2009 (10) TMI 76 - AT - Income Tax

Depreciation in case of intangible assets - assets falling in the category of any other business or commercial rights of similar nature - incurred expenditure obtaining the right and license for exploration of oil - principle of ejusdem generis - Assessee company has been granted licenses by Russian Government to explore and produce hydrocarbons in the agreement area - assessee acquiring 20 per cent participating interest has become the member of the consortium and acquired proportionate share in rights and licenses granted by the Russian State for Sakhalin Block - The contention of assessee was that the rights and licenses being intangible assets were entitled to depreciation @ 25 per cent in view of the amended provisions of s. 32. As per AO what has been acquired is a participation right in the license to carry out hydrocarbon operations in Sakhalin Block. CIT(A) held that the said expenditure even though represents revenue expenditure yet only 1/19th thereof had to be allowed since the same represents deferred revenue expenditure. Accordingly 1/19th of the expenditure so incurred by the assessee was directed to be allowed by the CIT(A) HELD THAT - In the instant case by entering into an agreement called PCA the Government owning the hydrocarbons granted rights to the assessee company along with license for carrying on hydrocarbons operations. The business rights in the license are owned by the assessee entering into PCA and such right and license can be assigned and transferred to other parties subject to the terms and conditions of the PCA and approval of the Government. The assessee by virtue of acquisition of 20 per cent. participating interest became the member of the consortium and acquired proportionate share in rights and licenses granted by the Russian State for Sakhalin Block. By acquiring these business rights and production licenses the assessee became entitled to carryon hydrocarbon operations in the Sakhalin project In view of principle of ejusdem generis the expression any other business or commercial rights has to be read in the company of the preceding words. This rule of interpretation makes an attempt to reconcile incompatibility between the specific and general words. The first category of words like know-how patents copyright etc. forms a distinct genesis or category in as much as all those items are specific and elucidated rights of business or commercial nature. In such circumstances the expression any other business or commercial rights of similar nature also must be in the same genesis or category with specific and elucidated identity of commercial or business nature. Therefore in the light of the statutory provisions contained in s. 32(1)(ii) the commercial rights of exploration of mineral oils as acquired by the assessee fall under the expression of any other business or commercial rights of the nature similar to one of the categories i.e. licenses as stipulated in s. 32(1)(ii). The commercial rights of exploration and licenses acquired by the assessee being in the nature of intangible assets are eligible for the claim of depreciation at the rate prescribed u/s. 32(1)(ii). This right had been granted to the assessee by way of license and the assessee became owner of such right i.e. license to have an access and to carry on of business of exploration and development of mineral oil. Accordingly as per our considered view such an asset falls within the category of asset falling under s. 32(1)(ii) of the Act. Accordingly we are inclined to agree with the learned senior counsel that the assessee had acquired business and commercial right and license by making payment of Rs. 1, 559.10 crores which is in the nature of intangible assets entitled to claim of depreciation under s. 32(1)(ii) of the IT Act. In view of the above discussion assessee s claim for allowing deduction of entire expenditure is declined. The stand of CIT(A) in treating the alleged expenditure as deferred revenue expenditure and directing the AO to allow 1/19th of the expenditure during the year is also declined since there is no concept of deferred revenue expenditure under IT Act. As we have treated the expenditure as capital in nature the same is eligible for claim of depreciation at the rates prescribed for the assets falling u/s. 32(1)(ii). We direct accordingly. Disallowance on expenses incurred for purchase and evaluation of the seismic data of foreign blocks - HELD THAT - In the instant case the expenditure so incurred by the assessee is for furtherance of activities undertaken by it in the normal course of its business. The same are incurred on continuous basis for evaluation of business activities. In view of the decision of Bombay High Court in the case of CIT vs. Essar Oil Ltd. 2008 (10) TMI 387 - BOMBAY HIGH COURT such expenditure is to be allowed as revenue expenditure. Hon ble Calcutta High Court in the case of Kesoram Industries Cotton Mills Ltd. vs. CIT 1991 (3) TMI 28 - CALCUTTA HIGH COURT held that where the setting up does not amount to starting of new business but expansion or extension of the business already being carried on by the assessee expenses in connection with such expansion or extension of the business must be held to be deductible as revenue expenses. One has to consider purpose of the expenditure and its object and effect. Accordingly it was held that expenses pertaining to exploring feasibility of expansion or extension of business are revenue expenditure and not capital expenditure. The expenditure so incurred by the assessee was in the normal course of business of exploration and production of oil being revenue in nature is liable to be allowed as a deduction. Similar claim was also made by the assessee in the earlier year. We therefore direct the AO to allow the same as revenue expenditure. As we have allowed ground the alternate ground as taken by assessee becomes infructuous. Expenditure incurred on projects pending final approval - even though the said expenditure was written off in the accounts over a period of five years the AO disallowed the same. The assessee had claimed the expenses pertaining to abandoned project as revenue expenses. The expenditure incurred for this purpose was in the nature of travel cost meeting and conference expenses delegation salaries and professional fees etc. These expenditure were claimed by the assessee in its return of income in the year of its incurrence. HELD THAT - The issue under consideration is covered in favour of the assessee by the order of Bombay High Court in the case of CIT vs. Essar Oil Ltd.( 2008 (10) TMI 387 - BOMBAY HIGH COURT wherein the High Court has observed that submitting tenders and bids in the field of oil exploration is a highly sophisticated technical task for which the assessee company had to incur substantial amount of expenditure before submitting its bid. If the assessee is not successful in obtaining bid such expenditure is allowable as revenue expenditure. As the assessee was continuously in the business of exploration and production of oil the expenditure so incurred was in the normal course of its business such expenditure being revenue in nature incurred for the purpose of existing exploration and production business was required to be allowed u/s. 37(1). Similar claim was also made by the assessee in earlier years. Accordingly we direct the AO to allow the same.

