TMI Blog2011 (6) TMI 395X X X X Extracts X X X X X X X X Extracts X X X X ..... at the claim of depletion by the assessee is in fact depreciation to the fixed asset representing exploration and development expenditure, we are of the view that this issue is liable to be restored to the file of the Assessing Officer for re-adjudication and we do so - Decided in favor of assessee for statistical purposes. Re-opening of the assessment u/s 148 beyond the period of 4 years from relevant AY - assessee contended change of opinion by Revenue - Held that:- Original assessments were made u/s 143(1) and as it is noticed that the Assessing Officer has recorded his reasons for reopening of the assessment, in view of the decision in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (2007 - TMI - 6563 - SUPREME Court - Income Tax), we are of the view that the re-opening for the assessment year 2002-03 is valid - Decided in favor of Revenue Validity of Revisionary powers u/s 263 - AY 05-06 - Held that:-It is noticed that the assessment order passed by the AO does not discuss any of the issues which have been raised by the DIT in his SCN u/s 263 or his order passed u/s 263. In these circumstances, in view of the decision of the in the case of Malabar Industrial Co. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany incorporated in the United States of America, which has established a Project Office in India ('IPO') with the approval of the Reserve Bank of India. The Appellant has entered into a Production Sharing Contract ('PSC') with the Government of India ('GOI') along with ONGC and others for exploration, development and production of oil and gas in the east coast of India. The Appellant carries out the operations under the provisions of relevant Joint Operating Agreements entered into with the joint venture partners, and line with the provisions of the respective PSCs. 1.2 Brief background of the oil and gas activity undertaken by the company. We submit that oil and gas activities undertaken by the Company consist of exploration, which may result in discovery of oil and gas. After the discovery, appraisal wells are drilled to assess the commercial potential of the discovery. Once it is established to be commercial, development of the discovery is made by drilling and constructing the wells to extract the oil and gas and certain facilities such as flow lines and various plant and equipments are installed and commissioned for collection and processing of oil to make it as sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Connecting the equipment such as Christmas tree from the oil well to the flow lines. (d) Collecting the oil and gas from the flow line and separate the same as oil, gas and water. (e) Storing the processed oil and transportation for commercial sale. This is carried out in accordance with the development plan and at every stage, certain additional capital costs are also incurred to drill further development wells. Additional capital costs are further incurred to maintain the reservoir pressure such as gas lift and water injection system along with the other equipments. Accordingly, the entire expenditure incurred for installing the plant and equipments for extraction of oil and gas is nomenclated as "development costs". These entire costs are capitalized in the books of the account and it is a part of the capital assets of any oil and gas company. The "development" activity can be summarized in simple terms as creation of facilities/infrastructure that enable extraction of oil and gas in the same manner that a factory and its plant and machinery are set-up to facilitate production of goods. (d) Production activities. After the field is developed, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Disallowed provision for site restoration; and l Excluded depletion while computing the total depreciation loss under section 115JB of the Act The Appellant preferred an appeal before the Commissioner of Income-Tax (Appeals) ['CIT(A)'] Order by CIT(A) The CIT(A) vide its order dated 22-3-2010 directed the AO not to add back the provision for site challenging restoration while computing book profits for the purpose of section 115JB. However the Appellant's claim for adjustment of depletion in computing book profit under section 115JB was rejected by the CIT(A). The Appellant has preferred an appeal before the Hon'ble Tribunal against the order of CIT(A). On factual ground that Depreciation includes depletion in oil and gas industry. Depletion is nothing but depreciation as per the Guidance Note of the ICAI. Accordingly, for computation of book profits under section 115JB, depletion should form part of unabsorbed depreciation. The Assessing Officer has filed an appeal before the Hon'ble Tribunal against the order of CIT(A) on site restoration. Our submission : 2.1 Development costs are capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pletion) is calculated on the basis of the number of production or