Income Tax Appellate Tribunal - Delhi
Dy. Cit vs Geo Enpro Petroleum Ltd. on 4 May, 2007
ORDER
K.G. Bansal, A.M.
1. The aforesaid appeals of the revenue and the assessee involve one common ground regarding the determination of initial assessment year under Section 80-IB(9) of the Income Tax Act, 1961. The revenue's Appeal No. 3551 (Del)/2005 for assessment year 2001-02 also involves some issues regarding the computation of deduction under Section 80-IB of the Act. These appeals were argued in a consolidated manner by the learned counsel for the assessee and the learned Departmental Representative. Therefore, we find it fit to pass a consolidated order disposing off all these appeals. The ground taken by the revenue regarding the determination of initial assessment year is similarly worded in the appeals for assessment years 2000-01 and 2001-02. The ground is that on the facts and in the circumstances of the case and in law, the learned CIT (Appeals) has erred in holding that the initial assessment year for the purposes of deduction under Section 80-IB would be assessment year 1999-2000 and not assessment year 1996-97, as held by the assessing officer. The ground in respect of this issue is identically worded in the appeals of the assessee for assessment years 2003-04 and 2004-05. However, these have been stated in more elaborate manner by splitting it up in 7 parts. For the sake of ready reference, the ground is reproduced below :
I. That the CIT(A) erred on facts and in law in upholding the action of the assessing officer in denying the appellant exemption under Section 80-IB(9) of the Income Tax Act 1961 ('Act').
1.1 That the CIT(A) erred on facts and in law in holding that for the purpose of Section 80-IB(9) of the Act, the 'initial assessment year' in the instant case of the appellant is assessment year 1996-97 (and not assessment year 2000-01 as contended by the appellant) and accordingly, no deduction was admissible under Section 80-IB(9) of the Act for the relevant assessment year as the period of seven years specified under Section 80-IB(9) of the Act has already expired and, therefore, claim of deduction under Section 80-IB(9) has become time-barred for the relevant assessment year.
1.2 That the CIT(A) further erred on facts and in law in failing to appreciate that the extensive work-over operations were completed on 4-4-1999 i.e., during assessment year 2000-01 and that the appellant would be said to have commenced commercial production only on the completion of extensive work-over operation and not any time before the completion of extensive work-over operation.
1.3 That the CIT(A) further erred on facts and in law in holding that the extensive work-over operations carried out by the appellant in the instant case were in the nature of regular overhaul and running repairs which are necessary in the oil well's life cycle and, therefore, does not bear any connection with the determination of date of commercial production.
1.4 That the CIT(A) further erred on facts and in law in not appreciating that in terms of the Production Sharing Contract, the appellant along with other consortium partners was under an obligation to develop the field by carrying out substantial work-over operations and drilling ten new wells and, therefore, the commercial production could not be said to have commenced until the work-over operation were completed.
1.5 That the CIT(A) further erred on facts and in law in holding that the work-over operations carried out in the seven oil wells were aimed to enhance 'crude oil production' as distinguished from 'commencement of commercial production', which would be said to have occurred when first oil was produced through a well head.
1.6 That the CIT(A) further erred on facts and in law in failing to appreciate that miniscule/marginal oil production in seven out of thirty six oil wells during the period 1995-96, 1996-97 and 1997-98 were on account of trial production and, therefore the appellant could not be said to have commenced the commercial production until assessment year 2001-02, i.e., the period during which the work-over operations were completed and there was a substantial recovery of crude oil.
1.7 That the CIT(A) further erred on facts and in law in not appreciating the principle of judicial consistency and in holding that the orders passed by his predecessor for the assessment years 2000-01 and 2001-02 were unacceptable.
2. In order to appreciate the controversy regarding the determination of the initial assessment year, we may summarize the orders of the assessing officer, learned CIT (Appeals)-X, New Delhi (hereinafter called CIT(A)-l) and learned CIT (Appeals)-XV, New Delhi (hereinafter called the CIT( A)-2).
2.1 In the assessment order for assessment year 2000-01, it is mentioned that the case of the assessee was that it was eligible for deduction under Section 80-IB(4) and 80-IB(9) of the Act. However, it was pointed out that the assessee was not a notified industry in the North-Eastern Region for the purpose of deduction under Section 80-IB(4). Therefore the case of the assessee was considered under Section 80-IB(9) of the Act. It was pointed out that deduction under this section is admissible to an undertaking which begins commercial production of mineral oil for a period of seven consecutive assessment years including the initial assessment year. The initial assessment year in the case of the assessee was assessment year 1996-97. Therefore, this year was the 5th year of the claim out of seven years for which the claim was admissible. The aforesaid findings were reiterated in the assessment order for assessment year 2001-02 and it was pointed out that this was the sixth year out of seven years for which the claim was admissible under Section 80-IB.
