DCIT-14(1)(1), MUMBAI vs. MAHANAGAR GAS LTD, MUMBAI

As the issues are common in both the appeals, we hereby take ITA No.

Brief facts of the case are that the assessee is a limited company incorporated under the Companies Act, 1956 and is engaged in the business of manufacturing and distribution of compressed natural gas (CNG) for vehicles and distribution of Piped Natural Gas (PNG) for domestic and commercial industrial undertakings. The assessee had filed its return of income on 27.10.2017, declaring total income at Rs.535,66,63,160/- and book profit at Rs.600,66,01,594/- and subsequently filed its revised return of income dated 31.03.2018, declaring total income at Rs.515,10,44,240/- and book profit at Rs.600,66,01,594/-. The assessee’s case was selected for scrutiny under CASS and notices u/s. 143(2) and 142(1) of the Act were duly issued and served upon the assessee.

The learned Assessing Officer ('ld. A.O.' for short) observed that the assessee had claimed an amount of Rs.10,79,47,021/- u/s. 32AC of the Act and Rs.15,02,94,193/- as additional depreciation in its return of income, which was rejected by the ld. A.O. vide assessment order dated 22.12.2019 passed u/s. 143(3) of the Act, where the ld. A.O.

Aggrieved the assessee was in appeal before the first appellate authority who vide order dated 12.12.2023 allowed the appeal filed by the assessee by relying on the decision of Hon'ble High Court of Allahabad in the case of Central UP Gas Ltd. vs. of 2014).

The Revenue is in appeal before us, challenging the order of the ld. CIT(A) on the above mentioned grounds.

Ground nos. 1 & 2 of the Revenue’s appeal pertain to the disallowance u/s. 32AC of the Act on the deduction claimed by the assessee and ground no. 3 is on the additional depreciation claimed u/s. 32(1)(ii)(a) of the Act.

The learned Departmental Representative (ld. DR for short) for the Revenue contended that the activities of compressing the natural gas into compressed natural gas would not qualify to be “manufacture” or “production of any article or thing” which is the mandate of section 32AC(1A) of the Act. The ld. DR relied on the definition of the term ‘manufacture’ as per section 2(29BA) of the Act, where the assessee’s business activity will not come under the purview of the said provision. The ld. DR relied on the assessment order.

The learned Authorised Representative (ld. AR for short) on the other hand, controverted the said fact and stated that the assessee’s business activity qualifies for the claim made u/s. 32AC(1A) of the Act and further stated that the said issue stands covered Central UP Gas Ltd. (supra). The ld. AR also relied on the decision of the co-ordinate bench in the case of Addl. CIT vs. Indraprastha Gas Ltd. (in & 6715/Mum/2018 vide order dated 19.03.2021) which had placed reliance on the decision of Hon'ble High Court of Allahabad in the case of Central UP Gas Ltd. (supra). The ld.

We have heard the rival submissions and perused the materials available on record. The moot question to be determined is whether the assessee is entitled to claim deduction u/s. 32AC of the Act and additional deprecation u/s. 32(1)(iia) of the Act. The Revenue’s contention is that the assessee is not entitled to the claim u/s. 32AC(1A) of the Act for the reason that it is not engaged in the manufacturing and the production activities for it to be eligible u/s. 32AC(1A) of the Act and that the business activity of the assessee would not qualify to be a ‘manufacturing process’ as per the definition of the term ‘manufacture’ defined in section 2(29BA) of the Act. For this purpose, the relevant extract of the said provision is cited herein under for ease of reference:

In this Act, unless the context otherwise requires,— (29BA) "manufacture"7, with its grammatical variations, means a change in a non-living physical object or article or thing,— (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure; 12. As per the above definition, any activity which changes a physical object/article/thing into a new and distinct object/article/thing with a different nomenclature, character and utility or where a new and distinct object/article/thing is would be termed as manufacture and the process would be ‘manufacturing or production of a thing’. Further section 32AC(1A) of the Act states that wherein an assessee company which is engaged in the business of manufacture or production of article/thing, acquires and install new asset for its business purpose is entitled to claim deduction of a sum equivalent to 15% of the actual cost of such new asset. For the purpose of claiming deduction u/s. 32AC(1A) of the Act, the definition of the term ‘manufacture’ defined in section 2(29BA) of the Act is to be considered inter alia with the other conditions stipulated in the said provision. It is trite to reproduce section 32AC(1A) of the Act herein under:

The assessee has also contended that Central Excise Duty has been paid for the said manufacturing activity and relied on the tax audit report. The assessee has also placed reliance on the Circular of CBEC dated 16.10.2008 and also the provisions of Central Excise Act, 1944 along with Central Excise Tariff Act, 1985 to substantiate the fact that the assessee is engaged in the business of manufacture and production of compressed natural gas and the said Circular is cited herein under for ease of ready reference:

It is, therefore, requested that the above provisions/ instructions may be brought to the notice of the CNG manufacturers as well as field formations. These issues may also be discussed with the representatives of CNG manufacturers. Wherever, additional measuring devises are required to be fitted in terms of para 4 above, CNG manufacturers may be given a lead time of 3 months to install such devises.

The above Circular has categorically mentioned the compressed natural gas to be a manufacturing process and the person engaged in such activities to be ‘manufacturers’. It is also pertinent to point out that the ld. A.O. has held that since the constituent element of natural gas and the compressed natural gas is methane, there is no new distinct object coming into existence and the process of conversion is merely a change in the physical state which cannot be termed as a manufacturing activity and is merely for the purpose of accessible transportation/storage/combustion.

From the above, it is observed that the Hon'ble High Court has held the compressed natural gas to be a commodity with different nomenclature and distinct character and utility which qualifies the test as per section 2(29BA) of the Act and only when natural gas is processed to be compressed natural gas, it categorises to be of commercial value which is used as fuel for automobiles. We would also place our reliance on the decision of the Hon’ble Apex Court in the case of CIT vs. M/s.

We draw our support qua the said decision for the present case in hand, while dealing with the issue whether the process of compressing the natural gas to CNG would amount to ‘manufacture or production’ where the test to determine the same is to consider whether the process involves change in its nature and would be a commodity which would be different and distinct than the original commodity in terms of its commercial aspects. We do not have any iota of doubt, that the end product namely the CNG is different from the natural gas which per se cannot be consumed by the Automobile Industry without such conversion. By relying on the propositions laid down by the Hon’ble Apex Court in the above mentioned case and in various other decisions, we are in agreement with the order of the ld. CIT(A) in holding that the assessee was eligible to claim deduction u/s. 32AC(1A) of the Act dismissed.

In the result, both the appeals filed by the Revenue are dismissed.