2023 (1) TMI 1284 - AT - Income Tax

Tribunal decisions on exploration expenses and Section 80IB(9) deduction affirmed. Interest income classification upheld.

The Tribunal partly allowed the assessee's appeals and dismissed the revenue's appeals. The Tribunal affirmed the CIT(A)'s decisions on exploration and ... Correct head of income - Interest Income from Temporary Investments and Interest income from FDs - assessee deposited their surplus funds in the bank on which an interest was earned and the same offered to tax under the head ‘income from business and profession’ - AO treated the interest earned from fixed deposits under the head income from other sources - CIT(A) confirmed treated income from FDs as income from other sources and interest income from temporary investments as business income - HELD THAT:- As respectfully following the detailed judgment of Tuticorin Alkali Chemicals & Fertilizers Ltd. [1997 (7) TMI 4 - SUPREME COURT] we hold that the interest earned out of temporary investments made out of borrowed funds not immediately required for utilization in business be treated as business income as the commercial production has started from 29.08.2009. Ergo, the assessee gets relief of an amount accordingly. Earning of interest from FDs - assessee has invested the surplus funds in the FDs has nothing to do with the business connection - In the instant FDs, we find that there was no compulsion on the part of the assessee to invest in bank FDs as a part of an agreement. No business contingency was brought out whether in this case the surplus funds have been kept as fixed term deposits in the bank which yielded interest. It is a passive income which is not directly relatable to the main functions of the business or the venture of oil exploration. This interest would be received even in the absence of lull/cessation of exploration activity. The interest was received is to be treated under a separate head for the purpose of tax as per the provisions of Section 14 of the Income Tax Act, 1961 - Ergo, appeal of the assessee on this ground is dismissed. Prior period expenses - correct assessment year - expenses on account of Exploration - AO disallowed the expense on the basis that the same should be allowed in the year of commercial production i.e. the instant year - HELD THAT:- As AO disallowed the preoperative expenses in the Assessment Years 2003-04 to 2009-10, the assessee went into appeal and subsequently opted for VSV Scheme, thus resting all the litigation. Since, the matter attained finality the payment of tax wherever applicable, this ground cannot be re-entertained at this juncture. Additional Depreciation u/s 32(1)(iia) without its claim made by the assessee - “Mandatory Claim” or an optional claim at the convenience of the assessee - additional depreciation has not been claimed by the assessee and deduction u/s 80IB was recomputed after allowing additional depreciation - CIT(A) held that a general rule, the explanations incorporated in the Income tax act specifically provide that a particular explanation applies to a 'section' or sub-section' or 'clause' or 'sub-clause', therefore, there is no ambiguity in the applicability of a particular explanation in the act - HELD THAT:- The explanation 5 was introduced with effect from 1/04/2002 and clause (iia) was reintroduced from 01/04/2003. The later insertion of clause (iia) con not be the basis for non applicability of explanation 5 to the said clause because if the intention of the parliament was there to restrict the explanation to a particular clause only, it would have amended the phrase 'sub-section' to 'clause' or 'sub-clause' as the case may be. It may be interesting to note that explanation 2 to the sub-section 1 of section 32 was modified from the phrase '[For the purposes of this [clause]' to 'For the purposes of this [sub-section]' by the Finance Act, 2002, w.e.f. 1-4-2003. The case laws cited by the assessee do not pertain to Income Tax Act but to Evidence Act and Agriculture Income Tax Act and there may be ambiguity in the scope of applicability of 'explanation' in the respective Acts. AO has rightly allowed the additional depreciation in this case even without its claim by the assessee. The appeal of the assessee on this ground is dismissed. TDS on Exploration & Development Expenditure - addition u/s 40(i)(ia) - non deduction of tds - HELD THAT:- As the assessee has furnished tax audit report of the operator CEIL perusal of which shows that TDS requirement have been duly complied with the operator. hence, the disallowance made by the AO on account of exploration & development expenditure per se and on account of infraction of provisions of Section 40(a)(ia) of the Income Tax Act, 1961 are liable to be deleted. Disallowance of Time Cost Expenses u/s 40A - HELD THAT:- In the present case, it is an admitted position that the assessee does not have any other business in India except PI in the block and has not incurred any expenditure itself, rather it has made contribution to the cash calls made by the operator which has incurred the