Summary

Issues Involved:
1. Disallowance of depreciation and other expenses by the AO.
2. Treatment of expenditure incurred on acquiring participating interest in the Sakhalin PSA.
3. Disallowance of revenue expenses incurred on purchase and evaluation of seismic data.
4. Disallowance of revenue expenses relating to projects pending final evaluation.

Detailed Analysis:

1. Disallowance of Depreciation and Other Expenses by the AO:
The AO disallowed the claim of depreciation and other expenses made by the assessee on the grounds that the business or commercial rights under Section 32 of the IT Act are closely linked to intangible assets such as know-how, copyrights, trademarks, and franchises. The AO argued that the payment made should be for the use of intellectual property rights and not for acquiring participation rights in a license. The AO also held that accepting the claim would broaden the ambit of the section to an unreasonable extent and that commercial production had not started in the year of acquisition, making the expenditure pre-commencement.

2. Treatment of Expenditure Incurred on Acquiring Participating Interest in the Sakhalin PSA:
The CIT(A) held that the expenditure represents deferred revenue expenditure and allowed 1/19th of it. Both the Revenue and the assessee appealed this decision. The Revenue argued against allowing any part of the expenditure, while the assessee contended that the entire expenditure should be allowed or, alternatively, depreciation should be allowed under Section 32(1)(ii).

The Tribunal found that the assessee had acquired business rights and licenses, which are intangible assets eligible for depreciation under Section 32(1)(ii). The Tribunal rejected the concept of deferred revenue expenditure under the IT Act and directed that the expenditure be treated as capital in nature, eligible for depreciation at the prescribed rates.

3. Disallowance of Revenue Expenses Incurred on Purchase and Evaluation of Seismic Data:
The AO disallowed the expenses on the grounds that they were capital in nature. The Tribunal, however, found that the expenses were incurred in the normal course of business for evaluating business opportunities and should be allowed as revenue expenditure. The Tribunal referred to the decisions of the Bombay High Court in CIT vs. Essar Oil Ltd. and the Calcutta High Court in Kesoram Industries & Cotton Mills Ltd. vs. CIT, which supported the view that expenses for evaluating business opportunities are revenue in nature.

4. Disallowance of Revenue Expenses Relating to Projects Pending Final Evaluation:
The AO disallowed expenses incurred on projects pending final evaluation, treating them as capital expenses. The Tribunal found that these expenses were incurred in the normal course of business and were revenue in nature. The Tribunal referred to the Bombay High Court's decision in CIT vs. Essar Oil Ltd., which held that expenses incurred for submitting bids in oil exploration are allowable as revenue expenditure. The Tribunal directed the AO to allow these expenses.

Conclusion:
The Tribunal allowed the assessee's appeal in part, directing that the expenditure on acquiring participating interest in the Sakhalin PSA be treated as capital in nature and eligible for depreciation. The Tribunal also allowed the revenue expenses incurred on purchase and evaluation of seismic data and expenses relating to projects pending final evaluation as revenue expenditure. The Revenue's appeal was also allowed in part, rejecting the concept of deferred revenue expenditure.