2015 (7) TMI 995 - HC - Income Tax

Expenditure incurred on Dry Docking - revenue v/s capital expenditure - Held that - Substantial question of law already answered against the Revenue as decided in 2015 (6) TMI 104 - UTTARAKHAND HIGH COURT wherein held according to the accepted principles, capital expenditure is something which is spent once for all, while revenue expenditure is that which has to be incurred from year to year. If the expenditure is to bring into existence or advantage for the enduring profit of the business, then expenditure may be capital in the nature but where the expenditure has direct nexus, connection or relation to the carrying on or conducting the business of the assessee, it must be recorded as an integral part of profit making process and hence revenue in nature. The maintenance of these vessels and rigs is a sine-qua-non for carrying on its business of exploration and production of oil. In the case of the appellant, expenditure was claimed as revenue. Therefore, of the opinion that AO was not right in disallowing the expenditure as capital expenditure - Decided against revenue. Payment made on account of royalty to State Govt. - payment of royalty in excess of 20% - restriction under Section 6A(4) of the Oilfield (Exploration and Development Act), 1948 - to be calculated on international price instead of discounted sale price in the nature of allowable business expenditure? - Held that - The case set up by the Revenue that it is a case, which involves violation of the mandate of Section 37 in its explanation may not hold good. In this context, we would think that Section 6A may not be read in isolation; instead, we must also view it in the context of the notification read with resolution read with communication. Certainly, we cannot liken it to hafta or extortion money, which appears to have been the intention. It is very fairly conceded by the learned counsel for the Revenue, there is no question of any offence being committed. In fact, the respondents were only faithfully abiding by the decision of the Government of India. In the circumstances of this case, we are therefore of the view that the amounts, which were paid, would not incur the opprobrium of being in violation of Section 37. There is no dispute that all the other ingredients required to sanction the expenditure as expenditure under Section 37 are present. - Decide against revenue.

Summary

Issues Involved:
1. Whether the ITAT erred in law in holding that the expenditure incurred on Dry Docking expenses are revenue in nature.
2. Whether the ITAT erred in law by holding that payment made on account of royalty to State Govt. calculated on international price instead of discounted sale price is an allowable business expenditure.

Issue-Wise Detailed Analysis:

Issue 1: Dry Docking Expenses
The court noted that the first substantial question of law concerning the nature of Dry Docking expenses had already been answered against the Revenue in previous cases (I.T.A. Nos. 19 of 2010, 20 of 2010, 21 of 2010 & 22 of 2010). Therefore, the court saw no reason to take a different view and answered it against the Revenue.

Issue 2: Payment of Royalty
Background: The respondent assessee, engaged in oil exploration, was called upon by the Assessing Officer to explain the payment of royalty at a rate exceeding the statutory limit of 20% as per Section 6A of the Oilfield (Regulation and Development) Act, 1948. The assessee contended that the royalty was paid as per the instructions of the Central Government, which mandated payment on the pre-discount price to ensure state revenues were not affected by discounts given to Oil Marketing Companies (OMCs).

Assessing Officer's View: The Assessing Officer disallowed the excess royalty paid over 20% of the post-discount price, arguing that such payment was an infraction of law and thus not allowable under Section 37 of the Income Tax Act.

Appellate Authority and Tribunal's View: The Appellate Authority and the Tribunal allowed the assessee's appeal, holding that the royalty payment was made as per the guidelines and instructions of the Central Government and could not be considered an infraction of law. The Tribunal noted that the royalty payment based on pre-discount price was justified and allowable as revenue expenditure.

Revenue's Argument: The Revenue argued that the excess royalty payment was prohibited by Section 6A of the Oilfield (Regulation and Development) Act, 1948, and thus not allowable under Section 37 of the Income Tax Act. They contended that statutory provisions should prevail over government notifications.

Respondent's Argument: The respondent argued that the royalty payment was in compliance with the Central Government's notifications and resolutions, which allowed royalty calculation based on the international price rather than the discounted price. They referred to various government communications and resolutions to support their claim that the payment was not illegal.

Court's Analysis: The court examined Section 6A of the Oilfield (Regulation and Development) Act, 1948, and the relevant government notifications. It noted that the notifications allowed royalty calculation based on the international price to ensure state revenues were not affected by discounted sales to OMCs. The court found that the Well Head Price, as per government policy, was the market-driven price based on arm's length transactions, not the discounted price.

The court concluded that the royalty payment did not violate Section 6A, as it was calculated based on the international price, which did not exceed 20%. The court also noted that the payments were made in compliance with government directions and could not be equated with illegal payments like protection money or bribes, which the explanation to Section 37 aimed to disallow.

Conclusion: The court held that the royalty payments were allowable as revenue expenditure under Section 37 of the Income Tax Act. All necessary ingredients for allowing the expenditure were present, and there was no violation of Section 6A of the Oilfield (Regulation and Development) Act, 1948. The appeals were dismissed, and the second question of law was answered against the Revenue.