The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) upheld Gujarat Gas Ltd.’s claim for additional depreciation, ruling that compressing natural gas qualifies as a manufacturing activity under Section 32(1)(iia) of the Income Tax Act,1961.
Gujarat Gas Ltd., appellant-assessee, was engaged in city gas distribution, including the sale, purchase, processing, and transportation of natural gas. The Principal Commissioner of Income Tax (PCIT) reviewed the case and found that the assessee had claimed additional depreciation on certain assets. The PCIT held that compressing natural gas did not qualify as a manufacturing activity, a requirement for such depreciation, but the Assessing Officer (AO) had allowed the claim without proper examination.
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The PCIT also noted that the assessee had claimed a deduction of Rs.5.39 crores under Section 35DD of the Act, which included Rs.5 crores for stamp duty categorized as a “contingent liability.” Since contingent liabilities are not allowable as per tax laws, the PCIT found the AO’s decision to allow the claim incorrect.
During the Section 263 proceedings, the PCIT held that compressing natural gas did not qualify as “manufacturing” under Section 2(29A) and found the assessee’s claim of Rs.18.89 crores for additional depreciation unsubstantiated. The PCIT also noted that the Rs.25 crore deduction under Section 35DD for stamp duty was a contingent liability, and the AO failed to verify its payment. Thus, the assessment order was deemed erroneous and prejudicial to Revenue.
The assessee appealed before the tribunal.
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The two member bench comprising Siddhartha Nautiyal(Judicial Member) and Annapurna Gupta(Accountant Member) observed that the assessee had been consistently treated as an industrial undertaking engaged in “manufacturing activities,” with various orders granting deductions under Section 80-IA of the Act. It referred to past decisions by the ITAT and the Gujarat High Court, which held that altering natural gas to make it suitable for industrial or domestic use qualified as a manufacturing activity.
Based on these precedents, including the Gujarat High Court’s ruling in Tax Appeal No. 60 of 2009, the tribunal held that the PCIT erred in finding fault with the AO’s allowance of additional depreciation under Section 32(1)(iia) of the Act. It concluded that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue.
In short,the appeal filed by the assessee was allowed.
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