2023 (5) TMI 1003 - AT - Income Tax

Tax Tribunal Partially Allows Appeals: Oil Wells as 'Plant & Machinery,' Depreciation Adjusted, Issues Remanded for Verification.

The ITAT partially allowed the assessee's appeals for the assessment years 2007-08 and 2008-09. Key outcomes included the disallowance of the claim under ... Deduction under section 42 - Classification of oil wells as plant and machinery for depreciation - Depreciation at 60% under Entry III(8)(xii) of Appendix I to the Income Tax Rules, 1962 - Additional depreciation under section 32(1)(iia) for extraction of mineral oil - Adjustment of foreign exchange gain to block of assets under section 43A (realised v. unrealised) - Deduction under section 80IB(9) - whether each well constitutes separate undertaking and retrospective operation of Explanation - Deduction under section 37 for payments to head office-'make available' / treaty interpretation - Capital v. revenue characterisation of preliminary drilling, renovation and repairs expenditure - Disallowance under section 40A(3) for cash payments - Disallowance under section 40(a)(ia) for short/non-deduction of TDS - Depreciation on intangible / commercial rights (participating interest) and admissibility of depreciation on goodwillDeduction under section 42 - Deduction claimed under section 42 was not allowable. - HELD THAT: - The Assessing Officer rejected the claim under section 42 on the ground that the Product Sharing Contracts did not contain provisions entitling the assessee to deductions under that section. The assessee's own subsequent reliance on Supreme Court and earlier ITAT decisions led the Tribunal to dismiss the ground in favour of the Revenue. [Paras 5]Ground No. 2 dismissed.Classification of oil wells as plant and machinery for depreciation - Depreciation at 60% under Entry III(8)(xii) of Appendix I to the Income Tax Rules, 1962 - Oil wells and oil-field equipment are part of plant and machinery and are eligible for depreciation at 60% under Entry III(8)(xii); Assessing Officer to recompute depreciation on opening WDV and verify additions. - HELD THAT: - The Tribunal followed earlier decisions of the jurisdictional High Court and its own orders in the assessee's case, holding that oil wells and associated field equipment constitute plant and machinery. The DRP's requirement of 'distribution' to attract the entry was rejected. The AO was directed to recompute depreciation on opening WDV and to call for details for additions made during the year to allow depreciation accordingly. [Paras 6, 8]Grounds No. 2.1 and 2.2 allowed; AO directed to recompute and verify additions.Additional depreciation under section 32(1)(iia) for extraction of mineral oil - Assessee entitled to claim additional depreciation under section 32(1)(iia) for plant and machinery used in mineral oil extraction, subject to verification of statutory conditions. - HELD THAT: - Following the Tribunal's earlier decision in the assessee's case and reasoning of the Supreme Court that extraction of mineral oil amounts to 'production', the Tribunal held the assessee eligible for additional depreciation. The matter was restored to the AO to verify that the statutory conditions of section 32(1)(iia) (including non-use prior to installation) are satisfied before allowing the claim. [Paras 10, 11]Ground No. 2.3 allowed; claim restored to AO for verification and computation.Adjustment of foreign exchange gain to block of assets under section 43A (realised v. unrealised) - Whether the foreign exchange gain reduced from the block of assets under section 43A is realised or unrealised is to be determined by the Assessing Officer after verification. - HELD THAT: - The AO and DRP recorded that the assessee failed to demonstrate whether the foreign exchange gain was realised or unrealised. Given the lack of conclusive demonstration, the Tribunal remanded the issue to the AO to verify the nature of the foreign exchange gain and then apply section 43A as per law. [Paras 12, 13]Ground No. 3 is restored to the file of the AO for verification of realised/unrealised character and consequential computation.Deduction under section 80IB(9) - whether each well constitutes separate undertaking and retrospective operation of Explanation - Adjudication on entitlement under section 80IB(9) deferred pending Supreme Court determination; matter remitted to AO for fresh adjudication in light of Supreme Court directions. - HELD THAT: - The question whether each well is a separate 'undertaking' and whether the Explanation operates retrospectively is sub judice before the Supreme Court. Prior Gujarat High Court decisions struck down retrospective Explanation, but the Supreme Court has stayed finalisation of such matters. Following earlier practice in the assessee's own cases, the Tribunal refrained from deciding and set aside the issue to the AO to decide in accordance with the Supreme Court's eventual ruling. [Paras 15]Grounds Nos. 4 and 5 set aside to the file of the AO for fresh adjudication in light of the Supreme Court proceedings.Deduction under section 37 for payments to head office-'make available' / treaty interpretation - Payments to head office characterised as fees for services were held not to satisfy the 'make available' criterion under the India-US Treaty and therefore deduction under section 37 is allowable (subject to TDS considerations addressed elsewhere). - HELD THAT: - The Tribunal observed that merely supplying reports does not satisfy