TMI Blog1991 (4) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee for depreciation at 30% on the rig and compressor. On appeal by the assessee, the Appellate Assistant Commissioner, following the decision of the Income-tax Appellate Tribunal in the case of the assessee for the assessment year 1979-80 in I. T. A. No. 151/MDS of 1983, accepted the claim of the assessee and held that it was entitled to depreciation at 30% on the rig and compressor. Aggrieved by the order of the Appellate Assistant Commissioner, the Revenue filed an appeal before the Tribunal. The Tribunal, by its order dated February 27, 1985, following its earlier order in 1. T. A. No. 151 / MDS of 1983, upheld the order of the Appellate Assistant Commissioner and dismissed the appeal. Aggrieved by the order of the Tribunal, the Revenue obtained a reference under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), to this court, on the following question of law, for its opinion : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that the assessee is entitled to depreciation at the special rate of 30% in respect of the rig and compressor used for drilling bore-wells ?" In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... special rate of 30% on the ground that the rig and compressor mounted on the lorry would form part of the lorry. The assessee also claimed investment allowance in respect of the rig and compressor admissible under section 32A(2) of the Act. The Incometax Officer, in the original assessment proceedings, held that the assessee is entitled to claim investment allowance in respect of the rig and compressor. However, in the reassessment proceedings, the Income-tax Officer had withdrawn the investment allowance on the ground that sinking of borewells by the assessee, using the rig and compressor, could not be equated to the business of construction, manufacture or production of any article or thing. The assessee filed an appeal before the Commissioner of Incometax (Appeals) against the order of the Income-tax Officer withdrawing the investment allowance. The Commissioner of Income-tax upheld the assessee's claim relying on the order of the Tribunal dated July 21, 1981. Against the order of the Commissioner of Income-tax (Appeals), holding that the assessee is entitled to investment allowance, the Revenue filed an appeal before the Tribunal. On the question of grant of investment allowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment year 1981-82, the assessee undertook the work of construction of a dam in Selvalar. The major work of the assessee was construction of tunnels. For the purpose of drilling and blasting the rocks, a drill, air-compressors and jack-hammers were used. The Income-tax Officer allowed the general rate of depreciation of 10% on the drill, air-compressors and jack-hammers, as against the special rate of 30% claimed by the assessee. On appeal by the assessee before the Appellate Assistant Commissioner, it was held that the rig and compressor mounted on the lorry have to be treated as a motor-lorry for purposes of depreciation. The Appellate Assistant Commissioner further held that the rig and compressor also fell under "earth-moving machinery employed in heavy construction works, such as dams, tunnels, canals etc." Consequently, the Appellate Assistant Commissioner allowed the appeal and directed the Income-tax Officer to allow 30% depreciation. Against, the order of the Appellate Assistant Commissioner, the Revenue filed an appeal before the Tribunal. The Tribunal, confirming the finding of the Appellate Assistant Commissioner that the drills, air-compressors and jack-hammers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C. Nos, 242, 285 and 540 of 1986, viz., whether the assessees in those cases are entitled to depreciation at the special rate of 30% in respect of the rig and compressor used for drilling bore-wells. The assessees in these cases claimed depreciation at 30% on the rig and compressor under item No. III(ii)D(9) of Part I of Appendix I to the Rules on the ground that they constituted an integral part of the lorry on which they were mounted and were also worked by the same engine, which provided traction to the lorry. It is not in dispute that, if the drilling machinery, viz., the rig and compressor, owned and used by the assessees in these cases does not fall under item No., III (ii) D (9) of Part I of Appendix I to the Rules, the depreciation properly allowable is only 10%. Therefore, the claim of the assessees for depreciation at a higher rate of 30% would depend upon whether the machinery, viz., rig and compressor, owned and used by them will fall under item No. 111(ii)D(9) of Part I of Appendix I to the Rules. It would be appropriate in this context to refer to the relevant entry, which reads as follows : --------------------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of these assets could, however, be made out. The