similar units expected to be obtained from the asset by the enterprise". In short, the depreciation (depletion) is calculated by the following formula: Capitalised costs Volume of Production of oil for the year Total volume of Oil Reserves We further submit that the unit of production method is internationally recognised method for computing depreciation (depletion) in oil and gas industry. l Para 40 of the Guidance Note of oil and gas producing activities issued by the ICAI. l "Depreciation (Depletion) is calculated using the unit of production method. The application of this method results in oil and gas assets being written off at the same rate as the quantitative depletion of the related reserve." l Statement of Recommended Practice ('SORP') on Accounting for oil and gas Industry issued by the Accounting Standard Board, UK provides for suggested formats for disclosure of depreciation as 'Accumulated depreciation, depletion and amortization'. Per the SORP, costs pertaining to exploration and development should be capitalized as part of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Financial Accounting Standard Board, USA provides that successful exploration and development costs shall be amortized (depreciated) by the unit of production method l To summarise, depletion of development costs is nothing but depreciation in the oil and gas industry. To accept the Department's position is akin to denying a manufacturer of goods the right to claim depreciation on the producing asset, viz., the factory comprising inter alia of plant and machinery. Our detailed submission is as below : 2.4.1 Depletion and depreciation are one and the same in oil and gas industry. It is a well-accepted principle in the field of accounting that wear and tear in relation to a wasting asset such as a mine is nomenclated as depletion instead of depreciation. This view is Generally Accepted Accounting Principles and is also supported by the Guidance Note of oil and gas producing activities issued by the ICAI which states as under: Para 4. "Depreciation is a measure of the wearing out; consumption or other loss of value of a depreciable asset arising from use Depreciation also includes 'depletion' of natural resources through the process of extraction or use." [page No. 69 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.4.4 Dictionary meaning. Wikipedia, the encyclopedia in explaining about depletion provides that "Depletion is similar to depreciation in that, it is a cost recovery system for accounting and tax reporting" [Page No. 67 of the paper book-I]. We submit that the learned CIT(A) has erred in stating that depletion is not depreciation in oil and gas industry. Depletion is nothing but depreciation in the oil and gas industry. 2.5 Specific observations by CIT(A) in the order for the assessment year year 2006-07 and our responses to the same Para Ref. CIT(A)'s observation Our Comments 6.2( i ) Depletion may include depreciation as per ICAI guidelines but we have to analyze section 32 which is the main section dealing with depreciation and unabsorbed depreciation and which is part of Income-tax Act 1961. So the meaning for depreciation as per section 32 will be preferred over the meaning as per ICAI guideline ... Similarly definition of depreciation under. Companies Act is irrelevant. With respect to the above, we wish to submit that learned CIT(A) has incorrectly concluded that the meaning of depreciation has to be borrowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e context of section 115J, it was observed that the basic idea of incorporating the provision of Company Law is to work out the taxable book profits in the light of company law. Similar views were taken in the case of CIT v. Adoon Electronics Private Limited 232 ITR 528. l Further, the Mumbai ITAT in the case of KFA Corporation Ltd. v. JCIT (ITA No. 5147/Mum./2002) has also observed that when the starting point of MAT provisions is net profit as per the P L account prepared in accordance with the Companies Act and therefore the starting point for considering brought forward loss or unabsorbed depreciation has to be very same set of accounts only. It is important to note that section 211(3A) of the Companies Act, 1956 requires companies to prepare their financial statements in compliance with the Accounting Standards issued by the Institute of Chartered Accountants of India. In the absence of any accounting standard of the ICAI for oil and gas companies, the guidance note of the ICAI is relied upon by the assessee. 