TMI BlogUN-NECESSART LITIGATION BY TAX AUTHORITIES ON WELL SETTLED MATTER ABOUT REVENUE EXPENDITURE – ‘dry docking expense for repair of ship are revenue expenditure.X X X X Extracts X X X X X X X X Extracts X X X X ..... UN-NECESSART LITIGATION BY TAX AUTHORITIES ON WELL SETTLED MATTER ABOUT REVENUE EXPENDITURE – ‘dry docking expense for repair of ship are revenue expenditure. - By: - CA DEV KUMAR KOTHARI - Income Tax - Dated:- 12-8-2015 - - Relevant PROVISIONS AND LINKS: Sections 30 , 31 and 37 of the Income-tax Act, 1961 Commissioner of Income Tax And Others Versus Oil Natural Gas Cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poration Ltd 2015 (6) TMI 104 - UTTARAKHAND HIGH COURT Followed in: Commissioner of Income Tax, Dehradun Versus Oil And Natural Gas Corporation Ltd. 2015 (7) TMI 995 - UTTARAKHAND HIGH COURT The assessee- Oil Natural Gas Corporation Ltd (ONGC): The assessee ONGC, in the cited cases is a well-known Central Government Public Sector Enterprise- in fact it is one of navratna P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SU. The promoters, at present hold 68.93% of equity shares, as per information obtained from the website of BSE. Besides, Government Insurance Companies also hold substantial stake. During the years to which litigation relates the promoters stake was much higher, and it was reduced by divestment in few tranches.On visit of http://www.divest.nic.in and website of BSE complete details of dives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tments in ONGC could not be readily found, however, author remember that earlier stake of government and its other PSU was more than 90%. ONGC had also been largest tax payer / largest tax paying PSU for many number of years. Capital or revenue expenditure: The concept of capital expenditure and revenue expenditure is well known and can be decided easily and there should not be litigatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n so as to waste public money on un-necessary litigation. Dry docking expenses: FROM http://economictimes.indiatimes.com/definition/dry-docking : Definition of 'Dry Docking' During dry docking, the whole ship is brought to a dry land so that the submerged portions of the hull can be cleaned or inspected. Definition: Dry docking is a term used for repairs or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when a ship is taken to the service yard. During dry docking, the whole ship is brought to a dry land so that the submerged portions of the hull can be cleaned or inspected. Description: Usually dry docking is done every 12 months to 24 months, as there could be machinery and systems that cannot be stopped while the ship is in use; these are also serviced, repaired or replaced at the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e time. The normal steps followed are - the hull is cleaned of marine plants, painting with anti-corrosive and anti-fouling paints, hull inspection and repairs, shipside gratings cleaned and repaired, cleaning and surveying of tanks, rudder and carrier ring. Locking devices clearances are also examined. All overboard and sea suction valves are overhauled. Tail shaft bearing wear down is che ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cked. Tail shaft is removed and inspected. Anchor chain is examined, cleaned and re-marked. From the above description and details about dry docking , it is abundantly clear that dry docking is done on a ship which has already been acquired and has been used. Dry docking is a recurring affair and is necessary to keep Ship Sea worthy and capable to perform its functions properly. It is neces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sary to repair and maintain ship in working condition AND FOR THAT PURPSOE DRY DOCKING IS REQUIRED. Therefore, there should not be any doubt that dry docking is a regular course in course of business wherein ship is used as a plant and machinery. Repairs and maintenance are integral part of activities in any activity in which some durable assets are used. Dry docking is for repair and ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intenance of ships. Therefore, there should not be any reason for disallowing dry docking expenses by treating them capital expenses. Case of ONGC: We find that in case of ONGC, the dispute about allowability of dry docking expense has been repetitive. The learned AO treated expenses without giving any reason. In some earlier years learned AO had disallowed such expenses because assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has not debited expense in P L account. However, in that year also the expense were allowed in course of appeals. Accounting treatment: In view of the author the best course is to debit entire revenue expenditure in P L account so that disputes are reduced. However, just to raise demand, in that case also the AO may try to disallow a portion on the basis of matching principal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In accounts different treatment are given due to certain reasons like to apply matching principal to match costs with revenue and / or likely revenue earning period during which expenditure is likely to be useful. This is totally justified. However, sometimes expenses are capitalised, just to show higher profits so as to pay dividend, get better credit rating and to obtain finance at lower r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of interest. Author remember that some years ago there was dictate from the Central Government to PSU s to pay higher dividend, it may be that ONGC had also followed that dictate and to pay higher dividend by showing higher profits some expenses were capitalized. ONGC capitalising or treating deferred revenue expenditure. Appeal before the Supreme Court is not desirable: In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case and on the issue of allowability of dry docking expenses, the revenue should accept the judgment of the High Court and there should not be appeal before the Supreme Court. In case revenue challenges the judgment, it can be regarded frivolous litigation. - - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