3. The learned CIT(A)-1 considered the facts of the case and the admissibility of deduction under Section 80-IB. It was pointed out that the claim regarding the eligibility under Section 80-16(4) was not pressed, however, strong objection was taken to the finding of the assessing officer that assessment year 1996-97 was the initial assessment year for the purpose of Section 80-IB(9). It was pointed out to her that the assessee was a member of a consortium. The consortium, after taking over Kharsang Oil Field, carried out substantial work-over operations on the existing wells, which were not producing mineral oil or were capable of only marginal yield. The consortium carried out seismic aerial photography, surface geological mapping and casing placement etc. in order to increase the yield from nearly defunct oil wells. The consortium also created new storage facility and purchased various equipments for extraction of mineral oil in addition to carrying out massive work-over operations. It was further represented that the consortium entered into Production Sharing Contract (PSC) with Government of India on 16th June, 1995. The Government of Arunachal Pradesh granted lease to the consortium for carrying out mining operation in the fields on 21-10-1997. The delay in work-over operations due to delay in getting mining lease was disclosed to the Management Committee Meeting (MCM) of the consortium in January, 1998. It was also represented that production of mineral oil in commercially feasible quantities was started in the financial year relevant to assessment year 2000-01. In this respect, a detailed production chart for the period June, 1995 to March, 2003, was placed before her. On perusal of the same it was found that prior to the start of the work-over operation, the production of mineral oil was between 31 MT to 37 MT per day. After the work-over operations initiated in January, 1998, two wells yielded production of 53 MT per day during between January, 1998 to March, 1998. The commercial production commenced in previous year 1998-99, relevant to assessment year 1999-2000, in which the production ranged between 134 MT per day to 167 MT per day, the lowest being in the month of May, 1998, and the highest being in the month of February, 1999. In view of these facts, it was argued that assessment year 1999-2000 was the initial assessment year for the purpose of Section 80-IB(9) of the Act. The CIT(A)-1 considered these facts and agreed with the assessee that assessment year 1999-2000 was the initial assessment year for the purpose of Section 80-IB(9). Her findings on pages 6 and 7 of the order, which are rather cryptic in nature, are reproduced below:
I have carefully considered all the material placed before me by the learned counsel and I am inclined to agree with the submission that the initial assessment year for the purpose of Section 80-IB(9) would be assessment year 1999-2000 that is the year in which commercial production began. The learned counsel has been able to establish convincingly that the initial assessment year in terms of Section 80-IB(9) is assessment year 1999-2000 and not assessment year 1996-97 as erroneously held by the assessing officer. This ground is allowed.
3.1 The issue again came up before her in the appeal for assessment year 2001-02. Relying on the order for assessment year 2000-01, it was again reiterated that assessment year 1999-2000 was the initial assessment year for the purpose of Section 80-IB(9). For the sake of completeness, the finding in this regard is reproduced below from page 2 of the order :
Similar issue came up for disposal for me in assessment year 2000-01 wherein the learned counsel of the appellant claimed assessment year 1999-2000 as initial assessment year for the purpose of Section 80-IB(9). In that year vide my order dated 4-5-2005 in appeal No. 247/02-03 I have held that I am inclined to agree with the submission that the initial assessment year for the purpose of Section 80-IB(9) would be assessment year 1999-2000 that is the year in which commercial production began. The learned counsel has been able to establish convincingly that the initial assessment year in terms of Section 80-IB(9) is assessment year 1999-2000 and not assessment year 1996-97 as erroneously held by the assessing officer. This ground is allowed.' As the facts of the case are same for this year also, following my decision for assessment year 2000-01 this ground is allowed and the initial assessment year for purpose of Section 80-IB(9) would be assessment year 1999-2000 for this year also.
3.2 Aggrieved by these orders, the revenue is in appeal before us. We have already stated the ground taken by the revenue in this behalf.
4. The issue cropped up again in the proceedings for assessment year 2003-04. The assessing officer pointed out that if the production started in the previous year relevant to assessment year 1996-97, then this will be the 8th year and hence the assessee will not be entitled to deduction under Section 80-IB as the period of seven years expired with the expiry of previous year relevant to assessment year 2002-03. It was further mentioned that if the production started in assessment year 1999-2000, as claimed, then the provision contained in proviso to Section 80-IB(9) will have to be considered. According to him, the aforesaid provision states that for claiming the deduction in respect of an undertaking located in North-Eastern Region, the production had to begin before the first day of April, 1997. Therefore, it was held that the assessee was not entitled to the deduction in this year at all. This finding was repeated in the assessment order for assessment year 2004-05.
