TaxTMI 
TaxTMI 
2011 (6) TMI 395
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....r 2006-07. ITA No. 1077/Mds./2010 is an appeal 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 o....
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....l activities.-Once the discovery is made, the areal extension of the discovery 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 ....
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....t a technical estimate of the costs should be determined and a provision to be made by way of a 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 ....
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....at the development costs are capital in nature and depletion (depreciation) is charged on the basis the "unit of production method". 2.2 Accounting 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 th....
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....provides that "... Capitalised development costs shall be amortized (depreciated) by the unit of production method so that each unit produced is assigned a pro rata portion of 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 ....
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.... 2.4.2 Judicial precedents on acceptability of Guidance Note and its relevance to section 115JB.-The fact that Guidance Note issued by ICAI can be relied upon in interpreting accounting terms or understanding 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 a....
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....it and loss account; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at 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....
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....s under other sections are not to be considered for the purpose of section 115JB. Reference to section 32/section 42 is irrelevant in the instant case. Just as other provisions for the purpose of normal computation [section 37, section 36 etc.] do not apply for computing book 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". &....
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.... liable to the Government or any State Government for payment of the following amounts: (c) any other taxes calculated with reference to income from Petroleum except Income-taxes payable to the Government as specified in Article 16"[Emphasis Supplied] With regard to the above, we wish to submit that under Article 16 of 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 EXECUT....
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.... PSC, Petroleum and Natural Gas Rules -1959 ('P&NG Rules') and Directorate General of Hydrocarbons ('DGH'), The obligation of site restoration stalls as soon as a well is drilled and to construct/install a facility for extracting oil and gas from the sub-surface in any area, which needs to be estimated and provide for to meet the eventual obligation at the end of the field life. 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 othe....
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....tingent liability" The term 'Contingent liability' is not defined in section 115JB or under any other provision of the Income-tax Act and therefore it should be in its legal sens as in normal practice. Further for interpretation of the term 'contingent liability', the rationality of various judicial precedents is submitted for consideration as below: Further, the Chennai ITAT in the case of Assistant Director 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....
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....ir respective participating interests". Appendix C to Article 7.12 which deals with 'Security for Abandoment Costs" 3.1 "The operator shall include in each work programme and budget ... (i) Its estimate (or revised estimate as the case may be) of abandonment costs and the production profile during the production period. (ii) Each party's participating interest share of the abandonment costs for the immediately 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 dete....
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....per FAS 5 issued by the United States Financial Accounting Standards Board are also similar to IAS 37. FAS 5 defines contingency as an existing condition, situation, or set of circumstances that involve uncertainty as to the possible gain or loss to an enterprise. The uncertainty will ultimately be resolved only when one or more future events occur or fail to occur [Page No. 307 of the paper book-I]. 1.6.3 Judicial Precedent.-The Supreme Court in the cases of CIT v. Woodward 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....
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....bsp; In the case of TN Small Industries Development Corporation (supra), the issue involved was deductibility of interest on the cost of land acquired from the Government. In the facts of the said case, liability to pay the interest had not accrued while in the case of HEPI, under the PSC entered into with the Government of India, the liability for site restoration accrued immediately on commencement of exploration operations. l In the case of Indian Molasses Co. (supra), the issue 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 ....
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....ection with the exploration and development of the oil well are treated by the assessee as fixed asset and this expenditure is written off on the estimated life of oil basin. It was the submission that this write off of the expenditure had been claimed by the assessee as depletion. It was the submission that the assessee had claimed this depletion as depreciation. The Assessing Officer has not disturbed the quantification of the depletion. However, he has held that the depletion is not depreciation. Consequently, the actual depreciation being 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 in....
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....SMENT YEAR 2002-03 Gr.1 : General Gr.2 : Jurisdiction to initiate action under section 147 (a) The return was only processed under section 143(1) and no assessment under section 143(3) made earlier. Hence there is no question of change of opinion as there is no scope for Assessing Officer to form any opinion while processing the return under section 143(1). I rely on the following decisions: ACIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. (SC) 291 ITR 500 WCI (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 ....
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.... (c) Assessing Officer has the power to make adjustments to book profits as 'mentioned in Explanation 1 to section 115JB as held in : (i) CIT v. HCL Comnet Systems & Services Ltd. 305 ITR 409 (SC) (ii) Ajanta Pharma Ltd. v. CIT 327 ITR 305 (SC) (iii) Indo Rama Synthetics (I) Ltd. v. CIT 330 ITR 363 (SC). (d) 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 accounts". (e) 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....
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.... ITAT Chennai Bench in DCIT v. Thangavel Spinning Mills Ltd. (97 ITD 262). A form can never have any effect on the interpretation or operation of the parent statute as held by the Apex Court in CIT v. Tulsyan NEC Ltd. (330 ITR 226). (j) As held by Assessing Officer, 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 i.e., assessment year 2001-02, the unabsorbed depreciation brought forward is only 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 ....
