Income Tax Appellate Tribunal - Chennai
Hardy Exploration And Production ... vs Assessee on 15 September, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'A' CHENNAI
Before Dr. O.K. Narayanan, Vice President and
Shri George Mathan, Judicial Member
.....
I.T.A. Nos. 2154, 2155, 802 & 803/Mds/2010
Assessment Years : 2002-03, 2003-04, 2005-06 & 2006-07
M/s. Hardy Exploration & The Assistant Director of
Production (India) Inc., v. Income-tax, International
Floor 5, West Minister Building, Taxation,
108, Dr. Radhakrishnan Salai, Chennai.
Chennai-600 004.
(PAN: AAACV2469H)
AND
I.T.A. No. 1077/Mds/2010
Assessment year : 2006-07
The Assistant Director of Income-tax, M/s. Hardy Exploration &
International Taxation, Production (India) Inc.,
Chennai Chennai-600 004.
(Appellants) (Respondents)
Assessee by : Shri Rajan Vora
Department by : Shri Shaji P. Jacob
ORDER
PER GEORGE MATHAN, JUDICIAL MEMBER :
ITA No. 2154/Mds/2010 and 2155/Mds/2010 are appeals filed by the
assessee against the orders of the Dispute Resolution Panel (DRP), Chennai in F. No. DRP/Chennai/Sectt./029 & 30/2010-11 dated 15-09-2010 for the assessment years 2002-03 and 2003-04 respectively. ITA No. 802/Mds/2010 2 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 is an appeal filed by the assessee against the order of the learned Director of Income-tax, International Taxation, Chennai in D.C. No. 1143(4)/2008-09 dated 29-03-2010 for the assessment year 2005-06 passed u/s 263 of the Income Tax Act, 1961. ITA No. 803/Mds/2010 is an appeal filed by the assessee against the order of the learned CIT(A)-IV, Chennai in appeal No. CIT(A)-IV/CHE/105/09-10 dated 22-03-2010 for the assessment year 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 22-03-2010 fore 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, lerned 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 :
3 ITA Nos.802,803,1077,2154 & 2155/Mds/2010BEFORE THE INCOME TAX APPELLATE TRIBUNAL 'A' BENCH, CHENNAI IT A NO.803/CHNY -2010 - ASSESSEE'S APPEAL IN THE CASE OF HARDY EXPLORATION & PRODUCTION (INDIA) INC (ASSESSMENT YEAR: 2006-07)
1. Background 1.1.Profile of the company Hardy Exploration and Production (India) Inc ('HEPI' or 'the Appellant') is a company incorporated in the United States of America, which has established a Project Office in India ('IPO') with the approval of the Reserve Bank of India.
The Appellant has entered into a Production Sharing Contract ('PSC') with the Government of India ('GOI') along with ONGC and others for exploration, development and production of oil and gas in the east coast of India. The Appellant carries out the operations under the provisions of relevant Joint Operating Agreements entered into with the joint venture partners, and line with the provisions of the respective PSCs.
1.2. Brief background of the oil and gas activity undertaken by the company We submit that oil and gas activities undertaken by the Company consist of exploration, which may result in discovery of oil and gas. After the discovery, appraisal wells are drilled to assess the commercial potential of the discovery.
Once it is established to be commercial, development of the discovery is made by drilling and constructing the wells to extract the oil and gas and certain facilities such as flow lines and various plant and equipments are installed and commissioned for collection and processing of oil to make it as saleable crude oil.
After the field is fully exploited, the lease area is to be restored back to the original condition as much as possible and in addition the plant and equipment installed are to be removed which is referred to as site restoration work. A brief summary of the various activities undertaken in each phase is summarized as follows:
a) Exploration activities As per PSCs, certain minimum exploration work programs such as geological survey, acquisition of seismic data, and drilling of certain exploration wells are to be carried out to establish the 4 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 presence of oil and gas. Substantial costs are incurred for geological/seismic survey, processing of seismic data and interpreting the seismic and geological data to identify drillable exploration locations. If the studies indicate the presence of oil and gas, exploration wells will be drilled with substantial costs. The costs incurred for exploration is proved to be useful in case of a discovery of oil and gas and in such cases further appraisal of the discovery is made.
b) Appraisal 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 activites After establishment of commerciality. a development plan is being submitted to GOI for approval which has detailed engineering of the project to be executed. During this phase, substantial capital costs are incurred for:
a. Drilling of development wells for extracting the oil and gas from the reservoirs at the sub-
surface.
b. Completion of the wells with equipments such as well heads and Christmas tree which is a combination of many machinery, equipment and valves to control the flow of the oil and gas.
c. Connecting the equipment such as Christmas tree from the oil well to the flow lines.
d. Collecting the oil and gas from the flow line and separate the same as oil, gas and water.
e. Storing the processed oil and transportation for commercial sale.
This is carried out in accordance with the development plan and at every stage, certain additional capital costs are also incurred to drill further development wells. Additional capital costs are further incurred to maintain the reservoir pressure such as gas lift and water injection system along with the other equipments. Accordingly, the entire expenditure incurred for installing the plant and equipments for extraction of oil and gas is nomenclated as "development costs". These 5 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 entire costs are capitalized in the books of the accounts and it is a part of the capital assets of any oil and gas company.
The "development" activity can be summarized in simple terms as creation of facilities/ infrastructure that enable extraction of oil & gas in the same manner that a factory and its plant and machinery are set-up to facilitate production of goods.
d) Production activities After the field is developed, the commercial production will commence. This activity covers all operations relating to the lifting, processing, transporting and in addition operation and maintenance of plant and equipments established in the preceding phase. These costs include man power required for processing the oil, health safety environment, repairs and maintenance, and transportation etc.
e) Abandonment or site restoration After the field is fully exploited and no further commercial production is possible, the field is to be abandoned. In order to abandon the field, certain activities are to be carried out to return to the site to its natural state or render the site compatible with its intended use after the cessation of petroleum operations. These activities include proper abandonment of the wells, removal of equipment, structures and debris etc. It is insisted by the licensee and the GOI that 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 retumed 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 115J8 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 l15JB of the Act. We have provided below the sequence of events as regards the proceedings initiated for the Assessment Year (' A Y') 2006-07 at the various levels.
6 ITA Nos.802,803,1077,2154 & 2155/Mds/2010143(2) The learned Assessing The AO passed the order and made the Officer following adjustments:
(' AO') completed the assessment under section • Disallowed provision for site restoration;
143(3) of the Act vide order dated 31 December 2008. and • Excluded depletion while computing the total depreciation loss under section 115JB of the Act The Appellant preferred an appeal before the Commissioner of Income-Tax (Appeals) ('CIT(A)') Order by The CIT(A) vide its order dated The Appellant has preferred an appeal before CIT(A) 22 March 2010 directed the AO the Hon' ble Tribunal against the order of CIT(A) not to add back the provision for sitechallenging restoration while computing book profits for the purpose of • section On factual ground that Depreciation includes 115JB. depletion in oil and gas industry. Depletion is nothing but depreciation as per the However the Appellant's claim for Guidance Note of the ICAI. Accordingly, for adjustment of depletion in computation of book profits under section I computing book profit under 15JB, depletion should form pari of section 115JB was rejected by the unabsorbed depreciation. CIT(A).
The AO has filed an appeal before the Hon'ble Tribunal against the order of CIT(A) on site restoration.
Our submission :
2,1 Development costs are capital expenditure in nature.
As mentioned in paragraph I, the oil & gas activity involves different phases such as exploration, development and production while the development phase is critical in terms of incurring substantial capital costs on assets such as development wells. water injection wells, wellheads and christmas trees, flowlines, control umbilical, platforms. separators, tankage, pumps, artificial lift and other production and injection facilities etc. The development phase is a fundamental 7 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 foundation of drilling and constructing wells for extraction of oil and gas and erecting various plant and machinery for commencement of commercial production. This phase involves setting up the assets that are used to extract oil and gas from the reservoirs in the mining area over a period of time.
Accordingly, we submit that 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 accounts. 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 accounts. As per Para 38 of the Guidance Note issued by the Institute of Chartered Accountants of India (' ICA!'):
"when a well is ready to commence commercial production, development cost corresponding to proved 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 accounts. We have discussed in the subsequent paragraphs, the methodology for computation of depreciation on development assets and the nomenclature used therein.
2.3. Depletion (depreciation) is calculated based on "Unit of Production' method.
We submit that depletion (depreciation) on development cost is calculated based on unit of production method, which is a Generally Accepted Accounting method and is followed by all Accounting Standards in the world including the Guidance Note issued by the ICAI. The Guidance Note describes the method as under:
"The method of depreciation (depletion) under which depreciation (depletion) is calculated on the basis of the number of production or similar units expected to be obtained from the asset by the enterprise ".8 ITA Nos.802,803,1077,2154 & 2155/Mds/2010
In short, the depreciation (depletion) is calculated by the following formula:
Capitalised costs
------------------------------------------ x Volume of Production of oil for the year Total volume of Oil Reserves We further submit that the unit of production method is internationally recognised method for computing depreciation (depletion) in oil and gas industry.
• Para 40 of the Guidance Note of oil and gas producing activities issued by the ICAI • "Depreciation (Depletion) is calculated using the unit of production method. The application of this method results in oil and gas assets being written off at the same rate as the quantitative depletion of the related reserve. "
• Statement of Recommended Practice ('SORP') on Accounting for oil and gas Industry issued by the Accounting Standard Board, UK provides for suggested formats for disclosure of depreciation as 'Accumulated depreciation. depletion and amortization'.
Per the SORP, costs pertaining to exploration and development should be capitalized as part of the respective cost pools. Such cost pools are required to be depreciated based on 'unit of production method'. Paragraphs 68 to 70 [page 99 of the paper-book-I] of the SORP provide for "depreciation" on the exploration and development cost pools. The very reference to "depreciation" on exploration and development costs indicates that "depletion"
is nothing but "depreciation" in the oil and gas industry. In other words, the expression depreciation and depletion is used interchangeably to charge the capital cost in the Profit and Loss Account.
