TaxTMI 
TaxTMI 
2011 (6) TMI 395
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....ppeal filed by the Revenue against the order of the learned CIT(A)-IV, Chennai in appeal No. CIT(A)-IV/CHE/105/09-10 dated 22-3-2010 for the assessment year 2006-07. As identical issues are involved in all these appeals, they are being disposed of by this consolidated order. 2. Shri Rajan Vora, CA represented on behalf of the assessee and Shri Shaji P. Jacob, learned Sr. DR represented on behalf of the revenue. 3. On merits it was submitted by the learned authorised representative that the assessee is a company incorporated in USA and which has established project office in India. The assessee had entered into a Production Sharing Contract ('PSC' for short) with the Government of India along with ONGC and others for exploration, development and production of oil and gas in the east coast of India. The learned authorised representative filed detailed written submissions which are extracted as follows : "BEFORE THE INCOME-TAX APPELLATE TRIBUNAL 'A' BENCH, CHENNAI ITA NO. 803/CHNY -2010 - ASSESSEE'S APPEAL IN THE CASE OF HARDY EXPLORATION & PRODUCTION (INDIA) INC (ASSESSMENT YEAR : 2006-07) 1. Background 1.1 Profile of the company Hardy Exploration and Production (India) Inc....
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....ery and the potential volume of the discovery have to be mapped. In essence, the appraisal activity relates to the delineation of the petroleum reserves to which the discovery relates in terms of thickness and the lateral extent and determining the characteristics thereof and the quantity of recoverable petroleum therein. This involves additional capital expenditure such as drilling of appraisal wells and further geological, geophysical and reservoir studies. After the appraisal, if commercial volumes of oil and gas are present a development plan is made and executed for the commercial extraction oil and gas. In such cases, all the cost of successful exploration and appraisal are capitalized. (c) Development activities.-After establishment of commerciality a development plan is being submitted to GOI for approval which has detailed engineering of the project to be executed. During this phase, substantial capital costs are incurred for: (a) Drilling of development wells for extracting the oil and gas from the reservoirs at the sub-surface. (b) Completion of the wells with equipments such as well heads and Christmas tree which is a combin....
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.... site restoration fund to meet this obligation. We submit that all the capital costs for exploration, appraisal and development are capitalized and depreciated/depleted by "Unit of Production Method". All costs associated with production activities are charged as revenue expenditure. The above accounting treatment is globally accepted and is also prescribed by the Institute of Chartered Accountants of India for accounting of oil and gas activities in India. 1.3 Facts of Appellant's current case.-During the year under appeal, the Appellant returned Nil income under the normal provisions of the Income-tax Act, 1961 ('the Act') after setting of brought forward losses and unabsorbed depreciation. As the book profit under section 115JB of the Act was more than the normal provisions of the Act, the Appellant returned a total income of INR 16,34,96,776 under section 115JB of the Act. We have provided below the sequence of events as regards the proceedings initiated for the assessment year ('AY') 2006-07 at the various levels. Section Reference Events Specific facts that the Appellant wishes to bring to the notice of the Hon'ble ITAT ....
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....nting treatment for development costs.-It is a generally accepted accounting practice to capitalize these costs as assets in the books of account. In any oil and gas company the development cost is a substantial cost of its plant and machinery and is clubbed and nomenclated as Development Costs, in the books of account. As per Para 38 of the Guidance Note issued by the Institute of Chartered Accountants of India ('ICAI'): "when a well is ready to commence commercial production, development cost corresponding to prove developed oil and gas reserves should be capitalized". The development assets which are capitalized need to be amortized due to usage, wear and tear and efflux of time. As is a general accounting norm, all capital assets are subject to depreciation in the books of account. We have discussed in the subsequent paragraphs, the methodology for computation of depreciation on development assets and the nomenclature used therein. 2.3 Depletion (depreciation) is calculated based on "Unit of Production" method.-We submit that depletion (depreciation) on development cost is calculated based on unit of production method, which is a Generally Accepted Accounting method and is ....
