Madras High Court
Commissioner Of Income-Tax vs Popular Borewell Service And Others on 23 April, 1991
Equivalent citations: [1992]194ITR12(MAD)
JUDGMENT
1. These tax case references are dealt with together, as common questions of law relating to the allowance of depreciation and grant of investment allowance on a certain type of machinery, viz., rig and compressor arise for consideration. However, it will be convenient, to refer to the facts and the question arising for decision in each of these references.
2. The assessee in T. C. No. 242 of 1986 is a firm carrying on the business or drilling bore-wells. In the course of the assessment proceedings for the assessment year 1978-79, the assessee claimed depreciation at 30% on the rig and compressor under item No. III(ii) D(9) of part I of Appendix I to the Income-tax Rules, 1962 (hereinafter called "the Rules"), on the ground that they constituted an integral part of the lorry on which they were mounted and were also worked by the same engine which provided traction to the lorry. The Income-tax Officer rejected the claim of the assessee for depreciation at 30% on the rig and compressor. On appeal by the assessee, the Appellate Assistant Commissioner, following the decision of the Income-tax Appellate Tribunal in the case of the assessee for the assessment year 1979-80 in I. T. A. No. 151/MDS of 1983, accepted the claim of the assessee and held that it was entitled to depreciation at 30% on the rig and compressor. Aggrieved by the order of the Appellate Assistant Commissioner, the Revenue filed and appeal before the Tribunal. The Tribunal, by its order dated February 27, 1985, following its earlier order in I. T. A. No. 151/MDS of 1983, upheld the order of the Appellate Assistant Commissioner and dismissed the appeal. Aggrieved by the order of the Tribunal, the Revenue obtained a reference under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), to this court, on the following question of law, for its opinion :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that the assessee is entitled to depreciation at the special rate of 30% in respect of rig and compressor used for drilling bore-wells ?"
3. In T. C. No. 285 of 1986, the assessee-firm which carried on the business of drilling bore-wells, in the course of the assessment proceedings for the assessment year 1980-81, claimed depreciation at 30% on the rig and compressor under item No. III(ii) D(9) of part I of Appendix I to the Rules, on the ground that they constituted an integral part of the lorry on which they were mounted and were also worked by the same engine, which provided power to the vehicle. the income-tax Officer rejected the claim of the assessee for depreciation at 30% on the rig and compressor. On appeal before for the Commissioner of Income-tax (Appeals), the appellate authority accepted the claim of the assessee and allowed depreciation at 30% on the rig and compressor. Thereafter, the Revenue preferred an appeal before the Tribunal and the Tribunal, following its earlier order in I. T. A. No. 76/MDS of 1983, upheld the order of the Commissioner of Income_tax (Appeals), and dismissed the appeal. In those circumstances, the Revenue obtained a reference under section 256(1) of the Act to this court, on the following question of law, for its opinion :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law holding that the assessee is entitled to depreciation at the special rate of 30% in respect of the rig and compressor used for drilling bore-wells ?"
4. In T. C. Nos. 539 and 540 of 1986, the assessee is a firm engaged in the business of drilling bore-wells. The relevant assessment year is 1080-81. With regard to the rate of depreciation on rig and compressor, the Income-tax Officer, in the original assessment, allowed 20%, but in the reassessment,made he restricted it to 10%. On appeal by the assessee before the Commissioner of Income-tax (Appeals), the appellate authority allowed the appeal holding that the rig and compressor mounted on a lorry constituted an integral unit and the rig and compressor is eligible for depreciation at 30% prescribed for motor lorries. However, the Commissioner of Income-tax restricted depreciation to the original rate of 20% allowed in the original assessment order. Against the order of the Commissioner of Income-tax (Appeals), the Revenue filed an appeal before the Tribunal and the Tribunal, following its earlier order in I. T. A. No. 836/MDS of 1981, held that the assessee is entitled to depreciation at the special rate of 30% on the ground that the rig and compressor mounted on the lorry would form part of the lorry. The assessee also claimed investment allowance in respect of the rig and compressor admissible under section 32A(2) of the Act. The Income-tax Officer, in the original assessment proceedings, held that the assessee is entitled to claim investment allowance in respect of the rig and compressor. However, in the reassessment proceedings, the Income-tax Officer had withdrawn the investment allowance on the ground that sinking of bore-wells by the assessee, using the rig and compressor, could not be equated to the business of construction or production of any article or thing. The assessee filed an appeal before the Commissioner of Income-tax (Appeals) against the order of the Income-tax Officer withdrawing the investment allowance. The Commissioner of Income-tax upheld the assessee's claim relying on the order of the Tribunal dated July 21, 1981. Against the order of the Commissioner of Income-tax (Appeals), holding that the assessee is entitled to investment allowance, the Revenue filed an appeal before the Tribunal. On the question of grant of investment allowance in respect of rig and