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TMI Blog2008 (2) TMI 521X X X X Extracts X X X X X X X X Extracts X X X X ..... e as 'plant' as against the rate of depreciation at 10 per cent applicable to 'building' as the term 'building' is defined to include well as per Note 1 below Appendix to r. 5 of the IT Rules. (4) allowing depreciation @ 25 per cent on the capitalized value of Rs. 1,92,77,510 of gas separator and flood light mast treating the same as 'plant and machinery' as against 10 per cent allowed by the AO treating the same as 'building'. (5) allowing deduction under s. 80-IB(9) of the IT Act amounting to Rs. 3,24,95,075. (6) considering well Nos. 6 and 7 as separate undertaking and allowing deduction under s. 80-IB(9) of the IT Act. (7) in appreciating the fact that s. 80-IB(9) of the IT Act applies to an assessee who is engaged in commercial production or refining of mineral oil. whereas the assessee produces natural gas and the word 'mineral oil' does not include 'natural gas' for the purpose of s. 80-IB(9) of the IT Act." 2. In the appeal by the assessee (ITA No. 789/Ahd/2005) the grounds raised are: "The learned CIT(A)-IV, Baroda [hereinafter referred to as 'the CIT(A)'] erred on facts and in law in upholding the assessment order dt. 3rd March, 2004 issued by the learned Asstt. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hrough additional disallowance made The CIT(A) has, based on the facts of the case and in law, erred in treating the appellant as not eligible to claim any deduction under s. 42 of the Act amounting to Rs. 27,40,33,303 on the basis that the production sharing contracts do not provide for the deductibility of such expenses. The CIT(A) further, erred on the facts and in law, in enhancing the income of the appellant by Rs. 5,62,96,527 by holding to be disallowable, the deduction given by the AO under s. 42 of the Act in computing the appellant's income, on the same basis. The appellant prays that the AO be directed to allow deduction under s. 42 of the Act in respect of the expenditure incurred by the appellant amounting to Rs. 27,40,33,303 in connection with the drilling and exploration activities carried on by it. Without prejudice grounds 4.2 Error in allowing depreciation on expenditure incurred in drilling of wells Without prejudice to 4.1 above, the CIT(A) has, based on the facts of the case and in law, while allowing depreciation on the expenditure incurred on construction of wells, erred in not totalling well No. 12, which was put to use on 1st Oct., 2000, as put to use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ." 3. As regards ground No. 1 in Revenue's appeal, the facts are that the assessee paid demurrage charges of Rs. 3,56,051 during the year for late taking of delivery of the drilling equipment imported and claimed the same as deductible revenue expenditure. The AO disallowed the claim of the assessee by holding that the charges as paid were for infraction of law by not taking the delivery of certain goods within the stipulated time laid down as per rule. The CIT(A) allowed the claim by relying upon the decision of Allahabad High Court in the case of Nanhoomal Jyoti Prasad vs. CIT (1980) 123 ITR 269 (All) wherein it is held that the demurrage is a charge by way of compensation and includes amount chargeable for storage and safe custody of the goods by port authorities and it is an additional amount charged from the person for delayed clearance. It is not a fine paid to the port authorities for any criminal act but is a compensation for the use of port facilities beyond the free period allowed under the rules. 4. After hearing the parties we do not find reason to disagree with the CIT(A). For importing the drilling equipment goods at zero customs duty, essentiality certificate (EC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e course of assessment proceedings did not produce all the vouchers relating to these expenses on travelling, conveyance, welfare, miscellaneous and out of pocket expenses. The ground stated was that they were large in quantity and had been kept in so many files. Moreover, the voucher relating to these heads were found to be kept in a very disorderly manner and it was extremely difficult to find out a particular voucher for a particular expenditure and the purpose for which expenditure was incurred. Some of the journeys were not linked with the business purpose. The assessee could not satisfactorily explain as to what was the purpose of travelling. In absence of these details, the entire amount on out of pocket expenses/travelling and conveyance expenses, welfare and miscellaneous expenses were here held to be not for business purposes. The AO accordingly disallowed a sum of Rs. 10,00,000. 