4.1 Appeals in respect of these years were decided by the CIT(Appeals)-2 He considered various submissions of the assessee regarding the agreement of the consortium with the Government of India regarding PSC, grant of mining lease to the consortium by the Government of Arunachal Pradesh, work-over operation undertaken by the consortium, setting up of the storage tank and substantial increase in production of mineral oil after work-over operation. He also considered the report of the director for the year ended on 31-3-1996, in which it was mentioned that work-over operations were being ordered to enhance to production of crude oil. His view was that there was a word of difference between commencement of commercial production and enhancement of production. He also made certain observations regarding the life cycle of an oil well spanning over four segments, namely, drilling, completion production and abandonment. It was pointed out that work-over operations were a part of regular overhaul of an oil well during its life cycle undertaken to enhance production from the older wells. It was stated that nowhere in any literature on the subject any reference is available to equate work-over operation with the commencement of commercial production. Having considered all these matters, it was held that the commercial production had started in assessment year 1996-97 and that was the initial assessment year. In this regard, it would be worthwhile to reproduce paragraph 3.5 of his order, in which it as held that the assessee could not be understood to be engaged in non-commercial activity in assessment year 1996-97, when it undertook as the operating agency of the consortium the work of extraction of crude oil and managed to produce 9,430 MT of crude oil :
3.5 It is accepted that the legal definition of 'commercial' is not clear. There are no precedents where the meaning of 'commercial' has been tried. Yet one might suspect that the interest of profit or other market advantage will matter in a legal perspective on the word 'commercial'. The term can be appreciated negatively against the meaning of 'non-commercial', which in ordinary legal parlance would connote activities in the nature of charity or philanthropy or activities of that nature. However, when interpreting the facts of this case from the purview of commencement of commercial production, one will also look on that the consortium members did reasonably expect from the production sharing contract, what were the circumstances concerning the formation of the contract, how the members of the consortium have acted in the market and more importantly how the appellant has booked the sales of crude oil in its accounts. From all available angles, the appellant cannot be understood to be engaged in a non-commercial activity in assessment year 1996-97, when the company undertook as the operating agency of the consortium extraction of crude oil and managed to log a production of 9430 MT of crude oil.
4.2 Thus, it was held that commercial production commenced in the previous year relevant to assessment year 1996-97 and in view thereof the claim under Section 80-IB(9) came to an end in assessment year 2002-03. Aggrieved by this order, the assessee is in appeal before us. Its grounds have already been reproduced earlier.
5. We proceed with the appeals of the assessee in the first instance. The learned counsel pointed out that the only controversy in these appeals and also the main controversy in the appeals of the revenue is about the determination of "initial assessment year" which has been defined in Section 80-IB(14)(c)(iii) to mean in the case of an industrial undertaking in the business of commercial production or refining of mineral oil referred to in Sub-section (9), the assessment year relevant to the previous year in which the undertaking commences the commercial production or refining of mineral oil. Thus initial assessment year under Section 80-IB(9) is that year in which the consortium commenced the commercial production of mineral oil. Further, he referred to the provision contained in Section 80-IB(9), which provides for the deduction to an undertaking which begins commercial production or refining of mineral oil at the rate of 100 per cent of the profits for a period of seven consecutive assessment years including the initial assessment year. The proviso to this sub-section states that where the undertaking is located in the North-Eastern Region, it has begun or begins commercial production of mineral oil before the first day of April, 1997 and where it is located in any part of India, it begins commercial production of mineral oil on or after the first day of April 1997. The case of the learned counsel was that the State of Arunachal Pradesh is located in India and, therefore, even if commercial production A was commenced after the first day of April, 1997, it will be entitled to the deduction. Thus, he assailed the finding of the assessing officer that if assessment year 1999-2000 was the initial assessment year, then the assessee will not be entitled to the deduction as its undertaking was located in North-Eastern Region, therefore, for qualifying for the deduction, it had to begin commercial production on or before the first day of April, 1997. No particular argument was made by the learned Departmental Representative in this matter as he relied on the order of the assessing officer.
5.1 We may pause here and consider the finding of the assessing officer in the matter. The proviso contains two parts for qualification of an undertaking to claim the deduction, namely, (i) where the undertaking is located in North-Eastern Region, it has begun or begins commercial production of mineral oil before first day of April, 1997; and (ii) where it is located in any part of India, it begins commercial production of mineral oil on or after 1-4-1997. There is no controversy and in fact there cannot be any controversy that the State of Arunachal Pradesh is located in a part of India. Therefore, the second condition that the undertaking begins commercial production of mineral oil on or after 1-4-1997 stands satisfied if the case of the assessee that its undertaking started commercial production in the previous year relevant to assessment year 1999-2000 is accepted. On the other hand, if the revenue's contention that the under taking started commercial production in assessment year 1996-97 is accepted, even then, the condition in the first limb stands satisfied, namely that where the undertaking is located in North-Eastern Region it begun or begins commercial production of mineral oil before 1-4-1997. There fore we are of the view that the assessee will be entitled to the deduction if it was to be held that commercial production began in the previous year relevant to assessment year 1999-2000. It appears that the confusion arose in the mind of the assessing officer because the second limb is worded in a peculiar manner.
5.2 The learned counsel vehemently argued that the CIT(A)-2 was not an expert, competent to make comments on the technical matters like make-over operations and life cycle of an oil well. We find that this view is supported by the decision of Hon'ble Supreme Court in the case of Saraswati Industrial Syndicate Ltd v. CIT . In view of that decision, we tend to agree with him. However, we may add that the real controversy before us is regarding 'commercial production' and the technical details submitted to the assessing officer or stated by the CIT(A)-2 in his order do not really form the basis for resolving the controversy.