drilling rigs and compressors are independent items of machinery. A rig can exist without being placed on a lorry. It can, for instance, be placed on the ground. The same is true of a compressor also. It is not necessary, therefore, to think of a rig or a compressor only in the context of a lorry. Both the rig and the compressor can be utilised in any particular place. In the particular instance of the assessee's business, it may be necessary to take these assets to different places for performing necessary functions. It is for this reason that the rigs and the compressors are mounted on lorries. If the assessee had only two places of activities, perhaps the mounted rigs and compressors could be dismounted at the same place and the lorry could be dispensed with. It is the mere fact of activity at different places that makes the particular functioning of this item tied up to a lorry. What I want to stress is that neither the rig nor the compressor is an item which can be utilised or thought of only in terms of the assembly on a lorry. It is equally true that a lorry could be utilised without rig or compressor." The above discussion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso come under "earth-moving machinery employed in heavy construction works such as dams, tunnels, canals, etc." falling under entry No. 4 in item No. III(ii)D of Part I of Appendix I to the Rules. The Appellate Assistant Commissioner also took the view that the items of machinery in question owned and used by the assessee would also fall under the entries Nos. III(ii)D(9) and III(ii)D(7) of Part I of Appendix I to the Rules. The Tribunal confirmed the findings of the Appellate Assistant Commissioner and dismissed the appeal. We have held earlier in this judgment that the rig and compressor mounted on a lorry cannot be treated as a "motor lorry" and, therefore, they will not fall under entry No. III(ii)(D)(9) of Part I of Appendix I to the Rules. Equally, the items in question will not fall under entry No. III(ii)D(7), because the said entry will apply only to mineral and oil concerns which is not the case here. However, it is seen from the facts found by the authorities below that the drills, air-compressors and jack-hammers used by the assessee for the construction of dams, tunnels, etc., are earth-moving machinery and they are also employed in heavy construction works such as da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue. The assessees in these cases used the rigs and compressors for the purpose of sinking bore-wells. As a result of the drilling operations carried on by the assessees using rigs and compressors, they bring into existence a thing, i.e., a bore-well. A bore-well is in effect a "thing", which could be factually recognised and identified. Further, as far as the customer for whom the bore-well is sunk, it could be treated as a capital asset. Therefore, it has to be held that sinking bore-wells, using rigs and compressors, amounts to production of a "thing" as contemplated in section 32A(2)(b) of the Act. A similar question, whether the sinking of bore-wells using rigs and compressors amounts to production of a "thing", came up for consideration before a Division Bench of the Andhra Pradesh High Court in CIT v. Super Drillers [1988] 174 ITR 640. The Division Bench of the Andhra Pradesh High Court, in the decision referred to above, while holding that it would be wrong to think that drilling operations do not result in the production of any article or thing, observed as follows (pp, 644, 645): "Drilling operations do result in the production of underground water for use on the surfac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Motor Vehicles Act, 1939, it follows that the "road transport vehicle" referred to in clause (b) of the proviso to section 32A(1) of the Income-tax Act, 1961, would mean only those vehicles which are used for carrying passengers or goods. The rig and compressor mounted on a lorry cannot be treated as a road transport vehicle, because the rig and compressor mounted on a lorry are used only for the purpose of transporting equipment fixed on the lorry for sinking of bore-wells and not for carrying either passengers or loading or unloading of goods. Hence, the rig and compressor mounted on a lorry and used for drilling bore-wells cannot be considered as "road transport vehicle" and, therefore, they are eligible for investment allowance provided under section 32A(2)(b)(ii) of the Act. The Tribunal is right in holding that the assessees in T. C. Nos. 1796 of 1984 and 539 of 1986 are entitled to claim investment allowance under section 32A(2) (b) (ii) of the Act in respect of the rig and compressor. In the result, the question referred in T. C. Nos. 242, 285 and 540 of 1986 is answered in the negative and in favour of the Revenue ; the question referred in T. C. No. 1446 of 1986 ..... 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