JUDGMENT
Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, the following question of law has been referred to by the Tribunal for the assessment years 1978-79 to 1980-81 and 1982-83:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that investment allowance under Section 32A of the Income-tax Act, 1961, was allowable on the machinery used by the assessee for boring operation for extracting water from underground ?”
2. The assessee, a limited company, had been carrying on coal mines and boring operations. After nationalisation of the coal mines, the assessee-company had been carrying on business of boring operations for extracting water from underground. The assessee had claimed investment allowance under Section 32A in respect of its machinery used in boring operations. It is not in dispute that the machinery are new. The dispute relates to the question whether the plant and machinery used for boring to extract Sub-soil water would be eligible for investment allowance under Section 32A. The Assessing Officer held against the assessee as, according to him, boring and drawing Sub-soil water is not any activity for producing any article or thing. He was, therefore, of the opinion that the machinery used for boring operations were not entitled to investment allowance and he denied investment allowance claimed by the assessee on such plant and machinery. The Commissioner of Income-tax (Appeals), however, directed the Assessing Officer to allow the investment allowance under Section 32A on the machinery used by the assessee-company for the boring operations. Aggrieved, the Department preferred a second appeal before the Tribunal and the Tribunal after considering the submissions of the parties upheld the decision of the Commissioner of Income-tax (Appeals).
3. Before the Tribunal, it was the contention of the Revenue that the boring equipments are essential adjuncts of mining operations. Therefore, the assessee could not be said to produce any article or thing. The Tribunal was, however, of the view that by extracting underground water, the assessee has the business of producing a thing or article. The Tribunal applied and followed the decision of the Andhra Pradesh High Court in CIT v. Super Drillers [1988] 174 ITR 640 in directing the Income-tax Officer to allow investment allowance on plant and machinery installed and used for drilling operations.
4. At the hearing, counsel of the parties reiterated the contentions as were urged before the Tribunal.
5. The contention of the Revenue both before the Tribunal as also before us has been that drilling operations do not produce any article or thing by reason only of the fact that underground water is drawn out to the surface.
6. Learned counsel for the assessee placed reliance on the decision of the Andhra Pradesh High Court in CIT v. Super Drillers [1988] 174 ITR 640. There, the Andhra Pradesh High Court decided that new plant and machinery owned by the assessee who used them for the purpose of the business of drilling bore wells are entitled to investment allowance. In the case before the Andhra Pradesh High Court, the assessee-firm carried on the business of drilling bore wells. It was found as a matter of fact that drilling equipment was used by the assessee-firm for the purpose of business carried out by it in order to bring to the surface underground water. The Andhra Pradesh High Court held that the purpose of operating the boring equipment was to go underground and to produce water lying hidden under the ground. Drilling operations, according to the Andhra Pradesh High Court, had resulted in the production of underground water for use on the surface of the ground and, in that sense, the court held that the assessee-company was an industrial undertaking for the purpose of production of underground water for use on the surface of the ground.
7. The Andhra Pradesh High Court in the said decision cannot, however, be said to have laid down a proposition in the abstract that the mere activity of extracting underground water to the surface of the earth would amount to producing any article or thing. This could be evident from a close reading of the following observation (at page 644) :
“It should be borne in mind that water deposits lie hidden under the ground and the purpose of operating the equipment to go into ground is to produce water lying hidden under the ground. It would be wrong to think that drilling operations do not result in the production of any article or thing. Drilling operations do result in the production of underground water for use on the surface of the ground and in that sense it must be held that the assessee is an industrial undertaking for the purpose of production of underground water for use on the surface of the ground.”
8. This decision, as indicated, was also cited before the Tribunal but the decision required a study with more discernment than manifest in the Tribunal’s order.
9. It would be simplistic to take the view that drilling operations for the drawing of underground water in all cases invariably amount to production of water as a thing. The decisive factor is the purpose of the drawing of the water. Water can be drawn from underground simply for the purpose of making the underground pockets water-free as is done in the case of mining operations. Therefore, the Departmental representative while arguing drilling as part of mining operation was correct. But that observation may not be applicable in the present case because after nationalisation the assessee is prohibited from carrying out any mining operations. But the assessee can be commissioned for de-watering mines on contract by the mining authorities. In such a situation, the entire purpose of drilling or boring for extraction of water is de-watering the mines for keeping mines operational as well as safe against subsidence or inundation. The Tribunal has only seen one part of the matter, viz., water was extracted but the purpose of the extraction of water is the determinative criterion in the present case. Evidently, the assessee was engaged by a third party or parties to draw underground water. The purpose may be simply de-watering of the Sub-soil spaces without the project for use of the surface water. In fact, the drawing of water may be for two purposes, one for de-watering which is the negative purpose and the other for winning water which is for the positive object of surface use.
10. The importance of use of the water has been emphasised by the Andhra Pradesh High Court though in a suggestive manner. In the last sentence, the phrase “water for use on the surface of the ground” has occurred twice in the observations extracted above. In our opinion, the crux of the entire matter centres on this aspect of surface use.
11. In this case, it is not known for what purpose the assessee was commissioned to operate and extract water. Our knowledge is limited to extraction of water and goes no further. A question mark, therefore, hangs –whether the assessee bored wells to win water or bored the wells to bale out water from inside the mines. If the purpose is purely subterranean, then we cannot say that the assessee is producing any article or thing. Mere physical emergence of water does not necessarily constitute in the commercial sense production of an article or thing. Any mechanical operation may, for a purpose, incidentally produce things but of no surface use. In such a situation, it cannot be said that such non-commercial thing would also be a thing for the purpose of Section 32A because the word “thing” in its setting necessarily refers to a commercial thing. In point of fact, the Sub-soil water drawn to surface ground, far from having a commercial potential, may be unwholesome and injurious to the surface environment.
12. The Tribunal has not looked into the purpose of extracting water. In the case, the purpose of drilling was to win water the ratio decidendi in Super Drillers’ case shall apply. As the full facts of the case are not available, we decline to answer the question and remit the matter to the Tribunal with the direction to ascertain the purpose of boring and drawing water from underground. The Tribunal shall allow the parties to lead evidence if they so desire.
13. There will be no order as to costs.
Shyamal Kumar Sen, J.
14. I agree.