• Para 35 of the "The Statement of Financial Accounting Standard 19" relating to financial accounting and reporting by oil and gas producing companies issued by Financial Accounting Standard Board provides that "... Capitalised development costs shall be amortised (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 9 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 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 industrv. 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:
• It is a well-accepted principle in the field of accounting that wear and tear in relation to a wasting asset such as a mine is nomenclated as depletion instead of depreciation • Section 115JB clearly states that profit and loss account prepared as per Accounting Standards and accounting policies shall be considered for the purpose of computing book profits.
• As per Guidance Note of oil and gas Producing Activities issued by the ICAl, "Depreciation also includes depletion"
• Further echoing the Indian guidance, the Statement of Recommended Practice ('SORP') on Accounting for oil and gas Industry issued by the Accounting Standard Board, UK provides for depreciation of development costs based on the unit of production method.
• The Statement of Financial Accounting Standard 19 relating to financial accounting and reporting by oil and gas producing companies issued by Financial Accounting Standard Board, USA provides that successful exploration and development costs shall be amortized (depreciated)by the unit- of-production method • To summarise, depletion of development costs is nothing but depreciation in the oil and gas industry. To accept the Department's position 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.
Our detailed submission is as below :
2.4.1 Depletion and depreciation are one and the same in oil and gas industry.
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. This view is Generally Accepted Accounting Principles and is also supported by the Guidance Note of oil and gas Producing Activities issued by the ICAI which states as under:
Para -4 "Depreciation is a measure of the wearing out; consumption or other loss of value of a depreciable asset arising from use ... Depreciation also includes 'depletion' of natural resources through the process of extraction or use." [page no 69 of the paper book-I] 10 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 Para -40 "Depreciation (Depletion) is calculated using the unit of production method. The application of this method results in oil and gas assets being written off at the same rate as the quantitative depletion of the related reserve. "
.In the absence of Accounting Standards in India, the Companies engaged in oil and producing activities are required to follow the Guidance Note issued by ICAI for accounting its exploration and production activities. This view has been published as article in the journal of the ICAI, a body which has also issued the Accounting Standards [page no 70 & 77 of the paper book-I] 2.4.2. Judicial precedents on acceptability of Guidance Note and its relevance to Sec.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 Vs Dai lchi 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 no 187 of the paper book-I] Further, the Madhya Pradesh High COLlli in the case of Commissioner Of Income Tax Vs State Bank Of Indore 2005-(IT4)-GJX-0311-MP [page no 189 of the paper book-lJ has also upheld the above principle.
Section 115J8 clearly states that the Profit and Loss account prepared as per Accounting Standards and accounting policies shall be considered for the purpose of computing book profits. In the absence of an Accounting Standard for oil and gas accounting in India, the Guidance Note issued by the supreme accounting body of India (the Institute of Chartered Accountants of India) is the only basis to be adopted for computing depreciation / profits and loss and such mode of accounting should be the basis for computing book profits and understanding of the meaning of "depreciation" under section I 15J B 2.4.3. Industry practice.
The fact that both depreciation and depletion are a measurement of wearing out assets can be inferred from the Annual Report of Oil And Natural Gas Corporation Limited for the year ended 3151 March 2010 [Page no 177 of the paper book-I].
2.4.4 Dictionary meaning Wikipedia, the encyclopedia in explaining about depletion provides that "Depletion is siimilar to depreciation in that, it is a cost recovery system for accounting and tax reporting" [Page no 67 of the paper book-I].
11 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 We submit that the learned CIT(A) has erred in stating that depletion is not depreciation in oil and gas industry. Depletion is nothing but depreciation in the oil and gas industry.
2.5 Specific observations by CITCA) in the order for the A Y 2006-07 and our responses to
the same
Para CIT(A)'9 obsen'ati:Ol1 Our Comments
Ref
6.2(i) Depletion may include depreciation With respect to the above, we wish to submit that
as per ICAI guidelines but we have learned CIT(A) has incorrectly concluded that the
to analyze sec. 32 which is the main meaning of depreciation has to be borrowed from
section dealing with depreciation section 32 of the Act when the issue under
and unabsorbed depreciation and consideration pertains to section 115J8, which is a
which is part of IT Act 1961. So the non-obstante clause.
meaning for depreciation as per
section 32 will be preferred over As per section 115JB of the Act:
the meaning as per ICAl guideline
... Similarly definition of " Every assessee, being a company, shall, for the
depreciation under Companies Act purposes of this section, prepare its profit and loss
is irrelevant account for the relevant previous year in accordance
with the provisions of Parts II and III of Schedule V I
12 ITA Nos.802,803,1077,2154 & 2155/Mds/2010
Para CIT(A)'s observation Our Comments
Ref
to the Companies Act, 1956 (1 of 1956):
"Provided that while preparing the annual accounts
including profit and loss account,-
(i) the accounting policies;
(ii) the accounting standards adopted for
preparing such accounts including profit 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 tem1 'depreciation' has to be understood from the Company law provisions and not as per the Act for the applicability of 115 JB • The Supreme Court in the case of Surana Steel Private Limited vs Deputy Commissioner of Income-tax (237 ITR 777) has observed that "There is no reason to assign /0 the term "loss"
as occurring in section 205, proviso clause (b), of the Companies Act, a meaning different from the one in which it is understood therein solely because it is being read along 'with section 115J of the Income-tax Act ". The principle that what is permissible under company law in view of the facts that it has to be computed in terms of Part II and Part III of Schedule VII of the companies 1956 would dictate computation except to the extent to which adjustment are required to be made otherwise by a specific provision.
13 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 Para CIT(A)'s observation Our Comments Ref • [n Buttwelded Tools Private limited vs ACIT (39 ITD 432) the Chennai tribunal in the context of section 115J observed that the fact that company law provisions are incorporated in 1 15 J indicates clearly that the object of the law for levying Minimum Alternate Ta.x is linked to the book profit and the meaning consonance thereon under the Companies Act.
• In Krishna Oil Extraction Limited vs CIT(1998) 230 ITR 806 (MP High Court) in the context of 115J, it was observed that the basic idea of incorporating the provision of company Law is to work out the taxable book profits in the light of company law. Similar views were taken in the case of CIT vs Adoon Electronics private limited 232 ITR 528.
• Further, the Mumbai IT AT in the case of KF A Corporation Ltd. Vs JCIT (ITA No. 5147/Mum/2002) has also observed that when the starting point of MAT provisions is net profit as per the P&L account prepared in accordance with the Companies Act and therefore the starting point for considering brought forward loss or unabsorbed depreciation has to be very same set of accounts only.
It is important to note that section 211 (3A) of the Companies Act, 1956 requires companies to prepare their financial statements in compliance with the Accounting Standards issued by the Institute of Chartered Accountants of India. In the absence of any accounting standard of the ICAI for oil and gas companies, the guidance note of the ICAI is relied upon by the assessee.
6.2(iii) Section 115JB is a self contained • Section 115JB is a non-obstante clause and code does not mean that the meanings/ definitions as understood for normal meaning of depreciation will have provisions shall not be applicable for the to be borrowed from outside when purpose of section I 15JB. f. 14 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 its meaning can be inferred from Section 115J8, infact, specifically requires that section 32 if the IT Act 1961 itself "depreciation" as per books of accounts should and depreciation and depletion be adopted for computing book-profits. are separately used in section 42. Accordingly, meanings / allowances 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 115J8.
6.2(iv) In the P&L Ale itself for the • The learned CIT(A) has failed to appreciate that relevant year, depreciation and depletion of development costs is nothing but depletion are separately depreciation in the oil and gas industry. To mentioned. accept the position of the CIT(A) is akin to The depreciation on fixed assets denying a manufacturer of goods the right to and depletion towards claim depreciation on the producing asset, viz development expenditure are the factory comprising inter alia of plant and separately machinery.
mentioned in Sch-14 of the P&L A/c 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".
• The Guidance Note issued by the lCAI for oil and
gas accounting specifically states that
"depreciation" and "depletion" are one and the
same. The Supreme Court in the case of CCE Vs
Dai lchi Karkaria Limited [GJX-0503-SC] 1999
has held that Guidance Notes should be
considered for understanding accounting and the
ICAI is an authoritative body in laying down
accounting standards.
• The position adopted by the assessee [that
depletion is same as depreciation] is also in line
with the accounting practices and guidance for
oil and gas companies globally.
15 ITA Nos.802,803,1077,2154 & 2155/Mds/2010
Para CIT(A)'s observation Our Comments
ReI'
6.2(vii) The observation of the AAR in the • The learned CIT(A) has erred in placing
case of Rashtriya lspat Nigam Ltd. reliance on the decision of the AAR in the case
Squarely applies in this case in that of Rashtriya Ispat Nigam Ltd as the said
the accounts prepared under the decision does not deal with the issue of whether
Companies Act must be modified "depletion" forms paIi of "unabsorbed
whereever necessary to comply depreciation". The said decision is of no
with the provisions of section relevance to the facts of the instant case.
115JB. So depreciation must be
treated differently from • Section 115.1B does not require modification of
depreciation and unabsorbed figures with respect to unabsorbed depreciation/
depreciation meaning thereby that loss. The section infact states that figures as per
depletion will be part of business accounts should be adopted.
loss and not part of depreciation
We submit that the Appellant has complied with Schedule VI requirements for the purposes of Section 115JB and has prepared its accounts based on the Guidance Note of the ICAI and in accordance with the Generally Accepted Accounting Principles.