5.3 The learned counsel also referred to the provisions of Section 80-IA before its substitution by the Finance Act, 1999. Sub-section (1) inter alia provided for the deduction to an industrial undertaking engaged in commercial production of mineral oil in the North-Eastern Region or in any part of India on or after 1-4-1997. Thus, the exemption was available to the undertaking located in North-Eastern Region when it commenced commercial production at any time or it commenced production in any part of India on or after 1-4-1997. Thus it appears that the provisions of this sub-section are in pari materia with the provisions of Sub-section (9) of Section 80-IB. Further he referred to the provisions of Sub-section (4E) which provided that the provisions of aforesaid Sub-section (1) were applicable to any undertaking which begins commercial production of mineral oil in North-Eastern Region or in any part of India on or after the first day of April, 1997. The contents of this sub-section stands covered by Sub-section (1) also. He also referred to the provision contained in Sub-section (5)(v) which granted deduction at the rate of 100 per cent of the profits and gains derived from the business of production of mineral oil for the initial seven assessment years. The condition of the number of years seems to have been stated in more clear terms in Section 80-IB but the period in both the sections is the same. He also referred to the provisions of Sub-section (14)(c)(6) which defines the "initial assessment year" to mean assessment year relevant to previous year in which the undertaking commences the commercial production of mineral oil. Similar provision exists in Section 80-IB as we have seen earlier. Thus, we find that the provisions in both sections are identical. Therefore, if initial assessment year is 1996-97, the assessee will be eligible for deduction under Section 80-IA, as it stood before its substitution. However, if initial assessment year is 1999-2000, it will be entitled to deduction under Section 80-IB.
5.4 The case of the learned counsel was that the deduction was claimed for the first time by the assessee in assessment year 1999-2000. On the basis of the statutory provisions discussed above, it was the claim of the learned counsel that the undertaking of the consortium was entitled to the deduction for the first time in assessment year 1999-2000 and this was the initial assessment year. Once a year has been fixed as the initial assessment year, it cannot be changed later on as held by Hon'ble Madras High Court in the case of CIT v. India Forge & Drop Stampings Ltd. . The Hon'ble Court pointed out that the Tribunal was not correct in holding that the assessee was entitled to claim deduction under Section 80-J for the assessment year 1980-81 if the assessee established that its commercial production commenced in the year 1973-74. Once an initial year had been fixed, it attains finality. Therefore it was further held that the Tribunal exceeded its jurisdiction in directing the ITO to consider the question de novo and determine whether it had commenced commercial production during the year 1973-74. The import of the aforesaid submission is not clear. On perusal of records, it is found that the assessee addressed a letter dated 12-1-2006 to the assessing officer in the course of proceedings for assessment year 2003-04. In this letter, various stages in the life cycle of an oil well, the work-over operations carried out by the assessee, commercial production under the PSC and the legal provisions A contained in Section 80-IB(9) were discussed. On the basis of various submissions, it was argued that assessment year 2000-01 will be the initial assessment year in the case of the assessee, but it was also pointed out that in the appellate proceedings for assessment years 2000-01 and 2001-02, the CIT(Appeals)-1 held that assessment year 1999-2000 shall be the initial assessment year. Revenue's appeals for both these years are pending before us against the aforesaid orders. Therefore, the whole issue of the determination of initial assessment year is pending before us. Nonethe-less, it appears to us that similar consideration will be applicable under Section 80-IB(9). If a particular year is fixed as the initial assessment year, then, it cannot be change. It may be that the submission meant that the CIT(A)-2 could not have changed the initial assessment year and he ought to have followed the order of his predecessor.
5.5 The learned Departmental Representative did not make in submission in these matters. After consideration of the submissions, we find that two conclusions can be C drawn from the aforesaid discussion, namely, that - (i) the assessee would be entitled to the deduction subject to the condition that the period of deduction has not expired and in this connection the provision contained in the proviso to the erstwhile Section 80-IA or 80-IB(9) supports the case of the assessee; and (ii) once the initial year is fixed, it becomes final which cannot be disturbed.