6.2( iii ) Section 115JB is a self-contained code does not mean that the meaning of depreciation will have to be borrowed from ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase in that the accounts prepared under the Companies Act must be modified wherever necessary to comply with the provisions of section 115JB. So depreciation must be treated differently from depreciation and unabsorbed depreciation meaning thereby that depletion will be part of business loss and not part of depreciation. l The learned CIT(A) has erred in placing reliance on the decision of the AAR in the case of Rashtriya Ispat Nigam Ltd. as the said decision does not deal with the issue of whether "depletion" forms pali of "unabsorbed depreciation". The said decision is of no relevance to the facts of the instant case. l Section 115JB does not require modification of figures with respect to unabsorbed depreciation/loss. The section infact states that figures as per accounts should be adopted. We submit that the Appellant has complied with Schedule VI requirements for the purposes of section 115JB and has prepared its accounts based on the Guidance Note of the ICAI and in accordance with the Generally Accepted Accounting Principles. 2.6 Non-applicability of MAT to the Appellant. Without prejudice to the above arguments, we humbly submit that the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , UK provides for depreciation of costs based on the unit of production method. The Statement of Financial Accounting Standard 19 relating to financial accounting and reporting by oil and gas producing companies issued by Financial Accounting Standard Board, USA provides that successful exploration and development costs shall be amortized (depreciated) by the unit of production method. To summarise, depletion of development costs is nothing but depreciation in the oil and gas industry. To accept the Department's position is akin to denying a manufacturer of goods the right to claim depreciation on the producing asset, viz. the factory comprising inter alia of plant and machinery. "BEFORE THE INCOME-TAX APPELLATE TRIBUNAL 'A' BENCH, CHENNAI ITA NO. 1077/CHNY-2010 - DEPARTMENT'S APPEAL IN THE CASE OF HARDY EXPLORATION PRODUCTION (INDIA) INC (ASSESSMENT YEAR : 2006-07) I. Provision for Site Restoration is an ascertained liability. 1.1 Background of site restoration in oil industry and the facts relevant to the Appellant. HEPI has entered into a Production Sharing Contract ('PSC') with the Government of India and other joint venture partners with respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing activities. "Abandonment costs are the costs incurred on discontinuance of all operations and surrendering the property back to the owner. Those costs relate to plugging and abandoning of wells, dismantling of well heads, production and transport facilities and to restoration of producing areas in accordance with license requirements and the relevant legislation". Further clause 54 states that "The full eventual liability for abandonment cost net of salvage values should be recognized at the outset on the ground that a liability to remove an installation exists the moment it is installed. Thus, an enterprise should capitalize as a part of the cost centre the amount of provision required to be created for subsequent abandonment. 1.2.2 Accounting treatment as per International Accounting Standard (IAS)16 Clause 15 of (IAS) 16 stipulates that "an item of property, plant and equipment that qualifies for recognition as an asset shall be measured at cost". Clause 16 stipulates that "the cost of an item of property, plant and equipment comprises ..(c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 69 ITR 675 "The legal position is that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happens. But if it is a debt the fact that the amount has to be ascertained does not make it any the less a debt if the liability is certain and what remains is only a quantification of the amount: debitum in praesenti, solvendum in futuro." Supreme Court in the case of Calcutta Co. Ltd. 37 ITR 1 "If that undertaking imported any liability on the appellant the liability had already accrued on the dates of the deeds (sale, though that liability was to be discharged at a future dates). It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could very well be deducted from the profits and gains of the business .. " Accordingly, it can be summarized and submitted from the above that a liability is not to be said as contingent liability in the event that There is certainty in the incurrence of the liability; and It is capable of being estimated with reasonable certainty. 1.4 Provision for site restoration is pursuant to an agreement between the parties. A Joint Operating Agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Revenue that the provision for Site Restoration has not been scientifically estimated is incorrect. 1.6 Accounting literature on contingent liability. Given that section 115JB is a levy of income-tax on "book profits" computed based on net profit as shown in the profit and loss account, it is also relevant to examine accounting literature for interpretation of terms used therein as the tax emanates from the concept of book profit. 