2016 (7) TMI 1328 - HC - Income Tax

Mineral oil wells not buildings for tax depreciation

Niko Resources Ltd. Versus Assistant Commissioner of Income-Tax

The High Court held that mineral oil wells should not be treated as buildings for depreciation under Section 32 of the Income-tax Act. The court restored ... Treatment to mineral oil wells as buildings for the purpose of applying rate of depreciation under section 32 - Held that:- In light of the decision of the hon'ble Supreme Court in the case of Scientific Engineering House P. Ltd. v. CIT (1985 (11) TMI 1 - SUPREME Court), we are of the view that the reasoning which was adopted by the Tribunal holding that the well would not form a part of the plant and machinery for drilling of oil is not correct. In that view of the matter, the view taken by the Commissioner of Income-tax (Appeals) is restored and the findings of the Tribunal are reversed. Issues Involved:1. Whether the Income-tax Appellate Tribunal was right in treating mineral oil wells as buildings for the purpose of applying the rate of depreciation under Section 32 of the Income-tax Act.Issue-wise Detailed Analysis:1. Treatment of Mineral Oil Wells as Buildings for Depreciation:The appellant-assessee challenged the judgment and order of the Income-tax Appellate Tribunal, which reversed the findings of the Commissioner of Income-tax (Appeals) and confirmed the assessment order of the Assessing Officer. The main issue was whether mineral oil wells should be treated as buildings for the purpose of applying the rate of depreciation under Section 32 of the Income-tax Act.Arguments by the Appellant:- The appellant argued that the Tribunal erred in restricting the alternate claim of depreciation made by the assessee without prejudice to its principal claim under Section 42 of the Act.- The Tribunal restricted the claim of depreciation to 10% by treating the oil wells as buildings, whereas the Commissioner of Income-tax (Appeals) had allowed 100% depreciation.- The appellant contended that mineral oil wells could not be equated with buildings and that applying the rate of depreciation for buildings to mineral oil wells was illegal and unsustainable.Cited Case Laws by the Appellant:- Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86 (SC): The Supreme Court held that the term 'plant' includes any apparatus used by a businessman for carrying on his business, provided it has some degree of durability.- CIT v. Dr. B. Venkata Rao [2000] 243 ITR 81 (SC): The court applied the functional test to determine whether a building used as a nursing home could be considered a plant.- Asst. CIT v. Victory Aqua Farm Ltd. [2015] 379 ITR 335 (SC): The court held that specially designed ponds for rearing prawns should be treated as tools of the business and eligible for depreciation.- CIT v. Oil India Ltd. [1992] 198 ITR 701 (Cal): The Tribunal held that oil wells constituted a plant for the purpose of allowance of development rebate.Arguments by the Respondent:- The respondent's counsel referred to the assessment order, which stated that no machine was installed below ground in the case of a gas well and that the gas well was equipped only with chokes and valves to control the flow.- The Tribunal's findings were that the well was not a plant but a setting through which the assessee extracted oil and gases, thus qualifying as a building for depreciation purposes.Cited Case Laws by the Respondent:- R. C. Chemical Industries v. CIT [1982] 134 ITR 330 (Delhi): The Delhi High Court held that a building could not qualify as a plant for the purpose of development rebate.- Nowrangroy Metals P. Ltd. v. Joint CIT (Assessment) [2003] 262 ITR 231 (Gauhati): The Gauhati High Court held that the building in question was a plant and thus entitled to a higher rate of depreciation.Court's Analysis and Judgment:- The court referred to the decision of the Supreme Court in Scientific Engineering House P. Ltd. v. CIT, which provided a broad definition of 'plant' and emphasized the functional test.- The court concluded that the Tribunal's reasoning that the well would not form part of the plant and machinery for drilling oil was incorrect.- The view taken by the Commissioner of Income-tax (Appeals) was restored, and the findings of the Tribunal were reversed.- The issue was answered in favor of the assessee, and the appeal was disposed of accordingly.In summary, the High Court held that mineral oil wells should not be treated as buildings for the purpose of depreciation under Section 32 of the Income-tax Act, thereby restoring the decision of the Commissioner of Income-tax (Appeals) and reversing the Tribunal's findings.