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M/s. Hindustan Oil Exploration Company Ltd. Versus Income tax Officer-9 (2) (1) , Mumbai And Vica-Versa

2016 (2) TMI 891 - ITAT MUMBAI

Addition u/s 42 - application filed by for extending the exploration period as AO held that there was no voluntary surrender of the oil fields, that the assessee could not claim deduction u/s. 42(1) - FAA allowed the claim - Held that:- Purposive interpretation of the provisions of the Act will be useful to decide the issue. Section 42 of the Act was brought on statute with a very specific purpose- to encourage oil exploration. Purpose to introduce it was to tide over the ever increasing import .....

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s to be allowed in full. If the background of the legislation is considered it becomes clear that there was no scope for bringing in the concept of voluntarily surrender/forced surrender. The Act has not provided such terms in the section and therefore there was no justification in denying the assessee a legitimate benefit. We find that the PSC had distinguished relinquishment and termina -tion of contracts. As per Article4 of PSC(Pg-1. 19 of the PB)‘if the contractor exercises the option provid .....

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see that its contract stood relinquished

The termination condition of the PSC deals with totally different situations. We find that the letter dt. 28. 3. 2007 talks of Article -4 and not of Article- 30 of the PSC. Clearly, the case of the assessee does not fall in the category of termination. Considering the above, we are of the opinion that the order of the FAA does not suffer from any legal or factual information. So, confirming his order, we decide effective ground of appeal agains .....

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see-company, engaged in the business of oil exploration, filed its return of income on 25. 09. 2008, declaring total income at Rs. Nil. The AO completed the assessment, u/s 143(3) of the Act, on 22. 12. 2010, determining the income of the assessee at ₹ 51. 13 crores. ITA/3486/Mum/2012: 2. Effective ground of appeal filed by the AO is regarding the above claim made by the assessee u/s. 42(1)(a) of the Act. During the assessment proceedings the AO found that assessee had claimed a deduction .....

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ction was allowable. He further observed that word surrender would mean wanting to continue /voluntarily giving up control/voluntarily relinquishing control or possession of something, that the assessee had claimed that it had surrendered its producing property because of non discovery of oil, that the assessee wanted an extension to continue its exploration, that it had to surrender its producing property because he government had terminated the contract. The AO referred to letters dated 16. 12 .....

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penalized by the government for failing to adhere to the terms laid down in its contract and that it was forced to relinquish the block. Finally, he held that the assessee s claim for deduction of ₹ 99. 96 crores, u/s. 42 was liable to be rejected. 3. Aggrieved by the order of AO, the assessee preferred an appeal before the First Appellate Authority(FAA). Before him, it was argued that the AO had placed undue stress on the require -ment of surrender for the purposes of allowing the deduct .....

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of relinquishment of the block pursuant to the end of the stipulated 7 year exploration under the PSC, that the assessee had putforth its proposal dated 16. 1. 2008, seeking extension beyond exploration phase III. The FAA called for a remand report from the AO and obtained submission of the assessee in response to the report. After considering the submission of the assessee and the assessment order, he held that the assessee had entered into a PSC with Government of India on 8. 1. 2001, that the .....

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lied with all the provisions of PSC, that it had made no commercial discovery of the block, that it was entitled to deduction u/s 42(1)(a) of the Act for the expenditure incurred by way of infructuous or abortive exploration, that a policy of extension of exploration plants beyond the exploration period was introduced under the PSC by the government, that DGHC had discretionary power to extend the contract, that the assessee had made an application for extension, however, it was turned down, tha .....

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surrender, that assessee was not granted extension, that the letter of DG dated was as good as termination. Authorised Representative(AR)stated that the assessee had started the exploration job as per the PSC, that the wells did not yield results, that it informed the Bombay Stock Exchange about not finding oil in the wells, that it had requested for extension as per the existing policy, that denial of extension could not be termed termination, that in the agreement there was separate clause fo .....

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y and simultaneously made amendment in the Act, that the assessee had made an application in pursuance of PSC and was allotted area for exploration w. e. f. 16. 03. 2001, that it was allowed to explore the area for seven years in three phases, that it had informed the BSE that it could not oil in two of the wells, that in the year 2006 Government notified that extension could be granted to the earlier allotees, that vide its application, dated 16. 1. 2008, the assessee requested for an extension .....

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ng import bill of petroleum products. PSC is the testimony of the efforts and intention of the government to deal with the oil crisis. To encourage the oil exploration area incentive in form of introduction of section 42(1)was given to the assessees. As an exception capital expenditure and other expenditure are fully allowed, under section 42(1)(a)of the Act, even when the exploration of oil results in failure. Such expenditure is not being amortised or not is being allowed partially year after .....

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ion provided in paragraph (b)of Article 3. 5 the contractor shall, after any development area has been designated, relinquish all of the contract area not included within the said develop ment area . Article-30of PSC(pg. 1. 84)deals with termination of contract. It provides 10 circumstances under which the government could terminate the contract. Clearly relinquishment and termination of agreement are two different concepts as per the PSC. In his letter, dated 28. 03. 2007, the DGHC has informed .....

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deals with totally different situations. We find that the letter dt. 28. 3. 2007 talks of Article -4 and not of Article- 30 of the PSC. Clearly, the case of the assessee does not fall in the category of termination. Considering the above, we are of the opinion that the order of the FAA does not suffer from any legal or factual information. So, confirming his order, we decide effective ground of appeal against the AO. ITA/4042/Mum/2012: 6. The first effective ground of appeal(Ground No. 2-6), ra .....

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gains of the business involved, that commercial production had commenced in each of the blocks, that the expenditure incurred was in the nature of drilling and other expenses, that the expenses were claimed in accordance with the terms of PSC entered into by the assessee, that Article 7. 2. 1 of the PSC provided that deduction @100% had to be allowed for all expenditures-both capital and revenue-incurred in respect of exploration /drilling operations, that it had claimed drilling expenditure in .....

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f the AO, that the nature and scope of both the sub sections were different, that the AO had not given any reason for disallowing the amount of ₹ 4. 77 crores, that the assessee was never contended with proposed disallowance to be made u/s 42(1)(b) of the Act, that the necessary documents were filed by the AO in his support, that no separate accounts of expenditure had been maintained by the assessee, that the expenditure was fungible and could not be objectively allocated u/s. 42(1)(a) an .....

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