1.6.1 Accounting literature under Indian GAAP and International Financial Reporting. Standards ('IFRS') the term contingent liability is defined in Indian Accounting Standard -29 issued by the Institute of Chartered Accountants of India ('lCAI') [Page No. 273 of the paper book-I] as (a) a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprises; or (b) a present obligation that arises from past events but is not recognized because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or (ii) a reliable est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s capitalized as asset in the books for not meeting any of the above criteria to be considered as contingent liability. 2. Non-applicability of the decisions in the cases of TN Small Industries Development Corporation and Indian Molasses Company Private Limited to the Respondent. We humbly submit that the revenue has erred in considering the decisions of the Madras High Court in the case of TN Small Industries Development Corporation (242 ITR 122) and that of the Supreme Court in the case of Indian Molasses Company Private Limited (37 ITR 66) as relevant and applicable to the Respondent for the following reasons: Both the above mentioned cases deal with deduction in the nature of general expenses as per section 37 of the Income-tax Act, 1961 ('the Act') in computing taxable income under normal provisions of the Act. The instant case deals with computation of income under section 115JB of the Act and it is the item in the financial statements of the taxpayer and specific exclusions/disallowances prescribed under section 115JB that are relevant for determining deductibility in computing book profit. Without prejudice to the above, even in a scenario where the Revenue intends to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability even though the amount cannot be determined with certainty. Supreme Court in the case of Bharat Earth Movers Limited 245 ITR 428 Supreme Court in the case of Shri Goverdhan Ltd . 69 ITR 675 Supreme Court in the case of Calcutta Co. Ltd. 37 ITR 1 Court in the case of Shri Goverdhan Ltd. 69 ITR 675 Further the Chennai ITAT in the case of Assistant Director of Income-tax v. Cairn Energy India Pty. Ltd. 2010-TH-IISITAT-MAD-INTL. has held that provision for site restoration is ascertained liability for the purpose of determining book profits under section 115JB of the Act " 4. It was the submission that there was no dispute in regard to the normal computation under the regular provisions of the Income-tax Act, 1961 ('the Act' for short). It was the submission that when the assessee was filing its return, it was filing it by applying the provisions of section 42 of the Act, which related specifically to the computation of total income in regard to the assessee which is doing the business of oil exploration. It was the further submission that the dispute was in regard to the computation under the provisions of section 115JB of the Act. It was the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to re-do the assessment after examining the issue of the allowability of depletion as depreciation in computing the book profits of the assessee under section 115JB of the Act. It was the further submission that for the assessment years 2002-03 and 2003-04 the assessee has also challenged the re-opening of the assessment under section 148 of the Act. It was the submission that though the assessment years 2002-03 and 2003-04 in ITA Nos. 2154 2155/Mds./2010 the original assessment had been made under section 143(3), still the re-opening of the assessment was done beyond the period of 4 years and consequently it should be deemed to be a change of opinion on which the re-opening should not be permitted. 5. In regard to the challenging of the revision under section 263 of the Act for the assessment year 2005-06. It was the submission that the assessment order was under section 143(3) and all the issues had been considered by the Assessing Officer in the course of original assessment and the action of the learned DIT was on account of an audit objection which had been raised. It was the further submission that even for the assessment years 2002-03 and 2003-04 there was audit objecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oted by the Audit Party is only an 'observation' as evident from the note prepared by the revenue Audit Party [pages 14 to 22 of paper book pp 17] As evident from this note, no interpretation of law was made by the audit party and it only observed certain facts omitted to be considered by the AO. Gr. 3 4 : Deduction of depletion in book profits This ground is misconceived as Assessing Officer did not make any such adjustment to the book profits. He only deducted loss brought forward or unabsorbed depreciation, whichever is less in accordance with clause (iii) of Explanation 1 to section 115JB. (b) As per Explanation 1 to section 115JB, for the purpose of computation of "book profit" under that section, the net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act is the starting point. Assessing Officer cannot change this figure. This is the view held by Apex Court in Apollo