TMI Blog2019 (4) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... rements are satisfied, the expenditure in question would be recognized as a deduction. The emphasis of this provision is of infructuous or abortive exploration expenses and that there is surrender prior to the beginning of the commercial production. The term surrender in this clause, therefore, has to be appreciated in light of these essential requirements of the deduction clause. The revenue in our opinion has put unnecessary stress on the term surrender while the main focus of the clause is on infructuous or abortive exploration expenditure in respect of area surrendered prior to the beginning of the commercial production. As long as the commercial production has not begun and the expenditure is abortive or infructuous exploration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal in error in its interpretation of Section 42(1)(a); that deals with the surrender of an area of exploration and not the relinquishment of the contract as concluded by the Tribunal. 2. Brief facts are as under; Respondent Assessee Hindustan Oil Exploration Company Ltd. is engaged in the business of exploration and extraction of oil. The issue pertains to the assessee's return of income for the year 2008 2009. The return filed by the assessee for the said assessment year declared NIL income. In the return, the assessee had claimed a deduction of a sum of ₹ 99.96 Crores under section 42 of the Income Tax Act, 1961 (for short the Act ). 3. The assessee company had entered into a Production Sharing Contract (PSC) with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India introduced a new policy 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 allottees, that vide its application, dated 16.1.2008, the assessee requested for an extension, that the DGHC rejected the application filed by it for extending the exploration period that the AO held that there was no voluntary surrender of the oil fields, that the assessee could not claim deduction u/s 42(1) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g. 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 the assessee that its contract stood relinquished. We would like to reproduce the relevant portion of the letter and same reads as under; Since Phase llI exploration period is expired on 16.3.2008 and the consortium has not fulfilled the terms laid down for extension as per policy for extension beyond exploration period, hence the block CY OSN 97/1 stands relinquished as per Article 4.3 of PSC w.e.f the date of completion of phase III i.e. 15.3.2008. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement 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) to expenditure by way of infructuous or abortive-exploration expenses in respect of any area surrendered prior to the beginning of commercial production by the assessee; (b) after the beginning of commercial production, to expenditure incurred by the assessee, whether before or after such commercial production, in respect of drilling or exploration activities or servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he commercial production by the assessee would be admissible. For the applicability of clause (a) of subsection (1), the elements vital are that the expenditure should be infructuous or abortive exploration expenses and that the area should be surrendered prior to beginning of the commercial production by the assessee. In other words, as long as these two requirements are satisfied, the expenditure in question would be recognized as a deduction. The emphasis of this provision is of infructuous or abortive exploration expenses and that there is surrender prior to the beginning of the commercial production. The term surrender in this clause, therefore, has to be appreciated in light of these essential requirements of the deduction clause. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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