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....the unamortized costs" [page No. 137 of the paper book-I). The statement reiterates the fact that depletion is nothing but depreciation in the field of oil and gas industry. Therefore it is an international practice to deplete (depreciate) development cost over a period of time by the unit of production method. 2.4 Depletion is nothing but depreciation in oil and gas industry for the purpose of computation of book profit.-We have submitted below the reasons to consider depletion as part of depreciation in computation of book profits as per section 115JB: l It is a well-accepted principle in the field of accounting that wear and tear in relation to a wasting asset such as a mine is nomenclated as depletion instead of depreciation l Section 115JB clearly states that profit and loss account prepared as per Accounting Standards and accounting policies shall be considered for the purpose of computing book profits. l As per Guidance Note of oil and gas Producing Activities issued by the ICAl, "Depreciation also includes depletion." l Further echoing the Indian guidance, the Statement of Recommended Practic....
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....accounting methods is also endorsed by the Supreme Court in the case of Collector of Central Excise, Pune v. Dai Ichi Karkaria Limited [GJX0503-SC] 1999 which held as under: "(26) The view we take about the cost of the raw material is borne out by the Guidance Note of the Indian Institute of Chartered Accountants, and there can be no doubt that this Institute is an authoritative body in the matter of laying down accountancy standards ". [page Nos. 187 of the paper book-I] Further, the Madhya Pradesh High Court in the case of Commissioner of Income-tax v. State Bank of Indore 2005-(IT4)-GJX-0311-MP [page No. 189 of the paper book-I] has also upheld the above principle. Section 115JB clearly states that the Profit and Loss account prepared as per Accounting Standards and accounting policies shall be considered for the purpose of computing book profits. In the absence of an Accounting Standard for oil and gas accounting in India, the Guidance Note issued by the supreme accounting body of India (the Institute of Chartered Accountants of India) is the only basis to be adopted for computing depreciation/profits and loss and such mode of accounting should be the basis for computing boo....
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.... its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (l of 1956)". Further, we also place reliance on the following decisions wherein it was held that the meaning of the term 'depreciation' has to be understood from the Company law provisions and not as per the Act for the applicability of section 115JB l The Supreme Court in the case of Surana Steel Private Limited v. Deputy Commissioner of Income-tax (237 ITR 777) has observed that "There is no reason to assign to the term "loss" as occurring in section 205, proviso clause (b), of the Companies Act, a meaning different from the one in which it is understood therein solely because it is being read along with section 115J of the Income-tax Act". The principle that what is permissible under company law in view of the facts that it has to be computed in terms of Part II and Part III of Schedule VII of the 1956 would dictate computation except to the extent to which adjustment are required to be made otherwise by a specific provision. l In Buttwelded Tools Private Lmited v. ACIT (39 ITD 432) the Chennai Tribuna....
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.... profits under section 115JB. 6.2(iv) In the P&L A/c itself for the relevant year, depreciation and depletion are separately mentioned. The depreciation on fixed assets and depletion towards development expenditure are separately mentioned in Sch-14 of the P&L A/c The learned CIT(A) has failed to appreciate that depletion of development costs is nothing but depreciation in the oil and gas industry. To accept the position of the CIT(A) is akin to denying a manufacturer of goods the right to claim depreciation on the producing asset, viz., the factory comprising inter alia of plant and machinery. Mere use of different nomenclature in accordance with accounting guidance does not signify that "depletion" is not "depreciation". The CIT(A) ought to have appreciated that "depletion" is, in substance "depreciation". l The Guidance Note issued by the lCAI for oil and gas accounting specifically states that "depreciation" and "depletion" are one and the same. The Supreme Court in the case of CCE v. Dai Ichi Karkaria Limited [GJX-0503-SC] 1999 has held that Guidance Notes should be considered for....
