2022 (3) TMI 1333 - AT - Income Tax

Depreciation claimed by the assessee at a higher rate - 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 - AO substituted the accelerated depreciation rate from 60% as claimed to a normal depreciation of 15% as eligible to assessee - HELD THAT - As relying on decision of HLS India 2011 (5) TMI 322 - DELHI HIGH COURT and Co-ordinate Bench of ITAT 2011 (5) TMI 322 - DELHI HIGH COURT 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 concernsCo-ordinate Bench of ITAT in ITA No. 5710/Del/2014 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. Nature of expenditure - Disallowance of repair and maintenance charges - assessee claimed the aforesaid expenditure towards repair and maintenance as revenue expenditure - HELD THAT - 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). - Decided in favour of assessee.

Summary

Issues Involved:
1. Depreciation Rate on Oil Rigs
2. Capitalization of Repair and Maintenance Charges

Issue 1: Depreciation Rate on Oil Rigs

The Revenue contested the deletion of a disallowance amounting to ?11,85,19,801/- made by the Assessing Officer (AO) regarding the depreciation claimed by the assessee at a higher rate. The AO had substituted the accelerated depreciation rate of 60% claimed by the assessee to a normal depreciation rate of 15%, arguing that the assessee was not a mineral oil concern but merely provided plant and machinery on hire. The CIT(A) had ruled in favor of the assessee, allowing the 60% depreciation rate based on the decision in CIT vs. HLS India Ltd.

The Tribunal reviewed the submissions and noted that the Co-ordinate Bench of ITAT had previously agreed with the assessee's entitlement to the accelerated depreciation rate of 60% on oil rigs used for drilling operations in the oil field of mineral oil concerns. The Tribunal upheld the CIT(A)'s decision, referencing the Delhi High Court's judgment in HLS India Ltd., which supported the assessee's claim for higher depreciation. Consequently, the Tribunal dismissed the Revenue's appeal on this ground.

Issue 2: Capitalization of Repair and Maintenance Charges

The Revenue challenged the deletion of an addition of ?2,40,72,898/- on account of repair and maintenance charges, which the AO had capitalized, arguing that the expenditure was substantial and provided enduring benefits. The CIT(A) had deleted the disallowance, concluding that the expenditure was of a recurring nature and did not create any assets of enduring nature.

The Tribunal examined the details and submissions, noting that the assessee had incurred these expenses as part of its contractual obligations and that the expenditure was integral to performing the contract. The Tribunal found no evidence from the Revenue to rebut the assessee's claim that no new asset was created or that any enduring benefit was derived. The AO's capitalization of the expenditure was deemed unjustified. Thus, the Tribunal upheld the CIT(A)'s decision and dismissed the Revenue's appeal on this ground as well.

Conclusion:

The Tribunal dismissed the Revenue's appeal in its entirety, affirming the CIT(A)'s decisions on both issues. The order was pronounced in the open Court on 08/03/2022.