TMI Blog2008 (2) TMI 521X X X X Extracts X X X X X X X X Extracts X X X X ..... ation at 10 per cent applicable to 'building' as the term 'building' is defined to include well as per Note 1 below Appendix to r. 5 of the IT Rules. (4) allowing depreciation @ 25 per cent on the capitalized value of Rs. 1,92,77,510 of gas separator and flood light mast treating the same as 'plant and machinery' as against 10 per cent allowed by the AO treating the same as 'building'. (5) allowing deduction under s. 80-IB(9) of the IT Act amounting to Rs. 3,24,95,075. (6) considering well Nos. 6 and 7 as separate undertaking and allowing deduction under s. 80-IB(9) of the IT Act. (7) in appreciating the fact that s. 80-IB(9) of the IT Act applies to an assessee who is engaged in commercial production or refining of mineral oil. whereas the assessee produces natural gas and the word 'mineral oil' does not include 'natural gas' for the purpose of s. 80-IB(9) of the IT Act." 2. In the appeal by the assessee (ITA No. 789/Ahd/2005) the grounds raised are: "The learned CIT(A)-IV, Baroda [hereinafter referred to as 'the CIT(A)'] erred on facts and in law in upholding the assessment order dt. 3rd March, 2004 issued by the learned Asstt. CIT, Circle 6. Baroda (hereinafter refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance made The CIT(A) has, based on the facts of the case and in law, erred in treating the appellant as not eligible to claim any deduction under s. 42 of the Act amounting to Rs. 27,40,33,303 on the basis that the production sharing contracts do not provide for the deductibility of such expenses. The CIT(A) further, erred on the facts and in law, in enhancing the income of the appellant by Rs. 5,62,96,527 by holding to be disallowable, the deduction given by the AO under s. 42 of the Act in computing the appellant's income, on the same basis. The appellant prays that the AO be directed to allow deduction under s. 42 of the Act in respect of the expenditure incurred by the appellant amounting to Rs. 27,40,33,303 in connection with the drilling and exploration activities carried on by it. Without prejudice grounds 4.2 Error in allowing depreciation on expenditure incurred in drilling of wells Without prejudice to 4.1 above, the CIT(A) has, based on the facts of the case and in law, while allowing depreciation on the expenditure incurred on construction of wells, erred in not totalling well No. 12, which was put to use on 1st Oct., 2000, as put to use for at least 180 day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. As regards ground No. 1 in Revenue's appeal, the facts are that the assessee paid demurrage charges of Rs. 3,56,051 during the year for late taking of delivery of the drilling equipment imported and claimed the same as deductible revenue expenditure. The AO disallowed the claim of the assessee by holding that the charges as paid were for infraction of law by not taking the delivery of certain goods within the stipulated time laid down as per rule. The CIT(A) allowed the claim by relying upon the decision of Allahabad High Court in the case of Nanhoomal Jyoti Prasad vs. CIT (1980) 123 ITR 269 (All) wherein it is held that the demurrage is a charge by way of compensation and includes amount chargeable for storage and safe custody of the goods by port authorities and it is an additional amount charged from the person for delayed clearance. It is not a fine paid to the port authorities for any criminal act but is a compensation for the use of port facilities beyond the free period allowed under the rules. 4. After hearing the parties we do not find reason to disagree with the CIT(A). For importing the drilling equipment goods at zero customs duty, essentiality certificate (EC) fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of assessment proceedings did not produce all the vouchers relating to these expenses on travelling, conveyance, welfare, miscellaneous and out of pocket expenses. The ground stated was that they were large in quantity and had been kept in so many files. Moreover, the voucher relating to these heads were found to be kept in a very disorderly manner and it was extremely difficult to find out a particular voucher for a particular expenditure and the purpose for which expenditure was incurred. Some of the journeys were not linked with the business purpose. The assessee could not satisfactorily explain as to what was the purpose of travelling. In absence of these details, the entire amount on out of pocket expenses/travelling and conveyance expenses, welfare and miscellaneous expenses were here held to be not for business purposes. The AO accordingly disallowed a sum of Rs. 10,00,000. 6. The CIT(A) reduced the disallowance to Rs. 5,00,000. He accepted the assessee contention as regards out of pocket expenses paid to auditors because as per the terms of agreement, normally, an assessee is required to reimburse out of the pocket expenses incurred and claimed by the auditors. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on him to bring all material facts on record to substantiate the claim in view of decisions of Sohan Pathak Sons vs. CIT (1951) 19 ITR 199 (All), Lakshmiratan Cotton Mills Co. Ltd. vs. CIT (1969) 73 ITR 634 (SC), L.H. Sugar Factory Oil Mills (P) Ltd. vs. CIT (1980) 19 CTR (SC) 185 : (1980) 125 ITR 293 (SC), CIT vs. Chandravilas Hotel (1986) 56 CTR (Guj) 182 : (1987) 164 ITR 102 (Guj), CIT vs. Southern Sea Foods Ltd. (1995) 129 CTR (Mad) 79 : (1995) 215 1TR 176 (Mad) and Assam Pesticides Agro Chemicals vs. CIT (1998) 145 CTR (Gau) 213 (1997) 227 ITR 846 (Gau). According to him the AO was reasonable enough to disallow only Rs. 10,00,000 out of the expenses of about Rs. 234 lakhs which is about 4 per cent and deserve to be sustained. 8. The learned counsel on the other hand submitted that the AO has presumed that all expenses claimed cannot be said to be laid out for business purpose on the allegation that the relevant vouchers could not be produced; that all the aforesaid expenses have been incurred wholly and exclusively for the purposes of business of the assessee; that a reputed firm of chartered accountants has audited the financial statements of the assessee without any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, are being discussed hereunder together. 11. We shall first take up the issue of deduction under s. 42, raised in the appeal of the assessee that being the principle issue. The question of allowing depreciation and that too at what rate would arise only when assessee's claim under s. 42 is found to be not maintainable. 12. The assessee claimed for deduction of a sum of Rs. 27,40,33,303 under s. 42 of the IT Act, 1961 comprising of the following amounts-(i) Rs. 25,58,865 being additions to fixed assets; (ii) Rs. 5,41,95,406 being drilling costs and exploratory delineation; and (iii) Rs. 21,72,79,032 being additions to producing properties. 13. As regards first item, the details of claim of expenditure being additions to fixed assets of Rs. 25,58,865 are: ----------------------------------------------------------------------- Description Hazira Bhandut Cambay Baroda Surat Baroda Total ----------------------------------------------------------------------- Office equipment and furnishing 66,465 3,300 4,748 1,72,827 16,904 - 2,64,244 ----------------------------------------------------------------------- Guest house equipment - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and exploration activities; that Rs. 1,76,550 on purchase of generator kept at Baroda cannot be used in connection with drilling operations which are being carried out at a far distant place. Therefore, these sums were not deductible under s. 42 of the IT Act, 1961 by the AO. He however allowed depreciation at the applicable rates on these items. 15. As regards drilling costs and exploratory delineation Rs. 5,41,95,406, the AO allowed the claim and held that the drilling and exploration work was done by Essar Ltd. and John Co. by their own drilling rig. The assessee has paid charges for drilling and exploration work to both the companies. Therefore, the assessee's claim for deduction under s. 42 was restricted to drilling and exploration charges paid to both the companies. 16. As regards claim for deduction on additions on producing properties of Rs. 21,72,79,032 the AO held: "13.5 The amount of Rs. 21,72,79,032 claimed to be deductible under s. 42 of the IT Act, 1961 comprises the following amounts: ----------------------------------------------------------------------- Description Hazira Bhandut Cambay Baroda Surat Baroda Total ---------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the definition of building. Accordingly disallowance of Rs. 14,07,98,3323 is made and depreciation @ 10 per cent which works out to Rs. 1,40,79,803 is allowed. 13.7 The assessee has also claimed deduction of Rs. 1,50,01,084 under s. 42 in respect of pipeline cost. The pipeline costs are not a part of a drilling and exploration expenditure. However, it qualifies for 100 per cent deduction as depreciation under s. 32 of the IT Act, 1961; the assessee being a mineral oil concern. Therefore no disallowance is made. 13.8 Land based drilling platform on which expenditure of Rs. 23,04,579 is incurred is held to be related to drilling and exploration activities and the amount incurred is deductible under s. 42 of the IT Act, 1961. 