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....the PSC, reference is made only to provisions of section 42 of the Act and no reference is made to tax under section 115JB of the Act. Accordingly, the Appellant is not liable to tax under the said provision. It is clear that based on the PSC that the provisions of section 115JB are not applicable to the Appellant. 3. Our Prayer.-The order of the CIT(A) deserves to be quashed having regard to the following: The CIT(A) has erred in holding that meaning of depreciation has to be adopted as per section 32 of the Act when the issue under consideration pertains to section 115JB which is non obstante provision. On the basis of all of the above submissions, it is prayed that Appellant's appeal be allowed and justice rendered. The order of the CIT(A) to the extent prejudicial to the Appellant is bad in law and deserves to be quashed." Appellant EXECUTIVE SUMMARY ON MERITS Issues raised by AO Appellant's submissions Depreciation does not include depletion It is a well-accepted principle in the field of accounting that wear and tear in relation to a wasting asset such as a mine is nomenclated as depletion instead of depreciation Section 115JB clearly states that pr....
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..... Article 1.77 of such PSC defines "Site restoration" to mean all activities required to return a site to its natural state or to render a site compatible with its intended after-use (to the extent reasonable, having regard to its former use, if any, and state), after cessation of Petroleum Operations in relation thereto and shall include, where appropriate, proper abandonment of wells or other facilities, removal of equipment, structures and debris, establishment of compatible contours and drainage, replacement of top soil, re-vegetation, slope stabilisation, infilling of excavations or any other appropriate actions in the circumstances [Page No. 248 of the paper book-I). Once the wells cease to produce, it is mandatory obligation under the P&NG Rules amended from time to time and under various other guidelines issued that well should be properly be abandoned by putting appropriate barriers such as cement plugs in the well to avoid any possible leakage and the consequent pollution thereby. Further, to ensure that the oil and gas companies are fully funded to comply with the statutory obligation of restoring the site to avoid environmental hazard, it is insisted by DGH that a fu....
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....rector of Income-tax v. M/s. Cairn Energy India Pty Ltd. 2010-TII-115-ITAT-MAD-INTL [Page No. 216 of the paper book-I] wherein the respondent was engaged in the business of exploration, development and production of oil and natural gas held that; "the assessee is clearly obliged under the PSC to undertake site restoration activities as part of the exploration or production operations i.e., to return the site to its natural state or render the site compatible with its intended use after cessation of exploration and, production operation and, other operations in relation thereto, 'which involves removal of facilities, equipment, structures and debris, establishment of compatible contours and drainage, replacement of top soil, re-vegetation, slope stabilization, infilling of excavations and carrying out other appropriate actions; the provision for site restoration arose as a result of the PSC with the Government of India and, is an ascertained liability and, therefore clause (c) of Explanation to section 115JA is inapplicable to the facts of the assessee-company." Supreme Court in the case of Bharat Earth Movers Limited 245 ITR 428 The law is settled; if a business liability has d....
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....following year" As is evident from the above, costs in relation to the site restoration is technically determined and payments are being made by the parties. The sum contributed by the parties to the contract is being deposited with the State Bank of India under the Site Restoration Fund Scheme, 1999 [Page No. 257 of the paper book-I). Accordingly, we submit that the site restoration costs cannot be considered in the nature of contingent or unascertained liability. It is a case of the Respondent that a detailed budget and scientific estimation of site restoration expenditures are determined to effect the same with State Bank of India towards the ascertained liability for site restoration. 1.5 Provision for site restoration is determined on a scientific basis.-We wish to submit that the provision for site restoration expenses has been debited to the profit and loss account of the Respondent annually based on scientifically estimated costs using the unit of production method ('UOP'). Under the 'UOP' method, the depreciation or depletion in mining assets is calculated on the basis of the number of units produced as numerator and the denominator being the total expected number of u....
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....ard Governor India (P.) Ltd. and Honda Siel Power Products Ltd. [2009] 312 ITR 254 has held that "the method of accounting undertaken by the assessee continuously is correct. Given that the interpretation of the term contingent liability can be examined from the perspective of the accounting literature applicable in India and other well established and widely relied upon standards. Such as those of International Accounting Standards Board ('IASB ') and United States Financial Accounting Standards Board (US FASB') and Statement of Recommended Practice ('SORP') on Accounting for Oil and Gas Industry issued by the Accounting Standard Board, UK given the above, it is clearly evident that site restoration is not a contingent (unascertained) liability and is an ascertained liability". 1.6.4 Summary.- Key aspects of contingent liability-summarised The key aspects of contingent liability as evidenced by the extracts of AS 29 of ICAI, IAS 37 of IFRS and FAS 5 of US FASB are summarized as follows: (i) There is a possible obligation; and (ii) The obligation should arise from past events; and (iii) The existence of the obligation will be confirmed by occurr....
