Income Tax Appellate Tribunal - Delhi
Hydrocarbons India Ltd. vs Inspecting Assistant Commissioner on 21 September, 1990
Equivalent citations: [1990]35ITD443(DELHI)
ORDER
J.P. Bengra, Judicial Member
1. These are appeals by the assessee against a consolidated order under Section 263 of the Income-tax Act, 1961 pertaining to the assessment years 1981-82 to 1983-84. Since common issues are involved in all these appeals, therefore, for the sake of convenience, they are being disposed of by this single order, specially when the Commissioner of Income-tax has also passed a single order.
2. The assessee company was a wholly owned subsidiary of Oil & Natural Gas Commission of India. The Company was incorporated with the main object of taking over the rights and interest of Oil & Natural Gas Commission of India which the latter had under a Joint Structure Agreement made on 17-1-1965 between the National Iranian Oil Co. on one hand and A.C. I.P., S.P.A. of Italy, Philips Petroleum Co., USA and ONGC of India on the other hand. Under the Agreement dated 17-1-1965, the parties to the agreement were to carry on business of drilling, extracting, producing and selling petroleum and other crude oils in the Persian Gulf. 50 per cent of the petroleum produced was to be owned by the National Iranian Oil Co. and the balance 50 per cent by the other three parties viz. ONGC, AGIP and Philips which was 1/3rd equal in 50 per cent of the produce. After incorporation of the assessee-company, all the rights and interest of ONGC were assigned to M/s. Hydrocarbons India Ltd.
3. In the year 1978 some political changes took place in Iran which resulted in cessation of business activities of the assessee company in that country. The assessee company did not exhibit any income from business operations for the previous years relevant to the assessment years 1980-81 and onwards. Here, we are concerned with these assessment years only. As a result of negotiations between the assessee company and the National Iranian Oil Co. through good offices of the Government of India, a settlement was arrived at between the parties as on 26-12-1983 whereby the assessee company was paid a sum of 6 million US Dollars by way of compensation for the rights and interest of the assessee company in the business operations in Iran. The interest on account of delayed payment was also charged with effect from 1-1-1979 against the assets and the claim taken over by the Iranian Co. During the assessment years under consideration the assessee claimed depreciation of Rs. 13,93,463 for the assessment year 1981-82, Rs. 11,82,200 for the assessment year 1982-83 and Rs. 10,11,902 for the assessment year 1983-84. The deduction on account of Section 42 aggregated to Rs. 52,38,762 was allowed. The Commissioner of Income-tax found that the assessee has not carried out any business activities in Iran during those years, therefore, the deduction allowed to the assessee on account of depreciation under Section 42 of the Income-tax Act, was erroneous and prejudicial to the interests of the revenue inasmuch as this was wrongly allowed by the IAC (Asst.). It was also found that the interest accruing on the amount of 6 million U.S. Dollars received under the Settlement Agreement dated 26-12-1983 has also remained to be included. The company was, therefore, required to show cause as to why the same should not be withdrawn and after going through the submissions made by the assessee, the Commissioner was of the view that the depreciation was wrongly allowed by the IAC (Asst.) for these assessment years because there were no business activities of the assessee company in that year after the political changes had taken place in Iran. Its only source of income was interest on moneys lent to the holding corporation viz. ONGC. While arriving at this conclusion, the Commissioner of Income-tax has mentioned that the previous Joint Structure Agreement was abrogated and held to be null and void by a fresh agreement between the assessee company and Iranian Oil Co. dated 26-12-1983. Similarly for deduction under Section 42, the CIT was of the view that Sections 28 to 43 set out the provisions governing the computation of profits and gains of any business or profession carried on by the assessee at any time during the relevant previous year. Since the assessee had not carried out any business during the relevant previous years, there was no question of allowing any deduction under Section 42 from the computation of profits and gains of its business. Regarding taxability of interest in respect of the amount Of 6 million U.S. Dollars received under the Settlement Agreement dated 26-12-1983, he was of the view that it is a debatable question and keeping in view the decision of the Supreme Court in the case of CIT v. Chunilal V. Mehta & Sons (P.) Ltd. [1971] 82 ITR 54, the interest on the said compensation under the settlement agreement was held to be taxable in the assessment year 1984-85. Therefore, on these findings, he set aside the finding of the IAC (Asst.) and directed him to recompute the total income of the assessee after disallowing the claim of the assessee under Section 32 and under Section 42 in regard to the business assets in Iran. The assessee is aggrieved.