13.9 An amount of Rs. 11,36,961 has been incurred on storage/trans/other/facility and the same is claimed to be deductible under s. 42 of the IT Act, 1961 on the ground that the said expenditure relates to drilling and exploration expenditure. The assets were used for storing oil and natural gas obtained from the oil and gas field. They are not connected or related to the drilling and exploration activities. Therefore the amount of Rs. 11,36,961 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowances should also fall in any of the sub-cl. (a), (b) or (c) of s. 42(1); that sub-cl. (a) applies to situation prior to beginning of commercial production; that sub-cl. (b) applies to the situation, after the beginning of commercial production and that sub-cl. (c) applies to allowance in relation to depreciation on mineral oil in the year where production has begun and in succeeding year. As the assessee has already started commercial production, he held that only sub-cl. (b) would apply. He then referred to s. 42(1) with sub-cl. (b) and saw that for the purpose of allowing deduction/allowances in addition to the allowances admissible in other sections of this Act, the conditions to be satisfied are: (1) There should be an agreement of the person with Central Government (and agreement should be laid on the table of each house of the Parliament); (2) Only such allowances are allowed which are specified in the agreement, (3) Such specified allowances should be in relation to the expenditure incurred in respect of drilling or exploration activities or services or in respect of physical assets used in that connection and (4) Such allowances shall be computed and made in the manne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , including, s. 42 of the Act" was rejected by the CIT(A) by observing that firstly, because in PSC art. 15.3 phrase used is "as reduced by "allowable deduction" and that this having been laid on the table of both the houses of Parliament and being a legal document no word or phrase can be added. While reading it, one has to read what has been mentioned in the contract/agreement; that presuming but not admitting that one can read the contract be adding words "including s. 42 of the IT Act", thus, making the phrase "as reduced by deduction allowable under the Act including s. 42 of the Act" even then one will have to revert back to s. 42 itself and thus, no additional allowance can be allowed to be deducted by virtue of s. 42, over and above, the normal allowance allowable under other section of the Act. He further observed that the aforesaid gets further fortified from the fact that not only these allowances should be specified in the agreement, but even the computation of such allowances has to be made in the manner specified in the agreement. The same is quite clear from the phrase used below sub-cl. (c) of s. 42(1), namely: "...and such allowances shall be computed and made in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision. The Supreme Court: again in CIT vs. N.C. Budharaja Co. Anr. Etc. Etc. (1993) 114 CTR (SC) 420 : (1993) 204 ITR 412 (SC) held that the words used in a provision take colour from the context as also from the history of the provision. Liberal interpretation should not do violence to plain language. The object of an enactment should be gathered from a reasonable interpretation of the language used therein. It is thus clear that the language in the statute has to be read plainly and normally, to be read from the context in which they have been used. The rule of interpretation has only to be used when there is any doubt with regard to the express language used in the provision. In the instant case of the assessee, there is no any doubt in the language used in s. 42(1) of the IT Act as well as in PSC. The language used is quite unequivocal and there is no scope of any double interpretation. The principle of liberal interpretation has to be applied, even if it were to apply, it should not be to do violence to the plain language of the Act. 21. The argument of the assessee that when the plain interpretation produces a manifestly unjust result, the Court might modify the la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no difference in the provisions of IT Act, more particularly, s. 42 for Indian company and Canadian company. Accordingly, this argument of the assessee has no basis and is in fact misplaced and therefore, rejected, It is only that the AO of M/s GSPCL has not examined the basic issue 'regarding allowability of deduction under s. 42', Accordingly, the learned CIT(A) in the case of M/s GSPCL has no occasion to examine whether deduction under s. 42 of IT Act is at all available to M/s GSPCL or not. Without prejudice to above, it may be mentioned that no detailed discussion has been done by the learned CIT(A) in the case of M/s GSPCL in relation to the basic issue of allowability of deduction under s. 42. In fact CIT(A) has discussed the allowability of specific expenditure with reference to the fact whether same can be considered as drilling and exploration expenses or not and is thus covered under cl. 'b' of s. 42(1) and not the basic issue whether all these expenses have been specified in the argument, which is a prerequisite before proceeding further to examine whether these expenses are part of drilling or exploration expenses." 23. Claim under s. 42(1): The learned counsel of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al (1991) 190 ITR 56 (Bom). 25, The assessee submits that it has claimed a sum of Rs. 27,40,33,303 under s. 42 of the Act, towards expenditure incurred by it in connection with natural gas and oil drilling and exploration activities and assets used in connection therewith. This includes Rs. 14,07,33,983 towards expenditure incurred for drilling natural gas and oil wells which comprised of expenditure on drilling tangibles and drilling services Rs. 12,14,56,473, gas separator Rs. 1,87,92,603, and flood light mast Rs. 4,84,907. The expenditure of Rs. 12,14,56,473 is 1/3rd share of the assessee of Rs. 36,34,52,591 and was incurred in the course of drilling natural gas/oil wells below the ground at depths varying between 1,000 to 2,000 meters, and therefore wrongly disallowed by AO. Sec. 42 of the Act allows deduction for, inter alia, "drilling or exploration activities or services or in respect of physical assets used in that connection" in lieu of depreciation which would have otherwise been allowable on such expenditure. The terms "drilling" and "exploration" are not defined in the Act and there be understood on the industry practices, governing business laws, and relevant guidanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining production to the well bore and controlling formation pressure. These steps are summarised: -Placing the drill bit, "collar" and "drill pipe" in the hole; -Attaching the "kelly" and "turntable" and begin drilling; -As drilling progresses, circulated mud through the pipe and out of the bit to float the rock cuttings out of the hole; -Adding new sections (joints) of drill pipes as the hole gets deeper; and -Removing (trip out) the drill pipe, collar and bit when the pre-set depth (any where from a few hundred to a couple-thousand feet) is reached. 26. Para 8 of the Guidance Note on Accounting for Oil and Gas Producing Activities issued by the ICAI ("the Guidance Note") is referred to defining the exploration activities as: "Exploration activities cover the prospecting activities conducted in the search for oil and gas. In the course of an appraisal programme these activities include but are not limited to aerial, geological, geophysical geochemical, palaeontological, palynological, topographical and seismic surveys, analysis, studies and their interpretation. Investigations relating to the subsurface geology including structural test drilling, exploratory type strat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to which the Central Government has entered into an agreement with any person for the association or participation of the Central Government or any person authorised by it in such business (which agreement has been laid on the table of each house of Parliament), there shall be made in lieu of, or in addition to, the allowances admissible under this Act, such allowances as are specified in the agreement in relation; (a) .......... (b) after the beginning of commercial production, to expenditure incurred by the assessee, whether before or after commercial production, in respect of drilling and exploration activities or services or in respect of physical assets used in that connection, (c) .........., and such allowances shall be computed and made in the manner specified in the agreement, the other provisions of this Act being deemed for this purpose to have been modified to the extent necessary to give effect to the terms of the agreement." 29. On a close reading of this section, we find that the deduction under this section is allowed for computing the profits and gains of the business of prospecting for or extracting or production of mineral oil, in relation to whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits and gains of a company consisting of petroleum operations shall, for the purpose of levy of income-tax under the IT Act, 1961 be computed on the basis of the value, determined in accordance with art. 18 of its participating interest share of crude oil produced and saved and sold, or otherwise disposed of, from the contract area and from any revenue realised on the same or disposal of associated or non-associated natural gas referred to in art. 20 as well as any other gains or receipts from petroleum operations as reduced by the allowable deductions." 32. This article provides as to how the profits and gains of a company consisting of petroleum operations shall, for the purpose of levy of income-tax under the IT Act, 1961 be computed. It is on the basis of the value determined in accordance with art. 18, of its participating interest share of crude oil produced and saved and sold, or otherwise disposed of, from the contract area and from any revenue realised on the same or disposal of associated or non-associated natural gas referred to in art. 20 as well as any other gains or receipts from petroleum operations as reduced by the allowable deductions. The assessee submits t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons which contain "purpose", "definitions", "inconsistency", "documentation and statements to be submitted by the contractor", "language and units or account", "currency exchange rates", "payments", "arms length transactions", "audit and inspection rights of the Government" and "revision of the accounting procedures." 35. None of these clauses do not (sic) specify for the computation of income and the manner in which they are to be allowed. What section says is that "there shall be made in lieu of, or in addition to, the allowances admissible under this Act, such allowances as are specified in the agreement in relation". Nothing is specified in the agreements and, therefore, deduction under s. 42 would not be granted for any expenditure except that is allowable under the Act otherwise. 36. An expenditure on storage, transportation and other facilities is more relatable to the production and/or sale rather than exploration and drilling. Exploration is an activity carried out to find out the possibility of oil/gas by collecting geological data and seismic survey etc. and thereafter the drilling is done at a place where probability of finding the oil/gas is comparatively high. At ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot resulting or creating any unjust result. In fact the language used in the provisions of s. 42 is plain, simple and is quite clear admits, of no doubt inasmuch as that only those allowances are to be allowed which are specified in the agreement entered into by the assessee with Central Government. 