TaxTMI 
TaxTMI 
2018 (11) TMI 1049
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....it was stated as under: "The above appeal has been fixed for hearing on 13.11.2018 before your honour. In this regard, we respectfully submit that we wish to withdraw ground number 1 to 6 and ground number 8 of the above appeal. We regret for the inconvenience caused due to the aforesaid request". 2.1. In view of the above, Ld. Counsel stated that only effective ground remains is Ground No.7. When a query was put to Ld. Counsel that in case the assessee is not contesting Ground Nos. 6, 8 & 9, in that eventuality the revision order stands and he agreed for that. However, Ld. Counsel first of all drew our attention to the following Ground No.7 which he wants to contest on merits: "7. While upholding the right of your appellant to claim deduction u/s. 42 of the Act in respect of costs pertaining to the aborted oil blocks which are surrendered during the year, the learned CIT seriously erred in concluding that the expense or loss of Rs. 101 Crores. Occasioned in respect of such aborted blocks which was allotted to the appellant under PSC wholly distinct from PSC in respect of KGD will go to reduce the profit derived by the appellant from qualifyin....
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....cordingly, the AO proceeded to recast the "Profit and Loss Account" of KG basin undertakings in accordance with the view taken by him, which is discussed by us in paragraph 88 (supra) for both the financial years relevant to AY 2010-11 and 2011-12. In this process, (a) the AO disallowed the depreciation claimed by the assessee on "Intangible assets" discussed above. (b) the AO also deducted the expenses relating to Aborted blocks or unsuccessful exploration (2042.69 crores). (c) allowed depreciation at the applicable rates prescribed under Income tax Act on the Capital assets. Since Article/clause 17.2.4 of PSC gave an alternative option to amortise expenses in 10 years, the AO asked the willingness of the assessee to opt for the alternative methodology. From the reply given by the assessee, the AO inferred that the assessee is opting for alternative method of deduction. Accordingly the AO deducted 1/10th of expenses requiring amortisation. Accordingly he re-computed the profit from KG basin activities for the financial year 2009-10 (AY 2010-11) and FY 2010-11 (AY 2011-12). The same resulted in loss of Rs. 3367.38 crores in AY 2010-11. For AY 201....
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.... used in sec.80IB(9) of the Act. Accordingly the AO held that the profit relating to sale of crude oil alone is entitled for deduction u/s 80IB(9) of the Act. Since the crude oil constituted 19.11% of the total turnover, the AO computed the profit arising on sale of crude oil (mineral oil) @ 19.11% of the total profit from the undertaking, i.e., 19.11% of Rs. 2672.16 crores, which worked out to Rs. 510.72 crores. Accordingly, he restricted the deduction u/s 80IB(9) of the Act to Rs. 510.72 crores. 97. In the appellate proceedings, the Ld CIT(A) confirmed the disallowance of depreciation claimed on "Intangible assets". Hence the assessee is contesting the said decision of Ld CIT(A). 98. The ld A.R submitted that the assessee has followed the accounting practice of accumulating the costs incurred till the date of commercial production as "Intangible asset", since the "Participating right" acquired by the assessee from Government of India in the oil field is "Commercial right" eligible for depreciation. The Ld A.R submitted that the AO has allowed depreciation in AY 2010-11 and hence the AO should not have taken different view on this matter during the year under con....
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.... thereon. Accordingly we uphold the order passed by Ld CIT(A) on this issue. 101. We would like to prefer to dispose of the Ground No.6 and 7 urged by the Revenue at this stage, as the facts relating to those grounds have been discussed in the preceding paragraphs. In Ground no.6, the revenue is challenging the decision of Ld CIT(A) in holding that the expenses relating to aborted blocks need not be reduced from the profit from sale of mineral oils for computing deduction u/s 80IB(9) of the Act, since the deduction is allowable for each "undertaking". 102. We have noticed earlier that the AO has taken the view that, after the commencement of commercial production, all the expenses relating to Aborted blocks (unsuccessful blocks) should be reduced from the profit arising from sale of mineral oil taken from successful block. Accordingly, the AO reduced a sum of Rs. 2042.69 crores from the profit from sale of mineral oil obtained from successful block (here KG-DWN- 98/3) for the purpose of allowing deduction u/s 80IB(9) of the Act. For this purpose, the AO placed reliance on the clause/article 17.2.2 of PSC, which provided that - "...to deduct all i....
