TMI Blog2011 (6) TMI 919X X X X Extracts X X X X X X X X Extracts X X X X ..... terest etc income was reduced from pre operative expenses and only the net amount of pre operative expenses (after reduction of interest etc income) was capitalized in the books of account In the assessment of RPCL, however the Assessing Officer held that interest etc income should be assessed as Income From Other Sources . The Hon ble ITAT after considering the decision of the APEX court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd (227 ITR 172) set aside the assessment orders with direction to the AO to frame the assessments de novo. In the case of Tuticorin Alkali Chemicals and Fertilizers Ltd (227 ITR 172), the Hon ble Supreme Court had held that interest on funds deployed before commencement of business cannot be set off against capital expenditure and has to be assessed as income from other sources. In the mean while RPCL amalgamated with Reliance Industries Ltd with effect from 1.3.1992. While assessments of RPCL set aside by the Tribunal were pending the Voluntary disclosure of income scheme 1997 (VDIS) was introduced. Considering the law laid down in Tuticorin Alkali s case and availing the benefit of the VDIS, the appellant company offered to tax the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oved by the Court all assets and liabilities (as per books) of RPCL stood transferred to the appellant company. Hence it was not permissible to pass any entries in the books for that would violate the order of the Court and also the terms and conditions of the scheme of merger. As regards the AO s contention that the interest income in question is taxable under the head other sources it is urged that this view actually supports the stand of the appellant. For if the interest income is taxable then the capitalized pre operative expenses earlier reduced by the interest income would automatically stand increased by the interest amount. Consequently the actual cost WDV of the assets would stand enhanced resulting in corresponding increase in depreciation. 5. It is further contended that entries in the books of account are not determinative. Claims for deduction have to be decided as per the applicable provisions of law. Reliance for this proposition is placed on the decision of the Hon ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd Vs CIT 82 ITR 363-SC. It is asserted that there is no dispute that the capitalised pre operative expenditure is eligible for depreciation a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect the determination of substantive issues as per the law. Therefore though the appellant had adequate reasons for not being able to give effect to the VDIS declaration in the books of account that cannot prejudice claims of the assessee which have no direct nexus with the subject of the declaration under VDIS. Besides in the instant case entries of both the pre operative expenses and interest income obtained in the accounts. The VDIS declaration merely had the effect of undoing the set off of interest income against the pre operative expenses. As mentioned above even if the interest income had been brought to tax u/s 56 the effect would be the same. The fact that the appellant chose to avail the opportunity offered by the VDIS cannot alter its other rights under the law For these reasons I hold that upon charging of the said interest amount to tax the pre operative expenses would stand increased correspondingly. Consequently the actual cost of those assets to which the preoperative expenses had been allocated would also stand increased within the meaning of sec 43(1). This is as per the decisions of the Bombay High Court in the cases of CIT vs BSES, 142 ITR 298 and Ahmedabad El ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) had held claim of the assessee that once the income which is given to reduce the cost of acquisition has separately taxed then the correspondingly and as a consequence the cost of acquisition of the assets should also be increased. Mere entries or lack of them in the books of account cannot affect the determination of substantive issue as per law. Further, the CIT(A) also relied on various decisions wherein the WDV has to be determined based on the actual cost that may be worked out every year and the WDV should be arrived at after deducting therefrom the depreciation actually allowed. The CIT(A) directed the allowance or depreciation at 25% relating to the above income of ₹ 1045383201/-. 9. The contention of the revenue is that under VDIS the declarant shall not be entitled in respect of VDIS to reopen any issue or reassessment made in the Income tax Act or claim any set or relief on appeal, reference or other proceedings. Therefore, the assessee who had offered the income during the pre-operative period cannot claim benefit of depreciation on the same amount. 9.1 The Ld. DR submitted as follows: The declarant shall not be entitled in respect of the voluntaril ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed in the regular assessment was declared under the VDIS. Therefore the assessee is not claiming any further relief by claiming depreciation on the correct cost of acquisition without reduction of pre-operative income. Therefore, we agree with the conclusion of the CIT(A) that the assessee is entitled to depreciation on the total cost of acquisition without reducing the pre-operative income of ₹ 1045383201/- which has been excluded and taxed separately. The revenue s appeal on this issue is dismissed. 