39. The assessee had made this miss rectified in subsequent agreements and itself has provided specifically the allowances to be deducted under s. 42 and the manner thereof and Department has allowed but that does exonerate the assessee from complying with the requirement in these agreements appearing in this year. The letters exchanged between two Departments of the Government to this effect also do not help the assessee as they only requested for clarification and nothing more. No action taken thereon for a long time might be indication or an impression otherwise. It only proves that while entering into these contracts with the assessee and GSPCL, the Central Government at that time have not thought it fit to provide special deduction under s. 42 of IT Act and therefore, no benefit thereof can be given in the circumstances. A plain reading of the statute is not producing any mainfes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hole connection. During boring or drilling the well, drilling fluid or drilling mud is constantly circulated down the well bore. Afterwards casing of stainless steel is set for the completion of the well another tubing is lowered (this is basically a steel pipe), the perforation is done in the casing and cement by setting off explosive charges so that formation fluid can flow from formation into the well bore. Thereafter, valves and fittings controlling the production at the well head are installed which is known as "installing the christmas tree". The wells are drilled below the ground to extract the gas from its natural reserves in the various layers of the earth. When the drill bit becomes worn out or damaged, entire drill pipe has to be removed by the process known as "tripping out". 45. Claim of the assessee is that it incurred expenditure of Rs. 12,14,56,473 on drilling tangibles and services towards drilling wells below the ground. It claims that in the business of mineral oil, which is extracted from the earth, the only way to access the natural resources and extract the same is through drilling a well. It is stated that the 'well' is thus the fundamental apparatus for pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted, cannot be regarded as building, since it stands alone as structures and, therefore, not adjuncts to any building on the parity of reasoning by the Supreme Court in the case of Indore Municipal Corporation vs. CIT (2001) 166 CTR (SC) 511 : (2001) 247 ITR 803 (SC) holding that roads not adjunct to building cannot be treated as building. In this case a road was constructed for dumping wastes and there were no buildings in the vicinity. As there was no construction other than the road, it is held, it could not be regarded as building. The ratio is squarely applicable to the case of the assessee as there is no construction other than the well and hence the same cannot be regarded as building by any stretch of imagination. The assessee thus claimed that 100 per cent depreciation be allowed on the capitalised value expenditure of Rs. 12,14,56,473 on drilling of wells. 47. The view of AO is that the well constitutes building. It is specifically included in the definition of building given as per Note No. 1 below Appendix I of IT Rules, 1962 which includes both well and a tube well in the definition of the building. 48. The CIT(A) held that oil well is undisputedly a special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether well is a plant or not, the Courts itself have held that oil well is an apparatus used by the assessee for the purpose of deriving income from crude oil. Accordingly if the oil well has not been used for the purpose of deriving income, it meant that it had not started commercial production and, therefore, it cannot be said to have been put to use. In view of the above, well Nos. 8, 12, 13 and 14 have been put to use for less than 180 days during the year under consideration. In such a situation, depreciation on these wells is allowable @ 50 per cent, as these have been used for less than 180 days during the previous year relevant to asst. yr. 2001-02. The cost of well Nos. 8, 12, 13 and 14 as shown during the assessment proceedings is Rs. 1,41,88,962, Rs. 2,05,26,337, Rs. 1,67,94,696 and Rs. 1,60,78,880 respectively totaling to Rs. 6,75,88,875. Accordingly, only 50 per cent of the above being Rs. 3,37,94,437 would be allowed and balance amount was to be disallowed for the year under consideration in respect of aforesaid four wells. 50. The submission of CIT-Departmental Representative is that the CIT(A) is wrong in allowing depreciation at 50 per cent of Rs. 6,75,88,875 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the road is held to be a part of building, and the decision of Supreme Court in the case of Indore Municipal Corporation vs. CIT, wherein the road leading to the plant is held to be not a building because it was not leading to the building. The learned counsel for the assessee submitted that the decision of Gujarat High Court in the case of Shree Digvijay Woollen Mills Ltd. vs. CIT (1993) 114 CTR (Guj) 396 dt. 3rd April, 1993, relied upon by the learned CIT-Departmental Representative was not on the issue whether tube well is a plant but whether the expenditure on tube well is a capital or revenue. 53. The learned Departmental Representative in reply submitted that link to building theory as propounded by the learned counsel fails in the case of a bridge included in the definition of "building" and, therefore, the definition cannot be restricted to the items connected only with the building. 54. Our finding: Sec. 32 prescribes 4 broad categories of assets for granting depreciation. These are: (i) buildings, (ii) machinery, (iii) plant, and (iv) furniture. The depreciation is allowed on these various assets as per rates prescribed in the IT Rules Appendix 1. The term building i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the structure plays no part in carrying on the business activities and is used as a space for carrying on the business, it will fall within the category of a building then it cannot be called plant. There may be a situation where part of the construction of the building is such which is specially designed and meant for carrying on the mechanical process and part of it is used as a space for various activities like research, office or the like and in that case the part construction would not be treated as a plant. The functional test is whether a structure is used for carrying on the business and hence a tool of the trade or whether it is only the place of business in which the business is carried on. Cold storage, silos and well are such of the items which have been interpreted to fall within the term "plant". 56. To determine as to whether an asset is a 'plant', the Supreme Court in the case of Scientific Engineering House (P) Ltd. lays down certain tests. These are: "Does the article fulfil the function of a plant in the assessee's trading activity? Is it a tool of his trade with which he earned on his business? If this answer is in the affirmative, it will be a plant". The S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that even if it did not result in the creation of an asset, it would not cease to be an expenditure of the nature of capital. 58. The decision of Supreme Court in the case of Indore Municipal Corporation vs. CIT wherein the expenditure on laying road was held to a capital expenditure road not leading to the building is held to be not a building. A claim in this case before the High Court was also made that road is a plant but was rejected by the High Court [Indore Municipal Corporation vs. CIT (1981) 132 ITR 540 (MP)] because construction of metal roads for hauling compost cannot be an expenditure on plant and machinery. 59. The view of the AO that a well constitutes a building in a mineral oil concern may also be not wrong, if we see it with the definition of a building which includes a well and a tube-well within its meaning. In CIT vs. Gwalior Rayon Silk Manufacturing Co. Ltd. the road was held to be a building and the view was supported by the amendment in the Rules. The Court observed "While enacting the IT (Fourth Amendment) Rules, 1983, the rule making authority accepted this interpretation" consistently laid down by various High Courts that building includes roads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eory not sacrosanct and fails. Consequently all types of wells and tube-wells would be included in the term building. 61. The other contention of the assessee that there is no roof and therefore, it cannot be a building has also no force. Firstly, as aforesaid, there is no such requirement that to be a building it has to have a roof and secondly, the specific inclusion thereof in the definition of building is sufficient to hold it a building. 62. The purposive theory advanced by the learned counsel on the basis of the Supreme Court decisions in Getti Chettiar and Tirath Ram Ahuja would not assist us in taking a view and holding that a gas oil well is a plant in contradiction to its specific inclusion in the term 'building'. 63. In N.S. Getti Chettiar the Supreme Court dealt with the term 'transfer' of property in s. 2(xxiv). The Court observes that cl. (xxiv) enumerates several types of transfers and not to any other transactions; that it is also necessary to attach significance to the words "or other alienation of property" immediately after setting out the various types of transfers; that if we read the clause as a whole, it is clear that it deals with transfer of propertie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly the value of his own property and to increase the value of the property of another person. A member of an HUF who, as mentioned earlier, has no definite share in the family property before division, cannot be said to diminish directly or indirectly the value of his property or to increase the value of the property of any other coparcener by agreeing to take a share lesser than what he would have got if he had gone to Court to enforce his claim. Till partition his share in the family property is indeterminate. He becomes entitled to a share in the family property only after the partition. Therefore, there is no question of his either diminishing directly or indirectly the value of his own property or of increasing the value of the property of anyone else. The 'transaction' referred to in cl. (d) of s. 2(xxiv) takes its colour from the main clause, viz., it must be a transfer of property in someway. This conclusion of ours gets support from sub-cls. (a) to (c) of cl. (xxiv) of s. 2, each of which deals with one or the other mode of transfer. If Parliament intended to bring within the scope of that provision partitions of the type with which we are concerned, nothing was easier th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd also considering the decisions of various High Courts, he held the same was to be considered as plant. Accordingly, depreciation on gas separator and flood light masts was allowed @ 25 per cent. The assessee has not furnished the dates, of installation of these two assets, he therefore directed that if AO, on examination, finds that the same has been installed after 30th September and have been put to use for less than 180 days, half of the allowable depreciation may be allowed. 69. We have heard the parties and considered the rival submissions. The gas separator separates the gas and oil from the mix and is thus a machine used for the production of natural gas and as the name suggests, it has to be a plant. 