High Court allows depreciation on drilling equipment & investment allowance for borewell partnership firm

The High Court affirmed the Income-tax Appellate Tribunal's decision allowing a partnership firm engaged in drilling borewells to claim 30% depreciation on rig and compressor used for drilling, considering the rig as earth-moving machinery under the Depreciation Schedule. Additionally, the High Court held that the firm was eligible for the investment allowance deduction under section 32A of the Income-tax Act, as drilling operations resulting in the production of underground water constituted manufacturing or production, meeting the requirements of the provision.

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Issues involved:
1. Depreciation allowance on rig and compressor used in boring of wells under the Income-tax Act, 1961.
2. Eligibility for investment allowance under section 32A of the Income-tax Act.

Depreciation Allowance Issue:
The partnership firm, engaged in drilling borewells, claimed 30% depreciation on rig and compressor used for drilling, citing entry D(7) of the Depreciation Schedule. The Income-tax Officer disagreed, stating that the depreciation rate of 30% applies only to rigs used by mineral oil concerns. The Commissioner of Income-tax upheld this decision. However, the Income-tax Appellate Tribunal allowed the 30% depreciation, considering the rig as earth-moving machinery under item D(4) of the Depreciation Schedule. The High Court affirmed the Tribunal's decision, emphasizing that the rig used for drilling fell under item D(4) based on technical information and industry practices.

Investment Allowance Issue:
Regarding the investment allowance under section 32A, the Revenue argued that the firm was not an industrial undertaking involved in manufacturing or producing articles or things, thus ineligible for the deduction. However, the Tribunal ruled in favor of the firm, stating that drilling operations resulting in the production of underground water constituted manufacturing or production under section 32A. The High Court concurred, holding that the firm met the requirements of section 32A(2)(b)(iii) and was entitled to the investment allowance deduction.

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