Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH “F” DELHI
Before: SHRI AMIT SHUKLA & SHRI PRADIP KUMAR KEDIA
PER PRADIP KUMAR KEDIA, A.M.: The captioned appeal has been filed at the instance of the Revenue against the order of Commissioner of Income Tax (Appeals)-VII, Delhi (‘CIT(A)’ in short) dated 17.03.2015 arising from the assessment order dated 28.02.2013 passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2010-11. The grounds of appeal raised by the Revenue read as under:
“1. (a) On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 11,85,19,801/- made on account of depreciation claimed by the assessee at a higher rate by not correctly interpreting the provisions of section 32 of the Income Tax Act, 1961 n the facts and circumstances of the case.
(b) by not correctly appreciating the facts that the assessee is not in the business of drilling operation in oil field of mineral oil, but actually is in the business of providing plant and machinery on hire only (c) by incorrectly relying on the decision of CIT Vs. HLS India Ltd. The facts of which are not squarely applicable in the instant case of the assessee company.
2. On the facts and in the circumstances of the case, the Ld.CIT(A) has erred in deleting the addition of Rs. 2,40,72,898/- on account of repair and maintenance charges capitalization without appreciating the fact that expenditure incurred was for improving the capacity of assets which bestowed upon the assessee a benefit of enduring nature.”
2. When the matter was called for hearing, ld. counsel for the Revenue defended the action of the Assessing Officer and submitted that ld. CIT(A) proceeded on a mistaken belief of facts and law. It was contended that the assessee has been merely providing services to oil and gas industry for the purposes of exploration and extraction of mineral oil which cannot be equated with plant and machinery used in mineral oil exploration as per entry at Part A-III-(8)(xii) of Appendix-I of the Income Tax Rules, 1962. It was thus submitted that the ld. CIT(A) has wrongly applied the principles laid down by the Hon’ble Jurisdictional High Court in CIT vs. HLS India Ltd. (2011) 335 ITR 292 (Del). It was thus submitted that Assessing Officer has rightly substituted the accelerated depreciation rate from 60% as claimed to a normal depreciation of 15% as eligible to assessee.
The ld. counsel for the assessee, on the other hand, pointed out that the assessee is a public limited company engaged, inter alia, in the business of rendering services to mineral oil concerns for drilling operations on charter hire basis by using own oil rigs for the purpose of exploration and extraction of mineral oil. It was submitted that both the conditions for ownership of asset as well as user for the purposes of business as contemplated under Section 32 has been fully satisfied. It was submitted that, in the instant case, the oil rigs used being plant of specific category are owned by the assessee and used in drilling operations for the purpose of exploration and extraction of mineral oil in the field of mineral oil concerns, and therefore, the case of the assessee is fully covered by the decision of HLS India (supra). It was also pointed out that Co-ordinate Bench of Tribunal in Assessment Year 2008-09 in its own case has applied the principles laid down in HLS India and there being identical facts, there is no reason to depart from the view already taken in this regard. Ld. counsel thus contended that no interference with the order of the ld. CIT(A) is called for.
We have carefully considered the rival submissions. Ld. CIT(A) has adjudicated the issue in favour of the assessee for which relevant operative paragraph is reproduced herein:
“6.1. The appellant is a company engaged in giving plant &. machinery on hire. The plant & machinery is oil rigs owned by the appellant and given on hire to various mineral oil concerns like Reliance Industries Ltd., Oilex Ltd. and ONGC Ltd. 6.2. The appellant claimed depreciation at the rate of 60% on the oil rigs which were given by lease stating that as per depreciation rates, depreciation at the rate of 60% was allowable on the oil rigs which were given on lease to the various oil concerns.
6.3. The AO however stated that depreciation would be allowable at the rate of not 60% but 15%. The AO stated that the appellant was claiming higher rate of depreciation on the basis of clause 8(xii) of part A-III of depreciation table. As per this clause the appellant:
should be a mineral oil concern and
the plant & machinery must be of a specific category.