13. The second issue is against the CIT(A) allowing expenditure of ₹ 2500.99 lakhs towards well head platform, u/s 42(1)(b) of the Act. The Assessee claimed total expenditure of ₹ 13717.10 lakhs as deduction u/s 42(1)(b), in respect of Oil and Gas division for extraction and production of oil and gas from panna, Mukta and Tapti fields. As per details of this expenditure furnished before the AO, the expenditure on production facilities at Panna Mukta field includes ₹ 25.00 crore incurred on well head platforms which was claimed deductible u/s 42(1)(b) as expenditure incurred on drilling and exploration,. The AO has disallowed the claim on the ground that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for lifting the oil and gas to the surface. (ii) Work over of wells. B. Pre well Head Cost: Cost of gathering treating field transportation field processing etc. 15. The AR contended that the expenditure incurred under the above heads for E P are accounted under the heads capital expenditure or revenue expenditure depending upon the nature of activity performed. The AR has submitted a detailed technical note to justify as to how the expenses incurred in wellhead Platforms are actually for drilling or exploration activities. The said note is reproduced as under: Justification for claiming wellhead platforms under section 42: Exploration activities include acquisition processing and interpretation of Geological Geophysical data various analysis studies and investigations such as geo chem./biostrat analysis. PVT fluid analysis core analysis and drilling of wells for prospecting for hydrocarbons. Production Facilities includes wellhead platforms processing platforms infield pipelines and export pipelines. Part of these facilities wellhead platforms (viz platform PC,PF and PG) houses equipments essential for drilling of wells. These wellhead platf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for that purpose. It is subjected that since a part of capital expenditure incurred and clubbed under the head production activity is directly attributable to drilling and exploration activity the same is clearly allowable as deduction while computing the total income under sec 42 of the act as claimed. 16. Before the CIT(A) the AR asserted that the details of exploration drilling and production expenditure were filed during the course of assessment, These details clearly show that expenditure on production facilities includes ₹ 25.00 crore incurred on platforms at Panna, Mukta site. This expense though classified under the expenses head production facilities is actually in the nature of expenses incurred on drilling or exploration activities and so has been rightly claimed as deduction under section 42(1)(b) of the act. 17. In the alternative the AR submitted that the assessee is eligible for depreciation on the capital expenditure relating to the drilling extraction and production facilities. 18. The Ld. CIT(A) accepted the contention of the assessee observing as under: I have carefully considered the matter The AO has disallowed the claim of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure in respect of drilling and exploration activities as well as in respect of physical assets used in that connection. 22. As pointed out by the Ld.CIT(A), the Wellhead Platform is necessary for carrying out drilling and exploration activities. For the sake of convenience the part played by Well Head in drilling and exploration as explained by the Assessee is reproduced below: Exploration activities include acquisition processing and interpretation of Geological Geophysical data various analysis studies and investigations such as geo chemical/biostrata analysis. PVT fluid analysis core analysis and drilling of wells for prospecting for hydrocarbons. Production Facilities includes wellhead platforms processing platforms infield pipelines and export pipelines. Part of these facilities wellhead platforms (viz platform PC,PF and PG) houses equipments essential for drilling of wells. These wellhead platforms are necessary to be installed before the drilling of wells and the utility of these platforms are as follows: Facilitate drilling of drill multiple wells from a single location. On completion of each well the wellhead platform only holds the assembl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is against the Ld. CIT(A) deleting the addition made to book profit u/s 115JA of ₹ 391,17,724/- being provision of doubtful debts. The AO increased the book profit u/s 115JAof the IT Act by provision for doubtful debts of ₹ 3,91,17,724/-. It was noticed by the assessing officer that though this provision had been added back by the assessee while computing income under the normal provisions the said provision had not been added back to the book profit u/s 115JA. The assessing officer took the view that in terms of clause (c) of explanation to sec 115JA (2) the assessee company as required to add back the said provision for computing the book profit. It was explained by the assessee before the Assessing Officer that the provision had been made for debts which were considered by the management as doubtful of recovery after evaluating each