6. Coming to the facts of the case, the learned counsel referred to pages 1 to 7 of the paper book, being notice inviting offers for joint ventures to develop medium size oil and gas fields in India issued by the Government of India. It is mentioned that the offers are invited for developing medium-size oil/gas fields listed in the brochure and the companies may bid for one or more fields, singly or in association with other companies. Kharsang Oil Field in the State of Arunachal Pradesh was included in the offer. Consequent upon the acceptance of the offer of the assessee along with others who formed the consortium a PSC being an agreement among Government of India and four others was signed on 16-6-1995 regarding regulation of Petroleum Operations and the grant of licences and leases for exploration and development of petroleum. It is mentioned that exploration carried out by Oil India Ltd. prior to the effective date pursuant to the agreement had led to discovery in the Contract Area of petroleum in commercial quantity. The Government desire that the resources in the Contract Area be exploited expeditiously in the interest of India in accordance with good international practices. Therefore, the Government had invited bids from interested persons for such development of resources in the Contract Area. The companies have represented that they had requisite financial and technical resources for performance of obligations. Therefore, the Government has granted a mining lease to Oil India Ltd. and the companies authorizing them inter alia to carry out Petroleum Operations and activities ancillary thereto. Article 1 of the Agreement contains various definitions governing the agreement. Article 1.24 defines "commercial production" to mean production of crude oil of natural gas or both from the Contract Area and delivery of the same at the relevant delivery point under a programme of regular production and sale. We may pause here and state that one of the arguments of the learned counsel was that this definition should govern the meaning of the words "commercial production" used in Section 80-IB(9), and it appears to us that real controversy lies in respect of the meaning of the aforesaid words under the section and their interpretation. Article 1.37 contains the definition of the term "development operations" under the agreement to mean the conduct of operations in accordance with the development plan, including inter alia purchase, shipment, storage of equipments and materials used in developing petroleum accumulation, drilling completion and testing of development well in accordance with the Development plan and shall include the purchase, shipment or storage of equipments and materials used in developing petroleum accumulations, the drilling, completion and testing of Development Wells, the drilling and completion of wells for gas or water injection, the laying of gathering lines, the installation of separators, tankage, pumps, artificial lift and other producing and injection facilities, including the laying of pipelines within or outside the Contract Area, Storage and Delivery Point, the installation of said storage or gas processing facilities, the installation of loading facilities and other facilities required for the development and production of the said petroleum accumulations and for the delivery of the said petroleum accumulations and for the delivery of crude oil and/or gas at the Delivery Point and also including incidental operations not specifically referred to herein as required for the most efficient and economic development and production of the said petroleum accumulation in accordance with good international petroleum industry practices. Article 1.38 defines "Development Plan" to mean (a) in relation to the existing discovery, the work programme as given at Appendix F and (b) in relation to a new discovery, a plan submitted by the Contractor containing proposals required under Article 10, 11 or 21 for the development of a Commercial Discovery which has been approved by the Management Committee or Government. It was submitted that part (b) of Article 1.38 is not applicable to the assessee as it is not a case of a new discovery. Article 1.59 defines the term "lease" to mean a mining lease granted to the contractor under the rules upon application to the appropriate authority in respect of the Contract Area. Article 1.67 defines "Oil Fields" to mean an area within the Contract Area consisting of a single oil reservoir or multiple oil reservoirs all grouped on or related to the same individual geological structure, or stratigraphic conditions, approved by the Management Committee (to include the maximum area of potential productivity in the Contract Area in one or more simple geometric shapes) in respect of which a commercial discovery has been declared and a Development Plan has been approved and a reference to an Oil Field shall include a reference to the production of associated natural gas from that Oil Field Article 1.74 defines "Petroleum Operations", subject to the A requirement of the context to mean, Exploration Operations, Development Operations or Production Operations or any combination of such operations, including but not limited to collection of seismic information, drilling and completion and re-completion of wells, operation and maintenance of all necessary facilities and assets, construction, plugging and abandonment of wells, environmental protection, transportation, storage, sale or disposition of petroleum to the Delivery Point, site restoration and all other incidental operations or activities as may be necessary. Article 1.76 defines "Production Operations" to mean all operations conducted for the purpose of producing petroleum from the Contract Area pursuant to this contract including the operation and maintenance of all necessary facilities and assets thereof.
6.1 Article 2 dealing with the scope and duration and states that the scope of the contract is for conducting Petroleum Operations for exploitation of petroleum by the contractor in the Contract Area. The duration was fixed for a period of 25 years from the Effective Date subject to its termination or extension in certain circumstances.
6.2 As per Article 3.1, the assessee was entitled to 10 per cent share in the crude oil or natural gas obtained from Petroleum Operations. Article 5 deals with the Work Programme. Article 5.1.1 states that the contractor shall commence Petroleum Operations on the Effective Date in accor dance with the contract. Under Article 5.3, a Management Committee was constituted for approvals of work programmes and budgets and it was provided that the Management Committee shall consider the proposed work programme and budget within 30 days after submission thereof pursuant to Article 5.2. Article 5.4 deals with amendments to work programmes and budgets, which provides for approval of the proposals of the contractors after taking into account the existing circumstances. Such proposals were also to be considered within 30 days after their submissions. The work programme was narrated in Appendix "F" of the agreement, to which we shall revert at appropriate stage.
6.3 Article 6.6 dealt with the matters which required the approval of the Management Committee. These included, inter alia, annual work programmes and budgets, material modifications or revisions thereof as proposed by the operating committee.
6.4 Under Article 7 the assessee was appointed the operator for carrying out petroleum operations pursuant to the contract and it was undertaken by the assessee that it shall not resign as operator until the completion of Minimum Work Programme contained in Appendix "F".