6.4. The AO did not discuss the issue of the specific plant & machinery. However, the AO discussed the issue whether the appellant was mineral oil concern or not. The AO stated that the business of the appellant was only to give on hire plant & machinery. The appellant was by itself not a mineral oil concern. The AO cited several case laws which defined what was a mineral oii concern. The AO finally concluded that the appellant was not a mineral oil concern. Therefore the appellant did not fulfill one of the basic conditions which entitled it to claim depreciation at 60%.
6.5. The AO also held that the appellant had quoted the decision of the Hon'ble Delhi High Court in the case of CIT vs. HLS India Ltd. But the AO was not following the decision as the SLP had been filed before the Hon'ble Supreme Court.
6.6. The appellant claimed that there was no doubt that the appellant was eligible to claim depreciation on the assets as it owned the assets and the assets were used for the purposes of its business and profession. The AO has also not doubted this contention of the appellant.
6.7. The dispute is at what rate depreciation would be allowed to the appellant. The appellant has quoted the decision of the Hon'ble High Court of Delhi in this respect in the case of CIT vs. HLS India Ltd. which clearly stated that depreciation of 60% would be given to concerns other than mineral oil concerns which are providing oil rigs on lease.
6.8. I shall now consider the issue as to whether depreciation would be allowed at 60% or 15%.
6.9 As per section 32:
32.(1) In respect of depreciation of-- (ii) know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—] 6.10. Therefore, the assets or the oil rigs are wholly owned by the appellant and are used for the purpose of the business of the appellant which is to give on lease the assets. The fact that the appellant is entitled for depreciation on the oil rigs is also not disputed by the AO.
6.11. The appellant had claimed depreciation on the oil rigs at 60% as per 8(xii) of the depreciation table. This specified that in the case of mineral oil concerns in respect of (a) plant used in field operations distribution. Returnable packages (b) plant used in filed operations (below ground) but not including kerbside pumps including underground tanks and fittings used in field operations (distribution) by mineral oil concerns depreciation would be 60%.
6.12. As per the definition of rigs:
"A large structure with equipment for removing oil from under the ground, especially from under the sea.
A structure and associated machinery used in drilling for oil or gas. It is usually in the form of a tower. Consists of an offshore platform floating or fixed to the sea bed from which many oil wells can be bored radically.”
6.13. Thus there is no doubt that the oil rigs are plants specified in 8(xii). However, the AO disallowed the appellant the benefit of higher depreciation stating that it was not a concern and was only giving the oil rigs on lease.
6.14 I have been shown the decision of the Hon'ble Delhi High Court in the case of CIT vs. HLS India Ltd. by the appellant. The observations of the Hon'ble court are as under:
"43. Now the question before us in this regard is as to whether the assessee can be termed as a —mineral oil concern so as to put it in a position from where it can be entitled to claim depreciation & 100% under the Item III (3) (ix) (b) in Appendix-I to the Income Tax Rules, 1962; and further, even if the assessee is not a mineral oil concern, can it be given benefit of the aforesaid provision on the basis of nature of operation of its high-tech wireline logging and perforation equipments.
At this point, it would be interesting to note that while the appeal against the order of the ITA T dated 10.01.2002, whereby it has upheld the action of the CIT (A) to reverse the fresh assessment order passed by the AO in pursuance of the direction of the ITA T dated 10.10.1998 to do so is filed in this court in the year 2002 [listed before us as ITA 208/2002], however, the appeal against the original order of the ITAT dated 10.10.1998 whereby it had reverted the matter back to the table of the AO was filed by the revenue in the year 2005 only [listed before us as ITA 194/2005]. It is not hard to understand that filing of the appeal, though at a delayed stage of the case, against the original order of the ITA T is an act of prudence on the part of the Department. The reason being is that had not there been this appeal against the order dated 10.10.98 as passed by the ITAT, it would have been taken by assessee as acceptance of the approach, as adopted by the ITAT, on the part of the revenue that if the public Oil giants are able to give a technical certificate to the assessee regarding the similarity of the equipments and the nature of operations then the matter would become a subject of technical interpretation of the real world operations of the equipments in question rather a question which is to be determined by way of giving judicial interpretation to the statutory provisions and in case if the certification thing comes in favour of the assessee then the entire genesis of the arguments as build by the revenue in order to push forward its case, would start crumbling on its feet.
