2011 (8) TMI 428 - AT - Income Tax

Expenditure incurred on bidding for exploration - Capital expenditure or revenue expenditure - Exploration and production of oil and gases as revenue expenditure -the assessee were not in the nature of an independent business, but it was part of the existing business carried on by it under the control and supervision of the same management - The activities were inter-connected and there was no inter-lacing of funds and resources - The activities were carried out as inseparable from the existing line of business - Therefore, in the light of the decisions of the Supreme Court in the cases of Produce Exchange Corporation Ltd. v. CIT 1970 (4) TMI 18 - SUPREME Court , these expenses need to be allowed as revenue in nature - the impugned expenditure incurred during the previous year for setting up refinery. Depreciation on the lease assets - Held that - depreciation claim of assessee being disallowed - Assessing Officer not to tax the principal amount of lease rental DTAA - Tax liability - Residential status - There is no dispute that the assessee is having a permanent establishment in Oman and is clearly liable to tax under the provisions of Income-tax law in Oman - the provisions of DTAA override the provisions of the Income-tax Act - In the light of the ratio of the decision laid down by Hon ble Supreme Court in CIT v. P.V.A.L. Kulandagan Chettiar 2004 (5) TMI 8 - SUPREME Court , the income earned by the assessee from its Oman Branch cannot be added as income for computing the taxable income in India - Do not find any infirmity in the order of learned CIT(A) - Held that the income from business carried on at Oman and Qatar cannot be subjected to tax in India. Interpretation of provisions of DTAA - The expression used in Article 7 of the DTAA between India and Oman is may be taxed , while the words used in Article 7 of India Qatar DTAA is may also be taxed . Could there be different consequences because of the above difference in the language of the DTAA? - it cannot be said that the expression may also be taxed used in the DTAA gave option to the other Contracting States to tax such income. As laid down in the decision in the case of Pooja Bhatt 2008 (10) TMI 251 - ITAT BOMBAY-L contextual meaning has to be given to such expression. - the contention of the revenue that the expression may also be taxed in other State giving the option to the other State and the State of residence is not precluded from taxing such income cannot be accepted. Interest under section 36(1)(iii) - It is not in dispute that the assessee company had been using the jetty purchased for the purpose of the marketing business and that income earned there from was also offered for tax - The CIT(A) has found that there was no evidence of use of own funds for purchase of jetty - The revenue has itself allowed depreciation on jetty in the past -deduction on account of interest allowed.

Summary

Issues Involved:
1. Classification of expenditure for exploration and production of oil and gases as revenue expenditure.
2. Taxability of principal amount of lease rental.
3. Taxability of profits from Oman and Qatar branches.
4. Allowance of proportionate interest on borrowed funds under section 36(1)(iii) of the Income-tax Act.

Detailed Analysis:

1. Classification of Expenditure for Exploration and Production of Oil and Gases as Revenue Expenditure:
The primary issue was whether the expenditure of Rs. 78,28,226 incurred by the assessee for exploration and production of oil and gases should be treated as revenue expenditure. The assessee argued that the expenses were directly related to its ongoing business activities and should be allowed as revenue expenditure. The Assessing Officer (AO) disagreed, considering the expenses as preliminary and capital in nature, to be capitalized in the books as preoperative expenditure. The CIT(A) deleted the addition made by the AO, following the ITAT's previous decisions in the assessee's favor for assessment years 1996-97 to 1998-99. The Tribunal confirmed the CIT(A)'s order, noting that the Bombay High Court had upheld the Tribunal's decision on similar issues, thereby dismissing the revenue's ground.

2. Taxability of Principal Amount of Lease Rental:
The second issue was whether the principal amount of lease rental of Rs. 1,11,58,514 should be taxed. The assessee had entered into a lease transaction with Essar Steel Ltd. in assessment year 1995-96, claiming depreciation on the leased assets. The revenue had treated the lease as a finance lease, disallowing the depreciation claim. The assessee argued that if the lease was considered a finance lease, only the interest element should be taxed, not the principal repayment. The CIT(A) directed the AO to allow the assessee's claim, but the Tribunal accepted the assessee's counsel's plea that in light of the ITAT's order allowing depreciation for assessment year 1995-96, the CIT(A)'s direction could not be sustained. However, the Tribunal allowed the ground subject to the condition that if depreciation was disallowed by an appellate forum, the assessee could revive its claim for excluding the principal repayment from taxable income.

3. Taxability of Profits from Oman and Qatar Branches:
The third issue involved the taxability of profits from the assessee's branches in Oman and Qatar. The AO included the profits from Oman and Qatar projects in the total income, arguing that as a resident of India, the assessee's global income was taxable in India under section 5(1) of the Income-tax Act. The AO allowed tax credit for taxes paid in Oman. The CIT(A) directed the AO to exclude the profits from Oman and Qatar, following the CIT(A)'s orders for previous years. The Tribunal upheld the CIT(A)'s decision, noting that the Bombay High Court had upheld similar decisions for earlier years. The Tribunal distinguished between the terms "may be taxed" and "may also be taxed" used in the DTAA with Oman and Qatar, respectively, concluding that the income should not be taxed again in India if it had already been taxed in the source country.

4. Allowance of Proportionate Interest on Borrowed Funds:
The final issue was the allowance of proportionate interest on borrowed funds under section 36(1)(iii). The AO disallowed the interest claimed by the assessee, arguing that the assessee could not match the borrowed funds with the purchase of a jetty. The CIT(A) allowed the claim on a proportionate basis, considering the ratio of own funds to borrowed funds. The Tribunal upheld the CIT(A)'s order, noting that the funds for the purchase of the jetty came from a mix of borrowed and own funds, and the best course was to allow proportionate interest. The Tribunal dismissed the revenue's ground, following its earlier decision in the assessee's favor for assessment year 2002-03.

Conclusion:
The appeal by the revenue was partly allowed, with the Tribunal confirming the CIT(A)'s orders on the classification of expenditure for exploration and production of oil and gases, the taxability of profits from Oman and Qatar branches, and the allowance of proportionate interest on borrowed funds. The Tribunal allowed the revenue's ground on the taxability of the principal amount of lease rental, subject to the condition that the assessee could revive its claim if depreciation was disallowed by an appellate forum.