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....involved was deductibility of amounts set aside towards contributions in deferred annuity policy for the Managing Director. The said contributions were payable in the happening of a contingency. It was accordingly held that such payments were not deductible in computing taxable income. From the above, it is evident that section 33ABA allows for a deduction as and when the sum is deposited in the Site Restoration fund and the contention of the Rev. that the expenditure, for the purpose of deduction should actually been incurred, is incorrect. 3. Our Prayer.-It is our humble prayer that the Revenue's appeal deserves to be quashed having regard to the following: l It is evident from the above submission and from the order of the CIT(A) that the provision for site restoration is an ascertained liability; l The provision for site restoration has been estimated by the Respondent using a scientific method and the Revenue has erred in treating the same as a mere estimate; and l The decisions relied by the Revenue are not applicable to the Respondent's case. On the basis of all of the above, it is prayed that Revenue's appeal be....
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....ing the depreciation on the office machinery etc. was only allowed and the depletion claimed by the assessee was treated as a business loss. It was the further submission that in regard to the assessment year 2006-07 the Assessing Officer had also not granted the assessee the deduction in respect of the site restoration expenditure claimed by holding that the site restoration expenditure was only a contingent liability. On appeal, the learned CIT(A) had held that the site restoration expenditure was not a contingent liability and was allowable as a deduction. It was the submission that the site restoration expenditure was as per the PSC entered into with the Government of India and the liability was ascertained and allowable. It was the submission that the appellate authorities had not allowed the claim of the assessee that the depletion as claimed by the assessee was part of depreciation. It was the submission that against the action of the learned CIT(A) and the DRP in not accepting the claim of the assessee that the depreciation was liable to include the depletion the assessee was in appeal for the assessment years 2002-03, 2003-04 and 2006-07 and against the action of the learn....
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....p; (Madras) (P.) Ltd. v. ACIT (Mad.) 324 ITR 181 CIT v. Ravindran Prabhakar (Mad.) 326 ITR 363 ITO v. K.M. Pachiappan (Mad.) 311 ITR 31 ACIT v. Mahindra Holidays & Resorts (India) Ltd. (ITAT, SB Chennai) 3 ITR (Trib.) 600 (b) Reasons were recorded by the Assessing Officer before issuing the notice under section 148 [pages 10 & 11 for assessment year 2002-03 and 12 & 13 for assessment year 2003-04 of Paper Book]. (c) Copy of reasons recorded was furnished to the assessee vide letter dated 23-9-2009 [pages 46 & 288 of assessee's Paper Book]. Subsequently, assessee filed its objections to re-opening and Assessing Officer passed a separate speaking order on 17-11-2009 disposing such objections [pages 55 to 57 and 297 to 299 of assessee's Paper Book]. Assessee accepted this order and no appeal/petition was filed before any authority till date. (d) For re-opening under section 147, tangible material need not be from outside the return of income as held in ACIT v. Kanga & Co. (2010-TIOL-464. ITAT-Mum.) (e)&n....
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.... As per the books of account of the company, all expenses including depreciation is debited to the P & L A/c and only the net figure of profit/loss is carried forward to subsequent years. Thus in the subsequent years only consolidated figure of loss as on date (including unabsorbed depreciation) is available. However separate figures of loss brought forward and unabsorbed depreciation as per books of account are necessary for implementing the statutory provisions contained in c1. (iii) of Explanation 1 to section 115JB. (f) Hence Assessing Officer relied on the figures [para. 7.3 of the assessment order]. As per the respective Profit and Loss account appearing in the printed Annual Accounts of the assessee company for financial years 1995-96 to 1999-2000 which were approved by the Board of directors and placed before the Annual General Meeting. Copy of such accounts are available in pages 1 to 4 of Department's Paper Book. However the figures shown by the assessee in the Income Computation Statement [pages 38 & 280 of assessee's Paper Book] are at variance with these figures. This clearly shows that Assessing Officer followed the principles laid down by the Apex....