expenditure. It is a settled position of law that for making a disallowance u/s 40A of the Act, the onus is on the AO to establish that the payments made by the assessee were excessive and unreasonable. In the present case, the AO made disallowances without discussing even the nature of expenses and its reasonableness. Hence, the disallowance proposed to be made is bad in law and deserves to be deleted. Disallowance of Overhead Expenses - AO disallowed the Parent Company Overheads as Head office expenditure by treating the same as expenditure under section 44C - CIT(A) deleted the addition holding that the addition made in the earlier years was due to the fact that the commercial production was not started and the AO has not given any reasons as to how the provisions of 44C are applicable - HELD THAT:- AO has not given the reasoning as to how these expenses are hit by the provisions of section 44C and has simply disallowed these expenses on the basis of the stand taken by the Assessing Officer in earlier assessment years. Disallowance of Deduction u/s 80IB(9) - deduction was not allowed by the AO on the sole reason that such claim was not claimed in the return of income and no adverse observations was made by the AO on the veracity of the claim of the Appellant u/s 80IB(9) - HELD THAT:- We are in agreement with the finding of the ld. CIT(A), the AO has simply commented that since deduction has not been claimed in the return of income, it cannot be allowed. This argument is fallacious as when there is no taxable income in the return, then how can the appellant suppose to claim such a deduction. Once the income of the assessee is turns positive (instead of loss) then the deduction eligible should also be allowed in principle. Hence, the appeal of the revenue on this ground is dismissed. Issues Involved:1. Exploration and development expenditure disallowance.2. Time cost and expenses disallowance.3. Interest income classification.4. Additional depreciation allowance.5. Deduction under Section 80IB(9).Detailed Analysis:1. Exploration and Development Expenditure Disallowance:The revenue challenged the allowance of exploration and development expenditure by the CIT(A), arguing that the assessee contravened provisions of Chapter XVII-B read with Section 40a(i) and 40a(ia) of the Income Tax Act, 1961. The CIT(A) allowed the expenditure, noting that the production had commenced, and the operator had complied with TDS provisions. The Tribunal upheld the CIT(A)'s decision, emphasizing that the operator is responsible for maintaining accounts and complying with TDS requirements, and the expenses were thus allowable.2. Time Cost and Expenses Disallowance:The revenue contended that time cost and expenses recharged by the operator to the Unincorporated Joint Venture (UJV) were notional and unverifiable. The CIT(A) allowed these expenses, treating them as deferred revenue expenses, and the Tribunal affirmed this, noting that the expenses were certified as cost reimbursements and the AO failed to establish that the payments were excessive or unreasonable.3. Interest Income Classification:The assessee argued that interest income from temporary investments and fixed deposits should be classified as business income. The AO treated interest from fixed deposits as income from other sources. The CIT(A) upheld the AO's decision for fixed deposits but classified interest from temporary investments as business income. The Tribunal agreed, stating that interest from fixed deposits is passive income not directly related to business activities, while interest from temporary investments made out of borrowed funds for business purposes should be treated as business income.4. Additional Depreciation Allowance:The assessee did not claim additional depreciation under Section 32(1)(iia) of the Income Tax Act, 1961. The AO allowed it mandatorily, citing Explanation 5 to Section 32(1). The CIT(A) upheld the AO's decision, interpreting that Explanation 5 applies to all clauses under sub-section 1 of Section 32. The Tribunal affirmed this interpretation, noting that the explanation applies to the entire sub-section, making the allowance mandatory.5. Deduction under Section 80IB(9):The assessee claimed eligibility for deduction under Section 80IB(9) of the Income Tax Act, 1961, but did not claim it in the return due to nil income. The AO denied the deduction since it was not claimed in the return. The CIT(A) allowed the deduction, stating that the AO did not dispute the eligibility, and the deduction should be allowed if there is positive income after adjustments. The Tribunal upheld this, emphasizing that the AO's reasoning was fallacious and the deduction should be allowed if the income turns positive.Conclusion:The Tribunal partly allowed the assessee's appeals and dismissed the revenue's appeals, affirming the CIT(A)'s decisions on exploration and development expenditure, time cost and expenses, and deduction under Section 80IB(9). The Tribunal upheld the classification of interest income and the mandatory allowance of additional depreciation.