the 'make available' requirement and, on the facts, the Department failed to show that knowledge or technology was made available such that the branch would not require future head office services. The Tribunal noted that technical services are not caught by the embargo in section 44C and placed reliance on favorable authorities and the DRP decision in the succeeding year where the Department allowed the claim. On that basis the DRP's disallowance for AY 2007-08 was reversed. [Paras 17, 18, 19, 20]Ground No. 6 allowed; deduction of technical service charges to head office permitted.Capital v. revenue characterisation of preliminary drilling, renovation and repairs expenditure - Preliminary drilling expenditure held revenue; certain renovation and repair items allowed as revenue while identified capital items were held capital but eligible for depreciation on verification. - HELD THAT: - Preliminary drilling expenses were incurred to test feasibility and no enduring capital asset resulted; following authority, they were held revenue in nature. Office renovation expenditure was dissected: items like dismantling and minor works were allowed as revenue, while purchases of furniture and certain assets were capital and not allowable as revenue but directed to be depreciated by the AO after verification. Repairs and maintenance largely related to creation of capital assets (detailed break-up by DRP) and were held capital; depreciation to be allowed where appropriate following verification. [Paras 26, 27, 28, 29, 30]Ground No. 7 allowed (preliminary drilling revenue). Ground No. 9 dismissed on capital nature but Ground No. 9.1 allowed for depreciation; Ground No. 10 dismissed but Ground No. 10.1 allowed for depreciation on verification.Disallowance under section 40A(3) for cash payments - Disallowance under section 40A(3) of 20% on cash payment for sweets sustained where assessee failed to produce supporting evidence. - HELD THAT: - The assessee could not furnish evidence to substantiate the cash payment claim. In absence of supporting evidence, the Tribunal found no infirmity in the DRP's application of the statutory disallowance provision. [Paras 32, 33]Ground No. 11 dismissed.Disallowance under section 40(a)(ia) for short/non-deduction of TDS - Disallowance under section 40(a)(ia) for inadvertent short-deduction (exclusion of surcharge) deleted; correct remedy is proceedings under section 201 and relevant authorities favor the assessee. - HELD THAT: - Relying on High Court authority (Future First Info Services), the Tribunal held that mere inadvertent short deduction due to exclusion of surcharge does not justify disallowance under section 40(a)(ia) and that the appropriate course is action under section 201. On that basis the DRP's disallowance was set aside. [Paras 35, 36]Ground No. 12 allowed; disallowance under section 40(a)(ia) deleted.Depreciation on intangible / commercial rights (participating interest) and admissibility of depreciation on goodwill - Claim for depreciation on amount paid for participating interest / goodwill not finally adjudicated; issue remanded to Assessing Officer for detailed examination of nature of asset, correct category under section 32 and supporting documents. - HELD THAT: - The DRP had disallowed depreciation treating the amount as goodwill or otherwise not falling within prescribed intangible categories. The Tribunal rejected the assessee's vested-right argument and held that earlier allowance, if erroneous, can be re-examined. As the AO had not examined in detail whether the payment represented goodwill, other intangible commercial right, or otherwise, the Tribunal set aside the issue to the AO to determine the true nature of the asset and admissibility of depreciation after verification. [Paras 37, 38]Grounds Nos. 13 and 13.1 allowed for statistical purposes and remitted to the AO for fresh examination.Deduction under section 80G - Assessee's claim for deduction under section 80G not allowed by AO is remitted for verification and grant as per law. - HELD THAT: - The Tribunal observed omission in assessment and remitted the claim to the AO to allow deduction under section 80G after necessary verification. [Paras 50]Ground No. 9 (AY 2008-09) set aside to AO for verification and decision.Consequential reliefs and recomputations - Several issues required recomputation or consequential allowance of depreciation by AO after verification (e.g., recompute depreciation on opening WDV, allow depreciation where capitalisation accepted). - HELD THAT: - The Tribunal directed the Assessing Officer in multiple places to recompute depreciation, verify additions and statutorily mandated conditions, and thereafter allow additional or normal depreciation as directed in the respective findings. [Paras 8, 11, 27, 30, 52]AO to carry out recomputations and verification as directed across the two assessment years.Final Conclusion: The Tribunal partly allowed the assessee's appeals for A.Y. 2007-08 and A.Y. 2008-09: claims under section 42 were dismissed; oil wells and oil-field equipment held to be plant and machinery eligible for 60% depreciation and additional depreciation under section 32(1)(iia) allowed subject to verification; certain expenditures (preliminary drilling, specified renovation items) treated as revenue while identified capital items to attract depreciation; technical service charges to head office allowed; cash disallowance under section 40A(3) and other capital/revenue categorizations partly sustained; short-TDS disallowance under section 40(a)(ia) deleted; several issues (foreign exchange gain under section 43A, section 80IB(9) entitlement, admissibility of depreciation on participating interest/goodwill, and certain consequential items) were remanded to the Assessing Officer for fresh consideration or verification in accordance with the directions given. Issues Involved:1. Disallowance of claim under section 42.2. Treatment of oil wells as 'Plant & Machinery' vs. 