6.5 Article 27 provided that the Government shall be the sole owner of petroleum underlying the Contract Area and shall remain the sole owner of petroleum produced pursuant to the contract except as regards that part of the crude oil or gas the title to which has passed to the contractor under the agreement. It further provides that the title to the crude oil or gas to which the contractor is entitled shall pass at the Delivery Point. The contractor was responsible for all costs and risks prior to the Delivery Point and all parties were responsible for all costs and risks after delivery point in respect of the crude oil or gas for which the title passed to them at the delivery point. Appendix-F contains two sections dealing with : (i) technical information for the Kharsang oil field, and (ii) proposed work programme for development and related outlay. It is mentioned that presently 12 wells were flowing, however, at the time of taking over the field (fixed arbitrarily on 1-1-1994) only seven wells will continue flowing. Unless remedial work is carried out, five fields would cease flowing in 1993. The cumulative production in June, 1992 was 5,41,449 KLS and it would be around 5,85,000 KLS in the beginning of 1994. It is further mentioned that the main problem is the sand ingress, for which different solutions are available to minimize the problem, being-(i) all wells are completed with seven inch casing, (ii) sand consolidation through chemical method, and (iii) regular well cleaning with coiled tubing and a nitrogen unit. The appendix also contains details of proposed work programme, i.e. acid wash location of new wells, transfer of zone and provide for artificial lift.
6.6 The minimum work programme assumes that at the time of take over seven flowing wells have the potential of producing crude oil at the rate of 58 Tons per day (TPD). After work-over 10 wells should yield crude oil at the rate of 180 TPD. Re-completion in higher sand on five wells would provide additional potential of 55 TPD. On the assumption that this work will be done in one year, the average production for the year one was estimated at 236 TPD. In the second year the production was expected to be 325 TPD and in the third year it was expected to be 395 TPD. In this manner, the production of first ten years was estimated.
6.7 We may pause here and state that the case of the learned counsel was that the initial assessment year for the purpose of Section 80-IB should be fixed by taking into account the work-over programme and the projections of estimated production therein. The initial assessment year should be that year in which substantial production has been achieved, which is commensurate with the normal production in subsequent years. This also was an issue hotly contested by the revenue.
6.8 Our attention was drawn towards Government's letter dated 5-6-1997 regarding fixation of crude price for Kharsang field. In particular, he emphasized that the price was fixed on 5-6-1997. We may state here that Article 19 of the PSC contains sub-articles regarding valuation of petroleum on FOB basis, to be determined at arm's length sale. Our attention was also drawn towards petroleum mining lease dated 21-10-1997. This deed refers to the PSC signed on 15-6-1995 and states that the State Government has agreed to grant the said lease with the approval of Central Government. It further states that the lease was granted from 16-6-1995 (being the date of PSC) for a period of 20 years. Our attention was also drawn towards the minutes of the Management Committee held A on 14-5-1998, in which the operator, inter alia made a presentation on the status of operation at Kharsang Oil Field between the period 14-1-1998 to 30-4-1998 It was pointed out that work-over operation commenced effect from 14-1-1998 and have been completed in respect of seven oil wells, leading to crude oil production at the rate of 130 to 140 KLS a day. The delivery point (CTTF) was activated on 18-9-1997 after approvals from statutory authorities. It was also informed that the development of the oil field was two years behind the schedule. The Chairman pointed out that although the development of the oil field should have started in the first year of signing of the PSC, but in real sense the first year commences from September, 1997, as signing of mining lease progressed during this period and was actually signed on 21-10-1997. Therefore, for all practical and comparison purposes under the PSC, all members agreed that it will be more logical to assume that the first year of the PSC starts from September, 1997. We may again pause here and state that the learned counsel for the assessee placed considerable stress on these minutes for the purpose of fixation of initial assessment year under Section 80-IB(9). It may also be stated that the assumption made about the first year by the members was only for the purpose of the progress of work-over programme under the PSC and it was agreed that it would be more logical to assume the first year of the PSC to be starting from September, 1997. It may also be mentioned here that although the mining lease was signed by the State Government on 21-10-1997, the lease was granted retrospectively from 16-6-1995, being the date of the PSC. This was obviously done because the crude oil was being extracted from the following wells and the assessee was getting its share in the production from the date of PSC. The learned counsel laid considerable stress on setting up of the Delivery point (CTTF) and vehemently argued that the date of its setting up has to be take into account. We may add here that the CTTF was set up for quantification of the production and levy of statutory dues. Before setting up the Delivery Point, the crude oil was being loaded in tankers at the oil head. Therefore, if oil was produced earlier also, then, it cannot be said that change in procedure of its quantification and payment of the Excise Duty at CTTF would make any difference to the conclusion.