2.6 Non applicability of MAT to the Appellant Without prejudice to the above arguments, we humbly submit that the provisions of Section 115.1B are not applicable to the Appellant, in terms of the PSC entered by the Appellant with the Government of India. Article 16.4 of the Production Sharing Contract (PSC) [page no 195 of paper book-I} states as under:
"Notwithstanding anything contained ill any Act (or the time being in force[emphasis supplied], it is expressly agreed amongst parties that the Companies shall not be 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 ill Article I6"[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 1 15.1B 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.
16 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 On the basis of all of the above submissions, it is prayed that Appellant's appeal be allowed and justice rendered. The order of the CIT(A) to the extent prejudicial to the Appellant is bad in law and deserves to be quashed. "
APPELLANT Executive summary on Merits Issues raised by AO Appellant's submissions Depreciation does not It is a well-accepted principle in the field of accounting that include depletion wear and tear in relation to a wasting asset such as a mine is nomenclated as depletion instead of depreciation Section 115JB clearly states that profit and loss account prepared as per Accounting Standards and accounting policies shall be considered for the purpose of computing book profits.
As per Guidance Note of oil and gas producing activities issued by the ICAI, "Depreciation also inclues depletion"
Further echoing the Indian guidance, the Statement of Recommended Practice ('SORP') on Accounting for oil and gas Industry issued by the Accounting Standard Board, UK provides for depreciation of costs based on the unit of production method.
The Statement of Financial Accounting Standard 19 relating to financial accounting and reporting by oil and gas producing companies issued by Financial Accounting Standard Board, USA provides that successful exploration and development costs shall be amortized (depreciated) by the unit-of-production method.
To summarise, depletion of development costs is nothing but depreciation in the oil and gas industry. To accept the Department's position 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.
17 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 "BEFORE THE INCOME TAX APPELLATE TRIBUNAL 'A' BENCH, CHENNAl ITA NO. 1077/CHNY-2010 -DEPARTMENT'S APPEAL IN THE CASE OF HARDY EXPLORATION & PRODUCTION (INDIA) INC (ASSESSMENT YEAR: 2006-07) I. Provision for Site Restoration is an ascertained liability. 1.1. Background of site restoration in oil industry and the facts relevant to the Appellant.
HEPI has entered into a Production Sharing Contract (' PSC') with the Government of India and other joint venture partners with respect to the contract area CY -OS-901 I on 30 December 199 for exploration and production of oil and gas.
As per Article 12.9 (b) of the PSC executed with the Government of lndia, the site restoration activities in accordance with good international petroleum industry practice should be made to prevent hazards to the environment [Page no 251 of the paper book-I).
1.1.1 Site restoration is a liability mandated by PSC, Petroleum and Natural Gas Rules - 1959 ('P&NG Rules') and Directorate General of Hydrocarbons ('DGH'), The obligation of site restoration stal1s 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 other guidelines issued that well should be properlv be abandoned bv putting appropriate barriers such as cement plugs in the well to avoid any possible leakage and the consequent pollution therebv.
18 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 • Further, to ensure that the oil and gas companies are fully funded to comply with the statutory obligation of restoring the site to avoid environmental hazard, it is insisted by DGH that a fund should be created to meet this obligation of site restoration. It is further important to state that the fund cannot be withdrawn and could be used onlv for the purpose of site restoration.
• 1.2 Accounting treatment of Site Restoration 1.2.1 Accounting treatment as per Guidance note issued by ICAI As per clause 53 of the Guidance Note issued by the ICAI on Accounting for Oil and Gas producing activities "Abandonment costs are the costs incurred on discontinuance of all operations and surrendering the property back to the owner, Those costs relate to plugging and abandoning of wells, dismantling of well heads, production and transport facilities and to restoration of producing areas in accordance with license requirements and the relevant legislation "".
Further clause 54 states that "The full eventual liability for abandonment cost net of salvage values should be recognized at the outset on the ground that a liability to remove an installation exists the moment it is installed. Thus, an enterprise should capitalize as a part of the cost centre the amount of provision required to be created for subsequent abandonment.
1.2.2. Accounting treatment as per International Accounting Standard (IAS)16 Clause 15 of (IAS) 16 stipulates that "an item of property, plant and equipment that qualifies for recognition as an asset shall be measured at cost". Clause 16 stipulates that "the cost of an item of property, plant and equipment comprises ........(c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either with the items acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period".
From the above it could be seen that the liability for site restoration is capitalized along with the other costs at the beginning of the life of the asset.
19 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 1.3. Meaning of the term Contingent 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 sensei 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 IT AT in the case of Assistant Director Of Income Tax Vs. M/s. Cairn Energy India Pty Ltd 2010-TII-115-ITAT-MAD-INTL [Page no 216 o[the paper book-I] wherein the respondent was engaged in the business o(exploration, development and production o(oil and natural gas held that;
"the assessee is clearly obliged under the PSC to undertake site restoration activities as part of the exploration or production operations i.e. to return the site to its natural state or render the site compatible with its intended use after cessation of exploration and, production operation and, other operations in relation thereto, 'which involves removal of facilities, equipment, structures and debris, establishment of compatible contours and drainage, replacement of top soil, re-vegetation, slope stabilization, infilling of excavations and carrying out other appropriate actions;
the provision for site restoration arose as a result of the PSC with the Government of India and, is an ascertained liability and, therefore clause (c) of Explanation to section 115JA is inapplicable to the facts of the assessee company. "
Supreme Court in the case of Bharat Earth Movers Limited 245 ITR 428 The law is settled; if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged a future date. What should be certain is the incurring of the liabilitv. It should also be capable of being estimated with reasonable certaintv though the actual quantification mav not be possible.
Supreme Court in the case of Shri Goverdhan Ltd. 69 ITR 675 "The legal position is that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happens. But if it is a debt the fact that the amount has to be ascertained does not make it any the less a debt if the liability is certain and what remains is onlv a quantitication of the amount: debitum in praesenti, solvendum in futuro. "
20 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 Supreme Court in the case of Calcutta Co Ltd. Limited 37 ITR 1 "If that undertaking imported any liability on the appellant the liability had already accrued on the dates of the deeds .( sale, though that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could very well be deducted from the profits and gains of the business ........ "
Accordingly, it can be summarized and submitted from the above that a liability is not to be said as contingent liability in the event that • There is certainty in the incurrence of the liability; and • It is capable of being estimated with reasonable certainty.
1.4. Provision for site restoration is pursuant to an agreement between the parties.
A Joint Operating Agreement ('JOA') [Page no 252 of the paper book-I} has been entered into between the parties undertaking development of the block CY-OS-90/1. As per the terms of the JOA:
Article 7.12 dealing with Abandonment costs "the costs, expenses, obligations and liabilities of or in connection with the abandonment shall be paid, borne and discharged by the parties in proportion to their 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 partv'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, I 999 [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 21 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 budget and scientific estimation of site restoration expenditures are determined to effect the same with State Bank of India towards the ascertained liability for site restoration.
1.5 Provision for site restoration is determined on a scientific basis We wish to submit that the provision for site restoration expenses has been debited to the profit and loss account of the Respondent annually based on scientifically estimated costs using the unit of production method ('UOP').
Under the' UOP' method, the depreciation or depletion in mining assets is calculated on the basis of the number of units produced as numerator and the denominator being the total expected number of units to be produced from the asset by the enterprise. In the instant case, the provision for site restoration cost is calculated by multiplying the UOP rate with the production for the period.
The AO, in the assessment order, has however increased the book profit by provision for site restoration, stating it as a contingent liability.
We humbly submit that the contention of the Revenue that the provision for Site Restoration has not been scientifically estimated is incorrect.
1.6. Accounting literature on contingent liability Given that section 115JB is a levy of income-tax on "book profits" computed based on net profit as shown in the profit and loss account, it is also relevant to examine accounting literature for interpretation of terms used therein as the tax emanates from the concept of book profit.
1. 6. 1. Accounting literature under Indian GAAP and International Financial Reporting Standards ('IFRS') The term contingent liability is defined in Indian Accounting Standard -29 issued by the Institute of Chartered Accountants of India ('lCAI') [Page no 273 of/he paper book-I] as (a) a possible obligation that arises from past events and the existence of which will be confirmed only bv the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprises; or
(b) a present obligation that arises from past events but is not recognized because:
(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or 22 ITA Nos.802,803,1077,2154 & 2155/Mds/2010
(ii) a reliable estimate of the amount of the obligation cannot be made.
It is further submitted that above definition is akin to the International Accounting Standard ('IAS')37 [Page no 335 of the paper book-
1.6.2 Accounting literature under 90: US Financial Accounting Standards (USFAS) The general recognition criteria for contingent liability as 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 case of CIT vs Woodward Governor India (P) Ltd and Honda Siel Power Products Ltd [2009] 312 lTR 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 oj Recommended Practice ('SORP ') on Accounting for Oil and Gas Industry issued by the Accounting Standard Board, UK Given the above. it is clear(v evident that site restoration is not a contingent [unascertained) liability and is an ascertained liability".
1.6.4. Summary Key aspects of contingent liability-summarised The key aspects of contingent liability as evidenced by the extracts of AS 29 of ICAI, IAS 37 of IFRS and FAS 5 of US FASB are summarized as follows:
(i) There is a possible obligation; and
(ii) The obligation should arise from past events; and
(iii) The existence of the obligation will be confirmed by occurrence or non-occurrence of one
or more uncertain future events; and
(iv) Such events are not wholly within the control of the enterprises; and
(v) It is not probable that an outflow of resources for future economic benefits will be required; and
(iv) A reliable estimate of the amount of obligation cannot be made.
23 ITA Nos.802,803,1077,2154 & 2155/Mds/2010
From the above, it is clear that the liability for site restoration which is capitalized as asset in the books for not meeting any of the above criteria to be considered as contingent liability.
