2014 (6) TMI 214 - AT - Income Tax

Claim of depreciation u/s 32(1)(ii) of the Act Requisition of participating interest in oil blocks - Held that - As decided in assessee s own case in the earlier assessment year, it has been held that - The commercial rights of exploration of mineral oils, as acquired by the assessee falls under the expression of any other business or commercial rights of the nature similar to one of the category i.e. licenses as stipulated in Section 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) of the Act - It also cannot be said that the right so acquired was not an asset - If it is an asset being the right then it is obvious that same is commercial right, therefore in the nature of asset in the form of license - 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 - such an asset fall within the category of asset falling u/s 32(1)(ii) of the Act - the assessee had acquired business and commercial right and license by making payment of Rs.1559.10 crores, which is in the nature of intangible assets entitled to claim of depreciation u/s 32(1)(ii) of the IT Act as the expenditure is treated 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) of the Act Decided against Revenue. Allowability of expenses - Evaluating existing business opportunities relating to products pending for final evaluation Held that - Following CIT Vs. Essar Oil Ltd. 2008 (10) TMI 387 - Bombay High Court - 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) of the IT Act thus, the order of the FAA is upheld Decided against Revenue. Claim for allowance of risk insurance premium Held that - As decided in assessee s own case for the earlier assessment years, it cannot be denied that investment in the Sudan and expenditure incurred to take the insurance cover is a business decision - the expenditure needs to be allowed u/s 37(1) of the Act for the reason that the same is incurred in order to safeguard its business interest as it is the real beneficiary of insurance as well as investment made in the subsidiary the expenditure also falls within the meaning for the purpose of business as the appellant has earned substantial dividend from the above investment which has been offered to tax in India and therefore such expense has a direct link with the investment and also in protecting the legitimate business interest of the appellant Relying upon S.A. Builder Ltd VS CIT 2006 (12) TMI 82 - SUPREME COURT there was no infirmity in these findings of the FAA - The policy itself has been take at the specific directions given by the Govt. of India Decided against Revenue. Taxability of amount received in advance Quantity of gas sold Held that - As decided in assessee s own case for the earlier assessment years, under the mercantile system of accounting, a transaction of sale or purchase is complete only on the passing of title/risk attached to such sale or purchase from one party to another - the transaction of sale of gas was not complete in the current year as the title/risk of the gas did not pass from the appellant to the buyer in the absence of delivery - there could not be any reason for treating the advance received as a part of sale for the year - the title and risk in the gas sold passes from the seller to the buyer only when the gas sold is delivered by the seller to the buyer and not earlier the amount received by the appellant is in the nature of advance received for sale of gas, and to the extent that the sale of gas has not taken place during the year under consideration the amount of advance cannot be treated as sale and added to the income of the appellant for the current year Revenue could not controvert the factual findings of the FAA Decided against Revenue. Allowability of depreciation on UPS @ 60% - Held that - Following CIT vs. Oriental Ceramics and Industries Ltd. 2011 (1) TMI 26 - DELHI HIGH COURT - once the amount has gone out of the coffers of the assessee, the assessee would be entitled to capitalize the same - The assessee has spent the expenditure on the glow sign boards with an object to facilitate the business operation and not with an object to acquire asset of enduring nature - the expenditure was of revenue nature and the Tribunal has rightly treated the same as of revenue nature - depreciation @ 60% on UPS shall be allowed Decided against Revenue.

Summary

Issues Involved:
1. Depreciation on acquisition of participating interest under Section 32(1)(ii) of the Income Tax Act, 1961.
2. Allowability of expenditure incurred on evaluating business opportunities.
3. Allowability of risk insurance premium for safeguarding investment in a subsidiary.
4. Taxability of amounts received in advance for the sale of gas.
5. Allowability of depreciation on UPS at 60%.
6. Cross Objection regarding expenditure on acquiring participating interest as revenue expenditure.

Issue-wise Detailed Analysis:

1. Depreciation on Acquisition of Participating Interest:
The Revenue contested the allowance of depreciation under Section 32(1)(ii) for the acquisition of participating interest in oil blocks. The assessee argued that the expenditure was for acquiring business rights and production licenses, which qualify as intangible assets eligible for depreciation. The Tribunal upheld the assessee's claim, referencing prior ITAT decisions that classified such rights as intangible assets eligible for depreciation.

2. Allowability of Expenditure on Evaluating Business Opportunities:
The Revenue challenged the allowability of expenditure incurred on evaluating business opportunities. The Tribunal noted that similar expenditures were allowed in previous years under Section 37(1) of the Act. The expenses were for travel, meetings, salaries, and professional fees related to projects pending final evaluation. The Tribunal upheld the First Appellate Authority's decision to allow these expenditures as they were incurred in the normal course of business.

3. Risk Insurance Premium for Safeguarding Investment:
The Revenue disputed the deduction of Rs.22,59,81,215/- paid as a political risk insurance premium for safeguarding the assessee's investment in its subsidiary in Sudan. The Tribunal upheld the First Appellate Authority's decision, stating that the expenditure was a business decision to protect the assessee's investment and was incurred wholly and exclusively for business purposes. The policy was taken at the direction of the Government of India, and the expenditure was considered necessary to safeguard the assessee's business interests.

4. Taxability of Advances for Sale of Gas:
The Revenue argued that advances received for gas not supplied during the year should be treated as income. The assessee contended that these advances were for minimum quantities of gas under a "take or pay" agreement and should only be recognized as income when the gas is delivered. The Tribunal upheld the First Appellate Authority's decision that the advances were not taxable in the year of receipt as the sale was not complete until the gas was delivered. The Tribunal directed the Assessing Officer to verify the agreement and the actual delivery of gas.

5. Depreciation on UPS at 60%:
The Revenue contested the allowance of depreciation on UPS at 60%. The Tribunal referenced the decision of the Hon'ble Jurisdictional High Court in CIT vs. Oriental Ceramics and Industries Ltd., which supported the assessee's claim. The Tribunal upheld the First Appellate Authority's decision to allow depreciation at the rate of 60%.

6. Cross Objection on Expenditure for Acquiring Participating Interest:
The assessee filed a cross-objection claiming that the expenditure for acquiring participating interest in Sudan and Ivory Coast blocks should be allowed as revenue expenditure under Section 37(1). The Tribunal rejected this claim, following its earlier decisions that treated such expenditures as capital in nature, eligible for depreciation but not as revenue expenditure.

Conclusion:
Both the appeals filed by the Revenue and the Cross Objection filed by the assessee were dismissed. The Tribunal upheld the decisions of the First Appellate Authority on all contested issues, maintaining the allowances and disallowances as determined in the initial assessments.