'Flood light masts' is used to provide lighting at the field site to help in the production activity and would be similarly a part of plant and machinery. In any case, same has not been separately classified and included in the term 'building' in Appendix I of IT Rules the same cannot be considered as building. In view of these facts and circumstances the same is considered as plant. Accordingly, we hold that the CIT(A) is right in allowing depreciation on gas separator an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from this well and accordingly, the well has been abandoned. This according to him is nothing but a dry hole a dead expense. 73. The CIT(A) found it evident and also undisputed that "dry well" was the well which has not started production; that the assessee incurred heavy expenditure on drilling this well but turned out to be dry and that accordingly the same had to be abandoned; that it is thus clear that this well has not started production and was not put to use for the purpose of the business of the assessee; and that in view of these facts, the depreciation cannot be allowed on expenditure incurred on dry well. He held that it was a capital expenditure not allowed to be deducted under any provisions of the Act. He also mentioned that such type of expenditure has been considered to be allowable under s. 42 of the IT Act as the assessee is engaged in the business of prospecting for or production of mineral oils, provided the various conditions stipulated in s. 42 are satisfied. Accordingly, it would lead to very anomalous situation and will also be totally unjust, as such type of expenditure was not infrequent for the mineral oil concerns. However as discussed in the earlier p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t aside the order to this extent to the file of AO to decide the issue in accordance with law and after giving an opportunity to the assessee to present his case. 76. Ground No. (4.4) in the appeal of the assessee is again the alternate submissions made in relation to the assets, being the land based drilling platform and causeway as plant used by the assessee for exploration and production of mineral oils vide Entry III (I) of the Appendix I of the IT Rules, @ 25 per cent. 77. The AO allowed 100 per cent deduction under s. 42. The CIT(A) found that the assessee has reclaimed the sea bed and this land based drilling platform has been constructed about 1-1/2 to 2 kms. inside the sea; that on this platform, having area about 2 sq. kms. well Nos. 8 to 23 have been drilled (till the year under consideration well Nos. 8 to 15 have been drilled). This platform supports the various wells; that this platform has been prepared by highly specialized technical expertise and therefore, it is clear that the aforesaid amount included not only amount of expenditure incurred on platform itself but also on the approach road/path developed to reach to the platform. According to him at least, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The AO has discussed the issue in the assessment order stating that though the assessee made a plea that it reserves its right to claim exemption of income under s. 80-IB(9), however, has not staked any such claim so far; that the claim of the assessee was also not as per law, and that the assessee was not entitled to exemption of any part of income under s. 80-IB(9) because it had already began commercial production before 1st April, 1997. 81. As the deduction was not quantified before the AO in view of the likelihood of getting the claim of deduction under s. 42 and as that was not allowed, the ground was taken in the appeal before the CIT(A). The assessee filed the details of deduction before the CIT(A) who sent the details to AO for examination, scrutiny and his comments. 82. Preliminary objection was raised by the AO in his report for entertaining the ground by the CIT(A) mentioning in the report as under: "The assessee company has filed its return of income on 30th Nov., 2001 for year 2001-02 declaring total income of Rs. 11,02,58,873. In this return, or in the computation of income, the assessee has not claimed any deduction under s. 80-IB(9) of the Act. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 98, and hence eligible for deduction under s. 80-IB(9). The assessee has further submitted that this is the third year of claim and the profit eligible for deduction are Rs. 3,66,52,752 and has also enclosed chartered accountant's certificate dt. 8th Dec., 2004 along with P L a/c of the said undertaking, However from the records it seems that no such claim for deduction under s. 80-IB was made in earlier years i.e. asst. yr. 2000-01." 83. The CIT(A) rejected the preliminary objection of the AO that it was a new claim raised by the assessee which should not be allowed by observing as under: "12.5 I have considered the argument taken by the appellant and also the objections raised by the AO. It is undisputed that the appellant had requested the AO for reserving its rights for making claim under s. 80-IB, which was not made considering that appellant may get deduction under s. 42 of the IT Act. There was reasonable cause before the appellant for quantifying the claim under s. 80-IB for the first time before the CIT(A), though, the intention to claim the deduction was already put up and made known to the AO during the assessment proceedings. The AO was given opportunity by the unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be allowed by the AO (reliance is placed on the decision of the Supreme Court in the case of Goetze (India) Ltd. vs. CIT (2006) 204 CTR (SC) 182 : (2006) 284 ITR 323 (SC), wherein it was held that the AO cannot entertain a claim otherwise than by filing a revised return); that the assessee raised tile ground before the CIT(A) as under: "11. Ground No. 11: Disallowance of deduction claimed under s. 80-IB of the Act. During the assessment proceedings, your appellant.... or after 1st April, 1997. The AO .......... commence production prior to 1st Apri1, 1997. The AO .......... computing deduction under s. 80-IB of the Act..... (These re-extracts of statement of facts and not grounds as stated by the CIT-Departmental Representative)". 86. He further submitted that the language used in the ground of appeal is basically wrong as-(a) no claim was made before the AO; (b) no P L a/c and balance sheet was filed for the claim; (c) no audit report in Form No. 10CCB was filed which is a primary condition to entertain claim under s. 80-IB; (d) the assessee has not filed everything, nor satisfied all the conditions and the AO is also not satisfied with the claim; (e) an audit repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o dealt with the claim by observing that the deduction was not available on account of the undertaking having started commercial production before 1st April, 1997. In any case claim can be raised for the first time before the CIT(A) in view of the decision of the Supreme Court in Jute Corporation of India Ltd. vs. CIT (1990) 88 CTR (SC) 66 : (1991) 187 ITR 688 (SC); National Thermal Power Co. Ltd. vs. CIT (1999) 157 CTR (SC) 249 : (1998) 229 ITR 383 (SC). The assessee also relied on the decisions of B.L. Chaudhary vs. CIT (1976) 105 ITR 371 (Ori); Tara Devi Goenka vs. CIT (1980) 122 ITR 14 (Cal); CIT vs. Jay Textile Mills (1981) 21 CTR (P H) 115 : (1981) 128 ITR 480 (P H); and Bay Nath vs. CIT (1981) 132 ITR 7 (P H), wherein it is held that me CIT(A) is vested with the power of making further enquiry in the matter and allow the assessee to produce additional papers or additional evidence. It was also submitted that the AO is fastened with the responsibility of drawing attention of the assessee to claims/relief which an assessee is entitled to in the course of assessment proceedings vide Circular No. 14 (XL -35), dt. 4th April, 1955 of CBDT. Accordingly, even if the assessee had not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch begins commercial production or refining of mineral oil for a period of 7 consecutive assessment years including the initial assessment year. Provided that where the undertaking is located in north-east region it has begun commercial production of mineral oil before 1st April, 1997 and where it is located in any part of India, it begins commercial production of mineral oil on or after 1st April, 1997. The assessee company in its letter dt. 9th Dec., 2004 (filed before the CIT(A)) has submitted that the company has earned profits and gains from undertaking H-2. The undertaking H-2 has commenced commercial production on 27th Aug., 1998 and hence it is eligible for deduction under s. 80-IB(9) of the IT Act. It is further submitted that the undertaking H-2 comprises of well Nos. 6 and 7. The assessee has submitted a copy of letter dt. 25th Feb., 1997 from the Director General of Hydrocarbons, New Delhi regarding permission of drilling well No. 6. The assessee has further submitted the production details of different wells for the financial year 1998-99 wherein it is mentioned that in the month of August, 1998 the production of natural gas of 395.958 (standard cubic meter) in well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaking; that one assessee might have more than one undertaking and it is the profits and gains of the undertaking which has to be considered for the purpose of deduction; that the provision of s. 80-IB are coterminous with the provisions of earlier ss. 80J and 80-I insofar as issue regarding undertaking is concerned; and that in the newly introduced s. 80-IB(9) granting deduction to the assessee engaged in business of extraction and production of mineral oil, the phrase used is "the amount of deduction to an undertaking" contradistinct from the phrase used in other sub-sections of 80-IB, namely, sub-ss. (4) and (5), as applicable to other businesses where the phrase used is "the amount of deduction in the case of an industrial undertaking". 