'Building' for depreciation.3. Depreciation on oil field equipment.4. Additional depreciation under section 32(1)(iia).5. Unrealized foreign exchange gain adjustment under section 43A.6. Deduction under section 80IB(9) for Wavel and Dholka oil fields.7. Disallowance of technical service charges paid to the head office.8. Preliminary drilling expenditure as capital or revenue expenditure.9. Depreciation on plant and machinery.10. Renovation and repairs expenditure as capital or revenue.11. Disallowance under section 40A(3).12. Disallowance under section 40(a)(ia).13. Depreciation on goodwill and intangible assets.14. Non-grant of deduction under section 80G.15. Depreciation on expenditure capitalized in the previous year.Summary:Ground No. 2 (Disallowance of claim u/s. 42):The assessee's claim for deduction under section 42 was disallowed as the Product Sharing Contracts (PSCs) with the Government did not include a clause pertaining to section 42. The Supreme Court upheld this view, and ITAT dismissed the appeal based on this precedent.Ground No. 2.1 (Depreciation on oil wells):The ITAT held that oil wells qualify as 'Plant and Machinery' and not 'Building' for depreciation purposes, following the Gujarat High Court decision in Niko Resources Ltd. The Assessing Officer was directed to re-compute depreciation on oil wells accordingly.Ground No. 2.2 (Depreciation on oil field equipment):The ITAT allowed the claim for depreciation on oil field equipment at 60%, treating them as part of oil wells, consistent with the decision in the assessee's own case for the previous assessment year.Ground No. 2.3 (Additional depreciation u/s. 32(1)(iia)):The ITAT allowed additional depreciation under section 32(1)(iia), considering the extraction of mineral oil as production of articles or things, following the Supreme Court's decision in Sesa Goa Ltd. The matter was remanded to the Assessing Officer for verification.Ground No. 3 (Unrealized foreign exchange gain adjustment):The issue was remanded to the Assessing Officer for verification of whether the foreign exchange gains were realized or unrealized, as the assessee failed to provide appropriate details.Ground Nos. 4 and 5 (Deduction u/s. 80IB(9) for Wavel and Dholka Oil Fields):The ITAT refrained from adjudicating on the eligibility of each well as a separate undertaking for deduction under section 80IB(9) due to the pending Supreme Court judgment on the retrospective application of the Explanation to section 80IB(9). The matter was remanded to the Assessing Officer.Ground No. 6 (Technical service charges paid to head office):The ITAT allowed the deduction for technical service charges paid to the head office, as the 'make available' clause was not satisfied, and the services did not qualify as 'fee for included services' under the India-US Tax Treaty.Ground No. 7 (Preliminary drilling expenditure):The ITAT allowed the preliminary drilling expenditure as revenue expenditure, as no new asset of enduring nature was brought into existence.Ground No. 8 (Depreciation on plant and machinery):The ITAT allowed the claim for depreciation on plant and machinery at 60%, consistent with the decision in the assessee's own case for the previous assessment year.Ground Nos. 9 and 9.1 (Renovation and repairs expenditure):The ITAT allowed part of the renovation expenditure as revenue expenditure and directed the Assessing Officer to allow depreciation on the capitalized portion.Ground Nos. 10 and 10.1 (Repairs and maintenance expenditure):The ITAT upheld the treatment of repairs and maintenance expenditure as capital expenditure but directed the Assessing Officer to allow depreciation on such expenses.Ground No. 11 (Disallowance u/s. 40A(3)):The ITAT upheld the disallowance of Rs. 5,400 under section 40A(3) due to the absence of supporting evidence for the cash payment.Ground No. 12 (Disallowance u/s. 40(a)(ia)):The ITAT allowed the appeal, holding that short deduction of TDS does not warrant disallowance under section 40(a)(ia), following the Delhi High Court's decision in Future First Info Services Pvt. Ltd.Ground Nos. 13 and 13.1 (Depreciation on goodwill and intangible assets):The ITAT remanded the issue to the Assessing Officer to examine the eligibility of depreciation on the asset, whether as goodwill or any other intangible asset, and to verify the necessary supporting documents.Ground No. 9 (Non-grant of deduction u/s. 80G):The ITAT remanded the issue to the Assessing Officer to allow the deduction under section 80G after necessary verification.Ground No. 10 (Depreciation on expenditure capitalized in the previous year):The ITAT noted that this ground is consequential to the appeal for the previous assessment year and does not require specific adjudication.Conclusion:The assessee's appeals were partly allowed for both assessment years 2007-08 and 2008-09. The ITAT provided specific directions to the Assessing Officer for re-computation, verification, and fresh adjudication on various grounds.