This takes us to the order of the ITAT dated 10.10.98 to revert the matter back to the table of the AO to re-examine the matter after verification as required under the said order. The arguments, which Ms. Bansal, the learned senior counsel for revenue has advanced to destroy the case of the assessee have been, more or less, similar through-out the prolong history of the instant dispute. These arguments have been evolving and revolving around the department's position that the depreciation under Item-III(3), (IX) (a) and (b), in the schedule of rates of depreciation in Appendix I to the IT Rules, 1962 is allowable to the mineral oil concerns only as the words 'plant used in field operation (belowground)' is required to qualify the term — mineral oil concerns as found in the aforesaid provision and therefore the assessee, having not being engaged in drilling or oil production, cannot be given a status of a mineral oil concern. The learned senior counsel Ms. Bansal has vehemently contended before us that the business of the assessee is that of leasing and the equipments so leased by the assessee, only supplies the data to OIL and ON6C which are mineral oil concern. It is also submitted by her that the nature of the assessee's equipments is different from those used by state run mineral oil concerns as the assessee's equipments are mobile in nature while the equipments used by ONGC and OIL are permanently affixed down the hole. Hence, it is not entitled to 100 per cent depreciation. As opposed to this Mr. Vohra, though admitting that assessee is not a mineral oil concern, has submitted that even if it is not producing any oil nor has been engaged in the 208/2002 & Ors. Connected Matters Page 47 of 52 activity of oil drilling, even then it is lawfully entitled to depreciation allowance in respect of the plant and equipment owned and used by it in carrying out wire-line logging operations below the ground in the oil wells of mineral oil concerns at the rate of 100 per cent of the actual cost/written down value thereof as prescribed in item III(3)(ix)(b) of the table of rates of depreciation in Appendix-I to the IT Rules, 1962.
After hearing learned counsels for the parties at length on this issue, we are of the opinion that the Revenue's stand on this issue lacks substance. Sec. 32(1) of the Act provides for a deduction in the computation of business income, on account of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession. This provision reads as under:
Depreciation.
(1)[In respect of depreciation of— (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—] [(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed ;] (ii) [in the case of any block of assets, such percentage on the written down value may be prescribed:]
Rule 5 of the IT Rules, 1962 provides that the depreciation allowable under s. 32(l)(ii) of the Act in respect of any block of assets shall be calculated at the percentages specified in the II column of the table of rates of depreciation in Appendix I to the Rules, on the written down value of such block of assets as are used for the purpose of the business or profession of the assessee at any time during the previous year. The concerned entry in the Appendix I is Part 1, III (ix). This entry reads as under:
(ix) Mineral oil concerns: a. Plant used in field operations (above ground) distribution returnable packages. b. Plant used in field operations (below ground), but not including kerbside pumps including under-ground tanks and fittings used in field operations (distribution) by mineral oil concerns.
Column 2 corresponding to the above entry provides depreciation & 100% for the items described in the said entry.