92. The CIT(A) in view of meaning given to the term 'undertaking' as held by the Supreme Court decisions of Textile Machinery Corporation Ltd. vs. CIT 1977 CTR (SC) 151 : (1977) 107 ITR 195 (SC), CIT vs. Indian Aluminium Co. Ltd. (1977) 108 ITR 367 (SC) and CIT vs. Orient Paper Mills Ltd. (1989) 176 ITR 110 (SC); held that each well or a cluster of wells is a physically separate independent unit, which existed on its own as a viable unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd held to be not eligible to the deduction as it showed overall loss. 93. The CIT(A) also held the assessee was engaged in production of "mineral oil" which term though has not been defined separately under s. 80-IB included petroleum and natural gas; that the mineral oil has been used in the section at 3 other places in the IT Act, namely ss. 42, 44AB and 293A and at each of these places, the mineral oil has been stated to include petroleum and natural gas; that as per the Mines and Minerals (Development Regulation Act, 1957), "the mineral oil" includes petroleum and natural gas, as per s. 3(b) of the aforesaid Act; that similarly, as per Oil Industries Development Act, "mineral oil" includes petroleum and natural gas as per s. 3(h) of aforesaid Act; that opinion of the Attorney General as mentioned in the case of Dy. CIT vs. Schlumberger Seaco Inc. (1995) 51 TTJ (Cal) 72 : (1994) 50 ITD 348 (Cal) also so stated that petroleum and natural gas are mineral oils. He therefore held that mineral oil includes natural gas and accordingly, the assessee is also covered under s. 80-IB(9) for deduction. He also noted that in the case of M/s Gujarat State Petroleum Corporation Ltd. (asst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as sub-s. (9) of s. 80-IB prescribe the quantum of deduction, the period of deduction and the year from which deduction will be allowable and the rider of non-deduction. The CIT(A), according to him has not considered the express provisions in the proper perspective. His observation in admitting the ground are contrary to the provisions of the Act as the claim cannot be allowed on reserving or de-reserving the right as it is allowable on fulfilling certain conditions of the provisions under which the relief is claimed. He also submitted that the provisions of s. 80-IB(1) applicable to the eligible business and not to the individual wells. The assessee on its own benefits treated combination of wells as three separate industrial undertakings because it started commercial production before 1st April, 1997 and thus in H-1 cluster it included well Nos. 1 to 5, in H-2 cluster well Nos. 6 and 7 and in H-3 cluster well Nos. 8 to 15 (later 8 to 23). He further submitted that while deciding the issue of wells as separate undertakings, the CIT(A) has not examined whether the wells are separate units or not. This issue has been examined by the AO for the asst. yr. 2003-04. The finding of AO h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 at p. 83 is not said to be correct; (v) the CIT(A) was not correct in deciding that "mineral oil" would include petroleum and gases; vi) the CIT(A) misguided himself by the provisions of ss. 42, 44BB (not 44AB) and s. 293A and by other Acts. However, the meaning should be restricted as is given in the s. 80-IB itself. Secs. 44, 44BB and 293A, though explain the meaning but that is restricted to those sections only and should not be imported in s. 80-IB. The Explanations in all these sections state "For the purposes of this section "mineral oil" includes petroleum and natural gases"; vii) the legislature restricted the meaning of mineral oil only to those sections specifically which show that the legislature did not want it to be generally applied. 97. He also mentioned that this issue was examined by the CIT(A) while deciding the case of the assessee for the asst. yr. 2003-04 and referred to the relevant discussion in paras 7.20 to 7.26 pp. 66 to 76. He relied on the finding of the CIT(A) that mineral oil does not include natural gases and assessee will not be entitled for deduction under s. 80-IB as the assessee has produced the natural gases and not mineral oil. 98. Submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He further submitted that there is a mark distinction between an "undertaking" and an "industrial undertaking" in cl. (7) of s. 80-IA w.e.f. 1st April, 2002. In any case, the assessee has filed audit report before the CIT(A) and, therefore, complied with the conditions, it being procedural one. 99. He further contended that the assessee may have many undertakings and what is to be seen for granting deduction is whether it is an undertaking independent to the other undertaking carried on by the assessee. He refers to the decisions of Supreme Court in the case of Textile Machinery Corporation Ltd.; Indian Aluminium Co. Ltd. as well as the Government approval. He submitted that the assessee is an operator with a joint venture with Gujarat Gas Company having 33 per cent and 1/3rd share of profit. He then referred to the decision of the Madras High Court in the case of CIT vs. Premier Cotton Mills Ltd. (1999) 154 CTR (Mad) 538 : (1999) 240 ITR 434 (Mad), the decision of Bombay High Court in the case of CIT vs. Associated Cement Companies Ltd. (1979) 118 ITR 406 (Bom), the decision of Patna High Court in the case of CIT vs. Hindusthan Malleables Forgings Ltd. (1991) 191 ITR 70 (Pat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turing Co. Ltd. wherein paper and pulp entry was interpreted to include strawboard paper and contended that similar mineral oil industry should be interpreted to include natural gas. He referred to the decision of Association of Natural Gas Ors. vs. Union of India Ors. (2004) 4 SCC 489, where Entry No. 53 held to cover the natural gas. He then referred to the decision of the Tribunal, Calcutta Bench, in the case of Dy. CIT vs. Schlumberger Seaco Inc. (1995) 51 TTJ (Cal) 72 : (1994) 50 ITD 348 (Cal), wherein it is held that mining includes natural gas for the purpose of s. 9(1)(vii). He then referred to the decision reported as 1988 SOT 631, 641-42, wherein also it is held that mining included natural gas for the purpose of s. 9(1)(vii). He then referred to a decision of Madras High Court wherein the deduction is granted to meter for the four entry of electricity and the decision of Supreme Court in the case of CIT vs. Nirlon Synthetic Fibres Chemicals Ltd. (1981) 22 CTR (SC) 130 : (1981) 130 ITR 14 (SC). 103. It is submitted that if the issue is considered with reference to the assessee, it could be said that it had started production before 1st April, 1997 but what s. 80-I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve to be located within the contract area, which as per art. 1.14 of the PSC means the area described in Appendix A and delineated on the map attached as Appendix B, or any portion of the said area remaining after relinquish merit or surrender from time to time pursuant to the terms of this contract. Similarly art. 2.21 of PSC defines "Development area" to mean that part of the contract area corresponding to the area of an oil filed or gas field delineated in simple geometric shape together with a reasonable margin of additional area surrounding the field consistent with petroleum industry practice and approved by the management committee of the Government as the case may. Thus the assessee can only operate from the specified territory of the Contract area. 107. It is further submitted that the Supreme Court held in the case of Indian Aluminum that the proximity between the new undertaking and the old undertaking is held could not be the basis for denial of benefits to the new undertaking. The view of the AO that undertaking should be considered as a whole and not unit-wise is contrary to the circular of the CBDT No. F. No. 15/5/63 - IT(AL), dt. 13th Dec., 1963 in which "the Boar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section. (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely: (i) it is not formed by splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of an industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in s. 33B, in the circumstances and within the period specified in that section; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India: Provided that the condition in this clause shall, in relation to a small scale industrial undertaking or an industrial undertaking referred to in sub-s. (4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Official Gazette, specify with reference to any particular undertaking; (ii) where it is an industrial undertaking being a small scale industrial undertaking, it begins to manufacture or produce articles or things or to operate its cold storage plant [not specified in sub-s. (4) or sub-s. (5)] at any time during the period beginning on the 1st April, 1995 and ending on the 31st March, 2002. (4) The amount of deduction in the case of an industrial undertaking in an industrially backward State specified in the Eighth Schedule shall be hundred per cent of the profits and gains derived from such industrial undertaking for five assessment years beginning with the initial assessment year and thereafter twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from such industrial undertaking: Provided that the total period of deduction doe not exceed ten consecutive assessment years (or twelve consecutive assessment years, where the assessee is a co-operative society) subject to fulfilment of the condition that it begins to manufacture or produce articles or things or to operate its cold storage plant or plants during the period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be thirty per cent of the profits and gains derived from such ship for a period of ten consecutive assessment years including the initial assessment year provided that the ship- (i) is owned by an Indian company and is wholly used for the purposes of the business carried on by it; (11) was not, previous to the date of its acquisition by the Indian company, owned or used in Indian territorial waters by a person resident in India; and (iii) is brought into use by the Indian company at any time during the period beginning on the 1st April, 1991 and ending on the 31st March, 1995. (7) The amount of deduction in the case of any hotel shall be- (a) fifty per cent of the profits and gains derived from the business of such hotel for a period of ten consecutive years beginning from the initial assessment year as is located in a hilly area or a rural area or a place of pilgrimage or such other place as the Central Government may, having regard to the need for development of infrastructure for tourism in any place and other relevant considerations, specify by notification in the Official Gazette and such hotel starts functioning at any time, during the period beginning on the 1s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that any hotel approved by the prescribed deemed to have been approved under this sub-section. (8) The amount of deduction in the case of any company carrying on scientific research and development shall be hundred per cent of the profits and gains of such business for a period of five assessment years beginning from the initial assessment year if such company- (a) is registered in India; (b) has the main object of scientific and industrial research and development; (c) is for the time being approved by the prescribed authority at any time before the 1st April, 1999. (8A) The amount of deduction in the case of any company carrying on scientific research and development shall be hundred per cent of the profits and gains of such business for a period of ten consecutive assessment years, beginning from the initial assessment year, if such company- (i) is registered in India; (ii) has its main object the scientific and industrial