6.9 Our attention was drawn towards page 179 of the paper book, which is the account of Polish Oil & Gas Company, which raised two bills aggregating to Rs. 5,35,409 on 31-7-1999 and 1-3-2000 regarding work-over service charges. These bills were also placed in the paper book and it was pointed out that the bill dated 1-3-2000 was the final bill from the aforesaid company. Attention was also drawn towards the petroleum operation agreement dated 14-2-1998 between Kaaja Resources Ltd., Canada, and the assessee regarding well services for enhancing hydrocarbon production from Kharsang fields. A sum of Rs. 50,82,443 was payable to them for the services rendered in the period 9-3-1998 to 25-1-1999. Our attention was also drawn to page 193 of the paper book, which shows that the assessee had fixed assets of the value of Rs. 98,57,091 installed between 18-9-1997 and 7-2-1999.
7. In the context of the aforesaid facts and in particular the terms and conditions contained in PSC, the case of the learned counsel was that assessment year 2000-01, in which optimum production had been achieved, should be held to be the initial assessment year. In the alternative, it was his case that the findings of the CIT(A)-1 fixing assessment year 1999-2000, in which substantial production had been achieved, should be taken as the initial assessment year for the purpose of Section 80-IB(9) of the Act. It was pointed out that the expression "commercial production" has not been defined anywhere in the Act, in Section 2, Section 80-IB or anywhere else. Therefore, the terms defined in PSC should form the basis for fixing initial assessment year. Article 1.24 of the PSC defines commercial production to mean production of crude oil or industrial gas or both from the Contract Area and delivery of the same at the relevant Delivery Point under a programme of regular production and sale. The minutes of Management Committee held on 14-5-1998 clearly established that the delivery point was activated on 18-9-1997, after securing necessary approval from Central Excise and other authorities and the first custody transfer from tank-1 was effected on 18-11-1997. Therefore, the commercial production could not have started before 18-11-1997, falling in previous year relevant to assessment year 1998-99. However, sizeable quantity of crude oil was produced in previous year relevant to assessment year 1999-2000. Although the PSC was signed on 16-6-1995, delays occurred in commercial production due to grant of mining lease before which order could not be place with the Polish company for mobilizing the rigs for undertaking work-over programme. De-mobilization of the rigs took place in the financial year 1998-99, as seen from their bills, and if that is taken into account, the commercial production started in the previous year relevant to assessment year 1999-2000. Therefore, while the CIT(A)-1 rightly appreciated the facts of the case in terms of the PSC, the CIT(A)-2 erred in holding that the initial assessment year was 1996-97 relevant to the accounting period 1-4-1995 to 31-3-1996, in which the PSC was signed.
7.1 On the other hand, the learned Departmental Representative pointed out that the words "commercial production" have not been defined anywhere in the Act. Therefore, these words should be assigned the meaning which is understood in the common parlance. The CIT(A)-2 has furnished facts and figures regarding the production of mineral oil in various years starting from financial year 1995-96 up to financial year 1998-99. The figures were furnished on the basis of director's report. It was pointed out that 10 per cent share in the production of crude oil from the Kharsang Oil Field for the financial year 1995-96 was 943.20 MT, which showed that the wells produced overall crude oil of 9,340 MT. The overall production for subsequent three years were 11,900 MT 11,170 MT and 44,630 MT. Production of Oil of 9,430 MT, 11,900 MT and 11,170 MT was held to be commercial production by the CIT(A)-2. In this connection, he narrated certain details about the life cycle of the oil well and the work-over operations. Such details are available on electronic media and there was nothing wrong when he narrate various stages of life cycle of the oil well and the nature of work-over operations. As against the aforesaid, the CIT(A)-1 merely reproduced the submissions of the assessee and passed a non-speaking order accepting the contentions of the assessee. Her order was contained in a very small paragraph which merely stated that she was inclined to agree with the submission that initial assessment year for the purpose of Section 80-IB(9) would be assessment year 1999-2000, the year in which commercial production began. This order does not disclose the process of reasoning by which she came to the conclusion that assessment year 1999-2000 was the initial assessment year. Therefore, it was submitted that the orders of CIT(A)-1 may be set aside and the orders of CIT(A)-2 may be upheld.
7.2 In the rejoinder, the learned counsel pointed out that resort will have to be taken to PSC when a term is not defined in the Act. It was his case that the section was applicable even in the case of reconstruction of businesses and, therefore, the initial assessment year should be understood to be that year in which substantially higher production was achieved.
7.3 Before parting with the submissions of the rival parties, it may be mentioned here that it was pointed out by the learned Departmental Representative that the whole purpose of the PSC was to substantially increase the production. The assessee was a member of the consortium, which understood work-over operations with that purpose in mind. Therefore, he was requested to state as to why the meaning of the expression "commercial production" should not be understood in the context of the PSC. His argument was that the PSC was merely a commercial contract not having any force of the statute. The normal principle of interpretation of the statute is that if a word is not defined in the statute, it should be assigned the same meaning as understood in common parlance. That was done by the CIT(A)-2. On this very issue, the case of the learned counsel was that a contextual meaning should be assigned to these words and for that purpose PSC will have to be taken into consideration.
