Collection and transmission of data converted into paper logs/magnetic tapes amounted to manufacturing and producing of an article or thing: Delhi HC

Commissioner Of Income Tax vs M/S. Hls India Ltd. on 11 May, 2011

ITA No.627/2005

Assessment Year: 1989-90 – 2003-04

Relevant Facts:

1. The Assessee is an oilfield services company which provides services for exploration and production of hydrocarbons

2. Agreement dated 04/05/1988 was entered with Oil India Ltd. for providing information/analysis for the exploration of certain areas.

3. The assessee sought investment allowance u/s 32A of the Income Tax Act, 1961 (“Act”). The assessee also sought relief u/s 80IA / 80IB of the Act. Further, depreciation on the machinery used was claimed as 100% under Rule 5, Appendix I, Part I, III (ix) of the Income Tax Rules, 1961 (“Rules”)

4. The AO disallowed the claim u/s 32A(2) of the Act. The same was allowed by the CIT (A) and the ITAT as well for the AY 1989-90.

5. A claim u/s 80IA was raised by the assessee in AY 199192. This claim was denied by the AO but allowed by the CIT (A). On appeal, the ITAT remanded the matter back to the AO for fresh consideration.

6. On the claim under Rule 5, Appendix I, Part I, III (ix) of the Rules, the AO disallowed the same claiming that this was only available to mineral oil concerns.

Questions of law:

1. Whether the assessee is an industrial undertaking engaged in the business of manufacture or production of an article or a thing u/s 32A and u/s 80IA/80IB?

2. Whether the assessee is entitled to claim the depreciation allowance @ 100% under Rule 5, Appendix I, Part I, III (ix) of the Rules?

Upholding the appeal of the assessee, the Hon’ble Court held that:

(i) Technical information may be collected below the ground, but it is processed, analyzed and technical analysis of the same is done by experts. This information is then converted into understandable format and printed into logs and recorded on magnetic tapes. This would amount to manufacture.

(ii) Drawing an analogy, an X-ray machine converts an X-ray film into an article on which the impression of the bone is carried, it is a manufacture.

(iii) Machinery used for wirelogging and other data assessment for finding oil are machinery used in mineral oil concerns and thus eligible for 100% tax deduction under Rule 5, Appendix I, Part I, III (ix) of the Rules.

The decision is available here.

CESTAT, Chennai: Depriciation under Income Tax Act not applicable in existence of a uniform procedure laid down by the CBEC

CESTAT, Chennai: Depriciation under Income Tax Act not applicable in existence of a uniform procedure laid down by the CBEC

CCE, Madurai v. M/s. GGN Spinning Mills P. Ltd., decided on 18.01.2011

Relevant facts:

The respondents removed capital goods on which they had availed CENVAT credit to their sister unit. According to the rules in force at the material time, they were required to pay duty on the value of the capital goods. The respondents have calculated depreciated value applying depreciation at the rate of 25% as provided under the Income Tax Act. Boards Circular No. 643/34/2002-CX dated 1.7.2002 (Sl. No. 14 to the Table annexed to the circular) read with Circular F. No. 495/ 16/93-Cus. VI dated 26.5.1993 referred to therein provided a mechanism to calculate depreciation for these purposes. By applying Income Tax, the department argued, provisions the respondents have short-paid a duty amount of Rs.6,89,987/-. The original authority demanded this amount while the lower appellate authority had set it aside.

Question before the tribunal:

Whether the depreciation under the income tax can be used for custom and excise purposes?

Decision of the tribunal:

Upholding the demand for increased duty, the tribunal held as follows:

Para 4: “. I find that the Board has issued a circular clarifying how the depreciation is to be worked out for computing the value of used capital goods in this case and the circular is being uniformly followed by all assessees subject to excise control. There is no particular reason why the respondents herein have to be treated differently. The lower appellate authority has clearly erred in allowing depreciation as admissible under the Income Tax law when a uniform and unambiguous procedure has been laid down by the Central Board of Excise and Customs to be followed by all assessees subject to excise law.”

Delhi High Court: Goodwill is an intangible asset entitled to depreciation u/s 32(1)(ii)

CIT v. Hindustan Coca Cola Beverages on 14 January, 2011

Assessment Year: 2001-2002, 2002-03 and 2003-04

Substantial question of law before the Hon’ble Court:

“(1) Whether learned ITAT erred in holding that exercise of Revisionary Jurisdiction under Section 263 of the Income Tax Act, 1961 was invalid?

(2) Whether learned ITAT erred in setting aside the order of the CIT under Section 263 ignoring the fact that the goodwill generated in a business cannot be described as an "asset" so as to be entitled to depreciation under Section 32 and, therefore the depreciation on goodwill was not admissible?”

Relevant facts: After the order of assessment was framed after exercising jurisdiction u/s 143(3), the Commissioner of Income Tax-IV, New Delhi invoked the jurisdiction under Section 263 of the Act as he noticed that the depreciation on goodwill which was accepted by the assessing officer was not an asset so as to entitle the assessee the benefit of depreciation as claimed under Section 32 of the Act and, hence, the order was erroneous and prejudicial to the interest of the revenue which resulted in escapement of income and, accordingly, issued notice to the assessee. After hearing the party, the Commissioner set aside the order of the assessing officer relating to the claim of depreciation on goodwill and sent the matter for fresh adjudication.