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....that on perusal of section 80-IB(9J, it can be observed that this sub-section provides for granting deduction on the profits and gains derived from "such - undertaking",it is clear pointer for granting deduction in respect of profit earned by each of such eligible undertakings separately. According to the assessee in light of the provisions of section 80- IB(9) r.w.s 80-IA(5) of the Act, there is no warrant for reducing the loss of one eligible undertaking from the profit of the other eligible undertaking. Such an interpretation would violate the unambiguous language of section, which otherwise talks of granting deduction in respect of the 'profits and gains derived from such undertaking'. If we were to read the section in a way that has been read by the AO, then instead of the phrase extracted in the preceding line, it should have been 'aggregate of profits and gains derived from such undertakings'. The assessee has placed reliance in this regard is placed on the decision of the Hon'ble Supreme Court in the case of CIT v. Canara Workshop (P.) Ltd.[1986] 161 ITR 320. The Supreme Court in this case held that in computing the profits for the purp....
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.... Only such allowance are allowed which are specified in the PSC c. Such specified allowance should be in relation to various specific natures as mentioned in sub-clause (a) (b) and (c). d. Such allowances shall be computed and made in the manner specified in the PSC. The AO while computing deduction u/s.80lB(9) of the Act in respect of KGD undertaking has reduced the amount of Rs. 2042.69 crores being the abortive cost of wells incurred in contract areas other than KGD undertaking. In doing so he has relied upon the provisions of Article 17 of the PSC signed by the assessee with the Central Government which deals with the computation of profits and gains for the purpose of Income-tax and is named as "Taxes, Royalties, Rental Duties etc". The relevant extract is reproduced below. Article 17.2.2 states that" a Companyshall be entitled, for income tax purpose only, to deduct all its unsuccessful Exploration Costs in contract areas covered by other contracts from the aggregate value of Petroleum allocable to the Company from any Field(s) in the Contract Area in the manner as follows: a. unsuccessful Exploration Costs incurred in contract are....
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.... decision rendered by Ld CIT(A). 105. The Ld D.R submitted that the "Production Sharing Contract" shall override the provisions of Income tax Act in terms of sec.42 of the Act. This is so held by Hon'ble Supreme Court in the case of Enron Oil & Gas India Ltd (2008)(305 ITR 75). He submitted that the Article/clause 17.2.2 of the PSC provided for deduction of expenses relating to Abortive blocks against the profit from sale of mineral oil. Accordingly he submitted that the AO has rightly deducted Rs. 2042.69 crores relating to Abortive blocks from the profit in order compute the deduction u/s 80IB(9) of the Act. 106. The Ld A.R, on the contrary, submitted that the clause/article 17.2.2 of PSC provides the manner of computation of profit at entity level and hence the expenses relating to aborted blocks are required to be reduced from the profit from sale of mineral oil while computing profit at entity level. However clause/article 17.2.5 of PSC has also stated that "all other provisions of Income tax Act will apply". He submitted that, by virtue of sec.80IB(13) of the Act, the provisions of sec. 80IA(5) has been made applicable to the deduction allowed u/s 8....
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....n of the profits and gains of KGD undertaking u/s 80-IB(9) of the Act. While computing the profits and gains of KGD undertaking for the purpose of claiming deduction under the section 80IB(9) of the Act, the provisions of section 80IA(5) are applicable, which provide that for the purposes of determining the quantum of deduction, the profits and gains of the eligible business shall be computed as if such eligible business were the only source of income of the assessee. Accordingly, the assessee has correctly not reduced the unsuccessful exploration cost incurred in contract area other than KGD, which has been made in the computation of income u/s 42(l)(a) against the entire income of the assessee company while computing the business income. The AO has however, rejected the above claim of the assessee and has reduced the amount of Rs. 2042.69 crores being the abortive cost of wells incurred in contract areas other than KGD while computing deduction u/s.80IB(9) of the Act in respect of KGD undertaking. In doing so, he has relied on the provisions of Article 17.2.2. of the Production Sharing Contract (PSC). However, on harmonious reading of the provisions of ....