2018 (11) TMI 1319 - AT - Income Tax

Disallowance of exploration expenses pertaining to Pranhita Godavari (PG) Block - allowable expenditure u/s 42(1)(a) - failure to prove relinquishment of any area in PG Block - as per AO similar expenditure claimed by the assessee in the earlier assessment years were also disallowed - Held that - On a perusal of the material placed before us, we find that the assessee vide letter dated 28th December 1995, informed the Ministry of Petroleum and Natural Gas about relinquishment of 7,300 sq.kms. area of PG Block. Also seen, vide letter dated 22nd March 1996, the Dy. Secretary to the Government of India, Ministry of Petroleum and Natural Gas, informed the assessee about the consent of the Government to the relinquishment of 7,300 sq.mtrs. of PG Block. Thus, it is evident, in the previous year relevant to the assessment year under dispute, the assessee s relinquishment of 7,300 sq.kms. area in PG Block was accepted by the Government. Therefore, the finding of AO and Commissioner (Appeals) that the assessee has failed to prove relinquishment of any area in PG Block is contrary to the material on record. Further, a perusal of Article 16 of the PSC, as placed in the paper book, indicates that the assessee is to be allowed deduction of expenses in terms of section 42 of the Act. Therefore, the unsuccessful oil exploration expenses is allowable under section 42(1)(a) of the Act. - Decided in favour of assessee. Disallowance of set off of exploration expenses against interest income - Held that - Authorised Representative fairly submitted that the issue has to be decided against the assessee. In view of the aforesaid submissions made by the learned Authorised Representative, we dismiss the ground raised by the assessee. Short credit of TDS - Held that - We direct the Assessing Officer to consider assessee s claim in the context of facts and material available on record and grant proper credit of TDS. Ground raised is allowed for statistical purposes. Rejection of revised return of income filed by the assessee - assessee in the revised return of income the assessee has claimed various deductions, including exploration expenses in respect of some Blocks - assessee can file a revised return of income only for the purpose of correcting obvious omissions / mistakes and it cannot be use to make entirely a new claim - Held that - A reading of the provision 139(5) makes it clear that, in case, the assessee discovers any omission or any wrong statement in the original return of income he can file a revised return of income in the prescribed time limit. There is nothing in the said provision to suggest that the assessee cannot make a fresh claim in the revised return of income to be filed under section 139(5) of the Act. Only requirement of law is, it must be filed within the time limit prescribed under section 139(5). As regards the allegation of the learned Commissioner (Appeals) that the assessee filed the revised return of income to reduce the taxable income by making jugglery in the accounts, we must observe, nothing prevents the Assessing Officer to disallow on merits the claim made by the assessee in the revised return of income after properly examining such claim in the context of books of account maintained by the assessee as well as other facts and material on record. Merely on presumption and surmises assessee s revised return of income cannot be rejected if such return of income has been filed in accordance with the statutory provision - restore this issue to the Assessing Officer for fresh adjudication after considering assessee s claim made in the revised return of income - decided in favour of assessee for statistical purposes. Disallowance u/s 14A - Held that - AO has given a clear cut finding that the loan burden of the assessee is negligible, hence, it cannot be said that loan bearing funds are invested in tax free securities. Having held so, the Assessing Officer disallowed 15% of the exempt income earned towards administrative expenditure. Whereas, Commissioner (Appeals) without properly examining the facts has upheld the disallowance with the observation that the assessee has used borrowed funds for earning dividend income. Be that as it may, disallowance on account of administrative cost @ 15% of the exempt income, in our view, is on the higher side. We restrict such disallowance to 10% of the dividend income. Ground raised is partly allowed. Allowance of unsuccessful exploration expenses - Held that - There is no dispute that the assessee has filed the revised return of income within the prescribed time limit as per section 139(5) of the Act. Therefore, the contention of the learned Departmental Representative that the loss claimed in the revised return of income cannot be carried forward is not acceptable. As regards the allowability of expenditure claimed, the Revenue has failed to controvert the factual finding of the Commissioner (Appeals) that, though, the expenditure pertained to the preceding assessment year, however, in view of the Assessing Officer s own decision, such expenditure is allowable in the assessment year wherein the block is surrendered. In view of the aforesaid, we do not find any infirmity in the order of the learned Commissioner (Appeals). Grounds are dismissed. Allowance of expenditure in respect of PY 3 Block - Held that - On a reading of section 42(1)(b) of the Act, it becomes clear that after commencement of commercial production, expenditure incurred in respect of drilling or exploration activities or services or in respect of physical assets used in that connection, except, those assets on which depreciation is allowable under section 32 of the Act are allowable as deduction if such expenditure is allowable as per the terms of the agreement with the Government. Undisputedly, AO has not doubted the fact that the assessee has incurred such expenditure or the assessee has commenced commercial production. He has also not doubted that such claim is not provided in the PSC. That being the case, assessee s claim of expenditure is allowable under section 42(1)(b) of the Act. Even otherwise also, as rightly observed by the learned Commissioner (Appeals), the assessee is entitled to claim 100% depreciation on assets used in the field operation. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of exploration expenses.
2. Disallowance of set-off of exploration expenses against interest income.
3. Short credit of TDS.
4. Levy of interest under section 220(2).
5. Rejection of revised return of income.
6. Disallowance under section 14A.
7. Allowance of unsuccessful exploration expenses.
8. Allowance of development cost as revenue expenditure.