4. The learned counsel for the assessee Shri R.S. Singhvi submitted that the assessee company is a subsidiary company of the ONGC which is a Government of India Undertaking. The business of the assessee company was ceased on account of political turmoil and changes taken place in Iran. Therefore, it was a temporary cessation of the business activities of the assessee company in that country. Even if the assessee company was not allowed to explore and extract oil in Iran, the business was carried on by the Iranian Oil Company. The profits were received by the assessee company which has been credited in the books of account. Therefore, it cannot be said that there was no business activity of the assessee company. The assets of the assessee company were used by the Iranian Oil Company. It is also pointed out that the expenses incurred in that country were allowed by the IAC (Asst.). In case there was no activity as alleged by the Commissioner of Income-tax, how could these expenses be allowed. It is submitted that the assets were capable of being used though they were not used by the assessee, even on that principle of law, the assessee is entitled for depreciation. The settlement dated 26-12-1983 abrogating the Joint Structure Agreement is an unilateral act of Iranian Government which is invalid. The assets in question were used for the purposes of business for which these have been installed. The assessee company was merely prohibited from lifting any part of the oil produce point. In any case the Joint Structure Agreement which is alleged to have been abrogated subsequently has no affect. The agreement continued to subsist cannot be said to be erroneous. It is also pointed out that the Commissioner of Income-tax has not re-opened the assessment for the assessment year 1980-81 and that by implication means that there was a business activities of the assessee company which had been accepted by the department for that year. Therefore, no different view can be taken for subsequent years. In this connection, our attention was also invited to the Auditor's note attached with the Balance-sheet given at page 103, allocation of expenses given at page 101, reply of the Management on the comments of Audit at page 147 and the fact that this report was produced before the AGP who has not objected to the note. Continuing the arguments the learned counsel for the assessee submitted that status note on the activities of the assessee company is given by the assessee at pp. 193 to 198 and the object of the assessee company was also pointed out. It was submitted that the stock of the assessee company remained with the Iranian Oil Co. so the assets of the assessee were capable of being used. Our attention was also invited to the Agreement's clauses 10,11, 33,34 and 37 to 40 and the provisions of Section 293A and Section 42 of the Income-tax Act, 1961. Reliance was also placed on the following decisions: -
(1) L.Ve. Vairavan Chettiar v. CIT [1969] 72 ITR 114 (Mad.);
(2) Karsondas Ranchhoddass v. CIT [1972] 83 ITR 1 (Bom.);
(3) CIT v. Simon Carves Ltd. [1976] 105 ITR 212 (SC);
(4) CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC);
(5) Capital Bus Service (P.) Ltd. v. CIT [1980] 123 ITR 404 (Delhi);
(6) CIT v. Vayithri Plantations Ltd. [1981] 128 ITR 675 (Mad.);
(7) CIT v. Bharat Insurance Co. Ltd. [1983] 142 ITR 342 (Delhi); and (8) Venkatakrishna Rice Co. v. CIT [1987] 163 ITR 129 (Mad.).
The above decisions were cited for the proposition that if there is a temporary cessation of activities or lull in the business, it does not mean that there is no business activity and the expenditure should be allowed. Specifically relying on the decision of the Delhi High Court in the case of Capital Bus Service (P.) Ltd. (supra), it was submitted that mere change of opinion does not warrant revision of order of the IAC(Asst.). It was also pointed out that the IAC (Asst.) has considered the Audit report in which the note was given regarding change in the political situation and cessation of activity which was considered by the IAC (Asst.). Now after considering all that the Commissioner of Income-tax cannot take into consideration the same material that would amount to change of opinion and there cannot be any mistake on facts. In this connection, reliance was placed on the decision of Supreme Court in the case of Simon Carves Ltd. (supra). As against this, the learned Departmental Representative Shri K.B. Singh supported the action of the revenue authorities and read out that for claiming depreciation, it is necessary that the assessee should own the assets which should be used for the purposes of business in these assessment years. It was further pointed out that the Joint Structure Agreement dated 17-1-1965 was declared null and void by a subsequent Agreement dated 26-12-1983 which was signed by the assessee. Therefore, there is no use of referring the Articles of that Agreement. It was also pointed out that whatever stock was as on 31-12-1978, it was carried forward from year to year in these assessment years also and subsequently therefore, to say that the stock of the assessee was with the Iranian Oil Co. and it was capable of being used, has no meaning specially when the assessee had been paid compensation for the Asst. year 1984-85 for these assets as per settlement. It is also pointed out that Section 42 does not come into picture where there is no business activity of the assessee. Since the assessee has not carried any business of exploration in Iran, the revenue authorities were justified in withdrawing the depreciation allowance.