Paving the path for dismissal of the appeal of the revenue, the Hon’ble Court held that:

Para 24: “It is worth noting that the meaning of business or commercial rights of similar nature has to be understood in the backdrop of Section 32(1)(ii) of the Act. Commercial rights are such rights which are obtained for effectively carrying on the business and commerce, and commerce, as is understood, is a wider term which encompasses in its fold many a facet. Studied in this background, any right which is obtained for carrying on the business with effectiveness is likely to fall or come within the sweep of meaning of intangible asset. The dictionary clause clearly stipulates that business or commercial rights should be of similar nature as know-how, patents, copyrights, trademarks, licences, franchises, etc. and all these assets which are not manufactured or produced overnight but are brought into existence by experience and reputation. They gain significance in the commercial world as they represent a particular benefit or advantage or reputation built over a certain span of time and the customers associate with such assets. Goodwill, when appositely understood, does convey a positive reputation built by a person / company / business concern over a period of time.

Regard being had to the wider expansion of the definition after the amendment of Section 32 by the Finance Act (2) 1998 and the auditors report and the explanation offered before the assessing officer, we are of the considered opinion that the tribunal is justified in holding that if two views were possible and when the assessing officer had accepted one view which is a plausible one, it was not appropriate on the part of the Commissioner to exercise his power under Section 263 solely on the ground that in the books of accounts it was mentioned as goodwill and nothing else.”

The decision is available here.

Supreme Court: Amounts of revaluation reserve not deductible from 'book profit'

Holding that Companies covered under section 115JB of the Income Tax Act, 1961 would not be entitled to reduce from its book profit, such amounts which are in the nature of capital reserve or more specifically, which exist as revaluation reserve the Hon’ble Supreme Court in Indo Rama Synthetics (I) Ltd. v. C.I.T, New Delhi on 5 January, 2011 observed as follows:

Facts: During the assessment year 2000-01, fixed assets of the assessee were revalued resulting in increase in the net book value of such assets by Rs.288,58,19,000/-, which was credited to the revaluation reserve.

(The revaluation reserve is in the nature of a capital reserve rather than a revenue reserve and thus affecting treatment only in the Balance Sheet)

For the assessment year 2001-02, the AO disallowed a reduction by transfer from revaluation reserve to the extent of Rs.26,11,74,000/- to the depreciation account at Rs.127,57,06,000/- which was resulting in a net debit on account of depreciation of Rs.101,45,32,000/- under Section 115JB of the Act, did not allow reduction of the afore-stated amount of Rs.26,11,74,000/- on the ground that the revaluation reserve stood created in the assessment year 2000-01 and had not been added back while computing the book profit in that year in terms of the proviso to clause (i) of explanation to Section 115JB.

Question of Law: Whether the amount transferred from the revaluation reserve and set off against the amount of depreciation debited to P & L Account can be excluded in terms of clause (i) of explanation to Section 115JB(2) read with the proviso?

Dismissing the appeal the Hon’ble Court held:

“In the present case, had the assessee deducted the full depreciation from the profit before depreciation during the accounting year ending 31.3.2001, it would have shown a loss and in which event it could not have paid the dividends and, therefore, the assessee credited the amount to the extent of the additional depreciation from the revaluation reserve to present a more healthy balance sheet to its shareholders enabling the assessee possibly to pay out a good dividend. It is precisely to tax these kinds of companies that MAT provisions had been introduced. The object of MAT provisions is to bring out the real profit of the companies. The thrust is to find out the real working results of the company. Thus, the reduction sought by the assessee under clause (i) to the explanation to Section 115JB(2) in respect of depreciation has been rightly rejected by the AO.”

“Thus, if the reserves created had gone to increase the book profits in any year when the provisions of Section 115JB were applicable, the assessee became entitled to reduce the amount withdrawn from such reserves if such withdrawal is credited to P & L Account. Now, from the above facts, it is clear that neither the said amount of Rs.288,58,19,000/- nor Rs.26,11,74,000/- had ever gone to increase the book profits in the said year ending 31.3.2000 (being the financial year). Thus, when such amount(s) has not gone to increase the book value at the time of creation of reserve(s), there is no question of reducing the amount transferred from such revaluation reserves to the P & L Account. Thus, the proviso to clause (i) of the explanation to Section 115JB(2) comes in the way of the claim for reduction made by the assessee.”

The judgment is available here.

5. M/s. Techno Shares & Stocks Ltd. v Commissioner Of Income Tax on 9 September, 2010

Question of Law: Whether BSE Membership Card can be considered an intangible asset for the purpose of depreciation under Section 32(1)(ii) of the Income Tax Act, 1961 (for short "the 1961 Act")?

The Hon’ble Court held that:

"(para 19) …Therefore, the right of membership, which includes right of nomination, is a "licence" or "akin to a licence" which is one of the items which falls in Section 32(1)(ii) of the 1961 Act. The right to participate in the market has an economic and money value. It is an expense incurred by the assessee which satisfies the test of being a "licence" or "any other business or commercial right of similar nature" in terms of Section 32(1)(ii).

xxx

25. We answer the question at page 6 in the affirmative by holding that on the facts and circumstances of these cases the Tribunal was right in holding that depreciation was allowable on the cost of the membership card under Section 32(1)(ii) of the 1961 Act.”

The decision can be accessed here.