8. We have considered the facts of the case and rival submissions. It is clear that the words "commercial production" have not been defined in the Act. Therefore, we may have to take resort to the cases decided under Section 2 regarding the definition of the word "business", which includes within its ambit "trade" and "commerce". The word "trade" has not been defined in the Act. However, as per Webster's New Twentieth Century Dictionary, (Second Edition), "trade" means a means of earning one's living, occupation or work. In Black's Law Dictionary, "trade" means a business which a person has learnt or is carrying on for procuring subsistence or profit, occupation or employment, etc. In the case of CIT v. Assam Hard Board Ltd. , the Hon'ble Gauhati High Court at page 320 referred to the meaning of the word "trade" given in Webster's New Twentieth Century Dictionary and Black's Law Dictionary. It was pointed out that from the dictionary meaning it is abundantly clear that the commission received in real estate transaction can definitely be said to be business income arising out of the business. In the case of Griffiths (Inspector of Taxes) v. LP. Harrison (Watford) Ltd. [1965] 58 ITR 328 (PC), a reference was made to the word "trade" at page 341. It was pointed out that "It would seem that one reason why this question was held to be one of fact was that the word 'trade' is more indefinite than most words used in Acts of Parliament, and Parliament has not chosen to define it, except by a definition which repeats the word. So there are many cases where there is room for a difference of opinion and I think that this is one of them. I am not prepared to say that the opinion of the Commissioner is unreasonable, and, if that be so, this appeal ought, in my judgment, to be allowed." This issue also came up in the case of CIT v. Kasturi Estates (P) Ltd. . At pages 585 & 586, by referring to the final report of the Royal Commission, it was pointed out that all profits that arise from the utilization of property are made in a sense out of capital; but, as we have explained above, the law has established a distinction between the profit that arises when property has been committed to a trade or 'an adventure or concern in the nature of trade' as part of its merchantable stock and is then realised in the course of trading operations and the profit that arises from a realization of property not so committed. We may also refer to the meaning of the word "commerce" given in Concise Oxford English Dictionary. (10th Edition, Revised), which is the activity of buying and selling, especially on a large scale. It is pointed out that the word has its origin from the Latin word "commercial" meaning trade or trading. On the basis of these decisions and the meaning, which we have culled out in absence of any citations by the parties, it appears to us that when goods are purchased for sale, it is case of trade. When goods are purchased in somewhat larger quantity for sale, it is a case of commerce and when goods are habitually purchased and sold, it would be a case of business. This would apply even in a case where goods are produced and solearned We find that the consortium has produced 9,430 MT of crude oil in financial year 1995-96 itself, out of which the assessee's share was 943.20 MT. The production in subsequent two years was 11,900 MT and 11,170 MT, the assessee's share being 10 per cent thereof. The income was shown as business income in those years. We have seen that the "business" is a wider term than "trade" or "commerce". The assessee has been showing that the crude oil produced by the consortium from the date of the PSC was on account of business. Assuming that there was an error in the understanding of the assessee in this matter, it is clear that the consortium was undertaking regular systematic activity, which will amount to "business". If that is so, can it then be said that it was not A commercial production? We may like to compare this case with a case where a plant is being renovated on extensive scale to revive a sick unit or for achieving higher production. To our mind, the production before renovation as well as after renovation in much larger quantity will be commercial production because in either case the goods were being produced to be sold with a view to earn profit, which includes even loss within its ambit. Therefore, when the assessee produced roughly about 10,000 MT before work-over operations and 44,630 MT after work-over operations, the production in both the periods was commercial production for the assessee.
8.1 We may also examine the case of the learned counsel, which was that the whole situation should be seen in terms of the PSC, the implementation of which was delayed due to delay in grant of mining lease and other factors. We have seen that exploration carried out by Oil India Ltd. had led to discovery in the Contract Area of Petroleum in commercial quantity, the Government desired that the petroleum resources in Contract Area be exploited expeditiously and, therefore, the Government invited bids from persons interested for development of the resources in the Contract Area. Pursuant to this purpose, the consortium was granted rights to exploit petroleum resources in the Contract Area. Oil in commercial quantity was available and some oils were flowing. The consortium started production of crude oil soon after the agreement was made. It was also desired that production should be done in efficient manner be improving the quality of wells, for which work-over operations were to be done. For this purpose, the PSC defines certain terms, which repeatedly used in the agreement. It was a commercial agreement, which did not have any force of law. Therefore, without having resort to the commonly understood meaning of the term "commercial production" various terms used in the PSC should not have been lifted in interpretation of Section 80-IB(9). The reason is simple that statutory interpretation has to follow commonly understood rules of interpretation, which in this case are that, (i) we should first look to the meaning of the term in the section itself, (ii) if the word is not defined in the section, we should look to its meaning in the general definition under the Act, and (iii) if it is not defined anywhere, then its meaning should be taken to be the same as understood in the common parlance. Fortunately for us, there do exist some cases discussed above, which throw light on the meaning of the word "commerce". We are of the view that such meaning should be assigned to the words "commercial production" finding place in Section 80-IB(9). If we do so, we find that the CIT (Appeals)-2 rightly held that assessment year 1996-97 was the initial assessment year in which commercial production was undertaken by the consortium.