debt. Since each debt had been evaluated for its soundness it was contended that the provision was for ascertained liability. The Assessing Officer did not accept the assessee s contention and added the provision for doubtful debts to the Book profits u/s 115JA. 25. On appeal the CIT(A) allowed the claim of the assessee that the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that M/s Reliance Petrochemicals Ltd (RPCL), which later on merged with Reliance Industries Ltd., had earned interest and other income during the construction period. This income was set off against the pre-operative expenses and only the net amount was capitalized. Later on, it was held by the Supreme Court in the case of Tuticorin Alkali chemicals Fertilizers Ltd., 227 ITR 172 that the interest on funds before the commencement of business cannot be set off against the capital expenditure and has to be assessed as income from other sources. In the meantime, the department came out with Voluntary Disclosure of Income Scheme (VDIS). The interest income earlier set off by the appellant against pre-operative expenses was offered to tax under VDIS. Accordingly, the appellant increased the capitalization of preoperative expenses to this extent. The appellant claimed depreciation taking into account the increased value of fixed assets on Asst. Year 1997-98. However, the AO did not allow the depreciation on the enhanced value of assets on the ground that, as per section 69 of VDIS, income declared under VDIS cannot be considered for any other relief. However, the CIT(A) accepted the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 (AY: 1998-99) including explanation (g) whereby any amount set aside towards provision for diminution of assets is to be added back in computing the Book profits u/s 115JA. As held by the Apex Court in the case of CIT Vs HCL Comnet services and Systems Ltd reported in 305 ITR 409, any provisions made towards bad and doubtful debts is nothing but provisions made in diminution in value of assets and hence explanation (g) to sec 115JA would be applicable to Provisions for bad and doubtful debts. Hence the provision for bad and doubtful debts are to be added back in computing the Book profits u/s 115JA in view of Explanation (g) to Sec 115JA introduced by Finance Act (No.2) of 2009 with retrospective effect from 01.04.1998. 34. In this view of the matter having regard to the amendment to Section 115JA by way of introduction of explanation (g), we uphold the claim of the revenue and set aside the order of the Ld. CIT(A) and restore the order of the Assessing officer holding that the provisions for bad and doubtful debts should not be deducted in computing book profit under Section 115JA. The appeal of the revenue on this issue is allowed. 35. The appeal by the revenue in I.T.A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant on another recent decision of Mumbai Tribunal in the case of Shree Rajasthan Texchem Ltd., dated 22.7.2005 reported at (2005)97 TTJ (Mum) 91. In this case, also it was held that depreciation if not claimed by the assessee, cannot be thrust upon him for purposes of computing deduction u/s 80IA. 40. The assessee further submitted that on the facts of the instant case depreciation on the SBM unit cannot even be claimed by the assessee. It is pointed out that the appellant company had entered into an agreement for construction of captive jetty with Gujarat Maritime Board (GMB) vide agreement dated 1.12.1996. GMB gave the appellant company license to construct Single Buoy Mooring (SBM) facility along with service Jetty. The SBM facility was constructed by the assessee company for the purpose of handling, storage and transportation of materials manufactured by the appellant company and also for use by the public. Since the SBM unit was to be handed over to GMB, the appellant company claimed the entire cost of the infrastructure unit as deduction while computing its total income for the relevant year. However, in the books of account the cost of the SBM unit was capitalized a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation of ₹ 4.42 Crores attributable to that undertaking but not claimed by the Assessee. But as found by the CIT(A), the Assessee could not have claimed depreciation on the assets used in the SBM, since the SBM unit was to be handed over to Gujarath Maritime Board, the assessee had claimed the entire cost of the infrastructure unit as deduction while computing its total income for the relevant year. However, in the books of account the cost of the SBM unit was capitalized and depreciation at the applicable rate was debited in the books year after year. In the circumstances there is no question of deducting depreciation of ₹ 4.42. Crores, while computing the relief u/s 80 IA(4) or from the deduction to be made under Explanation (vI) to sec 115JA. We uphold the order of the CIT(A) on this issue and dismiss the departmental appeal on this issue. 43. The next ground of the revenue is against the order of the CIT(A) holding that provision for doubtful debts and advance of ₹ 23,00,01,065/- should not be added back while computing the Book profits u/s 115JA. Similar issue has been considered by us, in the revenue s appeals for AY 1997-98 and 1998-99 supra. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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