compressor, there was a difference of opinion between the two members of the Tribunal who heard the appeal. The Judicial Member held that the assessee is not entitled to the relief under section 32A of the Act, whereas the Accountant member disagreed with him and held that the assessee is entitled to the relief under section 32A of the Act. On a reference to the third member, on a consideration of the description of the assets, it was found that the rig and compressor the independent items of machinery and they can exist without being placed on a lorry. In the view of the third Member, there are three distinct items, the rig, compressor and the lorry, the first two items not being a lorry. The third Member, therefore, held that the investment allowance would be allowable on the rig and compressor, whereas such allowance would not be allowable on the lorry. In accordance with the majority view, the Tribunal held that the actual value of the three items, lorry, compressor and rig be worked out separately and investment allowance should be allowed on that part representing the rig and compressor only and not in respect of the value of the lorry and, accordingly, the Tribunal allowed the appeal of the Revenue in part. Therefore, the Revenue obtained a reference under section 256(1) of the Act, in two separate reference applications, viz., R. A. No. 86/MDS of 1985 and R. A. No. 402/MDS of 1984, on the following two questions of law to this court, for its opinion :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's view that the rig and compressor mounted on a lorry and used for drilling bore-wells should be treated as independent items of machinery and allowed investment allowance as such is sustainable in law ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in law in holding that the assessee is entitled to depreciation at the special rate of 30% in respect of the rig and compressor used for drilling wells ?"
5. Question No. 1, referred to above, is the subject-matter of T. C. No. 539 of 1986 and question No. 2 is the subject-matter of T. C. No. 540 of 1986.
6. The assessee in T. C. No. 1446 of 1986 is a firm of contractors doing Government contract work, like construction of dams, tunnels, canals, etc. During the accounting period relevant to the assessment year 1081-82, the assessee undertook the work of construction of a dams in Selvalar. The major work of the assessee was construction of tunnels. For the purpose of drilling and blasting the rocks, a drill, air-compressors and jack-hammers were used. The Income-tax Officer allowed the general rate of depreciation of 10% on the drill, air-compressors and jack-hammers, as against the spe-cial rate of 30% claimed by the assessee. On appeal by the assessee before the appellate Assistant Commissioner, it was held that the rig and compressor mounted on the lorry have to be treated as motor-lorry for purposes of depreciation. The appellate Assistant Commissioner further held that the rig and compressor also fell under "earth-moving machinery employed in heavy construction works, such as dams, tunnels, canals, etc. " Consequently, the Appellate Assistant Commissioner allowed the appeal and directed the Income-tax Officer to allow 30% depreciation. Against, the order of the Appellate Assistant Commissioner, the Revenue filed on appeal before the Tribunal. The Tribunal, confirming the finding of the Appellate Assistant Commissioner that the drills, air-compressors and jack-hammers are earth-moving machinery, dismissed the appeal filed by the Revenue. In those circumstances, the Revenue obtained a reference under section 256(2) of the Act, on the following question of law to this court, for its opinion :
"Whether, on the facts and in the circumstances of case, the Appellate Tribunal was right in holding that the drill and air-compressors and jack-hammers used for the construction of dams, tunnels, amounts to manufacture and production of an article and, therefore, the assessee is entitled to depreciation at the special rate specified in section 32(1)(ii) of the Income-tax Act ?"
7. The assessee in T. C. No. 1796 of 1984 is a registered firm carrying on business as contractors for sinking bore-wells. The machinery involved is rig and compressor mounted on a lorry used for drilling bore-wells. For the assessment year 1977-78, the assessee claimed that it is entitled to investment allowance under section 32A(2)(b) of the Act, as a small-scale industry engaged in the manufacture of production of an article or thing this was negatived by the Income-tax officer as well as the appellate authority on the ground that the assessee only burrowed a hole in the ground, which cannot be considered to be a thing. Against the order of the appellate authority, the assessee filed an appeal before the Tribunal, and the Tribunal found that the reasoning of the appellate authority for refusing investment allowance under section 32A(2)(b) of the Act is erroneous, because the assessee, according to the Tribunal, by sinking a bore-well, brought into existence a thing viz., a bore-well. The Tribunal found that the assessee was engaged in the manufacture or production of a thing and was entitled to investment allowance under section 32A(2)(b) of the Act. In the above circumstances, at the instance of the Revenue, under section 256(2) of the Act, the following question of law has been referred to this court for its opinion :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in law in holding that the sinking of bore-wells amounts to manufacture or production of an article and, therefore, the assessee is entitled to investment allowance as prescribed under section 32A(2)(b) of the Income-tax Act, 1961, for the assessment year 1977-78 ?"