5. We have considered the rival submissions. For claiming depreciation under Section 32, two conditions are necessary (1) that the assets on which depreciation is claimed are owned by the assessee and (2) are used for the purposes of the business or profession. We have to see whether there was any business activity in all these years and the assessee continued to own and use the Plant & Machinery, furniture, building etc., for the purposes of business. In this case, it is an admitted fact that during the year 1978, certain political changes took place in Iran and the assessee company did not have access to the business operations and the activities in Iran. The Islamic Republic of Iran promulgated Notification by which the assessee and other partners namely AGIP and M/s. Philips were not allowed to conduct any business operation or to lift any part of the oil produce. Therefore, so far as the assessee company is concerned, the business activity as per the agreement could not be continued or carried on any further beyond 31-12-1978 and the only source of income of the assessee was interest on moneys lent to the holding corporations though the assessee company had incurred some expenditure on account of this. But the fact that the assessee had incurredcertain expenditure in Iran just like an exploration and development salary, rent etc. would not mean that the assessee had been carrying on business activities after that. After 31-12-1978 the assessee's stock of exploration and development remained with the Iranian Oil Co. after taking over of assessee's activity by Government of Iran. The assessee was given compensation under settlement arrived at on 31-12-1978 through good offices of the Government of India between the assessee and Iranian Oil Co. Therefore, there was no possibility of exploration of this asset. Even if there was exploration of oil by Iranian Oil Co. after abrogation of Joint Structure Agreement, it was not on behalf of the assessee or under a previous agreement dated 17-1-1965 but in its independent rights. There was no direct evidence for that also which may prove that the Plant & Machinery was used by the assessee. Therefore, the assessee cannot take any benefit of this fact that the Plant & Machinery of the assessee were used by the Iranian Oil Co. So far as the Note in the Audit report and no comment of CAG thereon on this report is concerned, we would like to mention here that the Audit Report does not speak in itself that there was a business activity of the assessee company and the Machinery & Plant, furniture, building were used. It is clearly mentioned that the accounts in respect of activities in Iran have not been incorporated by the company in its account books as the same has not been received by it which is suggestive of the fact that no business had taken place. In this connection we would like to mention here the reply of the Director to the IAC(Asst.) dated 16-2-1985 given at pp. 108 & 109, where in it is admitted by the company that the company and second party members were not allowed to lift oil and the joint venture in Iran remained dormant though HIL was ready to meet its obligation under the Joint Structure Agreement. This is clearly indicative of the fact that no operations as such were carried on by the assessee company after 31-12-1978 when the New Government has taken over all the companies. Therefore, it is clear from the record that the company was not in a position to use the machinery & plant, furniture etc. Though it had been debiting the expenditure just like as development expenditure and warehouse stock etc. As regards the contention of the assessee's counsel that settlement dated 26-12-1983 is unilateral abrogation of the previous Joint Structure Agreement dated 17-1-1965 and thus has no affect on the rights and obligations of assessee, is without any substance because the settlement agreement dated 26-12-1983 clearly speaks of the fact that the earlier agreement has become null and void ab initio the signatories of this Settlement are the assessee and the Iranian Oil Co. This fact is corroborated by the Director's report of the company given at page 203 wherein it is mentioned as under:-
Settlement with 1MINOCO and AGIP During the year, the Company has been able to settle long outstanding dues from AGIP and made settlement with Iranian authorities towards compensation for the loss of interest of the Company in IMINOCO Agreement. Settlement was in the interest of the Company and was approved by the Government.
From this, it is clear that the assessee company has also accepted nullifying of the earlier agreement dated 17-1-1965 by subsequent agreement dated 26-12-1983. Therefore, the subsequent agreement has taken place over the previous one. Now this is only an agreement under which rights and obligations of the parties have to be determined. Even if the assessee's assessment for assessment year 1980-81 was completed under the earlier agreement dated 17-1-1965, it does not mean that the assessee can take advantage of this situation. The re-opening of the assessment depends upon the time limit prescribed for reopening. The reopening of the assessment for the assessment year 1980-81 was time-barred, therefore, the Commissioner of Income-tax has not taken any action. So far as the contention of the assessee that Section 42 override the provisions of Income-tax Act and the assessee is entitled to benefit of Section 42, is concerned, we have already mentioned that the agreement was nullified by subsequent settlement and secondly the claim of the assessee company under Section 42 is dependent upon the continuance of the business activities because Sections 28 to 43 set out the provisions of any profession--or business carried on by the assessee at any time during the relevant previous year. This is mentioned in Section 28. If there is no business carried on the provisions of Sections 29 to 43 would come into operation except for fictional provisions of Section 41. Therefore, deduction under Section 42 is admissible by virtue of the fact that the assessee company continues business. We have alreay held that allowability of depreciation as well as the claim under Section 42 depends on the continuance of the business in previous year but in this case the assessee could not show that the business operations were carried out in Iran. Therefore, the Commissioner of Income-tax has rightly withdrawn the benefit given by the IAC (Asst.) so far as the contention of the assessee that it is a change of opinion, is concerned, the IAC (Asst.) has allowed the benefit under some wrong impressions. The Commissioner of Income-tax has power to withdraw while exercising the provisions of Section 263, if it is wrongly allowed. The facts of the case in Capital Bus Service (P.) Ltd.'s case (supra) are different from the facts of the present case. So far as the reliance on the decisions cited above, is concerned, the facts of those cases are different from the facts of the present case. In those cases there was a temporary lull and cessation of activity whereas in the present case there was complete cessation and no business activities in Iran were carried on as per agreement and later on the assessee has received the compensation in pursuance to settlement, so the assessee cannot take benefit of the ratio laid down in those cases cited above. In view of our above discussion, we are of the opinion that the Commissioner of Income-tax has rightly revised the order passed by the IAC (Asst.) directing the IAC (Asst.) to recompute the total income after disallowing the claim of the assessee under Section 32 and under Section 42 in regard to the business assets in Iran and exploration expenditure. Therefore, we are of the opinion that no interference is called for. We agree with the findings given by the Commissioner of Income-lax.
6. In the result, the appeals are dismissed.