2022 (9) TMI 1488 - HC - Income Tax

Depreciation on oil wells - @10% OR 80% - what constitutes and what is included in Plant for the purposes of Section 32 ? - Tribunal confirmed CIT (A) order to hold that oil well was Plant Machinery as eligible for depreciation as Plant Machinery Depreciation @80% as claimed by the assessee - HELD THAT - All such things and tools which become plant if they are part and parcel of the plant functioning would aid an assessee s business activity. In Niko Resources 2016 (7) TMI 1328 - GUJARAT HIGH COURT it was accordingly held reversing the decision of the Tribunal that the Tribunal was not right in law in treating mineral oil wells as Buildings for the purpose of applying rate of depreciation under Section 32 of the Act. It was held that mineral oil wells constitute Plant for the purpose of Section 32 of the Act. ITAT did not erred in law and on facts in allowing the depreciation on oil wells treating the same as Plant and Machinery - No substantial question of law.

Summary

Issues:
1. Whether depreciation on oil wells can be treated as Plant and Machinery for income tax purposes.

Analysis:
The case involved a Tax Appeal under Section 260A of the Income Tax Act, 1961 against a judgment of the Income Tax Appellate Tribunal regarding the allowance of depreciation on oil wells. The respondent company, engaged in crude oil exploration, claimed depreciation under Section 42 of the Act, arguing that the oil wells should be considered as part of Plant & Machinery. The assessing officer, however, disallowed the claim, stating that oil wells were not considered as Plant. The Commissioner of Income Tax (Appeals) later overturned this decision, considering oil wells as an industrial undertaking. The Tribunal further upheld this view, allowing depreciation at 80% as claimed by the assessee.

The key issue revolved around the definition of "Plant" for depreciation purposes under Section 32 of the Act. The Court referred to the Niko Resources case, where it was established that assets like buildings, machinery, plant, and furniture owned and used for business purposes are eligible for depreciation. The definition of "Plant" under section 43(3) was emphasized, stating that the article must have durability and function as a tool in the assessee's business activity to qualify as Plant. The Court clarified that items aiding in an assessee's business activity could be considered as part of Plant.

In conclusion, the Court found that oil wells constitute "Plant" for depreciation purposes under Section 32 of the Act, as established in the Niko Resources case. As no substantial question of law arose from the Tribunal's judgment, the Tax Appeal was deemed meritless and dismissed accordingly.