research and development; (iii) is for the time being approved by the prescribed authority at any time after the 31st March, 2000 but before the 1st April, 2003; (iv) fulfils such other conditions as may be prescribed; (9) The amount of ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the 31st March, 2003. (11A) The amount of deduction in a case of an undertaking deriving profit from the integrated business of handling, storage and transportation of foodgrains, shall be hundred per cent of the profits and gains derived from such undertaking for five assessment years beginning with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from the operation of such business in a manner that the total period of deduction does not exceed ten consecutive assessment years and subject to fulfilment of the condition that it begins to operate such business on or after the 1st April, 2001. (12) Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger- (a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and (b) the provisions of this section shall, as far as may be, ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pal corporation, notified area committee, town area committee or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the preceding census of which relevant figures have been published before the first day of the previous year; o (ii) an area within such distance not being more than fifteen kilometers from the local limits of any municipality or cantonment board referred to in sub-cl. (i), as the Central Government may, having regard to the stage of development of such area including the extent of, and scope for, urbanisation of such area and other relevant considerations specify in this behalf by notification in the Official Gazette; (g) "small-scale industrial undertaking" means an industrial undertaking which is, as on the last day of the previous year, regarded as a small-scale industrial undertaking under s. 11B of the Industries (Development and Regulation) Act, 1951 (65 of 1951)." 110. On a close reading of the provisions we notice that sub-s. (1) of s. 80-IB provides for the deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Eleventh Schedule" had been omitted; and (d) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power. 112. Sub-s. (3) provides for the amount of deduction in the case of an industrial undertaking to be at twenty-five per cent (or thirty per cent where the assessee is a company), of the profits and gains derived from such industrial undertaking for a period of ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) beginning with the initial assessment year on fulfilment of the conditions that: (i) it begins to manufacture or produce, articles or things or to operate such plant or plants at any time during the period beginning from the 1st April, 1991 and ending on the 31st March, 1995 or such further period as the Central Government may; by notification in the Official Gazette, specify with reference to any particular undertaking; (ii) where it is an industrial undertaking being a small ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the total period of deduction does not exceed eight consecutive assessment years (or where the assessee is a co-operative society, twelve consecutive assessment years). Provided further that the industrial undertaking begins to manufacture or produce articles or things or to operate its cold storage plant or plants at any time during the period beginning on the 1st Oct., 1994 and ending on the 31st March, 2002. 115. Sub-s. (6) provides the deduction in the case of the business of a ship at thirty per cent of the profits and gains derived from such ship for a period of ten consecutive assessment years including the initial assessment year provided that the ship-(i) is owned by an Indian company and is wholly used for the purposes of the business carried on by it; (ii) was not, previous to the date of its acquisition by the Indian company, owned or used in Indian territorial waters by a person resident in India; and (iii) is brought into use by the Indian company at any time during the period beginning on the 1st April, 1991 and ending on the 31st March, 1995. 116. Sub-s. (7) provides for deduction to an approved hotel at fifty per cent of the profits and gains derived fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egins commercial production or refining of mineral oil for a period of seven consecutive assessment years including the initial assessment year. As per the 1st proviso it should begin commercial production of mineral oil on or after the 1st April, 1997 if the undertaking is located in North-Eastern Region but if it is located in any part of India it has begun or begins commercial production of mineral oil before the 1st April, 1997 in case the undertaking is engaged in refining of mineral oil, it begins refining on or after the 1st Oct., 1998. 120. Sub-s. (10) provides 100 per cent deduction to an undertaking developing and building housing projects approved before the 31st March, 2001 by a local authority, if,-(a) such undertaking has commenced or commences development and construction of the housing project on or after the 1st Oct., 1998 and completes the same before the 31st March, 2003; (b) the project is on the size of a plot of land which has a minimum area of one acre; and (c) the residential unit has a maximum built-up area of one thousand square feet where such residential unit is situated within the cities of Delhi or Mumbai or within twenty-five kilometres from the mun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... signing of PSC with Government of India, the second step, the pre-development stages (pre-commercial production) and the third step, the drilling operations-commercial production. The PSC agreement is a tripartite one amongst Government of India, the Gujarat Gases Company and the assessee. Pre-development stages (pre-commercial production), involved couple of stages, which are briefly: (i) Development plan and its approval which contains detailed proposals for the construction, establishments and operation of all the facilities and services for and incidental to the recovery storage and storage and transportation of the petroleum from the proposed development area to the delivery point together with all data and supporting information including out not limited to: (a) Characteristics of reservoir, data, production profiles, etc. (b) Outlines of the development project and/or alternative development projects, if any, describing the production facilities to be installed and the number of wells to be drilled under such development project and/or alternative development: projects, if any; (c)(d)(e) ..... (f) Work programme and budget for development and production operation; (g) and ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identifiable undertakings. 129. Each well an undertaking: Each well or a cluster of wells is a physically separate independent unit, which can exist on its own as a viable unit capable of earning income and would be an undertaking, eligible for tax holiday. Therefore, depending upon the facts of each case/addition of each single land based well or cluster of wells or additional well(s) would be a separate undertaking. Similarly, in case of LBDP, the cluster of wells in the platform would be said to be a separate and distinct unit capable of independent existence. Substantial investment is made by the assessee in the wells to the tune of Rs. 3,44,35,436 (total capital investment in undertaking H2 as on 31st March, 2001) and Rs. 30,22,23,646 (total capital investment in undertaking H3 as on 31st March, 2001) and therefore result in the creation of separate, distinct and new undertaking. Each well produces revenue independently. The anatomy of oil exploration is determined by the nature of land. The methodology of the oil exploration business clearly depicts that in case of land based drilling operations, even a single oil and gas well fits within the characteristics of a 'new and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he benefit under s. 15C. Every new creation in business is some kind of expansion and advancement. The true test is not whether a new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking, separate and distinct from the existing business. It is also held that the new activity may produce the same commodities of the old business or it may produce some other distinct marketable products, even commodities which may feed the old business. The Court held that new industrial undertaking must be an integrated unit by itself wherein articles are produced. In order to be entitled to the benefit under s. 15C (of the old Act), the following facts have to be established by the assessee: (1) Investment of substantial fresh capital in the industrial undertaking set up. (2) Employment of requisite labour therein. (3) Manufacture or production of articles in the said undertaking. (4) Earning of profits clearly attributable to the said new industrial undertaking and (5) Above all, a separate and distinct identity of the industrial unit set up. (b) CIT vs. Indian Aluminium Co. Ltd.: In this cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produced is metered. The objective of the measurement at the wellhead is to monitor the daily production from each of the wells and carry out reconciliation with the gas actually sold and the internal consumption. The final production at each well is based on the production measured at each well and finally reconciled to that at separation plant. To illustrate, if five wells together have produced 1,000 units of fluid and the final production measured after the separation is of 990 units of gas, then, the production at each wellhead is determined by reducing from the production measured at wellhead, a sum equivalent to 1 per cent thereof. This system is adopted because more than 99.9 per cent of the production of the undertaking is natural gas. Even if each well were producing a mix i.e., natural gas and crude oil, then also the metering system and the software available would enable the final production of the different products to be allocated to each well on a scientific basis. The production figures so derived are furnished to the Directorate General of Hydrocarbons ('DGH'). Ministry of Petroleum and Natural Gas, Government of India on monthly and quarterly basis. An extract of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etroleum and natural gas were denoted as 'mineral oil'. The Mines and Minerals (Development and Regulation) Act, 1959, the Oil Industry (Development) Act, 1974, the Regulation for foreign direct investment in India and in notification issued (No. GSR 304(E)) dt. 31st March, 1983 for extending the applicability of the Act to the continental shelf of India natural gas is part of 'mineral oil'. (c) New Exploration Licensing Policy (NELP) was formulated by the Government of India inherently to incite the private sector for efficient and timely utilization of natural hydrocarbon resources. To give philip to the policy the incentives under the taxation law were introduced as explained by the Finance Minister by giving the salient features in his Speech, while presenting the Union Budget of 1997-98. The NELP was for exploration and production of mineral oil, which means petroleum and natural gas. Under NELP, the Government of India has awarded contracts under which the exploration for oil and natural gas in India could be done only in pursuance of the production sharing contract (PSC) entered into with the Government and on terms and conditions, which are approved by the Parliament. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A dealing with power to grant exemption etc, in relation to participation in business of prospecting for extraction of 'mineral oil'. (f) As the activity of oil exploration was capital intensive and carried a high risk of losses due to uncertainty of exploration being successful, the Government's approach in taxation was clearly embedded in the tax provisions. On the one hand tax provisions allowed deductions of unsuccessful and abandoned exploration and as the same time provided incentive by way of deductions of profits and gains of the business activity of exploration of oil and gas. Initially 80-IA(4E) was introduced in the Act to promote oil and gas exploration activity. Thus, the context of the meaning of the word 'mineral oil' remains the same wherever used in the IT Act i.e. business of exploration, extraction or production of 'mineral oil'. 136. In Association of Natural Gas Ors. vs. Union of India Ors., natural gas, petroleum and mineral oil are described by the Supreme Court with reference to various dictionaries and statutes, Indian as well as foreign and Entries in List of the Constitution of India as: "20 In Kirk-Othomer: Encyclopaedia of Chemical Technology ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulated metal containers at near atmospheric pressure and when required, can be regasified. 26. Natural gas is used mainly as fuel to provide heat for homes, commercial buildings and industrial processing. 27. In Vol. 17 on p. 119, it is stated that the term "petroleum", literally rock oil, is applied to the deposits of oily material found in the upper strata of the earth's crust. Petroleum was formed by a complex and incompletely understood series of chemical reactions from organic, material laid down in previous geological eras. Large deposits have been found in widely different parts of the world and their chemical composition varies greatly. Consequently, no single composition of petroleum can be defined. It is not surprising that the composition varies, since the local distribution of plant, animal and marine life is quite varied and, presumably, was similarly varied when the petroleum precursors were formed. 28. As per The New Book of Popular Science, Vol. 2, petroleum is an oily, inflammable liquid made up mostly of hydrocarbons - compounds containing only hydrogen and carbon. The hydrogen content of petroleum ranges from 50 per cent to 98 per cent. The rest is made up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or stone and oleum means oil). Thus, natural gas could very well be comprehended within the expression "petroleum" or "petroleum product". 36 ........... 37. A survey of the various legislations on the topic would show that the term "petroleum" or "petroleum products" has been given a wide meaning to include natural gas and other similar products. 38. In the Pipelines Act, 1962 of the United Kingdom, "petroleum" has been defined as follows: "Petroleum includes any mineral oil or relative hydrocarbon and natural gas existing in its natural condition in strata, whether or not it has undergone any processing; but does not include coal or bituminous shales or other stratified deposits from which oil can be extracted by destructive distillation." 39. Petroleum has been variously defined in different Acts noted hereinbelow: Petroleum (Production) Act, 1934 (UK) "Petroleum includes any mineral oil or relative hydrocarbon and natural gas existing in its natural condition in strata, but does not include coal or bituminous shales or other shales or other stratified deposits from which oil can be extracted by destructive distillation: Petroleum Act, 2000 (s. 4), Australia " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "2. (c) 'petroleum' has the same meaning as in the Petroleum Act, 1934, and includes natural gas and refinery gas;" 6. The Oil Industry (Development) Act, 1974 "2. (h) 'mineral oil' includes petroleum and natural gas; (m) 'petroleum product' means any commodity made from petroleum or natural gas and includes refined crude oil, processed crude petroleum, residuum from crude petroleum, cracking stock, uncracked fuel oil, fuel oil, treated crude oil residuum, casing head gasoline, natural gas gasoline, naphtha, distillate gasoline, kerosene, bitumen, asphalt and tar, waste oil, blended gasoline, lubricating oil, blends or mixture of oil with one or more liquid products or by-products derived from oil or gas and blends or mixtures of two or more liquid products or by-products derived from oil condensate and gas or petroleum hydrocarbons not specified hereinbefore;" 41. Under Entry 53 of List I, Parliament has got power to make legislation for regulation and development of oilfields, mineral oil resources; petroleum, petroleum products, other liquids and substances declared by Parliament by law to be dangerously inflammable. Natural gas product extracted from oil wells predom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad 'Oil and gas', which are always used together, while referring to exploration and production of the same. The reference to the highlights of NELP by the Finance Minister in his Speech affirms the view of the Cabinet and the Parliament, while accepting the NELP. The definition of 'mineral oil' was specifically defined along with the producing sharing contract (PSC), which gives the details of the computation of profits and gains of business of oil and gas as a co-developer of the oil fields. PSC is binding on all parties including Government of India. Since there is Cabinet and Parliament approval for the NELP which is referred to by the Finance Minister in his Speech and consequently various contracts based on the NELP have been entered into by the Government of India, it makes it absolutely clear that treatment of 'oil and gas' has been made inseparable for all purposes including all the tax provisions. 138. This approach of the Government of India declared through Ministry of Petroleum was vetted by the Ministry of Finance as well. Accordingly, tax provisions were incorporated to allow deductions of unsuccessful exploration expenses, allowance of capital expenses as revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mineral oil and none have excluded natural gas from the concept of mineral oil hence there should not be any element of doubt on this issue and as aforesaid even otherwise mineral oil, as understood in commercial parlance and under other statutes also includes petroleum and natural gas. The production sharing agreement between the Government of India and Gujarat State Petrochemical Corporation Ltd. and the assessee Niko Resources. Canada refers to the Oil Fields (Regulation and Development) Act, 1948 wherein mineral oil is defined to include natural gas. Therefore mineral oil for the purposes of the PSC has to be understood to include natural gas as it defines petroleum to mean crude oil and natural gas. The Government has defined mineral oil to include petroleum and natural gas. Further the PSC has been placed before both houses of Parliament. Hence Parliament has also accepted the agreement clearly there is nothing in the Act or other statutes or commercial document which suggest that mineral oil does not include natural gas. The Mines and Minerals (Development and Regulation) Act, 1957, defines, by s. 3(b), the term "mineral oils" to include petroleum and natural gas. Sec. 3(h) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pours and natural gases and there is no commercial sales of this mix that is passed through separator wherein natural gas is separated from oil and what was sold is the output of the separator plant and not what comes out from the well is not a fact but a meter is provided at production point itself identifying the production of each well and so the sales. A well-wise production sheet was filed to prove the fact of separate identifying unit. Similarly the fact that saleable production is with reference to the delivery point and the sale is effected only when the oil and gas is delivered at the gathering station of ONGC/other buyer. Again the fact that what is delivered at the gathering station is not a natural gas or the oil recovered from the wells but natural gas and oil separated/processed at the separate unit would be of no avail because of separate recording of well-wise production. It is not a fact that no separate books for each well/cluster of well or fields are maintained by the appellant or that it is not possible because there is no well-wise or field-wise sales or billing is available. The accounts are prepared on the basis of metered production well wise, in this case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of Calcutta High Court in the case of CIT vs. Rohtas Industries Ltd. (1979) 120 ITR 110 (Cal), decision of Bombay High Court in the case of Mahindra Sintered Products Ltd. vs. CIT (1989) 75 CTR (Bom) 83 : (1989) 177 ITR 111 (Bom). 147. In International Instruments (P) Ltd. vs. CIT briefly, the facts were that the assessee had different shops or units which operate at different stages of production and claimed that each such unit should be taken as a separate and independent industrial undertaking within the meaning of s. 80J of the Act. These units were-(1) Press shop started in 1962; (2) Machine shop in 1963; (3) Dial printing shop in 1965; (4). Plastic moulding shop in 1965; (5) Cable shop in 1962; (6) Others in 1961; and (7) Die casting shop in 1966. The ITO held that the entire plant and machinery constituted a single industrial undertaking which commenced operation even as early as asst. yr. 1962-63 when they started production of dashboard instruments by mainly assembling imported parts. According to the assessee, however, each of the above so-called shops should be taken as separate and independent industrial undertaking and the profits of the same should be given t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts earlier, shows that they were marketable commodities and they answered one of the tests adopted by the Supreme Court in determining whether an undertaking is a new industrial undertaking or not. The fact that there was common management or the fact that separate accounts had not been maintained, would not also lead to the conclusion that they were not separate undertakings. Even if separate account is not maintained the investment on each of the units can be reasonably determined with the material which the assessee may make available to the Department. The High Court therefore held that the finding of the Tribunal that the assessee was not entitled to relief under s. 84 and deduction under s. 80J of the Act during the assessment years in question, is erroneous. 