Detailed Analysis:

1. Disallowance of Exploration Expenses:

The assessee challenged the disallowance of exploration expenses amounting to ?1,90,63,501 related to the Pranhita Godavari (PG) Block. The Tribunal found that the assessee had indeed relinquished 7,300 sq.kms. of the PG Block during the relevant previous year, as evidenced by the Ministry of Petroleum and Natural Gas's letter dated 22nd March 1996. The Tribunal held that the unsuccessful oil exploration expenses were allowable under section 42(1)(a) of the Income Tax Act, 1961, and deleted the disallowance made by the Assessing Officer and sustained by the Commissioner (Appeals).

2. Disallowance of Set-off of Exploration Expenses Against Interest Income:

The assessee's challenge against the disallowance of set-off of exploration expenses against interest income of ?20,060 was dismissed based on the assessee's own submission that the issue should be decided against them.

3. Short Credit of TDS:

The assessee claimed a short credit of TDS amounting to ?1,22,24,341, while the Assessing Officer had given credit for ?1,14,85,146. The Tribunal directed the Assessing Officer to grant proper credit of TDS after considering the facts and material available on record.

4. Levy of Interest Under Section 220(2):

This ground was deemed consequential and did not require adjudication at the stage of the judgment.

5. Rejection of Revised Return of Income:

The assessee's revised return of income for A.Y. 1997-98 was rejected by the Departmental Authorities on the ground that section 139(5) of the Act allows a revised return only for correcting obvious omissions or mistakes. The Tribunal, however, held that the provision does not prevent making a fresh claim in the revised return if filed within the prescribed time limit. The issue was restored to the Assessing Officer for fresh adjudication.

6. Disallowance Under Section 14A:

For A.Y. 1998-99, the assessee challenged the disallowance of ?7,39,985 under section 14A of the Act. The Tribunal found the disallowance of 15% of the exempt income towards administrative expenditure to be on the higher side and restricted it to 10% of the dividend income.

7. Allowance of Unsuccessful Exploration Expenses:

The Revenue's appeal for A.Y. 1998-99 challenged the allowance of unsuccessful exploration expenses of ?86,73,991. The Tribunal upheld the decision of the Commissioner (Appeals), who allowed the expenses on the ground that they pertained to the year in which the block was surrendered, in line with the Assessing Officer's own principle.

8. Allowance of Development Cost as Revenue Expenditure:

The Revenue also challenged the allowance of development costs of ?86,87,332 for PY-3 Block for A.Y. 1998-99. The Tribunal upheld the Commissioner (Appeals)' decision, which allowed the expenditure as revenue expenditure under section 42(1)(b) of the Act, since the assessee had commenced commercial production and the expenditure was in terms of the PSC.

Conclusion:

Several appeals were allowed, partly allowed, or dismissed based on the merits of each issue. The Tribunal provided detailed directions for the Assessing Officer to reconsider certain claims and allowed or disallowed expenses based on the specific provisions of the Income Tax Act and the facts presented.