The table of rates of depreciation in Appendix I to the Rules prescribes a single rate of depreciation for the assets falling within a particular block of assets. It does not prescribe deferential rates of depreciation with reference to the ownership of the asset It would be pertinent to note here that the special rate of depreciation for the main item ''III- Machinery and Plant" have been prescribed with reference to the nature of the particular asset and the character of its user including the types of business and the environmental conditions in which it is used. When the OIL has certified in this regard, that the wireline logging d perforation equipments/tools which are used by the assessee are similar to those equipments/ tools owned and used by mineral oil concerns and when there is no shadow is casted over the fact that the similar assets would qualify for a depreciation & 100% under the said entry if these are owned by a mineral oil concern like OIL, we do not find any substance in the department's approach to deny the same to the assessee on the ground that the owner of the similar assets, we are concerned with, will not be so entitled. Mentioning of the fact, in the letter of OIL dated 13 Nov 1998 that these equipments/tools are meant only for use in underground oil field operations for wireline logging d perforation leaves no iota of doubt that the nature of assessee"s equipments and its user is similar to those equipments which are owned by the mineral oil concerns and eligible for depreciation under the aforesaid entry. The artificial distinction regarding the mobile nature of the assessee's equipments, which has been created and relied upon by the department, is of no use because even if such a distinction exists it would neither alter the nature of the assessee's equipments nor the character of its user. We, therefore, are of the considered opinion that the assessee's wireline logging and perforation equipments are eligible for a higher depreciation @ 100% under cl (ii) of s. 32(1) of the Act, r/w item III(3)(ix)(b) of the schedule of rates of depreciation in Appendix I to the Income Tax Rules,
Having decided the issue in the aforesaid terms, we may take liberty to look into this issue from a different point of view. Depreciation allowance is a kind of tax benefit which is given to the business concerns for promotion of business activities in any particular field of business. In the instant case depreciation is allowable to mineral oil concerns @ 100% on the equipments used below the earth surface. If the same depreciation is not allowed to other business concerns on the ground that the owner of these equipments is not a mineral oil concern but it is just providing an assistance or leasing these equipments to a mineral oil concern then definitely this pother concern' will charge more for these services and consequently the mineral oil concerns will be commercially forced not to outsource wireline logging activities to other companies but to / :do it themselves. However, practically this is not a viable option because oil companies are facing immense pressure to increase the output to meet the energy needs of our growing economy and this has resulted in extra work load.
From the above discussion, both the legal issues, as formulated by us in para (7) above are found to be in favour of the assessee. Accordingly, all substantial question of law involved in the instant batch of appeals are decided in the favour of the assessee and against the revenue. Consequently, all the appeals are dismissed.
6.15 In view of the above it is clear that the appellant would be entitled to claim depreciation at the rate of 60%. The addition of Rs.11,85,19,801/- is thus deleted. The ground of appeal is ruled in favour of the appellant."
We straightaway notice that the Co-ordinate Bench of ITAT in order dated 3rd April, 2019 has agreed with the plea of the assessee for entitlement of accelerated rate of depreciation @ 60% on oil rigs which has been used for drilling operations in the oil field of mineral oil concerns in the following terms.
“19. We have heard both the parties and perused the material available on record. In the instant case of the assessee, both the conditions are duly satisfied since the oil rigs being plant of ‘specific category’ are owned by the assessee and further it is used in drilling operations for the purpose of exploration 8s extraction of mineral oil in the field of mineral oil concerns. The assessee claimed depreciation @ 60% on Oil rigs which has been used for drilling operations in the oil field of mineral oil concerns as per entry at Part A-III-(8) (xii) of New Appendix I, applicable from Assessment Year 2006-07 onwards. The same is evident from Annexure B to the Tax Audit Report for relevant assessment year. The Hon'ble jurisdictional High Court in case of CIT vs. HLS India Ltd. (2011) 335 ITR 292 held that:
"Depreciation allowance is a kind of tax benefit which is given to the business concerns for promotion of business activities in any particular field of business. In the instant case depreciation is allowable to mineral oil concerns @ 100% on the equipments used below the earth surface. If the same depreciation is not allowed to other business concerns on the ground that tire owner of these equipments is not a mineral oil concern but it is just providing an assistance or leasing these equipments to a mineral oil concern then definitely this "other concern” will charge more for these services and consequently the mineral oil concerns will be commercially forced not to outsource wireline logging activities to other companies but to do it themselves".
