2016 (2) TMI 891 - AT - Income Tax

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 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 year-it has 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 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 the assessee 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 against the AO. - Decided in favour of assessee

Summary

Issues:
1. Deduction of expenses under section 42(1)(a) of the Act.
2. Claim for deduction under section 42(1)(b) of the Act.
3. Deduction claimed under section 80IB(9) of the Act.

Issue 1: Deduction of expenses under section 42(1)(a) of the Act:

The case involved the appeal filed by the Assessee against the AO's decision to reject the claim for a deduction of expenses under section 42(1)(a) of the Act. The AO contended that the Assessee did not voluntarily surrender its producing property and, therefore, the claimed deduction was not allowable. The Assessee argued that it had complied with all provisions of the Production Sharing Contract (PSC) and was entitled to the deduction. The First Appellate Authority (FAA) allowed the Assessee's appeal, emphasizing that the Assessee had relinquished the block after the exploration period as per the terms of the PSC. The Tribunal upheld the FAA's decision, stating that the Assessee's case did not fall under termination but rather relinquishment, as per the PSC. The Tribunal highlighted the distinction between relinquishment and termination under the PSC, ultimately confirming the FAA's order.

Issue 2: Claim for deduction under section 42(1)(b) of the Act:

The Assessee raised an appeal regarding the claim for deduction under section 42(1)(b) of the Act, amounting to Rs. 4.77 crores. The AO disallowed the claim without proper deliberation. The Assessee argued that the expenditure was in accordance with the PSC terms and commercial production had commenced in each block. The FAA criticized the AO for disallowing the expenditure improperly and not providing reasons for the disallowance. The Tribunal, following a previous order for a different assessment year, decided in favor of the Assessee, restoring the issue to the AO for further verification due to identical circumstances.

Issue 3: Deduction claimed under section 80IB(9) of the Act:

The Assessee claimed a deduction of Rs. 49,00,99,629 under section 80IB(9) of the Act, subject to profit availability. Due to the decision to send back the first effective ground to the AO for verification, the matter regarding this deduction was also directed to be restored to the AO. Consequently, the AO's appeal was dismissed, and the Assessee's appeal was partly allowed.

In conclusion, the Tribunal's judgment addressed various issues related to the deduction of expenses under different sections of the Act. The decision provided detailed analyses of the Assessee's claims, the AO's disallowances, and the FAA's rulings, ultimately leading to the restoration of certain matters to the AO for further examination.