2019 (7) TMI 1577 - AT - Income Tax

Tribunal Upholds CIT(A)'s Decisions on Deductions for Oil Block Acquisition, Sudan Pipeline Expenditure

The Tribunal upheld the CIT(A)'s decisions, allowing the deduction for acquisition cost of participation interest in oil blocks as intangible assets ... Deduction u/s 37 - acquisition cost of participation interest in oil blocks - depreciation on acquisition cost of participating interest @ 25% holding them as intangible assets and the total depreciation claim - HELD THAT:- We find the Tribunal in assessee’s own case for assessment year 2002-03 [2009 (10) TMI 76 - ITAT DELHI-F] has held that commercial rights of exploration of mineral oils and licences acquired by the assessee, being in the nature of intangible assets are eligible for depreciation @ 25%. Since the CIT(A) has followed the order of the Tribunal in assessee’s own case for assessment year 2002-03 and the Tribunal has allowed the claim of depreciation in assessment year 2003-04 to assessment year 2005-06 and the appeal filed by the Revenue against order of the Tribunal for A.Y. 2002-03 has been dismissed by the Hon'ble Delhi High Court, therefore, in absence of any contrary material or distinguishing features, the order of the CIT(A) is upheld and the grounds raised by the Revenue are dismissed. Disallowance in respect expenditure incurred on Sudan pipeline - CIT (A) rejected the claim being the claim received from EPC contractor for additional expenditure incurred in respect of laying of Sudan pipeline on the ground that neither the liability has arisen in the hands of the assessee company nor revenue has accrued - HELD THAT:- We find merit in the findings given by the ld. CIT (A) that the additional expenses of ₹ 1026.08 million provided as expenditure by the assessee calls for disallowance as no liability has arisen in the hands of the assessee and since the revenue did not accrue or arise in the hands of the assessee, therefore, the addition of ₹ 1493.10 million made by the Assessing Officer cannot be justified. We accordingly dismiss the ground of appeal No.2 raised by the assessee and the ground Nos.6,7 and 8 by the Revenue. The various decisions relied on by the ld. counsel for the assessee are distinguishable and not applicable to the facts of the present case. In our opinion, the approach of the assessee should be consistent both for the revenue as well as expenditure. The assessee cannot take one stand for claiming the expenditure as an allowable deduction and, at the same time, do not recognize the revenue. In the instant case, since the claim has not been accepted by the EPC contractor, therefore, the addition made by the Assessing Officer is not justified. At the same time, although the assessee has provided in its Profit & Loss Account regarding the additional claim made by the EPC contractor, however, the assessee has challenged the same before the arbitrator and no payment having been made and the same is also under litigation and, therefore, following matching principle the claim of additional expenditure made by the assessee in its books of account has to be disallowed. We accordingly uphold the order of the CIT(A) on this issue Deduction u/s 42 or 37 - expense on purchase of seismic data / submission of tenders or bids etc. for evaluation of oil blocks proposed to be acquired by the assessee - HELD THAT:- We find the ld. CIT(A), in the instant case, following the order of the Tribunal in assessee’s own case for the three preceding years, has deleted the addition on the ground that the expenses incurred on submission of bids/tenders, consultancy fee paid to consultants and purchase and evaluation of seismic data etc., are normal business expenditure of the assessee and allowable under section 37 of the Act and provisions of Section 42 of the Act are not applicable. The ld. DR could not controvert by bringing any distinguishable features so as to take a different view than the vie taken by the Tribunal which has been followed by the CIT(A) while deleting the addition. In view of the above, we uphold the order of the CIT(A) and the ground raised by the Revenue is dismissed. Issues Involved:1. Deduction under section 37 of the Act for acquisition cost of participation interest in oil blocks.2. Disallowance of expenditure incurred on Sudan pipeline.3. Allowability of pre-acquisition expenses under section 37 of the Act.Issue-wise Detailed Analysis:1. Deduction under section 37 of the Act for acquisition cost of participation interest in oil blocks:The assessee claimed a deduction under section 37 for the acquisition cost of participation interest in oil blocks, arguing that it was incurred in the normal course of business and should be deductible. The Assessing Officer (AO) disallowed this claim, holding that the expenditure was capital in nature and not eligible for depreciation under section 32(1)(ii) of the Act. The CIT(A) allowed the claim, following the Tribunal's decision in the assessee's own case for earlier years, recognizing the participating interest as intangible assets eligible for depreciation.The Tribunal upheld the CIT(A)'s decision, noting that the commercial rights of exploration and licenses acquired by the assessee are intangible assets eligible for depreciation under section 32(1)(ii). The Tribunal referenced its own earlier decisions and the Hon'ble Delhi High Court's dismissal of the Revenue's appeal against these decisions.2. Disallowance of expenditure incurred on Sudan pipeline:The assessee incurred additional costs for laying a pipeline in Sudan and claimed it as an expenditure. The AO added the amount to the assessee's income, arguing that the revenue had accrued. Alternatively, the AO suggested disallowing the expense if the revenue was considered uncertain. The CIT(A) held that since neither the liability had arisen nor the revenue had accrued, the expenditure should be disallowed.The Tribunal upheld the CIT(A)'s decision, agreeing that the additional expenses provided as expenditure by the assessee should be disallowed as no liability had arisen. The Tribunal emphasized that the assessee cannot take contradictory stands by claiming the expenditure while not recognizing the revenue. The Tribunal dismissed the grounds raised by both the assessee and the Revenue.3. Allowability of pre-acquisition expenses under section 37 of the Act:The assessee incurred expenses on seismic data purchase, submission of tenders, and other pre-acquisition activities, claiming them as revenue expenditure under section 37. The AO disallowed the claim, suggesting that such expenses should be claimed under section 42 in subsequent years after commercial production begins. The CIT(A) deleted the addition, following the Tribunal's decision in the assessee's own case for earlier years, recognizing these expenses as normal business expenditures allowable under section 37.The Tribunal upheld the CIT(A)'s decision, noting that the expenses incurred for evaluating projects and making bids are normal business expenses and allowable under section 37. The Tribunal referenced its own earlier decisions and the Hon'ble Bombay High Court's ruling in a similar case.Conclusion:The Tribunal dismissed both the assessee's and the Revenue's appeals, upholding the CIT(A)'s decisions on all issues. The Tribunal emphasized the consistency of its earlier rulings and the principles of recognizing liabilities and revenues in accordance with the mercantile system of accounting.