Tyres v. CIT (255 ITR 273). There is no dispute on this issue. Assessing Officer has not modified this figure in the assessment order. (c) Assessing Officer has the power to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed by assessee corresponding to financial years 1995-96 to 1999-2000 (assessment years 1996-97 to 2000-01) has become final as on date. These assessments were completed by accepting the returned figures and no appeal was filed by assessee. Hence assessee cannot seek later on to change/modify the figures of brought forward loss/depreciation determined for such years in the present appeal proceedings. This view was upheld by Hon'ble Supreme Court in CIT v. Dalmia Cement (Bharat) Ltd. 216 ITR 79. This was followed by jurisdictional High Court in S.K.V. Selvaraj v. CIT (Mad.) 240 ITR 217. (i) Instead of relying on the figures as per the Profit and Loss account appearing in the printed Annual Accounts of the assessee company for financial years 1995-96 to1999-2000 which were approved by the Board of Directors and placed before the Annual General Meeting, assessee is now relying on certain new figures. Decision of the Apex Court in Apollo Tyres v. CIT (255 ITR 273) is equally applicable for the assessee as held by ITAT Chennai Bench in DCIT v. Thangavel Spinning Mills Ltd. (97 ITD 262). A form can never have any effect on the interpretation or operation of the parent statute as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only as contemplated by the PSC. In view of the special accounting procedure as prescribed by PSC, reliance on any other accounting system has to be ruled out as held by the Apex Court. (p) Article 16 of PSC provides for "Taxes, Royalties, Rentals Etc." (pages 558 to 562 of assessee's Paper Book). As per this Article, the only expenses deductible while computing profits and gains from the business of Petroleum operations are : 100 per cent of revenue and capital expenditure incurred in respect of Exploration Operations as per Appendix C - Section 2.2 and Drilling Operations as per Appendix C - Sections 2.3.1 and 2.3.2. Expenditure incurred in respect of Development Operations as per Appendix C - Section 2.3 (other than drilling operations covered above) and Production Operations as per Appendix C - Section 2.4 will be allowable as per the provisions of Income-tax Act. (q) Copy of Appendix C - Section 2 is available in pages 5 to 8 of Department Paper Book. As per this, Exploration costs are expenditure in search for Petroleum. Drilling costs are expenditure, for drilling as well as for bringing a well into use as a producing well. Development costs are e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent and the natural resources owned by Government were not parted with. Assessee did not acquire such assets at all. No such asset appears in the balance sheet of the assessee. Claim of the assessee for depletion costs arises only if the assessee purchases/acquires such natural resources and the expenditure incurred for the same is treated as capital expenditure in its books. (t) It is not a BOT contract but a PSC where assessee will be reimbursed the expenditure incurred by it and in addition will give a share of profit. Government, the owner of such natural resources is getting part of the profit for allowing its natural resources to deplete. In the circumstances, only Government whose natural resources get depleted can claim depletion costs and not the assessee who only earns profit by exploiting such natural resources owned by Government through the PSC. (u) When the PSC which was placed before both the house of Parliament did not provide for deduction on account of "depletion", Courts cannot grant such deduction in view of the principle of "Casus omissus". I rely on Laxmandas Pranchand v. Union of India (234 ITR 261 MP). (v) There is no scope for importing into t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es v. CIT (255 ITR 273) is equally applicable for the assessee as held by ITAT Chennai Bench in DCIT v. Thangavel Spinning Mills Ltd. (97 ITD 262). Gr.7 : Applicability of section 115JB Assessee contends that provisions of section 115JB is not applicable in view of the PSC entered into with the Government. In this regard, I submit as under : (a) Article 16.1 of PSC (pages 558 to 562 of assessee's Paper Book) says that assessee shall be subject to all fiscal legislation in India except specifically exempted under any law. Art. 16.4 reiterates "this position. Section 115JB is also an integral part of the Income-tax Act. Assessee has not produced any order of any authority exempting it from the provisions of Income-tax Act or any specific section contained therein. Hence the contention of the assessee is devoid of merits. (b) This issue stands covered by the decision of AAR in Niko Resources Ltd., In re (234 ITR 828). Gr. 8 : Levy of interest under section 234B on book profits computed under section 115JB Covered in favour of revenue by decision of Hon'ble