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....be allowable as per the provisions of Income-tax Act. (q) Copy of Appendix C - Section 2 is available in pages 5 to 8 of Department Paper Book. As per this, Exploration costs are expenditure in search for Petroleum. Drilling costs are expenditure, for drilling as well as for bringing a well into use as a producing well. Development costs are expenditure incurred for development of the Contract Area. Production Costs are expenditure incurred on Production Operations in respect of the Contract Area. (r) 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 doe....
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.... depleted can claim depletion costs and not the assessee who only earns profit by exploiting such natural resources owned by Government through the PSC. (u) When the PSC which was placed before both the house 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). (v) 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). (w) Legislature in;1s wisdom has not made any allowance towards "depletion" in the PSC since Government is the owner of ....
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....r of any authority exempting it from the provisions of Income-tax Act or any specific section contained therein. Hence the contention of the assessee is devoid of merits. (b) This issue stands covered by the decision of AAR in Niko Resources Ltd., In re (234 ITR 828). Gr. 8 : Levy of interest under section 234B on book profits computed under section 115JB Covered in favour of revenue by decision of Hon'ble Supreme Court in JCIT v. Rolta India Ltd. (330 ITR 470). Hardy Exploration & Production v. ADIT (India) WRITTEN SUBMISSION ITA 2155/10 ASSESSMENT YEAR 2003-04 Gr. 1 : General Gr. 2 : Jurisdiction to initiate action under section 147 Similar 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 ....
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...., the net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with the provisions of Parts II & III of Schedule VI the Companies Act is the starting Point. Assessing Officer cannot change this figure. This is the view held by Apex Court in Apollo Tyres v. CIT (255 ITR 273). There is no dispute on this issue. CIT has not modified this figure in the order under section 263. (b) Assessing Officer has the power to make adjustments to book profits as mentioned in Explanation 1.1 to section 115JB as held in : (i) CIT v. HCL Comnet Systems & Services Ltd. (305 ITR 409) (SC) (ii) Ajanta Pharma Ltd. v. CIT (327 ITR 305) (SC) (iii) 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....
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.... followed by jurisdictional High Court in S.K.V. Selvaraj v. CIT (240 ITR 217) (Mad.). (h) Instead of relying 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 1999-2000 which were approved by the Board of Directors and placed before the Annual General Meeting, assessee is now relying on certain figures appearing in Form 29B prepared by its auditor for the current year. Decision of the Apex Court in Apollo Tyres v. CIT (255 ITR 273) is equally applicable for the assessee as held by ITAT Chennai Bench in DCIT v. Thangavel Spinning Mills Ltd. (97 ITD 262). A form prescribed under the rules can never have any effect on the interpretation or operation of the 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....
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....per cent of revenue and capital expenditure incurred in respect of Exploration Operations as per Appendix C - Section 2.2 and Drilling Operations as per Appendix C - Sections 2.3.1 and 2.3.2. l Expenditure incurred in respect of Development Operations as per Appendix C - Section 2.3 (other than drilling operations covered above) and Production Operations as per Appendix C - Section 2.4 will be allowable as per the provisions of Income-tax Act. (p) Copy of Appendix C - Section 2 is available in pages 5 to 8 of Department Paper Book. As per this, Exploration costs are expenditure in search for Petroleum. Drilling costs are expenditure for drilling as well as for bringing a well into use as a producing well. Development costs are expenditure 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 nee....
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....s treated as capital expenditure in its books. (r) It is not a BOT contract but a PSC where assessee will be reimbursed the expenditure incurred by it and in addition will give a share of profit. Government, the owner of such natural resources is getting part of the profit for allowing its natural resources to deplete. In the circumstances, only Government whose natural resources get depleted can claim depletion costs and not the assessee who only earns profit by exploiting such natural resources owned by Government through the PSC. (s) When the PSC which was placed before both the house of However the situation is different in the present case where only PSC was entered into by the Government. (t) When the PSC which was placed before both the 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 legislati....
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....Expenses - whether can be added back to book profits computed under section 115JB Though such expenses are debited to Profit & Loss Account, it is not an allowable expenditure as per Article 16 of PSC, which is a self-contained code. Arguments similar to Gr. 5 & 6 in ITA 802/CHNY/10. Decision of ITAT in the case of Cairn Energy India Pty. Ltd. is distinguishable on facts as it was based on a different PSC." 7. It was submitted by the learned DR that in regard to the assessment years 2002-03 and 2003-04 in view of the decision of the Hon'ble Supreme Court in the case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316, the re-opening was liable to be upheld. It was the further submission that in regard to the assessment year 2005-06 even though the assessment order was passed 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 ....