8. We may first proceed to consider the common question referred in T. C. Nos. 242, 285 and 540 of 1986, viz., whether the assessees in those cases are entitled to depreciation at the special rate of 30% in respect of the rig and compressor used for drilling bore-wells. The assessees in these cases claimed depreciation at 30% on the rig and compressor under item No. III(ii) D(9) of Part I of Appendix I to the Rules on the ground that they constituted an integral part of the lorry on which they were mounted and were also worked by the same engine, which provided traction to the lorry. It is not in dispute that, if the drilling machinery, viz., the rig and compressor, owned and used by the assessees in these cases does not fall under item No. III(ii) D(9) of Part I of Appendix I to the Rules, the depreciation properly allowable is only 10%. Therefore, the claim of the assessees for depreciation at a higher rate of 30% would depend upon whether the machinery viz., rig and compressor, owned and used by them will fall under item No. III(ii) D(9) of Part I of Appendix I to the Rules. It would be appropriate in this conex to refer to the relevant entry, which reads as follows :
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Depreciation allowance as percentage of -
"Class of asset (i) actual cost in the case
of ocean-going ships;
(ii) written down value in
the case of any other asset.
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III. Machinery and plant (not being a ship)
(ii) Special rates :
D. (1) to (8) (omitted) (9) Motor buses and motor lorries, motor taxis, motor tractors (N. E. S. A.) 30%"
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9. The case of the assessees is that rig and compressors form an integral part of the lorry on which they are mounted and, therefore, the rig and compressor are motor lorries falling under entry No. III(ii) D(9) of Part I of Appendix I to the Rules and that they are entitled to depreciation at the special rate of 30%. the terms "rig", "compressor" and "motor lorry" are not defined either in the Act or in the Rules and those words have to be understood as connoting their plan, ordinary and natural meaning. In Webster's New World Dictionary, the meaning of "lorry" is given as follows :
"A low, flat wagon without sides - a motor truck" and the meaning of "motor truck" is given as a "motor-driven truck for hauling loads". Again, when the words "rig, compressor and motor lorry" are not defined in the Act or in the Rules, they have to be understood, not in any special or technical sense, but in a popular sense-a sense in which the ordinary man in the street would understand them. a person who requires a rig and compressor for the purpose of sinking a bore-well will not be satisfied, if a motor lorry, as understood in common parlance or in the commercial parlance, is supplied to him. In the popular sense, the rig and compressor mounted on a lorry, is not, understood as a motor lorry. In T. C. No. 540 of 1986, the third Member of the Tribunal to whom the matter was referred on a divergence of opinion between the Judicial-Member and the Accountant-Member has given the factual details about the rig and compressor mounted on a lorry in the following terms :
"From the description given and the gaps filled in by the details given by the parties before me, the exact nature of these assets could, however, be made out. The drilling rigs and compressors are independent items of machinery. a rig can exist without being placed on a lorry. It can, for instance, be placed on the ground. the same is true of a compressor also. It is not necessary, therefore, to think of a rig or a compressor only in the context of a lorry. Both the rig and the compressor can be utilized in any particular place. In the particular instance of the assessee's business, it may be necessary to take these assets to different places for performing necessary functions. It is for this reason that the rigs and the compressors are mounted on lorries. If the assessee had only two places of activities, perhaps the mounted rigs and compressors could be dismounted at the same place and the lorry could be dispensed with. It is the mere fact of activity at different placed that makes the particular functioning of this item tied up to lorry. What I want to stress is that neither the rig nor the compressor is an item which can be utilized or thought of only in terms of the assembly on a lorry. It is equally true that a lorry could be utilized without a rig or compressor."