Supreme Court in JCIT v. Rolta India Ltd. (330 ITR 470). Hardy Exploration Production v. ADIT (India) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. CIT [ITA 1597/10 - Order, dated 13-1-11 by ITAT Chennai Bench] D. Assessee's reliance on ITAT order for assessment year 2004-05 is misplaced as the said order was passed by ITAT only on the reasoning that in the impugned order of that appeal, CIT failed to point out what is erroneous in the assessment order [Para 10 of ITAT order] whereas in the impugned order under section 263 for this appeal, CIT clearly demonstrated the error in para 3. Gr. 5 6 : Incorrect set-off of brought forward loss/depreciation (a) As per Explanation 1 to section 115JB, for the purpose of computation of "book profit" under that section, the net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with the provisions of Parts II III of Schedule VI the Companies Act is the starting Point. Assessing Officer cannot change this figure. This is the view held by Apex Court in Apollo Tyres v. CIT (255 ITR 273). There is no dispute on this issue. CIT has not modified this figure in the order under section 263. (b) Assessing Officer has the power to make adjustments to book profits as mentioned in Explanation 1.1 to section 115JB as held in : (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments in respect of the IT returns filed by assessee corresponding to F.Ys. 1995-96 to 1999-2000 (assessment years 1996-97 to 2000-01) has become final as on date. These assessments were completed by accepting the returned income and no appeal was filed by assessee. Hence assessee cannot seek to change/modify the figures of brought forward loss/depreciation determined for such years in the present appeal proceedings. This view was upheld by Hon'ble Supreme Court in CIT v. Dalmia Cement (Bharat) Ltd. (216 ITR 79). This was followed by jurisdictional High Court in S.K.V. Selvaraj v. CIT (240 ITR 217) (Mad.). (h) Instead of relying on the figures as per the Profit and Loss A/c appearing in the printed Annual Accounts of the assessee company for F.Ys. 1995-96 to 1999-2000 which were approved by the Board of Directors and placed before the Annual General Meeting, assessee is now relying on certain figures appearing in Form 29B prepared by its auditor for the current year. Decision of the Apex Court in Apollo Tyres v. CIT (255 ITR 273) is equally applicable for the assessee as held by ITAT Chennai Bench in DCIT v. Thangavel Spinning Mills Ltd. (97 ITD 262). A form prescribed under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting procedure as prescribed by PSC, reliance on any other accounting system has to be ruled out as held by the Apex Court. (o) Article 16 of PSC provides for "Taxes, Royalties, Rentals Etc." (pages 189 to 193 of assessee's Paper Book). As per this Article, the only expenses deductible while computing profits and gains from the business of Petroleum operations are : l 100 per cent of revenue and capital expenditure incurred in respect of Exploration Operations as per Appendix C - Section 2.2 and Drilling Operations as per Appendix C - Sections 2.3.1 and 2.3.2. l Expenditure incurred in respect of Development Operations as per Appendix C - Section 2.3 (other than drilling operations covered above) and Production Operations as per Appendix C - Section 2.4 will be allowable as per the provisions of Income-tax Act. (p) Copy of Appendix C - Section 2 is available in pages 5 to 8 of Department Paper Book. As per this, Exploration costs are expenditure in search for Petroleum. Drilling costs are expenditure for drilling as well as for bringing a well into use as a producing well. Development costs are expenditure incurred for development of the Contract area. Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee did not acquire such assets at all. No such asset appears in the balance sheet of the assessee. Claim of the assessee for depletion costs arises only if the assessee purchases/acquires such natural resources and the expenditure incurred for the same is treated as capital expenditure in its books. (r) It is not a BOT contract but a PSC where assessee will be reimbursed the expenditure incurred by it and in addition will give a share of profit. Government, the owner of such natural resources is getting part of the profit for allowing its natural resources to deplete. In the circumstances, only Government whose natural resources get depleted can claim depletion costs and not the assessee who only earns profit by exploiting such natural resources owned by Government through the PSC. (s) When the PSC which was placed before both the house of However the situation is different in the present case where only PSC was entered into by the Government. (t) When the PSC which was placed before both the Houses of Parliament did not provide for deduction on account of 'depletion ', Courts cannot grant such deduction in view of the principle of "Casus omissus". I rely on