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....y Rs. 41,22,660 [Para 15 of assessment order] which was allowed by the Assessing Officer as deduction in view of c1ause (iii) of Explanation 1 to section 115JB. (k) Reduction made to book loss or depreciation in one year must form the basis for computation of MAT liability for the subsequent year, as held in : (i) Rashtriya Ispat Nigam Ltd., In re (AAR) 285 ITR 1 (ii) Lakshmi Machine Works Ltd. v. ACIT (ITAT, Chennai) 126 ITR 343. (l) In this background, any discussion on whether depletion should form part of depreciation or not, is irrelevant as assessee has not included depletion in the depreciation claim made in the Profit and Loss A/c which formed part of the printed Annual Accounts of the assessee company for F.Ys. 1995-96 to 1999-2000 which were approved by the Board of Directors and placed before the Annual General Meeting. The issue reached finality long back. (m) Further, reliance placed by assessee on Guidelines issued by ICAI is also not relevant since such guidelines were issued in 2003 whereas the dispute relate to F.Ys. 1995-96 to 1999-2000 period. No Guidelines can be retrospective in ope....
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....son for omission of the same as an expenditure in the PSC is the fact that assessee is not the owner of such natural resources and hence assessee need not be compensated for such reduction in natural resources. This aspect is discussed in detail by the Apex Court in CIT v. Enron Oil & Gas India Ltd. (305 ITR 75). As per Article 297 of the Constitution, all the natural resources vests with the Union Government. The international principle of permanent sovereignty over natural resources was adopted by the U.N. General Assembly in Resolution 1803. Assessee does not have any right in allocation of such resources or its pricing, marketing etc., as held under similar circumstances by the Apex Court in Reliance Natural Resources Ltd. v. Reliance Industries Ltd. [Civil Appeal Nos. 4273 to 4277 of 2010 by order dated 7-5-2010]. Obiter dicta of Hon'ble Supreme Court is also binding in view of Tata Iron & Steel Co. Ltd. v. V.R. Bapat (101 ITR 292 Bom.). (s) In fact the various papers filed by the assessee in support of accounting of 'depletion', are all in respect of enterprises which acquired mineral interests in properties and in such circumstances it was held to be a deductib....
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.... The intention of the legislature is primarily to be gathered from the words used in the statute. Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however, great the hardship may appear to the judicial mind to be as held in Tarulata Shyam v. CIT 108 ITR 345 (SC). Similar view was also held in Padmasundara Rao (Decd.) v. State of Tamil Nadu (255 ITR 147 SC). (w) Legislature in;1s wisdom has not made any allowance towards "depletion" in the PSC since Government is the owner of such Natural resources and assessee only makes investment towards exploration of oil wells and production of oil therefrom. Assessee is not affected anyway on account of depletion of natural resources and hence there is no need to make provision thereof. The interpretation as suggested by the assessee to allow "depletion" of an asset not owned by the assessee, will make the provisions contained in PSC otiose. Hence such an interpretation needs to be avoided as held by Karnataka High Court in Chartered Housing v. Appropriate Authority (250 ITR 1). Even though a liberal interpretation has to be given to an incentive provision, the interpretation has....
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....r to Gr. 2 in ITA 2154/10 Gr. 3 & 4 : Deduction of depletion in book profits Similar to Gr. 3 & 4 in ITA No. 2154/10 Gr. 5 Applicability of section 115JB Similar to Gr. 7 in 2154/10 Gr. 6 : Incorrect setoff in respect of brought forward losses under normal provisions No such issue raised before Assessing Officer and DRP. Not a legal issue. All the facts are not available on record. Gr. 7 : Levy of interest under section 234B on book profits computed under section 115JB Similar to Gr. 8 in ITA 2154/10" "Hardy Exploration & Production (India) Inc., Chennai v. ADIT (Int. Tax.), Chennai WRITTEN SUBMISSIONS ITA 802/CHNY/10 ASSESSMENT YEAR 2005-06 Gr. 1 : General Gr. 2 to 4 : Jurisdiction to initiate proceedings under section 263 A. CIT in para 3 of his order has clearly demonstrated the error committed by Assessing Officer while allowing set-off of brought forward depreciation against book profits computed under section 115JB. The main reason for committing such an error is non-verification of assessment records of earlier years. Perusal of the assessment order shows that Assessing Officer has not made any enquiry regarding eligibility as well as quantum of brought forwar....