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.... reasons, clauses 1.6.1 and 1.6.2 of Appendix 'C' to the PSC envisaged booking of all currency gains and losses irrespective of whether such gains/losses stood realized or remained unrealized. In case of gains, a part of the credit would go to the Government, and taxes would be payable on the income to the extent of such gains credited. Therefore, in our view, currency gains and losses constituted an inextricable part of the accounting mechanism for expenses incurred on the development and production of oil. Section 42 of the 1961 Act was enacted to ensure that where the structure of the PSC was at variance with the accounting principles generally used for ascertaining taxable income, the provisions of the PSC would prevail. Section 42 provides for deduction on expenditure incurred on prospecting for or extraction or production 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. P....
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....ortion of the total volume of petroleum produced which the Contractor is entitled to take for the recovery of contract costs as specified in article 13. Under article 13 the Contractor is entitled to recover contract costs out of the total volume of petroleum produced. That costs include development and exploration costs. Similarly, article 1.69 defines "Profit Petroleum" to mean all petroleum produced and saved from the contract area in a particular period as reduced by Cost Petroleum and calculated in terms of article 14. Continuing the analysis of PSC, article 7 inter alia provides that the Contractor shall provide for all funds necessary for the conduct of petroleum operations. Article 13 deals with recovery of costs, as stated above. Article 15 deals with taxes, royalties, rentals etc. It indicates that Government of India is entitled 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 re....
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....ation, and if so, whether translation losses could be claimed by EOGIL. In this connection, we need to consider article 20.2 which inter alia states that the rates of exchange for the purchase and sale of currency by the Contractor shall be the prevailing rates as determined by the SBI and for accounting purposes under the PSC such rates shall apply as provided for in clause 1.6 of Appendix 'C' to the PSC. Appendix is a part of PSC. The purpose of Appendix 'C' inter alia is to prescribe the accounting procedure. Clause 1.1 of Appendix 'C' provides for classification of costs and expenditures. That classification is warranted as PSC contemplates costs recovery by the Contractor(s), who has made initial contribution/ investment of funds in foreign currency. The said classification of costs and expenditures is also indicated in Appendix 'C' for 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 trans....
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....the issues in the appeal may be restored to the file of the Assessing Officer for re-adjudication in line with the decision of the Hon'ble Supreme Court. 10. In regard to the issue of the site restoration expenditure, the learned DR vehemently supported the order of the Assessing Officer. 11. In reply, the learned authorised representative submitted that the assessee has not claimed any depreciation/depletion on account of the depletion to the oil well/basin/natural resources. It was the submission that the expenditure incurred by the assessee on account of the exploration and development of the natural resources had been claimed by the assessee as a fixed asset in its Balance Sheet. It was this expenditure which as per the provisions of PSC read with section 42 of the Act which the assessee was entitled to a 100 per cent deduction. It was the 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 deplet....
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....epreciation and consequently for the purpose of computation of the book profits under section 115JB depreciation was liable to include depletion. It was thus submitted that as per the PSC all the costs are allowable at 100 per cent to the assessee. It is only for the purpose of computation the deduction of all the costs as mentioned in the PSC that section 42 of the Act was applied. 12. In reply, the learned DR submitted that as per the decision of the Hon'ble Supreme Court in the case of Enron Oil & Gas India Ltd. (supra), if a PSC was available, then section 42 has no applicability and the computation has to be done as per the PSC alone as it was a separate code by itself. 13. We have considered the rival submissions. A perusal of the decision of the Hon'ble Supreme Court in the case of Enron Oil & Gas India Ltd. (supra), clearly shows that the 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 sec....
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....us year in which commercial production is begun and for such succeeding year or years as may be specified in the agreement, being the PSC. Admittedly, in the PSC under consideration no allowance in respect of the depletion of the mineral oil has been permitted and none has been claimed. Section 42(1) specifically provides that allowances shall be computed and made in the manner specified in the agreement (PSC), the other provisions of the Income-tax Act, 1961 being deemed for this purpose to have been modified to the extent necessary to give effect to the terms of the agreement. Admittedly, the exploration and development expenditure is incurred before the commencement of the commercial production. The expenditure incurred by the assessee on account of the exploration and development before the commencement of the actual commercial production would obviously 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 o....
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....the assessment years 1995-96 to 1999-2000 have been filed and no proceedings are pending for these assessment years and as it is noticed that the issue of depletion comes in only in the assessment year 1998-99, considering the fact that the decision of the Hon'ble Supreme Court in the case of Enron Oil & Gas India Ltd. (supra) lays down the law as it stood and as it is supposed to be understood while computing the unabsorbed business loss as also carried forward depreciation, the Assessing Officer shall rework the same for the assessment years 1995-96 to 1999-2000 in line with the decision of the Hon'ble Supreme Court in the case of Enron Oil & Gas India Ltd. (supra), as the same would have an impact while computing the book profits as also the regular profits for the assessment years which are under appeal before the Tribunal as also for the assessment 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 ....