Laxm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 828). ITA 803/CHNY/10 ASSESSMENT YEAR 2006-07 Issue similar to Gr. 5 to 7 in ITA 802/CHNY/10 ITA 1077/CHNY/10 ASSESSMENT YEAR 2006-07 Site Restoration Expenses - whether can be added back to book profits computed under section 115JB Though such expenses are debited to Profit Loss Account, it is not an allowable expenditure as per Article 16 of PSC, which is a self-contained code. Arguments similar to Gr. 5 6 in ITA 802/CHNY/10. Decision of ITAT in the case of Cairn Energy India Pty. Ltd. is distinguishable on facts as it was based on a different PSC." 7. It was submitted by the learned DR that in regard to the assessment years 2002-03 and 2003-04 in view of the decision of the Hon'ble Supreme Court in the case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316, the re-opening was liable to be upheld. It was the further submission that in regard to the assessment year 2005-06 even though the assessment order was passed under section 143(3), the issues had not been considered and the assessment order was not speaking on the issues also. It was the submission that the assessment order had been passed without application of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d above, the accounts were required to be drawn up in USD. For that purpose also one had to reconvert the costs from barrels to monetary terms. For the said reasons, clauses 1.6.1 and 1.6.2 of Appendix 'C' to the PSC envisaged booking of all currency gains and losses irrespective of whether such gains/losses stood realized or remained unrealized. In case of gains, a part of the credit would go to the Government, and taxes would be payable on the income to the extent of such gains credited. Therefore, in our view, currency gains and losses constituted an inextricable part of the accounting mechanism for expenses incurred on the development and production of oil. Section 42 of the 1961 Act was enacted to ensure that where the structure of the PSC was at variance with the accounting principles generally used for ascertaining taxable income, the provisions of the PSC would prevail. Section 42 provides for deduction on expenditure incurred on prospecting for or extraction or production of mineral oil whereas section 44BB contains special provision for computing profits and gains in connection with the business of exploration or extraction or production of mineral oils. The head note i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n costs, development costs, production costs and all other costs related to petroleum operations. Similarly, "Cost Petroleum" is defined to mean the portion of the total volume of petroleum produced which the Contractor is entitled to take for the recovery of contract costs as specified in article 13. Under article 13 the Contractor is entitled to recover contract costs out of the total volume of petroleum produced. That costs include development and exploration costs. Similarly, article 1.69 defines "Profit Petroleum" to mean all petroleum produced and saved from the contract area in a particular period as reduced by Cost Petroleum and calculated in terms of article 14. Continuing the analysis of PSC, article 7 inter alia provides that the Contractor shall provide for all funds necessary for the conduct of petroleum operations. Article 13 deals with recovery of costs, as stated above. Article 15 deals with taxes, royalties, rentals etc. It indicates that Government of India is entitled to get taxes apart from profit petroleum. Article 15.2.1 inter alia provides that in order to compute profits of the business consisting of prospecting, extraction or petroleum production there shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting procedure prescribed by the PSC, AS-11 had to be ruled out. The question before us still remains as to whether the PSC talks of translation, and if so, whether translation losses could be claimed by EOGIL. In this connection, we need to consider article 20.2 which inter alia states that the rates of exchange for the purchase and sale of currency by the Contractor shall be the prevailing rates as determined by the SBI and for accounting purposes under the PSC such rates shall apply as provided for in clause 1.6 of Appendix 'C' to the PSC. Appendix is a part of PSC. The purpose of Appendix 'C' inter alia is to prescribe the accounting procedure. Clause 1.1 of Appendix 'C' provides for classification of costs and expenditures. That classification is warranted as PSC contemplates costs recovery by the Contractor(s), who has made initial contribution/ investment of funds in foreign currency. The said classification of costs and expenditures is also indicated in Appendix 'C' for profit sharing purposes and for participation purposes. Appendix 'C' prescribes the manner in which a Contractor is required to maintain his accounts. It stipulates that each of the co-venturer has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gas India Ltd. (supra), and as the decision of the Hon'ble Supreme Court lays down the law on the issue as it stood and it is to be understood, the issues in the appeal may be restored to the file of the Assessing Officer for re-adjudication in line with the decision of the Hon'ble Supreme Court. 