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2011 (5) TMI 322 - HC - Income TaxInvestment allowance u/s 32A / Deduction u/s 80IA - Whether the assessee can be said to be an industrial undertaking‖ engaged in the business of manufacturing or production of an article or a things for the purpose of section 32A and section 80-IA/80-IB of the Income Tax Act, 1961 - whether the production of log by the assessee, while providing wireline logging services to its clients, amounts to manufacturing or production of an article or thing so as to place the assessee at per an industrial undertaking wherefrom it can be entitled to claim various tax incentives as available to these entities under the Act. - Held that - the analogy has some substance - Decided in favor of assessee. Regarding 100% depreciation - Held that - 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. - 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, 1962.
Issues Involved:
1. Whether the assessee qualifies as an "industrial undertaking" engaged in the "manufacturing or production of an article or a thing" for the purposes of sections 32A and 80-IA/80-IB of the Income Tax Act, 1961. 2. Whether the assessee is entitled to a higher depreciation allowance at 100% under Rule 5, Appendix I, Part 1, III (ix) of the Income Tax Rules, 1962. Detailed Analysis: Issue 1: Qualification as an Industrial Undertaking Background: The assessee, an oilfield services company, claimed investment allowance under section 32A and deductions under sections 80-IA and 80-IB of the Income Tax Act. The Assessing Officer (AO) denied these claims on the grounds that the assessee was not an industrial undertaking engaged in manufacturing or producing an article or thing. Legal Framework: - Section 32A provides investment allowance to new industrial undertakings engaged in manufacturing or production. - Sections 80-IA and 80-IB allow deductions on profits derived from industrial undertakings engaged in infrastructure development. Tribunal and CIT(A) Decisions: - The CIT(A) and ITAT had previously held that the assessee qualifies as an industrial undertaking engaged in manufacturing or production. - ITAT had restored the matter to the AO to verify compliance with other conditions under sections 80-IA and 80-IB. Court's Analysis: - The court analyzed the process of wireline logging, which involves sophisticated measurements and data processing to produce logs that are used for oil exploration. - The court referenced several judicial precedents, including CIT vs. IBM World Trade Corporation and CIT vs. Datacons (P) Ltd., which supported the view that data processing and similar activities amount to manufacturing or production. - The court concluded that the process of generating logs from wireline logging involves a transformation of raw data into a distinct, usable form, thus qualifying as manufacturing or production. Conclusion: The court held that the assessee qualifies as an industrial undertaking engaged in manufacturing or production for the purposes of sections 32A and 80-IA/80-IB. Issue 2: Entitlement to Higher Depreciation Allowance Background: The assessee claimed 100% depreciation on equipment used below the earth surface, arguing that these are similar to those used by mineral oil concerns. Legal Framework: - Rule 5, Appendix I, Part 1, III (ix) of the Income Tax Rules provides 100% depreciation for plant and machinery used in field operations (below ground) by mineral oil concerns. Tribunal and CIT(A) Decisions: - The CIT(A) allowed the claim, stating that the nature of the equipment's use, not the ownership, determines eligibility for 100% depreciation. - ITAT upheld this view but directed the AO to verify the similarity of the assessee's equipment to those used by mineral oil concerns. Court's Analysis: - The court noted that Oil India Limited (OIL) had certified the similarity of the assessee's equipment to those used by OIL. - The court rejected the AO's argument that the mobility of the assessee's equipment disqualified it from 100% depreciation. - The court emphasized that the purpose of depreciation is to account for the wear and tear of assets used in business, regardless of the owner's primary business activity. Conclusion: The court held that the assessee is entitled to 100% depreciation on its equipment under Rule 5, Appendix I, Part 1, III (ix) of the Income Tax Rules, 1962. Final Judgment: Both legal issues were decided in favor of the assessee, and all the appeals by the revenue were dismissed. The court affirmed that the assessee qualifies as an industrial undertaking engaged in manufacturing or production and is entitled to 100% depreciation on its equipment.
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