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.... Indo Rama Synthetics (I) Ltd. v. CIT (330 ITR 363) (SC). (c) As per Explanation 1(iii), the book profits so arrived at has to be reduced by "the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account". (d) As per the books of account of the company, all expenses including depreciation is debited to the P and L A/c and only the net figure of profit & loss is carried forward to subsequent years. Thus in the subsequent years only consolidated figure of loss as on date (including unabsorbed depreciation) is available. However separate figures of loss brought forward and unabsorbed depreciation as per books of account are necessary for implementing the statutory provisions contained in clause (iii) of Explanation 1 to section 115JB. (e) Though assessee claimed that it had certain amount of brought forward losses and depreciation to be set off against the current year's profit, no details as to how such a figure is arrived at, was produced. On the contrary, CIT relied on the figures as per the Profit and Loss a/c appearing in the printed Annual Accounts of the assessee company for F.Ys. 1995-96 to 1999....
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....he parent statute as held by the Apex Court in CIT v. Tulsyan NEC Ltd. (330 ITR 226). (i) As held by CIT, as on 31-3-2000 total brought forward depreciation is Rs. 8,20,73,183 and total brought forward loss is Rs. 90,13,66,873. The lesser among this is brought forward depreciation of Rs. 8,20,73,183. After adjusting this against profits of F.Y. 2000-01 (Rs. 4,74,34,847) and F.Y. 2001-02 (Rs. 9,20,82,168), nothing remains to be brought forward to subsequent year. (j) Reduction made to book loss or depreciation in one year must form the basis for computation of MAT liability for the subsequent year, as held in- (i) Rashtriya Ispat Nigam Ltd., In re (AAR 285 ITR 1) (ii) Lakshmi Machine Works Ltd. v. ACIT (126 ITD 343 ITAT, Chennai) (k) In this background, any discussion on whether depletion should form part of depreciation or not, is irrelevant as assessee has not included depletion in the depreciation claim made in the Profit and Loss A/c which formed part of the printed Annual Accounts of the assessee company for F.Ys. 1995-96 to 1999-2000 which were approved by the Board of Directors and placed before ....
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....ture incurred for development of the Contract area. Production Costs are expenditure incurred on Production Operations in respect of the Contract Area. (q) In short, expenditure by way of "depletion" is not an allowable expenditure as per the PSC. The reason for omission of the same as an expenditure in the PSC is the fact that assessee is not the owner of such natural resources and hence assessee need not be compensated for such reduction in natural resources. This aspect is discussed in detail by the Apex Court in CIT v. Enron Oil & Gas India Ltd. (305 ITR 75). As per Article 297 of the Constitution, all the natural resources vests with the Union Government. The international principle of permanent sovereignty over natural resources was adopted by the U.N. General Assembly in Resolution 1803. Assessee does not have any right in a location of such resources or its pricing, marketing etc. as held under similar circumstances by the Apex Court in Reliance Natural Resources Ltd. v. Reliance Industries Ltd. [Civil Appeal Nos. 4273 to 4277 of 2010 by order dated 7-05-2010]. Obiter dicta of Hon'ble Supreme Court is also binding in view of Tata Iron & Steel Co. Ltd. v. V.R. B....