10. In regard to the issue of the site restoration expenditure, the learned DR vehemently supported the order of the Assessing Officer. 11. In reply, the learned authorised representative submitted that the assessee has not claimed any depreciation/depletion on account of the depletion to the oil well/basin/natural resources. It was the submission that the expenditure incurred by the assessee on account of the exploration and development of the natural resources had been claimed by the assessee as a fixed asset in its Balance Sheet. It was this expenditure which as per the provisions of PSC read with section 42 of the Act which the assessee was entitled to a 100 per cent deduction. It was the submission that this expenditure had been claimed on a yearly basis on the basis of the oil extracted. It was the submission that this was the scientific method for claiming the expenditure whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tural resources. It was the further submission that consequently the depletion having taken placed on the fixed assets it actually represented depreciation and consequently for the purpose of computation of the book profits under section 115JB depreciation was liable to include depletion. It was thus submitted that as per the PSC all the costs are allowable at 100 per cent to the assessee. It is only for the purpose of computation the deduction of all the costs as mentioned in the PSC that section 42 of the Act was applied. 12. In reply, the learned DR submitted that as per the decision of the Hon'ble Supreme Court in the case of Enron Oil Gas India Ltd. (supra), if a PSC was available, then section 42 has no applicability and the computation has to be done as per the PSC alone as it was a separate code by itself. 13. We have considered the rival submissions. A perusal of the decision of the Hon'ble Supreme Court in the case of Enron Oil Gas India Ltd. (supra), clearly shows that the Hon'ble Supreme Court has categorically held that the PSC is a code in itself. A perusal of the PSC Article 16 in the assessee's case found at page 558 of the assessee's paper book (vide Articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1)(c) the allowance is in respect of the depletion of mineral oil in the mining area in respect of the assessment year relevant to the previous year in which commercial production is begun and for such succeeding year or years as may be specified in the agreement, being the PSC. Admittedly, in the PSC under consideration no allowance in respect of the depletion of the mineral oil has been permitted and none has been claimed. Section 42(1) specifically provides that allowances shall be computed and made in the manner specified in the agreement (PSC), the other provisions of the Income-tax Act, 1961 being deemed for this purpose to have been modified to the extent necessary to give effect to the terms of the agreement. Admittedly, the exploration and development expenditure is incurred before the commencement of the commercial production. The expenditure incurred by the assessee on account of the exploration and development before the commencement of the actual commercial production would obviously have to be treated as a capital expenditure. Appendix 'C' of the PSC clearly classifies the classification, definition and allegation of costs and expenditure. On the basis of this classi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee, the same shall be treated as depreciation. Even though it has been argued by the learned authorised representative that the returns for the assessment years 1995-96 to 1999-2000 have been filed and no proceedings are pending for these assessment years and as it is noticed that the issue of depletion comes in only in the assessment year 1998-99, considering the fact that the decision of the Hon'ble Supreme Court in the case of Enron Oil Gas India Ltd. (supra) lays down the law as it stood and as it is supposed to be understood while computing the unabsorbed business loss as also carried forward depreciation, the Assessing Officer shall rework the same for the assessment years 1995-96 to 1999-2000 in line with the decision of the Hon'ble Supreme Court in the case of Enron Oil Gas India Ltd. (supra), as the same would have an impact while computing the book profits as also the regular profits for the assessment years which are under appeal before the Tribunal as also for the assessment years for which proceedings are open. 14. In regard to the claim of the treatment of the allowance of the site restoration expenditure while computing the book profits under section 115JB of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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