2. Non applicability of the decisions in the cases of TN Small Industries Development Corporation and Indian Molasses Company Private Limited to the Respondent We humbly submit that the revenue has erred in considering the decisions of the Madras High Court in the case of TN Small Industries Development Corporation (242 ITR 122) and that of the Supreme Court in the case of Indian Molasses Company Private Limited (37 ITR 66) as relevant and applicable to the Respondent for the following reasons:
Both the above mentioned cases deal with deduction in the nature of general expenses as per Section 37 of the Income-Tax Act, 1961 ('the Act') in computing taxable income under normal provisions of the Act. The instant case deals with computation of income under section 115JB of the Act and it is the item in the financial statements of the taxpayer and specific exclusions / disallowances prescribed under section 115JB that are relevant for determining deductibility in computing book profIt.
Without prejudice to the above, even in a scenario where the Revenue intends to consider allowances / disallowances prescribed for normal provisions in computing book profits under section 115JB, it is submitted that allowance in respect of site restoration expenditure is available under normal provisions of the Act as well (section 33ABA).
• 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 lndia, the liability for site restoration accrued immediately on commencement of exploration operations.
• 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.
24 ITA Nos.802,803,1077,2154 & 2155/Mds/2010
3. Our Prayer :
It is our humble prayer that the Revenue's appeal deserves to be quashed having regard to the following:
* It is evident from the above submission and from the order of the CIT(A) that the provision for site restoration is an ascertained liability; • The provision for site restoration has been estimated by the Respondent using a scientific method and the Revenue has erred in treating the same as a mere estimate; and • The decisions relied by the Revenue are not applicable to the Respondent's case.
On the basis of all of the above, it is prayed that Revenue's appeal be quashed and justice rendered.
RESPONDENT
Issues Respondent's submissions
Provision for site restoration is unascertained liability : Provision for site restoration is ascertained liability as lliability arises as soon as the well is drilled. Further site restoration is a mandatory liability as per PSD, P&NG Rules, DGH In following judicial precedents it has been held that were a liability to pay arises, the same would constitute ascertained liability even though the amount cannot be determined with certainty.
Supreme Court in the case of Bharat Earth Movers Limited 245 ITR 428 Supreme Court in the case of Shri Goverdhan Ltd. 69 ITR 675 Supreme Court in the case of Calcutta Co. Ltd.
37 ITR 1
• Court in the case of Shri Goverdhan Ltd. 69 ITR 675
25 ITA Nos.802,803,1077,2154 & 2155/Mds/2010
Further the Chennai ITAT in the case of Assistant Director Of Income Tax Vs. M/s Cairn Energy India Pty Ltd 2010-TH-llSITAT-MAD-
INTL has held that provision for site restoration is ascertained liability for the purpose of determining book profits under section I 15J B of the Act "
4. It was the submission that there was no dispute in regard to the normal computation under the regular provisions of the income-tax Act, 1961 ('the Act' for short). It was the submission that when the assessee was filing its return, it was filing it by applying the provisions of section 42 of the Act, which related specifically to the computation of total income in regard to the assessee which is doing the business of oil exploration. It was the further submission that the dispute was in regard to the computation under the provisions of section 115JB of the Act. It was the submission that as per the provisions of section 115JB what was deductible was the loss being the depreciation loss or the business loss whichever was lower. It was the submission all the expenditures incurred by the assessee in connection 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 26 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 and the depletion claimed by the assessee was treated as a business loss. It was the further submission that in regard to the assessment year 2006-07 the Assessing Officer had also not granted the assessee the deduction in respect of the site restoration expenditure claimed by holding that the site restoration expenditure was only a contingent liability. On appeal, the learned CIT(A) had held that the site restoration expenditure was not a contingent liability and was allowable as a deduction. It was the submission that the site restoration expenditure was as per the PSC entered into with the Government of India and the liability was ascertained and allowable. It was the submission that the appellate authorities had not allowed the claim of the assessee that the depletion as claimed by the assessee was part of depreciation. It was the submission that against the action of the learned CIT(A) and the DRP in not accepting the claim of the assessee that the depreciation was liable to include the depletion the assessee was in appeal for the assessment years 2002-03, 2003-04 and 2006-07 and against the action of the learned CIT(A) in holding that the site restoration expenditure is an ascertained liability the Revenue is in appeal in ITA No. 1077/Mds/2010 for the assessment year 2006-07. It was the submission that in the assessee's appeal for the assessment year 2005-06 in ITA No. 802/Mds/2010 the assessee has challenged the action of the learned DIT in invoking the powers u/s. 263 of the Act in directing the Assessing Officer to re-do the assessment after examining the issue of the allowability of depletion as depreciation in computing the book profits of the assessee u/s 115JB of the Act. It was the further submission that for the assessment years 2002-03 and 2003-04 the assessee has also challenged the re-opening of the assessment under section 148 of the Act. It was the submission that though the assessment years 2002-03 and 27 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 2003-04 in ITA Nos. 2154 & 2155/Mds/2010 the original assessment had been made u/s. 143(3), still the re-opening of the assessment was done beyond the period of 4 years and consequently it should be deemed to be a change of opinion on which the re-opening should not be permitted.
5. In regard to the challenging of the revision u/s. 263 of the Act for the assessment year 2005-06, It was the submission that the assessment order was under section 143(3) and all the issues had been considered by the Assessing Officer in the course of original assessment and the action of the learned DIT was on account of an audit objection which had been raised. It was the further submission that even for the assessment years 2002-03 and 2003-04 there was audit objection.
6. In reply, the learned DR filed written submissions which are extracted as follows:
"Hardy Exploration & Production (India) Inc., Chennai. v. ADIT (Int. Tax.), Chennai.
WRITTEN SUBMISSION ITA 2154/CHNY/10 A.Y.2002-2003 Gr.1 : General Gr.2 : Jurisdiction to initiate action u/s 147
a) The return was only processed u/s 143(1) and no assessment u/s 143(3) made earlier. Hence there is no question of change of opinion as there is no scope for A.O. to form any opinion while processing the return u/s 143(1). I rely on the following decisions:
ACiT Vs Rajesh Jhaveri Stock Brokers P. Ltd. (SC) 291 ITR 500 WCI (Madras) (P) Ltd. Vs ACiT (Mad) 324 ITR 181 ClT Vs Ravindran Prabhakar (Mad) 326 ITR 363 ITO Vs K.M. Pachiappan (Mad) 311 ITR 31 ACiT Vs Mahindra Holidays & Resorts (India) Ltd. (ITAT,SBChennai) 3 ITR (Trib) 600
b) Reasons were recorded by the A.O. before issuing the notice u/s 148 [pages 28 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 10'&11 for A.Y. 2002-03 and 12 & 13 for A.Y. 2003-04 of Paper Book].
c) Copy of reasons recorded was furnished to the assessee vide letter dated 23- 09-2009 [ page 46 & 288 of assessee's Paper Book ]. Subsequently, assessee filed its objections to re-opening and A.O. passed a separate speaking order on 17-11-2009 disposing such objections [ pages 55 to 57 and 297 to 299 of assessee's Paper Book ]. Assessee accepted this order and no appeal/petition was filed before any authority till date.
d) For re-opening u/s 147, tangible material need not be from outside the return of income as held in ACiT Vs Kanga & Co. (201 0-TIOL-464.ITAT-MUM)
e) Re-opening of assessment under identical situation was upheld by ITAT Chennai bench in Lakshmi Machine Works Ltd. Vs ACIT reported in 126 ITD
343.
f) Audit objection pointing out factual omissions is not a bar to initiation of proceedings u/s 148 especially in a case where the return was only processed u/s 143( 1) as held in ACIT Vs Rajesh Jhaveri Stock Brokers P. Ltd. (SC) 291 ITR 500. Decision of Apex court in CIT Vs P.V.S. Beedies (P) Ltd. reported in 237ITR 13 is also relevant.
g) Without prejudice to the above it is submitted that there was no audit 'objection' in this case. On this issue, what was noted by the Audit party is only an 'observation' as evident from the note prepared by the Revenue Audit Party [page 14 to 22 of paper book pp 17] As evident from this note, no interpretation of law was made by the audit party and it only observed certain facts omitted to be considered by the A O. Gr. 3 & 4 : Deduction of depletion in book profits This ground is misconceived as A.O. did not make any such adjustment to the book profits. He only deducted loss brought forward or unabsorbed depreciation, which ever is less in accordance with c1. (iii) of Expl. 1 to Sec. 115JB.
b) As per Expl. 1 to sec. 115JB, for the purpose of computation of "book profit" under that section, 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 and III of Schedule VI to the Companies Act is the starting point. A.O. cannot change this figure. This is the view held by Apex Court in Apollo Tyres Vs CIT (255 ITR 273). There is no dispute on this issue. A.O. has not modified this figure in the assessment order.
c) A.O. has the power to make adjustments to book profits as 'mentioned in Expl. 1 to sec. 115JB as held in :
i. CIT Vs HCL Comnet Systems & Services Ltd. (SC) 305 ITR 409 II. Ajanta Pharma Ltd. Vs CIT (SC) 327 ITR 305 III. Indo Rama Synthetics (I) Ltd. Vs CIT (SC) 330 ITR 363.