Further, the Special Leave Petition filed by revenue against the decision of the Hon’ble Delhi High Court in case of HLS India Ltd (Supra) has been dismissed by the Hon’ble Apex Court [SLP No. 2723/20121 and hence the decision has attained finality. The issue in present case is also squarely covered. Hence appeal of the revenue is dismissed.”
In view of the judgment of Hon’ble Delhi High Court in the case of HLS India (supra) in conjunction with the decision of the Co-ordinate Bench which has endorsed the conclusion drawn by the Ld. CIT(A), we see no reason to interfere.
Ground No.1 of the Revenue’s appeal is dismissed.
8. Ground No.2 concerns disallowance of repair and maintenance charges amounting to Rs.2,40,72,898/-. The relevant facts concerning the issue are that the assessee inter alia claimed a sum of Rs.2,77,85,775/- under the head Repair and Maintenance (Equipment) charges. The assessee claimed the aforesaid expenditure towards repair and maintenance as revenue expenditure. In the course of scrutiny proceedings, the Assessing Officer made disallowance (net of depreciation) on the ground that the assessee has given the plant and machinery on hire, and therefore, such expenditure are not warranted and devoid of commercial expediency. It was further observed that the items of expenditure are capital in nature and the amount incurred is quite substantial and gives enduring advantage. On this broad parameters, the disallowance of Rs.2,40,72,898/- was carried out holding the same to be capital expenditure.
In the first appeal, the CIT(A) examined the contract with Jubilant Oil & Gas Pvt. Ltd. and ONGC and has deleted the disallowance on the ground that the expenditure is of recurring nature and no assets of enduring nature came into existence. The relevant operative portion of the CIT(A)’s order in this regard are reproduced hereunder:
8. Ground No. 4 is in respect of disallowance of Rs.2,40,72,898/- on account of repairs & maintenance. 8.1 The AO has treated Rs.2,40,72,898/- out of Rs.2,77,85,775/- as capital expenditure. However, the AO has not given details of which items were considered to be capital in nature.
8.2. The appellant stated that the expenditure was incurred for buying MS Plates Spares, Steel wires, overhauling charges and labour charges.
I shall now discuss whether the expenses are of capital or revenue nature.
8.3. The main issue here is that by incurring the expenditure the appellant is not able to gain a benefit of an enduring nature. The expenditure would not bring an advantage for the enduring benefit of trade. The expenditure is also of a recurring nature. The expenditure incurred is not of a capital nature but it is revenue in nature.
8.5 The observation of the Hon. ITAT, Delhi in the case of ITO, Ward-33(2) vs. M/s. Gokal Chand Hari Chand are as under:
“7. We have heard the rival contentions in light of the material produced and precedent relied upon. We find that Ld. Commissioner of Income Tax (Appeals) has given a finding that the said expenditure 7 is a revenue and not a capital in nature. Such expenditure has been incurred by the assessee in the past also and also allowed. The examples in this regard are as under:- Asstt. Year Amount of expenses (in Rs.) Sales 2006-07 24,86,057.00 2,90,99,633.00 2007-08 42,41,219.00 3,98,51,062.00 2008-09 44,76,290.00 4,06,23,623.00 7.1 It was further found that incurring of the expenditure did not result any increase in the earning of the assessee. The item were purely on repair and maintenance in nature and were like brackets, bearing, belts, chain, loader, electrical motor rewinding, face plates, gas cutter pipe, nuts and bolts, washers, champs, PVC pipes, pulley, MS plates, wire mesh, welding rods, wooden gatka, ruti, shafts, lever pin etc. A perusal of the maintenance expenditure pertaining to the earlier years show that a full benefit was consumed in that period only because such expenditure was incurred in the subsequent year also and claimed by the assessee year after year. By incurring such expenditure assessee did not gain new advantage which increased the sales during the year. Ld. Commissioner of Income Tax (Appeals) also gave a finding that large number of parts get worn out and are replaced by new parts frequently within a year. In other words, Ld. Commissioner of Income Tax (Appeals) gave a finding that no single part that the assessee has purchased lasted for one year or more. It was further seen that no part of the machinery can be independently used and constituted separate machine or which constitute substitution of an old asset by a new asset to categorize it as capital expenditure. In the background of the aforesaid discussion ITA NO. 5031/Del/2011 8 and precedent, we find that Ld. Commissioner of Income Tax (Appeals) has passed a reasonable order, which does not need any interference on our part, accordingly, we uphold the same.