10. The above discussion shows that the rig and compressor mounted on a lorry and used by the assessees for drilling bore-wells consist of three distinct items, viz., rig, compressor and lorry, and the rig and compressor do not form an integral part of the motor lorry. Further, the rig and compressor are not necessary for operating a motor lorry. Again, the rig and compressor the mounted on a lorry for the purpose of conveniently transporting them from place to place for sinking bore-wells. merely because the rig and compressor are mounted on a lorry to facilitate easy and convenient transport from one place to another, it cannot be said that the rig and compressor either constitute integral parts of a lorry by themselves or can they be appropriately called or known as a "lorry", as understood on common parlance. Therefore, the rig and compressor used for drilling bore-wells, though mounted on a lorry, cannot be held to fall under "motor lorry" occurring in entry III(ii) D(9) of Part I of Appendix I to the Rules. We are unable to accept the reasons given by the Tribunal for holding that the rig and compressor used for drilling bore-wells would fall under the said entry. Therefore, in our view, the Tribunal is not right in holding that the assessees in those cases are entitled to depreciation at the special rate of 30% in respect of the rig and compressor used for drilling bore-wells.
11. We now proceed to examine the question in T. C. No. 1446 of 1986, viz., whether the drill, air-compressors and jack-hammers used for the constructions of dams, tunnels, etc., are entitled to depreciation at the special rate specified in section 32(1)(ii) of the Act. In this case, admittedly, the assessee is a firm of contractors doing Government work like construction of dams, tunnels, canals, etc., and during the relevant assessment year, the assessee undertook the work of construction of a dam in Selvalar. It is again admitted that the major work of the assessee was construction of tunnels and for the purpose of drilling and blasting rocks, drills, air-compressors and jack-hammers were used. The Income-tax Officer allowed only the general rate of depreciation at 10% on the above items. The Appellate Assistant Commissioner, on appeal, regarded thee rig and compressor mounted on a lorry as a motor lorry and also held that the items of machinery viz., drills, air-compressors and jack-hammers will also come under "earth-moving machinery employed in heavy construction works such as dams, tunnels, canals, etc. " falling under entry No. 4 in item No. III(ii) D of Part I of Appendix I to the Rules. The Appellate Assistant Commissioner also took the view that the items of machinery in question owned and used by the assessee would also fall under the entries Nos. III(ii) D(9) and III(ii) D(7) of part Appendix I to the Rules. The Tribunal confirmed the findings of the Appellate Assistant Commissioner and dismissed the appeal. We have held earlier in this judgment that the rig and compressor mounted on a lorry cannot be treated as a "motor lorry" and, therefore, they will not fall under entry No. III(ii) (D) (9) of Part I of Appendix I to the Rules. Equally, the items in question will not fall under entry No. III(ii) D(7), because that said entry will apply only to mineral and oil concerns which is not the case here. However, it is seen from the facts found by the authorities below that the drills, air-compressors and jack-hammers used by the assessee for the construction of dams, tunnels etc., are earth-moving machinery and they are also employed in heavy construction work such as dams, tunnels, canals, etc. Therefore, we hold that the drills, air-compressors and jack-hammers used by the assessee for the construction of dams, tunnels, etc., are "earth-moving machinery employed in heavy construction works" falling under entry No. III(ii) D(4). Recently, in T. C. Nos. 1188 to 1190 and 1391 of 1980, by judgment dated March 26, 1991, CIT v. Tamil Nadu Agro Industries Corporation [1991] 192 ITR 108, 113 (Mad), while interpreting the said entry No. III(ii) D(4), we have held as follows :
"In order, therefore, to fall within the entry referred to earlier, the earth-moving machinery must be of such a nature as is ordinary employed in heavy construction works where there is need for excavation of earth in very large quantities for the purpose for the purpose of building dams, tunnels canals, etc. To satisfy the requirements of the entry referred to earlier, it would not be sufficient, if the drilling machinery fell within the description of 'earth-moving machinery', but it would also be necessary that it should be of such a nature a kind, as are employed in the construction of works involving the excavation of earth in large quantities like dams, tunnels, canals..."
12. It is not in dispute that the above decision will apply to the facts of the present case. In view of the above decision, the Tribunal is quite right in holding that the drill, air-compressors and jack-hammers used in the construction of dams, tunnels, etc., are entitled to depreciation at the special rate of 30% specified in item No. 4 of entry No. III) ii) (D) in Part I of Appendix I to the Rules.
