TMI Blog2007 (5) TMI 265X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case and in law, the learned CIT (Appeals) has erred in holding that the initial assessment year for the purposes of deduction under section 80-IB would be assessment year 1999-2000 and not assessment year 1996-97, as held by the Assessing Officer. The ground in respect of this issue is identically worded in the appeals of the assessee for assessment years 2003-04 and 2004-05. However, these have been stated in more elaborate manner by splitting it up in 7 parts. For the sake of ready reference, the ground is reproduced below: "1. That the CIT(A) erred on facts and in law in upholding the action of the Assessing Officer in denying the appellant exemption under section 80-IB(9) of the Income-tax Act, 1961 ('Act'). 1.1 That the CIT(A) erred on facts and in law in holding that for the purpose of section 80-IB(9) of the Act, the 'initial assessment year' in the instant case of the appellant is assessment year 1996-97 (and not assessment year 2000-01 as contended by the appellant) and accordingly, no deduction was admissible under section 80-IB(9) of the Act for the relevant assessment year as the period of seven years specified under section 80-IB(9) of the Act has already e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arding the determination of the initial assessment year, we may summarize the orders of the Assessing Officer, learned CIT (Appeals)-X, New Delhi [hereinafter called 'CIT(A)-1'] and learned CIT (Appeals)XV, New Delhi [hereinafter called the 'CIT(A)-2']. 2.1 In the assessment order for assessment year 2000-01, it is mentioned that the case of the assessee was that it was eligible for deduction under section 80-IB(4) and 80-IB(9) of the Act. However, it was pointed out that the assessee was not a notified industry in the North-Eastern Region for the purpose of deduction under section 80-IB(4). Therefore, the case of the assessee was considered under section 80-IB(9) of the Act. It was pointed out that deduction under this section is admissible to an undertaking which begins commercial production of mineral oil for a period of seven consecutive assessment years including the initial assessment year. The initial assessment year in the case of the assessee was assessment year 1996-97. Therefore, this year was the 5th year of the claim out of seven years for which the claim was admissible. The aforesaid findings were reiterated in the assessment order for assessment year 2001-02 and it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uary, 1999. In view of these facts, it was argued that assessment year 1999-2000 was the initial assessment year for the purpose of section 80-IB(9) of the Act. The CIT(A)-1 considered these facts and agreed with the assessee that assessment year 1999-2000 was the initial assessment year for the purpose of section 80-IB(9). Her findings on pages 6 and 7 of the order, which are rather cryptic in nature, are reproduced below:- "I have carefully considered all the material placed before me by the ld. counsel and I am inclined to agree with the submission that the initial assessment year for the purpose of section 80-IB(9) would be assessment year 1999-2000 that is the year in which commercial production began. The ld. counsel has been able to establish convincingly that the initial assessment year in terms of section 80-IB(9) is assessment year 1999-2000 and not assessment year 1996-97 as erroneously held by the Assessing Officer. This ground is allowed." 3.1 The issue again came up before her in the appeal for assessment year 2001-02. Relying on the order for assessment year 2000-01, it was again reiterated that assessment year 1999-2000 was the initial assessment year for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of the consortium with the Government of India regarding PSC, grant of mining lease to the consortium by the Government of Arunachal Pradesh, work-over operation undertaken by the consortium, setting up of the storage tank and substantial increase in production of mineral oil after work-over operation, He also considered the report of the director for the year ended on 31-3-1996, in which it was mentioned that work-over operations were being ordered to enhance the production of crude oil. His view was that there was a word of difference between commencement of commercial production and enhancement of production. He also made certain observations regarding the life cycle of an oil well spanning over four segments, namely, drilling, completion, production and abandonment. It was pointed out that work-over operations were a part of regular overhaul of an oil well during its life cycle undertaken to enhance production from the older wells. It was stated that nowhere in any literature on the subject any reference is available to equate work-over operation with the commencement of commercial production. Having considered all these matters, it was held that the commercial production ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of mineral oil referred to in sub-section (9), the assessment year relevant to the previous year in which the undertaking commences the commercial production or refining of mineral oil. Thus, initial assessment year under section 80-IB(9) is that year in which the consortium commenced the commercial production of mineral oil. Further, he referred to the provision contained in section 80-IB(9), which provides for the deduction to an undertaking which begins commercial production or refining of mineral oil at the rate of 100 per cent of the profits for a period of seven consecutive assessment year including the initial assessment year. The proviso to this sub-section states that where the undertaking is located in the North-Eastern Region, it has begun or begins commercial production of mineral oil before the first day of April, 1997 and where it is located in any part of India, it begins commercial production of mineral oil on or after the first day of April, 1997. The case of the learned counsel was that the State of Arunachal Pradesh is located in India and, therefore, even if commercial production was commenced after the first day of April, 1997, it will be entitled to the deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tend to agree with him. However, we may add that the real controversy before us is regarding 'commercial production' and the technical details submitted to the Assessing Officer or stated by the CIT(A)-2 in his order do not really form the basis for resolving the controversy. 