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....he Houses of Parliament did not provide for deduction on account of 'depletion ', Courts cannot grant such deduction in view of the principle of "Casus omissus". I rely on Laxmandas Pranchand v. Union of India 234 ITR 261 (MP). (u) There is no scope for importing into the statute words which are not there. Even if there is a casus omissus, the defect can be remedied only by legislation and not by judicial interpretation. The intention of the legislature is primarily to be gathered from the words used in the statute. Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however, great the hardship may appear to the judicial mind to be as held in Tarulata Shyam v. CIT 108 ITR 345 (SC). Similar view was also held in Padmasundara Rao (Decd.) v. State of Tamil Nadu 255 ITR 147 (SC). (v) Legislature in its wisdom has not made any allowance towards "depletion" in the PSC since Government is the owner of such natural resources and assessee only makes investment towards exploration of oil resources, development of oil wells and production of oil therefrom. Assessee is not affected anyway on account of depletion of nat....
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....sed under section 143(3), the issues had not been considered and the assessment order was not speaking on the issues also. It was the submission that the assessment order had been passed without application of mind and in view of the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66, the learned DIT was right in invoking his powers under section 263 of the Act. 8. On merits it was submitted by the learned DR that all the assessments which were in appeal before this Tribunal were liable to be sent back to the Assessing Officer for re-consideration in line with the decision of the Hon'ble Supreme Court in the case of CIT v. Enron Oil & Gas India Ltd. [2008] 305 ITR 75/173 Taxman 346 wherein the Hon'ble Supreme Court has held as follows : "The above analysis of the PSC indicates that both the Government and the Contractor are entitled to their "take" in oil and not in money. That is why the contract is called as PSC and for that purpose it becomes necessary to translate costs into oil barrels. This is done by dividing the monetary value of costs by the agreed price of oil. The price of oil generally is benchmarked....
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....ion of mineral oil whereas section 44BB contains special provision for computing profits and gains in connection with the business of exploration or extraction or production of mineral oils. The head note itself indicates that section 42 is a special provision for deduction on expenditure incurred on prospecting, extraction or production of mineral oils. PSC is a contract in which the Central Government is not only a party, it is a partner in the process. Such contracts are required to be placed before each House of Parliament under section 42. Analysing section 42(1), it becomes clear that the said section is a special provision for deductions in the case of business of prospecting, extraction or production of mineral oils. As stated above, section 42(1) inter alia provides for deduction of certain expenses. Broadly speaking, section 42(1) provides for admissibility in respect of three types of allowances provided they are specified in the PSC. They relate to expenditure incurred on account of abortive exploration, expenditure incurred, before or after the commencement of commercial production, in respect of drilling or exploration activities and expenses incurred in relation t....
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....ed to get taxes apart from profit petroleum. Article 15.2.1 inter alia provides that in order to compute profits of the business consisting of prospecting, extraction or petroleum production there shall be made allowances in lieu of the allowances admissible under the 1961 Act, such allowances as are specified in the PSC pursuant to section 42 in relation to three items of expenditure specified under section 42(1)(a), (b) and (c). Under article 15.2.1, two allowances are provided for. They are for abortive exploration expenses and expenses incurred after the commencement of commercial production in respect of drilling or exploration activities. In other words, two out of three allowances mentioned in section 42(1) are provided for in article 15.2.1. The above analysis shows that section 42 provides for deduction for expenses provided such expenses/allowances are provided for in the PSC. The PSC in question provides for both capital and revenue expenditures. It also provides for a method in which the said expenses had to be accounted for. The said PSC is an independent accounting regime which includes tax treatment of costs, expenses, incomes, profits etc. It prescribes a separate ....
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.... profit sharing purposes and for participation purposes. Appendix 'C' prescribes the manner in which a Contractor is required to maintain his accounts. It stipulates that each of the co-venturer has to follow the computation of income-tax under the 1961 Act. Clause 1.6.1 of Appendix 'C' refers to currency exchange rates. It states that for translation purposes between USD and INR, the previous month's average of the daily means of buying and selling rates of exchange as quoted by SBI shall be used for the month in which revenues, costs, expenditures, receipts or incomes are recorded. Therefore, in our view, clause 1.6.1 of Appendix 'C' provides for translation. On reading the said PSC, one finds that it not only deals with ascertainment of profits of individual stakeholders including Government of India but it also refers to taxes on individual shares, calculation of costs against revenues from sale of petroleum, allowances admissible for deduction, taxability, valuation, recovery, conversion etc. In other words, it is a complete code by itself." 9. It was the submission that as per the decision of the Hon'ble Supreme Court, the assessee was not entitled to the claim of depletion....
