Oil wells are plant and machinery and eligible for higher depreciation

The Income Tax Appellate Tribunal (ITAT) in Ahmedabad has ruled that oil wells should be classified as plant and machinery, not buildings, for tax depreciation purposes. This means companies involved in oil exploration can claim a higher depreciation rate of 60% on their oil wells. The tribunal overturned previous decisions that had classified them as buildings or allowed lower depreciation rates, referencing earlier rulings in similar cases.

The ITAT, Ahmedabad in the case of M/s.Joshi Technologies International Inc. v. The Asst. Director of Income Tax [ITA Nos. 3456/Ahd/2010 & 3195/Ahd/2011, dated May 19, 2023] held that oil wells are plant and machinery, and accordingly, higher depreciation would be allowed to the assessee.

Facts

M/s. Joshi Technologies International Inc. ("the Appellant") is engaged in the exploration of crude oil, for which the Appellant installed oil wells.

For the Assessment Year 2007-08 the Assessing Officer ("the AO") denied the depreciation on oil wells @ 60% as contended by the Appellant by considering oil wells as plant and machinery by refereeing to Entry 8 of Appendix-1 ("Appendix-1") of the Income Tax Rules, 1962 ("the IT Rules"). However, the AO allowed depreciation @ 10% by treating oil wells as building.

Aggrieved by the decision of the AO, the Appellant filed an appeal before the Dispute Resolution Panel ("DR Panel") which allowed the depreciation @ 15% to the Appellant on oil wells by placing reliance on the decision of the ITAT, Ahmedabad in the Niko Resources Ltd. in ITA No. 661/Ahd/2005-06 andfurther held that the AO has rightly observed that oil wells will fall within the ambit of building, since, the oil wells have to be used as plant and consequently it should be used for "distribution" which is not the case.

Aggrieved by the Order of the DR Panel the Appellant filed an appeal before the ITAT.

The Appellant contended that the Gujarat High Court in the case of Niko Resources Ltd. inTax Appeal No. 1193 of 2009 dated July 20, 2016 held that mineral oil wells will form part of "plant and machinery" and not "building". Further, the ITAT for previous Assessment Year has allowed higher depreciation to the Appellant.

Issue

Whether the oil wells qualify as plant and machinery for computation of depreciation as per Income Tax Act, 1961?

Held

The ITAT Ahmedabad in ITA Nos. 3456/Ahd/2010 & 3195/Ahd/2011inter aliaheld as under:

• Observed that, DR Panel has erred in facts and in law in holding that to be eligible for claim for deduction the asset should be used for "distribution", whereas the entry in Appendix-1 does not mandate any such requirement.
• Further observed that, The ITAT, Ahmedabad in the Appellant’s case for Assessment Years 2001-02, 2002-03 and 2005-06 has allowed the depreciation @ 60% to the Appellant for oil wells and similarly the depreciation @ 60% was allowed to the Appellant for Assessment Year 2006-07 as well.
• Held that, the oil wells are eligible for depreciation as "plant and machinery" and directed the AO to re-compute the depreciation on oils wells @ 60% on Opening Written Down Value.