5.3 The learned counsel also referred to the provisions of section 80-IA before its substitution by the Finance Act, 1999. Sub-section (1) inter alia provided for the deduction to an industrial undertaking engaged in commercial production of mineral oil in the North-Eastern Region or in any part of India on or after 1-4-1997. Thus, the exemption was available to the undertaking located in North-Eastern Region when it commenced commercial production at any time or it commenced production in any part of India on or after 1-4-1997. Thus, it appears that the provisions of this sub-section are in pari materia with the provisions of sub-section (9) of section 80-IB. Further, he referred to the provisions of sub-section (4E) which provided that the provisions of aforesaid sub-section (1) were applicable to any undertaking which begins commercial production of mineral oil in North-Eastern Region or in any part of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -1-2006 to the Assessing Officer in the course of proceedings for assessment year 2003-04. In this letter, various stages in the life cycle of an oil well, the work-over operations carried out by the assessee, commercial production under the PSC and the legal provisions contained in section 80-IB(9) were discussed. On the basis of various submissions, it was argued that assessment year 2000-01 will be the initial assessment year in the case of the assessee, but it was also pointed out that in the appellate proceedings for assessment years 2000-01 and 2001-02, the CIT (Appeals)-1 held that assessment year 1999-2000 shall be the initial assessment year. Revenue's appeals for both these years are pending before us against the aforesaid orders. Therefore, the whole issue of the determination of initial assessment year is pending before us. Nonetheless, it appears to us that similar consideration will be applicable under section 80-IB(9). If a particular year is fixed as the initial assessment year, then, it cannot be changed. It may be that the submission meant that the CIT(A)-2 could not have changed the initial assessment year and he ought to have followed the order of his predecesso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same at the relevant delivery point under a programme of regular production and sale. We may pause here and state that one of the arguments of the learned counsel was that this definition should govern the meaning of the words "commercial production" used in section 80-IB(9), and it appears to us that real controversy lies in respect of the meaning of the aforesaid words under the section and their interpretation. Article 1.37 contains the definition of the term "development operations" under the agreement to mean the conduct of operations in accordance with the development plan, including inter alia purchase, shipment, storage of equipments and materials used in developing petroleum accumulation, drilling, completion and testing of development well in accordance with the Development Plan and shall include the purchase, shipment or storage of equipments and materials used in developing petroleum accumulations, the drilling, completion and testing of Development Wells, the drilling and completion of wells for gas or water injection, the laying of gathering lines, the installation of separators, tankage, pumps, artificial lift and other producing and injection facilities, including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wells, environmental protection, transportation, storage, sale or disposition of petroleum to the Delivery Point, site restoration and all other incidental operations or activities as may be necessary. Article 1.76 defines "Production Operations" to mean all operations conducted for the purpose of producing petroleum from the Contract Area pursuant to this contract including the operation and maintenance of all necessary facilities and assets thereof. 6.1 Article 2 dealing with the scope and duration and states that the scope of the contract is for conducting Petroleum Operations for exploitation of petroleum by the contractor in the Contract Area. The duration was fixed for a period of 25 years from the Effective Date subject to its termination or extension in certain circumstances. 6.2 As per Article 3.1, the assessee was entitled to 10 per cent share in the crude oil or natural gas obtained from Petroleum Operations. Article 5 deals with the Work Programme. Article 5.1.1 states that the contractor shall commence Petroleum Operations on the Effective Date in accordance with the contract. Under article 5.3, a Management Committee was constituted for approvals of work programm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt solutions are available to minimize the problem, being, - (i) all wells are completed with seven inch casing, (ii) sand consolidation through chemical method, and (iii) regular well cleaning with coiled tubing and a nitrogen unit. The appendix also contains details of proposed work programme, i.e., acid wash location of new wells, transfer of zone and provide for artificial lift. 6.6 The minimum work programme assumes that at the time of take over seven flowing wells have the potential of producing crude oil at the rate of 58 Tons Per Day (TPD). After work-over 10 wells should yield crude oil at the rate of 180 TPD. Recompletion in higher sand on five wells would provide additional potential of 55 TPD. On the assumption that this work will be done in one year, the average production for the year one was estimated at 236 TPD. In the second year the production was expected to be 325 TPD and in the third year it was expected to be 395 TPD. In this manner, the production of first ten years was estimated. 