 per cent. rate ? Whether the machinery which has been used for digging tube-wells and borewells falls under the thirdly of the said Appendix or under the category mentioned as D(4) ?

In the matter of Commissioner of Income Tax Vs. Super Drillers, , the asses-see was aggrieved by the decision of the Income Tax Officer and carried the matter to the Commissioner of Income Tax (Appeals) and the learned Commissioner agreed with the view of the Income Tax Officer and dismissed the appeal. Therefore, a second appeal was filed by the assessee before the Income Tax Appellate Tribunal and reiterated its claim for depreciation at 30 per cent. The Tribunal considered the matter at considerable length and held the view that although the rig used by the assessee for drilling borewells does not answer the description against item No. D(7), it answers the description against item No. D(4) which is in the following terms :

"Earth-moving machinery employed in heavy construction works, such as dams, tunnels, canals, etc."

It found that the depreciation allowable is 30 per cent. even if the rig used by the assessee for drilling operations is covered by item No. D(4) and the Tribunal accepted the claim of the assessee for depreciation at 30 per cent In that judgment, the Division Bench of the Andhra Pradesh High Court came to the conclusion that the Tribunal applied its mind carefully to determine the question under consideration. It found that the drilling equipment is liable to be categorised as "construction equipment" according to the information furnished by the McGraw Hill Encyclopaedia of Science and Technology (fifth edition 1982) at pages 497 and 498. It found that the Tribunal had extracted the information from the encyclopaedia to support that the earth-movers include heavy duty trucks with highsided dump bodies, self-propelled or towed scrapers, wagons and bulldozers. There was further information that drilling equipment should be regarded as "construction equipment" as holes are drilled in rocks for wells and for blasting, grounding and exploring. Drills are classified according to the way in which they penetrate rock, viz., percussion, rotating percussion and rotary. In smaller sizes, these drills may be hand-held but for production work, they are mounted on masts which are supported by trucks or special trucks mounted on drillings. Having regard to the above technical information, the Tribunal held that the description of the drilling equipment used by the assessee answered the description contained in item No. D(4) and, consequently, depreciation ought to be allowed at 30 per cent. The Tribunal had also gone through the brochures and extracts from certain magazines to show that a rig is considered in trade circles as drilling equipment for construction work. Pictures of this equipment along with the details of the work done were scrutinised by the Tribunal before it recorded its satisfaction that the equipment squarely fell under item No. D(4).

The Division Bench also recorded its opinion that having gone through the scientific and technical literature concerning the drilling and going through a lot of factual information before recording the finding that the drilling equipment utilised by the assessee in its business answered the description against item No. D(4). The Division Bench concluded that it did not find any reason to come to the contrary view which was recorded by the Division Bench as mentioned above. It further pointed out that it should be borne in mind that the description given against item No. D(4) is not exhaustive, but merely illustrative. It has clearly specified that the earth-moving machine is employed in heavy construction work such as dams, tunnels, canals, etc.

The depreciation is generally calculated in exemplary word. By using the approximate life of concerned machinery and the likely damage caused to it, in the nature of wear and tear in its use in a commercial concern, business or factory. Drilling machines used by companies engaged in the work of drilling bore-wells and tube-wells drill different materials of rough and tough as the rocks. It penetrates the granite layer also and thereafter, the material in the form of "water" is made available and "produced". Therefore, though it has not been so specifically mentioned by item No. D(4) or D(7), it comes at par with the items described by item Nos. D(4) and D(7). It is to be noted that item No. D(7) speaks of rigs, etc. Keeping in view that aspect, the depreciation should be at 30 per cent. By any stretch of imagination, it cannot be 15 per cent, as indicated by thirdly in Appendix I placing it at par with machinery (not being a ship).

Therefore, the Commissioner of Income Tax, Bhopal, was totally in error in setting aside the order passed by the Assessing Officer and reducing the depreciation from 30 per cent, to 15 per cent.

Thus, in view of this discussion, we record our concurrence with the view taken by the Division Bench of the Andhra Pradesh High Court in the matter of Commissioner of Income Tax Vs. Super Drillers, . We answer the moot questions raised accordingly. Thus, ITR Nos. 14 and 15 of 1997 stand dismissed with costs for unnecessary reference.