29 ITA Nos.802,803,1077,2154 & 2155/Mds/2010
d) As per Expl. 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 & Laic and only the net figure of profit I 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 Expl. 1 to sec.115JB.
f) Hence A.O. relied on the figures [ para. 7.3 of the assessment order] As per the respective Profit and Loss a/c appearing in the printed Annual ACCOLJt1tS of the assessee company for F.Y. 1995-96 to 199900 which were approved by the Board of directors and placed before the Annual general meeting. Copy of such accounts are available in pages 1 to 4 of Department's Paper Book. However the figures shown by the assessee in the Income Computation Statement [ page 38 & 280 of assessee's Paper book ] are at variance with these figures. This clearly shows that A.O. followed the principles laid down by the Apex court in Apollo Tyres Vs CIT (255 ITR 273). There is no basis for the assessee to show different figures in respect of F.Y. 1995-96 to 1999-00 from the figures which were approved by the Board of directors and placed before the Annual general meeting.
g) These documentary evidence clearly prove that the P&T a/c of the assessee company for F.Y.1995-96 to 1999-00 did not include depletion/abandonment costs as part of depreciation. From A.Y. 2000-01 onwards assessee is earning book profit and the issue of lossI unabsorbed depreciation I depletion etc. does not arise as net profit was earned after deducting all such expenditure.
h) Assessments in respect of the I.T. returns filed by assessee corresponding to F.Y. 1995-96 to 1999-00 ( A.Y. 1996-97 to 2000-01 ) has become final as on date. These assessments were completed by accepting the returned figures and no appeal was filed by assessee. Hence assessee cannot seek lateron to change I modify the figures of brought forward loss I depreciation determined for such years in the present appeal proceedings. This view was upheld by Hon'ble Supreme Court in ClT & Am. Vs Dalmia Cement (Bharat) Ltd. reported in 216 ITR 79. This was followed by jurisdictional highCourt in S.K.V. Selvaraj Vs CIT (Mad) 240 ITR 217.
i) 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.Y. 1995-96 to1999-00 which were approved by the Board of directors and placed before the Annual general meeting, assessee is now relying on certain new 30 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 figures. Decision of the Apex court in Apollo Tyres Vs ClT (255 ITR 273) is equally applicable for the assessee as held by ITAT Chennai bench in DClT Vs Thangavel Spinning Mills Ltc. reported in 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 ClT Vs Tulsyan NEC Ltd. (330 ITR 226).
j) As held by A.O., as on 31-03-2000 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 ie. A.Y. 2001-02, the unabsorbed depreciation brought forward is only Rs. 41,22,660 [ para. 15 of assessment order] which was allowed by the A.O. as deduction in view of c1.(iii) of Expl. 1 to sec. 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. Vs ACIT (IT AT, Chennai) 126 ITR 343
l) In this background, any discussion on whether depletion should form part of depreciation or not, is irrelevant as assessee has not included depletion in the depreciation claim made in the Profit and Loss a/c which formed part of the printed Annual Accounts of the assessee company for F.Y. 1995-96 to 1999-00 which were approved by the Board of directors and placed before the Annual general meeting. The issue reached finality long back.
m) Further, reliance placed by assessee on Guidelines issued by ICAI is also not relevant since such guidelines were issued in 2003 whereas the dispute relate to F.Y. 1995-96 to 1999-00 period. No Guidelines can be retrospective in operation as guidance is always prospective in nature.
n) Deduction u/s.42 not available while computing income u/s.115JB as held by ITAT Ahmedabad Bench in Gujarat State Petroleum Corporation Ltd. Vs. JCIT in 123 ITD 335.
o) In this case, Govt. of India has entered into a Production Sharing Contract (PSC) with the assessee company and such contract was 31 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 placed before both the Houses of Parliament. As held by Hon'ble Supreme Court in CIT & Anr. Vs Enron Oil & Gas India Ltd. [ reported in 305 ITR 75 ] said PSC is an independent accounting regime which includes tax treatment of costs, expenses, income, profits etc. It prescribes a separate rule of accounting. PSC represented an independent regime and the shares of Government and contractors were determined on that basis. Expenses had to be accounted for only as contemplated by the PSC. In view of the special accounting procedure as prescribed by PSC, reliance on any other accounting system has to be ruled out as held by the Apex Court.
p) Article 16 of PSC provides for "TAXES, ROYALTIES, RENTALS ETC."[ pages 558 to 562 of assessee's Paper Book ]. As per this Article, the only expenses deductiblewhile computing profits and gains from the business of Petroleum operations are:
100 % 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 - Section 2.3.1 and 2.3.2 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 !.T. 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 & Anr. Vs Enron Oil & Gas India Ltd. [ reported in305 ITR 75 ]. As per Article 297 of the Constitution, all the natural resources vests with the Union Government. The international principle of permanentsovereignty over natural resources was adopted by the U.N. GeneralAssembly in Resolution 1803. Assessee does not have any right in allocation of such resources or its pricing, marketing etc. as held under similar circumstances by the Apex court in Reliance Natural ResourcesLtd. Vs Reliance Industries Ltd. in Civil Appeal Nos. 4273 to 4277 of 2010 byorder dated 07-05-2010. Obiter dicta of 32 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 Hon'ble Supreme Court is also binding in view of Tata Iron & Steel Co. Ltd.Vs V.R. Bapat (Bom) 101 ITR 292.
s) In fact the various papers filed by the assessee in support of accounting of 'depletion', are all in respect of enterprises which acquired mineral interests in properties and in such circumstances it.was held to be a deductible expenditure. Such an accounting practice is permissible when assessee is the owner of the resources and not in the type of presentPSC, as held by the apex court in the decision cited supra. The accounting standards prescribed therein are under the assumption that the natural resources is an asset owned by and belonging to the company engaged in the business of exploration and extraction of such natural resources and therefore such depletion is to be charged on its profit and loss account.
• CI. 2 in page 412 of assessee's paper book which specifies the objective of the Guidance Note • CI. 41 in page 419 of assessee's paper book which specifies the method of calculation of depletion cost • CI. 1 in page 476 of assessee's paper book which specifies the objective o(the Accounting Standard However the situation is different in the present case where only PSC was entered into by the Government and the natural resources owned by Govt. were not parted with. Assessee did not acquire such assets at all. No such asset appears in the balance sheet of the assessee. Claim of the assessee for depletion costs arises only if the assessee purchases / acquires such natural resources and the expenditure incurred for the same is treated as capital expenditure in its books.
t) 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 Govt. 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 .
.
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 & Ors. Vs union of India & ors (MP) 234 ITR
261.
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 33 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 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 & ors. Vs CIT (SC) 108 ITR 345. Similar view was also held in Padmasundara Rao (Decd.) & ors. Vs State of Tamil Nadu & Ors. (SC) 255 ITR 147.
w) Legislature in ;1s wisdom has not made any allowance towards "depletion" in the PSC since Government is the owner of such Natural resources and assessee only makes investment towards exploration of oil wells and production of oil therefrom. Assessee is not affected anyway on account of depletion of natural resources and hence there is no need to make provision thereof. The interpretation as suggested by the assessee to allow "depletion" of an asset not owned by the assessee, will make the provisions contained in PSC otiose. Hence such an interpretation needs to be avoided as held by Karnataka High Court in Chartered Housing Vs appropriate Authority & ors reported in 250 ITR 1. Even though a liberal interpretation has to be given to an incentive provision, the interpretation has to be as per .the wordings of the section, and the benefits which are not available under the section cannot be conferred by ignoring or misinterpreting clear words in the section.
Gr. 5 : Provision for site restoration whether to be added to book profits u/s 115JB Though such expenses are debited to P & Laic, it is not an allowable expenditure as per Article 16 of PSC, which is a self-contained code. Arguments similar to Gr. 4 &3 above.
Decision of ITAT in the case of Cairn Energy India Pty. Ltd. is distinguishable on facts as it was based on a different PSC. Decision of ITAT Visakhapatanam Bench in Hindustan Shipyard Ltd. Vs DCIT reported in 6 ITR (Trib) 407 is relied upon.
Gr. 6 .: New claim for bad debts whether to be deducted from book profits u/s 115JB No such claim for bad debts was made in the Profit and Loss a/c appearing in the printed Annual Accounts of the assessee company for which were approved by the Board of directors and placed before the Annual general meeting. Decision of the Apex court in Apollo Tyres Vs ClT (255 ITR 273) is equally applicable for the assessee as held by IT AT Chennai bench in DCIT Vs Thangavel Spinning Mills Ltd. reported in 97 ITD 262.
Gr.7 Applicability of Sec.115JB Assessee contends that provisions of sec.115JB is not applicable in view of the PSC entered into with the Government. In this regard, I submit as under:
a)Article 16.1 of PSC [ pages 558 to 562 of assessee's Paper Book] says that assessee shall be subject to all fiscal legislation in India except specifically exempted under any law. Art. 16.4© reiterates "this position. Sec. 115JB is also an integral part of the !.T. Act. Assessee has not produced any order of any authority
34 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 exempting it from the provisions of !.T. 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 reported in 234 ITR 828.
Gr.8 L evy of interest u/s.234B on book profits computed u/s.115JB Covered in favour of revenue by decision of Hon'ble Supreme Court in JCIT Vs. Rolta India Ltd (330 ITR 470).
Hardy Exploration & Production Vs. ADIT (India) Written submission ITA 2155/10 A.Y. 2003-04 Gr.1 : General Gr. 2 : Jurisdiction to initiate action u/s 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 Sec.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 A.O. and DRP. Not a legal issue. All the facts are not available on record.
Gr. 7 : Levy of interest u/s 234B on book profits computed u/s 115JB Similar to Gr. 8 in ITA 2154/10"
"Hardy Exploration & Production v. ADIT (Int. Tax.), (India) Inc., Chennai. Chennai.
35 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 WRITTEN SUBMISSIONS ITA 802/CHNY/10 A.Y. 2005-06 Gr. 1 : General Gr. 2 to 4 : Jurisdiction to initiate proceedings u/s 263 A. ClT in para. 3 of his order has clearly demonstrated the error committed by.
A.O. while allowing set-off of brought forward depreciation against book profits computed u/s 115JB. The main reason for committing such an error is non-verification of assessment records of earlier years. Perusal of the assessment order shows that A.O. has not made any enquiry regarding eligibility as well as quantum of brought forward loss or depreciation allowable for set off during the current year. Assessee has not furnished any evidence to show that this issue was ever discussed during the course of assessment proceedings.
B In Malabar Industrial Co. Ltd. Vs ClT reported in 243 ITR 83 Apex Court held that when an assessment order was passed without application of mind in all perspective, it is an erroneous order. Similar view was also held in Rampyari Devi Saroagi Vs ClT (SC) 67 "ITR 84.