6.7 We may pause here and state that the case of the learned counsel was that the initial assessment year for the purpose of section 80-IB should be fixed by taking into account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly for the purpose of the progress of work-over programme under the PSC and it was agreed that it would be more logical to assume the first year of the PSC to be starting from September, 1997. It may also be mentioned here that although the mining lease was signed by the State Government on 21-10-1997, the lease was granted retrospectively from 16-6-1995, being the date of the PSC. This was obviously done because the crude oil was being extracted from the following wells and the assessee was getting its share in the production from the date of PSC. The learned counsel laid considerable stress on setting up of the Delivery Point (CTTF) and vehemently argued that the date of its setting up has to be taken into account. We may add here that the CTTF was set up for quantification of the production and levy of statutory dues. Before setting up the Delivery Point, the crude oil was being loaded in tankers at the oil head. Therefore, if oil was produced earlier also, then, it cannot be said that change in procedure of its quantification and payment of the Excise Duty at CTTF would make any difference to the conclusion. 6.9 Our attention was drawn towards page 179 of the paper book, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial production due to grant of mining lease before which order could not be placed with the Polish company for mobilizing the rigs for undertaking work-over programme. De-mobilization of the rigs took place in the financial year 1998-99, as seen from their bills, and if that is taken into account, the commercial production started in the previous year relevant to assessment year 1999-2000. Therefore, while the CIT(A)-1 rightly appreciated the facts of the case in terms of the PSC, the CIT(A)-2 erred in holding that the initial assessment year was 1996-97 relevant to the accounting period 1-4-1995 to 31-3-1996, in which the PSC was signed. 7.1 On the other hand, the learned DR pointed out that the words "commercial production" have not been defined anywhere in the Act. Therefore, these words should be assigned the meaning which is understood in the common parlance. The CIT(A)-2 has furnished facts and figures regarding the production of mineral oil in various years starting from financial year 1995-96 up to financial year 1998-99. The figures were furnished on the basis of director's report. It was pointed out that 10 per cent share in the production of crude oil from the K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me meaning as understood in common parlance. That was done by the CIT(A)-2. On this very issue, the case of the learned counsel was that a contextual meaning should be assigned to these words and for that purpose PSC will have to be taken into consideration. 8. We have considered the facts of the case and rival submissions. It is clear that the words "commercial production" have not been defined in the Act. Therefore, we may have to take resort to the cases decided under section 2 regarding the definition of the word "business", which includes within its ambit "trade" and "commerce". The word "trade" has not been defined in the Act. However, as per Webster's New Twentieth Century Dictionary (Second Edition), "trade" means a means of earning one's living, occupation or work. In Black's Law Dictionary, "trade" means a business which a person has learn t or is carrying on for procuring subsistence or profit, occupation or employment, etc. In the case of CIT v. Assam Hard Board Ltd. [1997] 224 ITR 318, the Hon'ble Gauhati High Court at page 320 referred to the meaning of the word "trade" given in Webster's New Twentieth Century Dictionary and Black's Law Dictionary. It was pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's share was 943.20 MT. The production in subsequent two years was 11,900 MT and 11,170 MT, the assessee's share being 10 per cent thereof. The income was shown as business income in those years. We have seen that the "business" is a wider term than "trade" or "commerce". The assessee has been showing that the crude oil produced by the consortium from the date of the PSC was on account of business. Assuming that there was an error in the understanding of the assessee in this matter, it is clear that the consortium was undertaking regular systematic activity, which will amount to "business". If that is so, can it then be said that it was not commercial production? We may like to compare this case with a case where a plant is being renovated on extensive scale to revive a sick unit or for achieving higher production. To our mind, the production before renovation as well as after renovation in much larger quantity will be commercial production because in either case the goods were being produced to be sold with a view to earn profit, which includes even loss within its ambit. Therefore, when the assessee produced roughly about 10,000 MT before work-over operations and 44,630 MT af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that appeals of the assessee for assessment years 2003-04 and 2004-05 are dismissed. The appeal of the revenue for assessment year 2000-01 is allowed and ground No. 1 of the appeal of the revenue for assessment year 2001-02 is also allowed. 10. Ground No. 2 of the revenue for assessment year 2001-02 is that the learned CIT (Appeals) erred in allowing deduction under section 80-IB in respect of income including parental support of Rs. 16,32,050, interest income of Rs. 2,54,681 and miscellaneous income of Rs. 1,48,673. 10.1 The learned DR pointed out that only such income which is derived from the business of the undertaking is deductible under section 80-IB(I), read with section 80-IB(9). Since none of the aforesaid items constituted income derived from the undertaking, the CIT (Appeals)-1 erred in allowing deduction of the aforesaid income. 10.2 As against the aforesaid, the learned counsel pointed out that the assessee was also appointed as "operator" under the PSC and the parental support was nothing but the payments made by the consortium to the assessee for acting as Project Manager. This income had direct link with the operations of the extraction of oil. However, he d ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