13. That takes us on to a consideration of the questions referred to in T. C. No. 1796 of 1984 and T. C. No. 539 of 1986, set out earlier. Section 32A(2)(b) of the Act, as amended by the Finance (No. 2) Act of 1977, with effect from April 1, 1978, provide for investment allowance in the case of small-scale industries engaged in the manufacture or production of any article or thing. Learned counsel for the Revenue submitted in the first place that the assessees in these cases are engaged in drilling bore-wells and that, inasmuch as the business carried on by the assessees was not a business for the manufacture or production of any article or thing, the assessees are not eligible for any allowance under section 32A of the Act. We are unable to accept the above contention of learned counsel for the Revenue. The assessees in these cases used the rigs and compressors for the purpose of sinking bore-wells. As a result of the drilling operations carried on by assessees using rigs and compressors, they bring into existence a thing, i. e., a bore-well is in effect a "thing", which could be factually recognized and identified. Further, as far as the customer for whom the bore-well is sunk, it could be treated as a capital asset. Therefore, it has to be held that sinking bore-wells, using rigs and compressors, amounts to production of a "thing" as contemplated in section 32A(2)(b) of the Act. A similar question, whether the sinking of bore-wells using rigs and compressors amounts to production of a "thing", came up for consideration before a Division Bench of the Andhra Pradesh High Court in CIT v. super Drillers [1988] 174 ITR 640. The Division Bench of the Andhra Pradesh High Court, in the decision referred to above, while holding that it would be wrong to think that drilling operations do not result in the Production of any article or thing, observed as follows (pp. 644, 645) :
"Drilling operations do result in the production of underground water for used on the surface of the ground and in that sense, it must be held that the assessees is an industrial undertaking for the purpose of production of underground water for use on the surface of the ground."
14. Though we are unable to agree with the reasoning of the Division Bench of the Andhra Pradesh High Court that drilling operations result in the production of ground water, we agree with its conclusion that drilling operations do result in the production of an article or thing, the thing produced, according to us, being the bore-well and not the water.
15. The second contention of learned counsel for the Revenue is that the Tribunal, in several cases, has accepted the case of the assessees and held that the rig and compressor mounted on a lorry form an integral part of the lorry and, therefore, they are "motor lorries" is a "road transport vehicle", the assessees are not entitled to the investment allowance, in view of the prohibition regarding road transport vehicles in clause (b) of the proviso to section 32A(2) of the Act In our view, there is no merit in this contention of learned counsel for the Revenue. We have, earlier in this judgment, while dealing with the question whether the rig and compressor are entitled to the special rate of depreciation, held that the rig and compressor mounted on a lorry, cannot be treated as a motor lorry. The term "road transport vehicle" is not defined either in the Act or in the Rules. However, the term "transport vehicles" as defined in section 2(33) of the Motor Vehicles Act, 1939, was as follows :
"'transport vehicle' means a public service vehicle or a goods vehicle".
16. Section 2(25) of the Motor Vehicles Act, 1939, defined a "public service vehicle" as follows :
"'public service vehicle' means any motor vehicle used or adapted to be used for the carriage of passengers for hire or reward, and includes a motor cab, contract carriage and stage carriage."
17. Section 2(8) of the Motor Vehicles Act, 1939, defined "goods vehicle" as follows :
"'goods vehicle' means any motor vehicle constructed or adapted for use for the carriage of goods, or any motor vehicle not so constructed or adapted when used for the carriage of goods solely or in addition to passengers."
18. From the above definitions of "transport vehicle", public service vehicle" and "goods vehicle", as they stood at the relevant time and as contained in the Motor Vehicles Act, 1939, it follows that the "road transport vehicle" referred to in clause (b) of the proviso to section 32A(1) of the Income-tax Act, 1961, would mean only those vehicles which are used for carrying passengers or goods. The rig and compressors mounted on a lorry cannot be treated as a road transport vehicle, because the rig and compressor mounted on a lorry are used only for the purpose of transporting equipment fixed on the lorry for sinking of bore-wells and not for carrying either passengers or loading or unloading of goods. Hence, the rig and compressors mounted on a lorry and used for drilling bore-wells cannot be considered as "road transport vehicle" and, therefore, they are eligible for investment allowance provided under section 32A(2)(b)(ii) of the Act. The Tribunal is right in holding that the assessees in T. C. Nos. 1796 of 1984 and 539 of 1986 are entitled to claim investment allowance under section 32A(2)(b)(ii) of the Act in respect of the rig and compressor.
19. In the result, the question in T. C. Nos. 242, 285 and 540 of 1986 is answered in the negative and in favour of the Revenue; the question referred in T. C. No. 1446 of 1986 is answered in the affirmative and against the Revenue, while the question referred in T. C. Nos. 1796 of 1984 and 539 of 1986 are answered in the affirmative and against the Revenue. There will be no order as to costs.