C. In Gee Vee Enterprises Vs Add!. CIT ( reported in 99 ITR 375 ) Delhi High court held that the ITa being not only an adjudicator but also an investigator. he cannot remain passive in the face of a return which is apparently in order but calls for further enquiry in the facts and circumstances of the case and the word 'erroneous' in s. 263 includes the failure to make such an enquiry. Similar view was held in Rajalakshmi Mills Ltd. Vs ITa (ITAT,SB-Chennai) 121 ITD 343 SRM Systems & Software Pvt. Ltd. Vs ACIT 2010-TIOL-646-HCMAD-IT Accel ICiM Frontline Ltd. Vs ClT in ITA 1597/10 - order dated 13-01-11 by ITAT Chennai Bench D. Assessee's reliance on ITAT order for A.Y. 2004-05 is misplaced as the said order was passed by IT AT only on the reasoning that in the impugned order of that appeal, CIT failed to point out what is erroneous in the assessment order [ para. 10 of IT AT order] whereas in the impugned order u/s 263 for this appeal, CIT clearly demonstrated the error in para. 3.
36 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 Gr. 5 & 6 : Incorrect set-off of brought forward loss/depreciation
a) As per Expl. 1 to sec. 115JB, for the purpose of computation of "book profit" under that section, 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 pf Schedule VI the Companies Act is the starting Point. A.O. cannot change this figure. This is the view held by Apex Court in Apollo Tyres Vs C1T (255 ·iiR 273). There is no dispute on this issue. C1T has not modified this figure in the order u/s 263.
b) A.O. has the power to make adjustments to book profits as mentioned in Expl.1. 1 to sec. 115JB as held in :
i. CIT Vs HCL Com net Systems & Services Ltd. (SC) 305 ITR 409 ii. Ajanta Pharma Ltd. Vs CIT (SC) 327 ITR 305
iii). Indo Rama Synthetics (I) Ltd. Vs C1T (SC) 330 ITR 363.
c) As per Expl. 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".
d) As per the books of account of the company, all expenses including depreciation is debited to the P & Laic and only the net figure of profit I loss is carried forward to subsequent years. Thus in the subsequent years onlyconsolidated 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 Expl. 1 to sec. 115JB.
e) Though assessee claimed that it had certain amount of brought forward losses and depreciation to be set off against the current year's profit, no details as to how such a figure is arrived at, was produced. On the contrary, CIT relied on the figures as per the Profit and Loss a/c appearing in the printed Annual Accounts of the assessee company for F.Y. 1995-96 to 1999-00 which were approved by the Board of directors and placed before theAnnual general meeting. Copy of such accounts are available in pages 1 to 4 of Department's Paper Book. However the figures shown by the assessee in the Income Computation Statement [ page 232 of assessee's Paper book] are at variance with these figures. This clearly shows that A.O. followed the principles laid down by the .Apex court in Apollo Tyres Vs CIT (255 ITR 273). There is no basis for the assessee to show different figures in respect of F.Y. 1995-96 to 1999-00 from the figures which were approved by the Board of directors and placed before
37 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 the Annual general meeting.
f) These documentary evidence clearly prove that the Profit & Loss a/c of the assessee company for the F.Y. 1995-96 to 1999-00 did not include depletion/abandonment costs as part of depreciation. From A.Y. 2000-01 onwards assessee is earning book profit and the issue of loss I unabsorbed depreciation I depletion etc. does not arise as net profit was earned after deducting all such expenditure.
g) Assessments in respect of the I.T. returns filed by assessee corresponding to F.Y. 1995-96 to 1999-00 ( A.Y. 1996-97 to 2000-01 ) has become final as on date. These assessments were completed by accepting the returned income and no appeal was filed by assessee. Hence assessee cannot seek to change I modify the figures of brought forward loss I depreciation determined for such vears in the present appeal proceedings. This view was upheld byHon'ble Supreme Court in Commissioner of Income Tax Vs. Anr. Vs. Dalmia Cement (Bharat) Ltd., in 216 ITR 79 This was followed by jurisdictional high court in S. K V Selvaraj Vs. Commissioner of Income Tax (Mad.) 240 ITR 217.
h) Instead of relying on the figures as per the Profit and Loss alc appearing in the printed Annual Accounts of the assessee company for F.Y. 1995- 96 to 1999-00 which were approved by the Board of directors and placed beforethe 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 Vs CIT (255 ITR
273) is equally applicable for the assessee as held by ITAT Chennai bench in DCIT Vs Thangavel Spinning Mills Ltd. reported in 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 ClT Vs Tulsyan NEC Ltd. (330 ITR 226).
i) As held by ClT, as on 31-03-2000 total brought forward depreciation .is Rs. 8,20,73,183 and total brought forward loss is Rs. 90,13,66,873. The lesser among this is brought forward depreciation of Rs. 8,20,73,183. After adjusting this against profits of F.Y. 2000-01 (Rs. 4,74,34,847) and F.Y. 2001-02 (Rs. 9,20,82,168), nothing remains to be brought forward to subsequent year.
38 ITA Nos.802,803,1077,2154 & 2155/Mds/2010
j) Reduction made to book loss or depreciation in one year must form the basis for computation of MAT liability for the subsequent year, as held in i. Rashtriya ispat Nigam Ltd., In Re (AAR) 285 ITR 1 ii. Lakshmi Machine Works Ltd. Vs ACiT (ITAT, Chennai) 126 ITD 343
k) In this background, any discussion on whether depletion should form part of depreciation or not, is irrelevant as assessee has not included depletion in the depreciation claim made in the Profit and Loss alc which formed part of the printed Annual Accounts of the assessee company for F.Y. 1995-96 to 1999-00 which were approved by the Board of directors and placed before the Annual general meeting. This issue reached finality long back.
l) Further, reliance placed by assessee on Guidelines issued by ICAI is also not relevant since such guidelines were issued in 2003 whereas the dispute relate to F.Y. 1995-96 to 1999-00 period. No Guidelines can be retrospective in operation as guidance is always prospective in nature.
m) Deduction uls 42 not available while computing income uls 115JB as held by ITAT Ahmedabad Bench in Gujarat State Petroleum Corporation Ltd. Vs JCIT reported in 123 ITD 335.
n) In this case, Govt. of India has entered into a Production Sharing Contract (PSC) with the assessee company and such contract was placed before both the Houses of Parliament. As held by Hon'ble Supreme Court in ClT & Anr. Vs Enron Oil & Gas India Ltd. [ reported in 305 ITR 75 ] said PSC is an independent accounting regime which includes tax 39 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 treatment of costs, expenses, income, profits etc. It ·prescribes a separate rule of accounting. PSC represented an independent regime and the shares of Government and contractors were determined on that basis. Expenses had to be accounted for only as contemplated by the PSC in view of the special accounting procedure as prescribed by PSC, reliance on any other accounting system has to be ruled out as held by the Apex Court.
o) Article 16 of PSC provides for "TAXES, ROYALTIES, RENTALS ETC."[ pages 189 to 193 of assessee's Paper Book]. As per this Article, the only expenses deductible while computing profits and gains from the business of Petroleum operations are:
• • 100 % 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 - Section 2.3.1 and 2.3.2 • • 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 I.T. 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.
40 ITA Nos.802,803,1077,2154 & 2155/Mds/2010
q) In short, expenditure by way of "depletion" is not an allowable expenditure as per the PSC. The reason for omission of the same as an expenditure in the PSC is the fact that assessee is not the owner of such natural resources and hence assessee need not be compensated for such reduction in natural resources. This aspect is discussed in detail by the Apex Court in CIT & Anr. Vs Enron Oil & GasIndia Ltd. [ reported in 305 ITR 75 ]. As per Article 297 of the Constitution, all the natural resources vests with the Union 'Government.The international principle of permanent sovereignty over natural resources was adopted by the U.N. General Assembly in Resolution 1803. Assessee does not have any right in allocation of such resources or its pricing, marketing etc. as held under similar circumstances by the Apex court in Reliance Natural Resources Ltd. Vs Reliance Industries Ltd. in Civil Appeal Nos. 4273 to 4277 of 2010 by order dated 07-05-2010. Obiter dicta of Hon'ble Supreme Court is also binding in view of Tata Iron & Steel Co. Ltd. Vs V.R. Bapat (Bom) 101 1TR292.
q) In fact the various papers filed by the assessee in support of accounting of"depletion", are all in respect of enterprises which acquired mineral interests in properties and in such circumstances it was held to be a deductible expenditure. Such an accounting practice is permissible when assessee is the owner of the resources and not in the type of present PSC,as held by the apex court in the decision cited supra. The accounting standards prescribed therein are under the assumption that the natural resources is an asset 'owned by and belonging to the company engaged in the business of exploration and extraction of such natural resources and therefore such depletion is to be charged on its profit and loss account.