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.... submission that this expenditure had been claimed on a yearly basis on the basis of the oil extracted. It was the submission that this was the scientific method for claiming the expenditure which was shown as a fixed asset in the Balance Sheet of the assessee and the reduction in the value of the fixed asset had been claimed as a depletion. It was the submission that the value of this fixed asset was multiplied by the volume of the oil extracted and divided by the estimated volume of the natural resources available in the basin. It was the submission that the assessee did not own the basin or the natural resources and it had not claimed for depletion of the natural resources. The learned authorised representative drew our attention to the Profit & Loss Account for the years ended 31-3-1996 and 31-3-1997 which was shown at page 1 of the departmental paper book to say that the assessee had not claimed depletion for the years ended 31-3-1996 and 31-3-1997 and only depreciation had been claimed. He further drew our attention to page 3 of the departmental paper book which was the Profit & Loss Account for the year ended 31-3-1998 wherein the claim of depletion and abandonment has been ....
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....Hon'ble Supreme Court has categorically held that the PSC is a code in itself. A perusal of the PSC Article 16 in the assessee's case found at page 558 of the assessee's paper book (vide Article 16.1) clearly shows that the PSC is bound and subject to all the fiscal legislation in India. Article 16.2 of the PSC clearly shows that section 42 of the Income-tax Act, 1961 has been specifically recognized for the purpose of allowance of specified in the PSC when computing the profits and gains of the business of the assessee. Article 16.2.1 specifies that deduction of 100 per cent shall be allowed on all expenditures, both revenue and capital, incurred in respect of the exploration operation, drilling operation, development operation and production operation as per the provisions of the Income-tax Act, 1961. Article 16.2.2 permits the deduction of all its unsuccessful exploration costs in the contract areas. Article 16.2.3 specifies that all allowable expenditures incurred prior to the financial year in which the commercial production commences shall be aggregated and treated as the assessed loss for the financial year in which the commercial production commences and such assessed loss ....
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....ously have to be treated as a capital expenditure. Appendix 'C' of the PSC clearly classifies the classification, definition and allegation of costs and expenditure. On the basis of this classification as specified in Appendix 'C' the capital expenditure and the revenue expenditure would have to be demarcated. As per the article 16 of the PSC read with section 42 of the Act, the exploration and development expenditure is also eligible for 100 per cent allowance. But as the same is a capital expenditure a question would arise as to how the expenditure is to be allowed - whether it is allowed in a single year or it is to be allowed over a number of years. This is where the claim of the assessee that this expenditure is liable to be allowed as a proportion to the natural resources extracted as against the estimated natural resources available is found to be scientific and appropriate. A deduction to the capital expenditure which is recorded as a fixed asset would clearly be a depreciation to the fixed asset. In these circumstances, we are of the view that the claim of the assessee that the depletion claimed (though we may mention here that the term used by the assessee is inappropriat....
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.... years for which proceedings are open. 14. In regard to the claim of the treatment of the allowance of the site restoration expenditure while computing the book profits under section 115JB of the Act it is found that the site restoration expenditure is in line with the PSC. As already held by the Hon'ble Supreme Court in the case of Enron Oil & Gas India Ltd. (supra), as the PSC is a code in itself and as it is noticed that the site restoration expenditure is a claim in line with Article 12 of the PSC, the same is clearly an ascertained liability and is in no way a contingent liability. In the circumstances, we are of the view that the site restoration expenditure is an allowable expenditure when computing the book profit under section 115JB of the Act. 15. Coming to the issue of re-opening of the assessment for the assessment years 2002-03 and 2003-04 as it is noticed that the original assessments are made under section 143(1) and as it is noticed that the Assessing Officer has recorded his reasons for reopening of the assessment, in view of the decision of the Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra), we are of the view that the re-ope....