In the result, the appeal filed by the Revenue stands dismissed." 8.6. In my view there is no indication that the amount was spent on items which were of capital nature. No assets of enduring nature were created. The addition of Rs.2,40,72,898/- is deleted. The ground of appeal is ruled in favour of the appellant.
10. Aggrieved, the Revenue preferred appeal before the Tribunal.
Ld. DR for the Revenue essentially reiterated the observations of the Assessing Officer and placed reliance thereupon.
Ld. counsel for the assessee, on the other hand, submitted that during the financial year relevant to assessment year under consideration, the assessee debited an amount of Rs.3.65 crore towards ‘repair and maintenance’ of machinery out of the sum of Rs.2.77 crore were incurred towards repair and maintenance (equipment) given on hire by the assessee. These expenses were incurred towards procurement of M.S. Plates, channels, angles, repair kit, spares and repair of drill pipe testing, repair of fuel injection pumps, repairing bunk house, etc. as reflected in page 76-82 of paper book. It was submitted that the assessee was engaged in the business of providing mobile drilling rigs, equipment and other related services to oil and gas industry. Details of contracts in operation, as placed in the paper book, would show that the assessee was under contractual obligation to provide at its own cost, any items of equipment, spare parts, supplies and materials, etc. as required for normal operations. In the process, the assessee has generated revenue of Rs.34.80 crore from such operations. The expenses incurred bore nexus of first degree to perform the contract in ordinary course. It was thus contended that the expenditure incurred towards repairs and maintenance in the course of carrying out the contractual terms are ordinary business expenditure has rightly held by the CIT(A). Such expenditure neither improves capacity of asset nor provides enduring benefit of revenue in nature. It was emphasized that no separate payments was either collected or any sort of reimbursement was made to the assessee by the contractors. A reference was made to several judicial precedents to buttress its plea.
We have carefully considered the rival submissions. The assessee-company is engaged in providing plants and machinery, mobile drilling rigs, equipment and other related services to oil and gas industry. The assessee during the year has entered into contract with Jubilant Oil and Gas Pvt. Ltd. On perusal of the terms of the contract, it was observed that while the payment terms are clearly specified and there does not appear to be any reimbursement of expenses relating to repair and maintenance specified therein. There is no dispute that expenses have been actually incurred towards repair and maintenance. The only dispute is whether such expenditure are eligible for deduction or being capital in nature. At this juncture, we take note of the plea of the assessee that there is no reimbursement of expenses and such expenses are integral part of the execution of the contract as demonstrated. Hence, the expenditure incurred requires to be set off against the revenue income arising from contract as per rudimentary principles of accountancy. The assessee has taken a plea that no new asset is created or no benefit of enduring nature has been derived. We do not see any rebuttal on this score from the revenue. The Assessing Officer has merely proceeded on a hypothesis of such expenditure being capital in nature without showing any justifiable grounds for doing so. The Assessing Officer has capitalized such expenditure without showing any reasonable grounds. On the contrary, we find merit in the conclusion drawn by the CIT(A) holding the same to be revenue expenditure on the face of such tell-tale facts. In the absence of any merits in the plea of the revenue, we decline to interfere with the order of the CIT(A).
In the result, the ground no.2 of the Revenue’s Appeal is dismissed.
As a result, the appeal of the Revenue is dismissed.
Order pronounced in the open Court on 08/03/2022.