• CI. 2 in page~ 69 of assessee's paper book which specifies the objective of the Guidance Note 41 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 Cl.4 in page 76 of assessee's paper book which specified the method of calculation of depletion cost • CI. 1 in page 132 of assessee's paper book which specifies the objective of the Accounting Standard • However the situation is different in the present case where only PSC was entered into by the Government and the natural resources owned by Govt. were not parted with. Assessee did not acquire such assets at all. No such asset appears in the balance sheet of the assessee. Claim of the assessee for depletion costs arises only if the assessee purchases / acquires such natural resources and the 'expenditure incurred for the same is treated as capital expenditure in its books.
r) It is not a BOT contract but a PSC where assessee will be reimbursed the expenditur7' 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 Govt. 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 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 & Ors. Vs union of India & ors (MP) 234 ITR 261.
u) There is no scope for importing into the statute words which are not there. Even if there is a casus omissus, the defect can be remedied only by legislation and not by judicial interpretation. The intention of the legislature is primarily to be gathered from the words used in the statute. Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however, great the hardship may appear tothe judicial mind to be as held in Tarulata Shyam & ors. Vs CIT (SC) 108 ITR 345. Similar view was also held in Padmasundara Rao (Decd.) & ors.Vs State of Tamil Nadu & Ors. (SC) 255 ITR 147.
v) Legislature in its wisdom has not made any allowance towards "depletion"in the PSC since Government is the owner of such natural resources and assessee only makes investment towards exploration of 42 ITA Nos.802,803,1077,2154 & 2155/Mds/2010 oil resources, development of oil wells and production of oil therefrom. Assessee is not affected anyway on account of depletion of natural resourcesand hence there is no need to make provision thereof. The interpretation as suggested by the assessee to allow "depletion" of an asset not owned by the assessee, will make the provisions contained in PSC otiose. Hence such an interpretation needs to be avoided as held by Karnataka High Court in Chartered Housing Vs appropriateAuthority & ors reported in 250 ITR 1. Even though a liberal interpretation has to be given to an incentive provision, the interpretation has to be as per the wordings of the section, and the benefits which are not available under the section cannot be conferred by ignoring or misinterpreting clear words in the section.
Gr.7 applicability of Sec.115JB
a) Assessee contends that provisions of sec. 115JB is applicable in view of the PSC entered into with the Government.
b) Article 16.1 of PSC [ pages 189 to 193 of assessee's Paper Book] says that assessee shall be subject to all fiscal legislation in India except specifically exempted under any law. Art. 16.4© reiterates this position. Sec. 115JB is also an integral part of the I.T. Act. Assessee has not produced any order of any authority exempting it from the provisions of LT. Act or any specific section contained therein. Hence the contention of the assessee is devoid of merits.
c) This issue stands covered by the decision of AAR in Niko Resources Ltd., In Re reported in 234 ITR 828.
ITA 803/CHNY /10 A.Y.2006-07 Issue similar to Gr. 5 to 7 in ITA 802/CHNY /10 ITA 1077/CHNY/10 A.Y.2006-07 Site Restoration Expenses - whether can be added back to book profits computed u/s 115JB Though such expenses are debited to P & L a/c, 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."
43I.T.A. Nos. 802,803,2154,2155 & 1077/Mds/2010
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 Assistant Commissioner of Income-tax v. Rajesh Jhaveri Stock Brokers P. Ltd, reported in 291 ITR 500 (SC), 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 u/s 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.
reported in 243 ITR 83) (SC), the learned DIT was right in invoking his powers u/s 263 of the Act.
8. On merits it was submitted by the learned DR that all the assessments which were in appeal before this Tribunal were liable to be sent back to the Assessing Officer for re-consideration in line with the decision of the Hon'ble Supreme Court in the case of CIT v. Enron Oil And Gas India Ltd., reported in 305 ITR 75 (SC) wherein the Hon'ble Supreme Court has held as follows :
" The above analysis of the PSC indicates that both the Government and the Contractor are entitled to their "take" in oil and not in money. That is why the contract is called as PSC and for that purpose it becomes necessary to translate costs into oil barrels. This is done by dividing the monetary value of costs by the agreed price of oil. The price of oil generally is benchmarked-x per cent above Brent Crude quotation, or it may depend on oil market price.
In India, oil had to be sold during the years in question by the Contractors to IOC so that it was convenient to have a benchmarked price.
If the price of oil increased, the extent of profit oil would also increase and thereby the share of the Government would automatically increase. It is for this reason that PSCs were considered to be a better arrangement for ensuring the Sovereign Governments (owners of the natural resources) the maximum possible "take". At the same time, such contracts ensure that the projects remained attractive enough for foreign investors. However, due to this kind of structure of the PSC, inherently there has to be frequent conversion from one currency to the other. Cash calls were made in USD; some of the cash calls were required to be converted to INR for local 44 I.T.A. Nos. 802,803,2154,2155 & 1077/Mds/2010 expenses; some of the expenses stood incurred in USD whereas some to be incurred in INR; the sale price of oil was in USD whereas the accounts were drawn up in USD. When some of the expenses were incurred in USD and some incurred in INR, conversion had to be made at the prevalent rates of exchange to bring them all to the contract currency, i.e., USD. Similarly, as stated above, the sale price of oil was in USD. At the time of sale, the INR- USD rate would change from that on the date of the cash calls. Similarly, as stated above, the accounts were required to be drawn up in USD. For that purpose also one had to reconvert the costs from barrels to monetary terms. For the said reasons, cls. 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.
Sec. 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. Sec. 42 provides for deduction on expenditure incurred on prospecting for or extraction or production of mineral oil whereas s. 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 s. 42 is a special provision for deduction on expenditure incurred on prospecting, extraction or production of mineral oils.
PSC is a contract in which the Central Government is not only a party, it is a partner in the process. Such contracts are required to be placed before each House of Parliament under s. 42.
Analysing s. 42(1), it becomes clear that the said section is a special provision for deductions in the case of business of prospecting, extraction or production of mineral oils. As stated above, s. 42(1) inter alia provides for deduction of certain expenses.
Broadly speaking, s. 42(1) provides for admissibility in respect of three types of allowances provided they are specified in the PSC. They relate to expenditure incurred on account of abortive exploration, expenditure incurred, before or after the commencement of commercial production, in respect of drilling or exploration activities and expenses incurred in relation to depletion of mineral oil in the mining area. If one reads s. 42(1) carefully it becomes clear that the above three allowances are admissible only if they are so specified in the PSC. For example, in the PSC in question expenses incurred on account of depletion of mineral oil is not provided for. Therefore, to that extent, respondent would not be entitled to claim deduction under s. 42(1)(c). Under s. 42(1) it is made clear that for the purpose of computing the profits or gains of any business consisting of prospecting, extraction or production of mineral oil, an assessee would be entitled to claim deduction in respect of abovementioned three items of expenditure in lieu of or in addition to the allowances admissible under the 1961 Act. Further, such allowances shall be computed and made in the manner specified in the agreement. In short, an assessee is entitled to allowances which are mentioned in the PSC. According to the Department, translation losses claimed by EOGIL are not specified in the PSC, hence they cannot be claimed as deduction under s. 42(1).45
I.T.A. Nos. 802,803,2154,2155 & 1077/Mds/2010 The question which this Court needs to answer is--are the translation losses within the scope of s. 42 ?
In order to answer the above question, we are required to analyse certain provisions of the PSC in question. Article 1 deals with definitions. Under art. 1.21 "Contract Costs" means exploration costs, development costs, production costs and all other costs related to petroleum operations. Similarly, "Cost Petroleum" is defined to mean the portion of the total volume of petroleum produced which the Contractor is entitled to take for the recovery of contract costs as specified in art. 13. Under art. 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, art. 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 art. 14. Continuing the analysis of PSC, art. 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 s. 42 in relation to three items of expenditure specified under s. 42(1)(a), (b) and (c). Under art. 15.2.1, two allowances are provided for. They are for abortive exploration expenses and expenses incurred after the commencement of commercial production in respect of drilling or exploration activities. In other words, two out of three allowances mentioned in s. 42(1) are provided for in art. 15.2.1.
The above analysis shows that s. 42 provides for deduction for expenses provided such expenses/allowances are provided for in the PSC. The PSC in question provides for both capital and revenue expenditures. It also provides for a method in which the said expenses had to be accounted for. The said PSC is an independent accounting regime which includes tax treatment of costs, expenses, incomes, profits etc. It prescribes a separate rule of accounting. In normal accounting, in the case of fixed assets, generally when the currency fluctuation results in an exchange loss, addition made to the value of the asset for depreciation. However, under the PSC, instead of increasing the value of expenditure incurred on account of currency variation in the expenses itself, EOGIL was required to book losses separately. Therefore, PSC represented an independent regime. The shares of the Government and the Contractors were also determined on that basis. Sec. 42 is inoperative by itself. It becomes operative only when it is read with the PSC. Expenses deductible under s. 42 had to be determined as per the PSC. This implied that expenses had to be accounted for only as contemplated by the PSC. If so read, it is clear that the primary object of the PSC is to ensure a fair "take" to the Government. The said "take"
comprised of profit oil, royalty, cesses and taxes. The said PSC prescribed a special manner of accounting which was at variance with the normal accounting standards. The said "PSC accounting" obliterated the difference between capital and revenue expenditure. It made all kinds of expenditure chargeable to P&L a/c without reference to their capital or revenue nature. But for the PSC accounting there would have been disputes as to whether 46 I.T.A. Nos. 802,803,2154,2155 & 1077/Mds/2010 the expenses were of revenue or capital nature. In view of the special accounting procedure prescribed by the PSC, AS-11 had to be ruled out.
The question before us still remains as to whether the PSC talks of translation, and if so, whether translation losses could be claimed by EOGIL. In this connection, we need to consider art. 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 cl. 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 translation purposes between USD and INR, the previous month's average of the daily means of buying and selling rates of exchange as quoted by SBI shall be used for the month in which revenues, costs, expenditures, receipts or incomes are recorded. Therefore, in our view, cl. 1.6.1 of Appendix 'C' provides for translation.
On reading the said PSC, one finds that it not only deals with ascertainment of profits of individual stakeholders including Government of India but it also refers to taxes on individual shares, calculation of costs against revenues from sale of petroleum, allowances admissible for deduction, taxability, valuation, recovery, conversion etc. In other words, it is a complete code by itself."
