Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Super Drillers on 11 February, 1988
Equivalent citations: [1988]174ITR640(AP)
JUDGMENT Y.V. Anjaneyulu, J.
1. The Income-tax Appellate Tribunal, Hyderabad Bench, makes this reference under section 256(1) of the Income-tax Act, 1961, for the income-tax assessment year 1979-80. Two questions are referred for the consideration of this court and they are extracted below :
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in allowing 30% depreciation on rig and compressor used in boring of wells in accordance with entry D(4) of the Depreciation Schedule under the Income-tax Rules, 1962 ?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in holding that the assessee-firm which carries on business in drilling borewells, is an industrial undertaking engaged in manufacturing or producing articles or things and is entitled to relief under section 32A of the Income-tax Act ?"
2. The assessee is a partnership firm carrying on business in drilling borewells (tube-wells). For the purpose of drilling borewells, the assessee, inter alia, used a rig and compressor of the value of Rs. 3,77,966. The assessee claimed that it is entitled to depreciation on the value of the rig and compressor at 30% relying on the depreciation rate specified against item D(7) of the Depreciation Schedule (Appendix I, Part I to the income-tax Rules). The assessee's claim was that the rig used for the purpose of drilling answered the description specified against item D(7) which is as under :
"(7) Mineral oil concerns - Field operations (above ground) - Portable boilers, drilling tools, well-head tanks, rigs, etc."
If the assessee is entitled to claim depreciation under this head, there is no dispute that depreciation calculated at 30% of the cost of the machinery is allowable as deduction. No extra shift allowance is allowable. The Income-tax Officer did not accept the assessee's claim. He was of the view that the depreciation at the rate of 30% on rigs could be allowed only if the rigs are used by mineral oil concerns and not by others. As the assessee is not a mineral oil concern, the Income-tax Officer felt that there is no specific head under which depreciation could be allowed on the rig used for drilling borewells. Accordingly, the income-tax Officer held that the assessee is entitled to claim depreciation at the general rate applicable to plant and machinery, which at the relevant time, was 10% subject to extra shift allowance for double shift and triple shift. Accordingly, the Income-tax officer allowed the depreciation at 10% in computing the assessee's income for the assessment year 1979-80.
The assessee was aggrieved by the decision of the Income-tax Officer and carried the matter to the Commissioner of Income-tax (Appeals). The learned Commissioner agreed with the view of the Income-tax Officer and dismissed the appeal. Thereupon a second appeal was filed by the assessee before the Income-tax Appellate Tribunal and it reiterated its claim for depreciation at 30%. 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 D (7), it answers the description against item D (4) which is in the following terms :
"(4) Earth-moving machinery employed in heavy construction works, such as dams, tunnels, canals, etc. (No extra shift allowance)."
3. The Tribunal found that the depreciation allowable is 30% even if the rig used by the assessee for drilling operations is covered by item D (4). In that view of the matter, the Tribunal accepted the assessee's claim for depreciation at 30%. The Commissioner of Income-tax was aggrieved by the decision of the Tribunal and carried the matter by way of reference to this court.
4. 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 (5th Edition 1982) at pages 497 and 498. The Tribunal extracted the information from the encyclopaedia to support that earth-movers include heavy duty trucks with highsided dump bodies, self-propelled or towed scrapers, wagons and bulldozers. There is further information that drilling equipment should be regarded as "construction equipment" as holes are drilled in rock 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 D (4) and, consequently, depreciation ought to be allowed at 30%. 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 D (4).
5. Having carefully examined the information on which the Tribunal acted, we feel that the question is, indeed, one of fact and no legal considerations would prevail. The Tribunal had occasion to go through the scientific and technical literature concerning the drilling and also went 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 D (4). We have no reason to come to a contrary conclusion. Learned standing counsel pointed out that the earth-moving machinery referred to against item D (4) should be employed in heavy construction works like dams, tunnels, canals, etc. It is claimed that this drilling equipment is not so employed and, consequently, this court cannot consider the use of the drilling equipment as satisfying the purpose of the description given against item D (4). It should be borne in mind that the description given against item D (4) is not exhaustive but merely illustrative. It is clearly specified there that earth-moving machinery is employed in heavy construction work such as dams, tunnels, canals, etc. The description given under this head is merely illustrative as is indicated by the use of the expressions "such as" and "etc." There is sufficient material upon which the Tribunal could come to the conclusion that the drilling equipment used by the assessee is employed in heavy construction works. No material has been placed by the Revenue to take a contrary view. We accordingly uphold the Tribunal's view that the rig and compressor used by the assessee for the purpose of drilling answers the description of item D (4) in Appendix I, Part I, and, consequently, the assessee would be entitled to claim depreciation at 30%. We accordingly answer question No. (1) in the affirmative, i.e., in favour of the assessee and against the Revenue.
6. The second question concerns the investment allowance under section 32A of the Act. There is no dispute that investment allowance is allowable under section 32A in respect of plant and machinery owned by the assessee and wholly used for the purpose of business carried on by the assessee provided the machinery or plant is new and is installed after March 31, 1976. The further requirement is that the machinery or plant should be installed in an industrial undertaking for the purpose of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule. There is no dispute in the present case that the drilling equipment is new and is installed after March 31, 1976. The Revenue contends that the assessee cannot be regarded as an industrial undertaking for the purpose of business of construction manufacture or production of any article or thing. It is pointed out that all that the assessee did is to drill and drilling operations do not result in the manufacture or production of any article or thing. It is, therefore, claimed that the assessee is not entitled to the deduction on account of investment allowance under section 32A. The Tribunal allowed the assessee's claim. We are in agreement with the Tribunal's conclusion. There can be no dispute about the fact that the drilling equipment is used by the assessee for the purpose of.' business carried on by it in order to bring to the surface underground water. It should be borne in mind that water deposits lie hidden under the ground and the purpose of operating the equipment to go into the ground is to produce water lying hidden under the ground. It would be wrong to think that drilling operations do not result in the production of any article or thing. Drilling operations do result in the production of underground water for use on the surface of the ground and in that sense, it must be held that the assessee is an industrial undertaking for the purpose of production of underground water for use on the surface of the ground. In our opinion, the requirements of section 32A (2) (b) (iii) are fully satisfied and the assessee is entitled to claim deduction on account of investment allowance. We answer question No. 2 referred to us in the affirmative, that is to say, in favour of the assessee and against the Revenue. The reference is answered accordingly. No costs.