148, In CIT vs. Rohtas Industries Ltd. the Calcutta High Court held that "It has been found that the new paper machinery, the chemical factory, the power house and the cement factory of the assessee are engaged in manufacture or production of articles yielding additional profit and these undertakings have been set up by fresh outlay of capital in separate and distinct units. The Tribunal has specifically found the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d separate accounts for the new unit. The Tribunal confirmed the order of the Addl. CIT as according to it also the new unit started for manufacture of copper powder amounted to reconstruction of business and was hit by the provisions of s. 80J(4)(i) of the Act. Distinguishing the case of CIT vs. Indian Aluminium Co. Ltd. (1973) 88 ITR 257 (Cal), the Tribunal agreed with the Addl. CIT that the assessee had not maintained separate accounts for its new unit and that in view of the Supreme Court decision in the case of CIT vs. Manmohan Das (1966) 59 ITR 699 (SC), the Addl. CIT was justified in considering the question of deduction under s. 80J of the Act in the proceedings for the asst. yr. 1970-71 as the claim under s. 80J was given set off for the first time in that year. The Bombay High Court observed that the judgment of the Calcutta High Court in CIT vs. Textile Machinery Corporation has been reversed by the Supreme Court in Textile Machinery Corporation Ltd. vs. CIT. The judgment in the case of CIT vs. Indian Aluminium Co. Ltd. has been confirmed in CIT vs. Indian Aluminium Co. Ltd. It has been held that a new activity launched by an assessee by establishing a new plant and mach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Canadian Embassy on 'Canada Day' by the assessee by observing that the assessee does not have either any business or any customer in Canada and assessee has not brought any evidence on record that the donation has brought benefit to the assessee by way of publicity or otherwise. The CIT(A) upheld the disallowance of Rs. 50,000 by observing that the Canadian Embassy is a representative of Canadian Government and accordingly, it is not understood as to for what exact purpose, the payment was made to the Canadian Embassy. Admittedly, the contended help for the trade promotion given by the Canadian Embassy, will in anyway, be given in the normal course and the trade promotion wing of the Canadian Embassy is expected and will also be doing such work of helping the Canadian companies, for which no payment is required to be made. Hence "Canadian Embassy" will not be the recipient of the amount. Out of the balance amount of Rs. 78,110/-, he allowed 50 per cent by partly agreeing with the claim of the assessee that same was spent towards business promotion for organizing lunch with business associates and contacts on several occasions as the assessee has not furnished the specific details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal by the assessee is regarding adhoc disallowance of expenditure of Rs. 70,000 out of expenditure of Rs. 7,14,778 incurred in providing residential accommodation to expatriate employees on the ground that the assessee had incurred expenditure on maintenance and running of guest house. The expenditure was of the general manager of the assessee company who was an expatriate and did not have any other residence and who availed of guest house facility. The AO observed that the bulk of the facilities were availed of by him for his personal purpose and were not related to business activities and that the assessee had not furnished complete details as to who others have availed of guest house facility and no records have been maintained to that effect. Therefore, in his view the entire amount incurred on running and maintenance of guest house cannot be held to be relating to the business needs and accordingly, disallowed a sum of Rs. 1,00,000 as not been incurred for business purposes. 154. The CIT(A) restricted the disallowance to 10 per cent and upheld the addition of Rs. 70,000 by observing as under: "I have considered the argument taken by the assessee and perused the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erature/humidity etc. It, therefore, becomes important for the assessee, as any other employer in this industry, to ensure that its employees' heath and safety are well taken care of. Therefore, the assessee has to provide accommodation facilities to its employees close to home standards. The expenditure was basically to provide such facilities to expatriates and therefore was wholly for the purposes of the business of the assessee. No part of the expenditure could be alleged for any other purpose. We, therefore, delete the disallowance and direct to allow entire expenses. 156. Ground No. 5 is for the claim for s. 44C being 'head office expenses' on the enhanced income is consequential and may be considered by the AO. 157. Ground No. 6 is for charge of interest under s. 234B. AO charged it @ 18 per cent the rate applicable on 1st April, 2001. On the date of completion of assessment the rate was 15 per cent. The assessee, therefore, claims that interest should be charged @ 15 per cent in view of decision on s. 214 of Madras High Court in the case of Addl. CIT vs. Madura South India Corporation (P) Ltd. (1977) 110 ITR 322 (Mad), holding that it is the rate governed on the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen the interest will have to be calculated only at 9 per cent and not at 6 per cent. In this context, the amendment made to s. 18A(5) of the Indian IT Act, 1922, can be usefully contrasted. Sec. 18A(5) also dealt with the liability of the Government to pay interest on the excess advance tax paid by an assessee. That provision was amended by s. 14 of the Finance Act, 1955, w.e.f. 1st April, 1955. While so amending, the statutory provision made it clear that the interest will be payable at the previous rate for the period anterior to 1st April, 1955, and at the amended rate for the period after 1st April, 1955. The said statutory provision, after its amendment in 1955, stood as follows: "18A (5) The Central Government shall pay simple interest (i) at two per cent per annum on any amount payable in accordance with the provisions of this section before the 1st April, 1955, and paid accordingly; (ii) at four per cent per annum on any amount payable in accordance with the provisions of this section after the 1st April, 1955, and paid accordingly; from the date of payment to the date of the provisional assessment made under s. 23B, or if no such assessment has been made, to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 983) 37 CTR (SC) 273 : (1984) 145 ITR 1 (SC) it is observed that "Towards the close of its order the Tribunal pointed to the fact that the different demands of tax were served on the assessee subsequent to the respective valuation dates and, on that ground, observed that the tax liabilities did not fall within the prohibition of s. 2(m)(iii)(a) and had to be taken into account as debt owed by the assessee on the valuation dates. It seems to us that the Tribunal has not correctly appreciated the scope of s. 2(m)(iii)(a). Sec. 2(m)(iii)(a) denies deduction to an amount of tax which is outstanding on the valuation date if the assessee contends in appeal, revision or other proceeding that he is not liable to pay the tax. It presupposes that there is a subsisting tax demand and the assessee has challenged its validity. It refers to the initial stage only where an appeal, revision or other proceeding is pending merely. It does not proceed beyond that stage to the point where, in consequence of such appeal, revision or other proceeding, the tax liability has been found to be nil. Once it is determined that the tax liability is nil, it cannot be said that any amount of tax is outstanding. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to quantify the precise amount of the tax liability. The process is initiated ordinarily by the assessee filing a tax return and thereupon the assessment machinery swings into motion. The tax return is scrutinised by the assessing authority and in accordance with the procedure detailed in the relevant statute the assessing authority proceed to determine the true figure, in its opinion, of the assessee's taxable income or taxable wealth or total value of the taxable gifts, depending on whether it is a case of income-tax, wealth-tax or gift-tax. The assessment order made by the assessing authority specifies the assessed income, wealth or value of the gifts, and on that the corresponding tax liability is computed, followed by a notice of demand. The assessment order may be subjected to consideration in appeal before the AAC and thereafter the case may be carried in second appeal to the Tribunal, in reference to the High Court and ultimately in appeal before this Court. At every stage, the endeavour of the authority, Tribunal or Court is to adjudicate on questions which will lead in the final result to a true determination of the tax liability. There may be cases where the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the asst. yr. 1961-62 was made on 10th June, 1965. In short, the rectification orders were made after the assessment proceeding had been completed by the WTO. It would seem that the claim to deduction on account of the income-tax liabilities and the wealth-tax liability was made in the course of the appeal before the AAC. From the record, it appears also that the income-tax liabilities, the wealth-tax liability and the gift-tax liabilities claimed as a deduction were quantified by assessment orders made after the WTO had completed the assessment proceeding. Those assessment orders were apparently brought to the notice of the AAC by the assessee during the hearing of the appeal filed by the assessee. Shri S.C. Manchanda, learned counsel for the Revenue, urges that the judgment of the Gujarat High Court in CWT vs. Kantilal Manilal (1973) 88 ITR 125 (Guj), does not conclude the question arising on this claim because the High Court was concerned with a claim to deduction on account of income-tax, wealth-tax and gift-tax liabilities which had arisen before the WTO had completed the assessment before him. Be that as it may, it is well settled that when an appeal is filed against an ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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