9. It was the submission that as per the decision of the Hon'ble Supreme Court, the assessee was not entitled to the claim of depletion. The learned DR drew our attention to the PSC between the assessee and the Government of India which was shown at page 558 of the assessee's paper book as also the Appendix 'C' to the said contract which was shown at page 5 of the departmental paper book. It was the submission that the contract was specific insofar as it did not include the depletion cost. It was the submission that the depletion cost was not included because the depletion was in regard to oil field which belonged to the Government of India and consequently the assessee could not claim depletion in regard to the oil field. It was the submission that a perusal of the assessment order itself clearly showed that the 47 I.T.A. Nos. 802,803,2154,2155 & 1077/Mds/2010 Assessing Officer had also not considered the fact that as per the decision of the Hon'ble Supreme Court the PSC was special and independent accounting regime. It was further submitted that a perusal of para 8.2 of the assessment order for the assessment year 2002-03 clearly showed that the assessee had claimed depreciation and business losses as specified in the chart therein and the assessments till 1999- 2000 cannot be adjusted insofar as the claim of the assessee is made in the return and such return has not been revised or disturbed. It was the submission that as the returns as also the assessment had not been done in line with the judgment of the Hon'ble Supreme Court in the case of Enron Oil And Gas India Ltd., referred to supra, and as the decision of the Hon'ble Supreme Court lays down the law on the issue as it stood and it is to be understood, 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% 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 depletion. It was the submission that the value of this fixed asset was multiplied by the volume of the oil extracted and divided by the estimated volume of the natural resources 48 I.T.A. Nos. 802,803,2154,2155 & 1077/Mds/2010 available in the basin. It was the submission that the assessee did not own the basin or the natural resources and it had not claimed for depletion of the natural resources. The learned authorised representative drew our attention to the Profit & Loss Account for the years ended 31.3.1996 and 31.3.1997 which was shown at page 1 of the departmental paper book to say that the assessee had not claimed depletion for the years ended 31.3.1996 and 31.3.1997 and only depreciation had been claimed. He further drew our attention to page 3 of the departmental paper book which was the Profit & Loss Account for the year ended 31.3.1998 wherein the claim of depletion and abandonment has been claimed for the first time. He further drew our attention to page 4 of the departmental paper book which was the copy of the Profit & Loss Account for the year ended 31.3.2000 wherein the depletion, site restoration and depreciation have been separately claimed. He further drew our attention to page 24 of the assessee's paper book for the assessment year 2002-03 which was the copy of the schedules forming part of the accounts for the year ended 31.3.2002, more specifically schedule-3 regarding the development expenditure which showed the net block at ` 19.09 crores as on 31.3.2002 and ` 6.06 crores as on 31.3.2001. It was the submission that the addition to the block was of an amount of ` 22.13 crores and the depletion was to an extent of ` 9.10 crores. The learned authorised representative further drew our attention to page 20 of the assessee's paper book wherein under the head 'Application of Funds - Fixed Asset', exploration and development expenditures have been categorically shown. It was thus the submission that even though the nomenclature was depletion, it was actually the depreciation on the fixed asset as shown in the Balance Sheet representing the explanation and development expenditure. It was categorically committed by the learned authorised representative that the depletion claimed by the assessee was not on account of any claim of depletion of the natural resources.
It was the further submission that consequently the depletion having taken placed on the fixed assets it actually represented depreciation and consequently for the 49 I.T.A. Nos. 802,803,2154,2155 & 1077/Mds/2010 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% 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 And Gas India Ltd., referred to supra, if a PSC was available, then sec. 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 And Gas India Ltd., referred to 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. 42 of the Income Tax Act, 1961 has been specifically recognized for the purpose of allowance of specified in the PSC when computing the profits and gains of the business of the assessee. Article 16.2.1 specifies that deduction of 100% shall be allowed on all expenditures, both revenue and capital, incurred in respect of the exploration operation, drilling operation, development operation and production operation as per the provisions of the Income Tax Act, 1961. Article 16.2.2 permits the deduction of all its unsuccessful exploration costs in the contract areas. Article 16.2.3 specifies that all allowable expenditures incurred prior to the financial year in which the commercial production commences shall be aggregated and treated as the assessed loss for the financial year in which the commercial production commences and such assessed loss together with the assessed loss, if any, in the assessment year relevant to the financial year in which commercial production commences or in any subsequent assessment year, shall be 50 I.T.A. Nos. 802,803,2154,2155 & 1077/Mds/2010 carried forward to the succeeding assessment years and set off as provided in the Income Tax Act, 1961. Thus the PSC recognizes that the Income Tax Act, 1961 is to be applied and section 42 is to be the controlling provision in regard to the allowance of expenditure. Here we may reiterate that as per the decision of the Hon'ble Supreme Court in the case of Enron Oil And Gas India Ltd., referred to supra, the PSC is to be considered as a separate code in itself and insofar as the computation of the income and expenditure of the assessee only such expenditures as permitted in the PSC are allowable. Depletion to the natural resources is not an allowable claim in the hands of the assessee herein as the depletion to the natural resources is not provided in the PSC herein. However, as has already been demonstrated before us the depletion as claimed by the assessee in the present case is not a claim on the depletion of the natural resources. The depletion in the present case is a reduction to the value of the fixed asset claimed by the assessee which represents the exploration and development cost incurred by the assessee. A perusal of the provisions of section 42 of the Act clearly shows that as per sec. 42(1)
(c) the allowance is in respect of the depletion of mineral oil in the mining area in respect of the assessment year relevant to the previous 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 51 I.T.A. Nos. 802,803,2154,2155 & 1077/Mds/2010 expenditure. Appendix 'C' of the PSC clearly classifies the classification, definition and allegation of costs and expenditure. On the basis of this classification as specified in Appendix 'C' the capital expenditure and the revenue expenditure would have to be demarcated. As per the Article 16 of the PSC read with section 42 of the Act, the exploration and development expenditure is also eligible for 100% allowance. But as the same is a capital expenditure a question would arise as to how the expenditure is to be allowed - whether it is allowed in a single year or it is to be allowed over a number of years. This is where the claim of the assessee that this expenditure is liable to be allowed as a proportion to the natural resources extracted as against the estimated natural resources available is found to be scientific and appropriate. A deduction to the capital expenditure which is recorded as a fixed asset would clearly be a depreciation to the fixed asset. In these circumstances, we are of the view that the claim of the assessee that the depletion claimed (though we may mention here that the term used by the assessee is inappropriate) is, in fact, depreciation and is liable to be treated as such. However, as it is noticed that the decision of the Hon'ble Supreme Court in the case of Enron Oil And Gas India Ltd., referred to supra, has not been considered by any of the lower authorities and has also not been verified by the lower authorities that the claim of depletion by the assessee is in fact depreciation to the fixed asset representing exploration and development expenditure, we are of the view that this issue is liable to be restored to the file of the Assessing Officer for re-adjudication and we do so. The Assessing Officer shall re-do the assessment in line with the decision of the Hon'ble Supreme Court in the case of Enron Oil And Gas India Ltd., referred to supra. The Assessing Officer shall also verify the claim of the assessee as to whether the depletion claimed by the assessee is on account of the depletion of the mineral oil or on account of a claim of deduction to the capital expenditure representing the exploration and development expenditure. If the claim of depletion is found by the Assessing Officer to be representing a depletion of the mineral oil, 52 I.T.A. Nos. 802,803,2154,2155 & 1077/Mds/2010 the same shall be disallowed in its entirety. If the claim of the assessee is found to be on account of the reduction in the value of the capital expenditure incurred by the assessee on account of the exploration and development expenditure incurred by the assessee, the same shall be treated as depreciation. Even though it has been argued by the learned authorised representative that the returns for 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 And Gas India Ltd. 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 re-
work 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 And Gas India Ltd., referred to 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 u/s 115JB of the Act it is found that the site restoration expenditure is in line with the PSC. As already held by the Hon'ble Supreme Court in the case of Enron Oil And Gas India Ltd, as the PSC is a code in itself and as it is noticed that the site restoration expenditure is a claim in line with Article 12 of the PSC, the same is clearly an ascertained liability and is in no way a contingent liability. In the circumstances, we are of the view that the site restoration expenditure is an allowable expenditure when computing the book profit u/s 115JB of the Act.
15. Coming to the issue of re-opening of the assessment for the assessment years 2002-203 and 2003-04 as it is noticed that the original assessments are made u/s 53 I.T.A. Nos. 802,803,2154,2155 & 1077/Mds/2010 143(1) and as it is noticed that the Assessing Officer has recorded his reasons for re-
opening of the assessment, in view of the decision of the Hon'ble Supreme Court in the case of ACIT v. Rajesh Jhaveri Stock Brokers P. Ltd. reported in 291 ITR 500 (SC), we are of the view that the re-opening for the assessment year 2002-03 is valid.
16. In regard to the challenge to the powers u/s 263 by the learned DIT for the assessment year 2005-06, it is noticed that the assessment order passed by the Assessing Officer does not discuss any of the issues which have been raised by the learned DIT in his show cause notice u/s 263 or his order passed u/s 263 of the Act.
In these circumstances, in view of the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co., referred to supra, we find no error in the invocation of the revisionary powers u/s 263 of the Act.
17. None of the other grounds in the appeals has been seriously agitated or any specific submission raised and consequently the same are treated as not pressed. In the circumstances, the appeals of the assessee in ITA Nos. 2154 & 2155/Mds/2010 are partly allowed. The appeal of the assessee in ITA No. 802/Mds/2010 is partly allowed to the extent that the order of the learned DIT stands modified insofar as the Assessing Officer while re-doing the assessment shall follow the directions given in the present order in regard to the applicability of the decision of the Hon'ble Supreme Court in the case of Enron Oil And Gas India Ltd, referred to supra, as also in regard to the examination of the issue of depletion. The appeal of the assessee in ITA No. 803/Mds/2010 is partly allowed. The appeal of the Revenue in ITA No. 1077/Mds/2010 stands dismissed.
18. The order was pronounced in the court on 09/06/2011.
Sd/- Sd/-
(Dr.O. K.Narayanan) (George Mathan)
Vice President Judicial Member
Chennai,
Dated the 09th June, 2011.
H.
Copy to: Assessee/AO/CIT (A)/CIT/D.R./Guard file