6. The CIT(A) reduced the disallowance to Rs. 5,00,000. He accepted the assessee contention as regards out of pocket expenses paid to auditors because as per the terms of agreement, normally, an assessee is required to reimburse out of the pocket expenses incurred and claimed by the auditors. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on him to bring all material facts on record to substantiate the claim in view of decisions of Sohan Pathak & Sons vs. CIT (1951) 19 ITR 199 (All), Lakshmiratan Cotton Mills Co. Ltd. vs. CIT (1969) 73 ITR 634 (SC), L.H. Sugar Factory & Oil Mills (P) Ltd. vs. CIT (1980) 19 CTR (SC) 185 : (1980) 125 ITR 293 (SC), CIT vs. Chandravilas Hotel (1986) 56 CTR (Guj) 182 : (1987) 164 ITR 102 (Guj), CIT vs. Southern Sea Foods Ltd. (1995) 129 CTR (Mad) 79 : (1995) 215 1TR 176 (Mad) and Assam Pesticides & Agro Chemicals vs. CIT (1998) 145 CTR (Gau) 213 (1997) 227 ITR 846 (Gau). According to him the AO was reasonable enough to disallow only Rs. 10,00,000 out of the expenses of about Rs. 234 lakhs which is about 4 per cent and deserve to be sustained. 8. The learned counsel on the other hand submitted that the AO has presumed that all expenses claimed cannot be said to be laid out for business purpose on the allegation that the relevant vouchers could not be produced; that all the aforesaid expenses have been incurred wholly and exclusively for the purposes of business of the assessee; that a reputed firm of chartered accountants has audited the financial statements of the assessee without any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are being discussed hereunder together. 11. We shall first take up the issue of deduction under s. 42, raised in the appeal of the assessee that being the principle issue. The question of allowing depreciation and that too at what rate would arise only when assessee's claim under s. 42 is found to be not maintainable. 12. The assessee claimed for deduction of a sum of Rs. 27,40,33,303 under s. 42 of the IT Act, 1961 comprising of the following amounts-(i) Rs. 25,58,865 being additions to fixed assets; (ii) Rs. 5,41,95,406 being drilling costs and exploratory delineation; and (iii) Rs. 21,72,79,032 being additions to producing properties. 13. As regards first item, the details of claim of expenditure being additions to fixed assets of Rs. 25,58,865 are: ----------------------------------------------------------------------- Description Hazira Bhandut Cambay Baroda Surat Baroda Total ----------------------------------------------------------------------- Office equipment and furnishing 66,465 3,300 4,748 1,72,827 16,904 - 2,64,244 ----------------------------------------------------------------------- Guest house equipment - - - 14,066 41,272 12,61,014 13,16,352 ------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t a far distant place. Therefore, these sums were not deductible under s. 42 of the IT Act, 1961 by the AO. He however allowed depreciation at the applicable rates on these items. 15. As regards drilling costs and exploratory delineation Rs. 5,41,95,406, the AO allowed the claim and held that the drilling and exploration work was done by Essar Ltd. and John & Co. by their own drilling rig. The assessee has paid charges for drilling and exploration work to both the companies. Therefore, the assessee's claim for deduction under s. 42 was restricted to drilling and exploration charges paid to both the companies. 16. As regards claim for deduction on additions on producing properties of Rs. 21,72,79,032 the AO held: "13.5 The amount of Rs. 21,72,79,032 claimed to be deductible under s. 42 of the IT Act, 1961 comprises the following amounts: ----------------------------------------------------------------------- Description Hazira Bhandut Cambay Baroda Surat Baroda Total ----------------------------------------------------------------------- Wells cost 14,02,49,076 4,84,907 14,07,33,983 ----------------------------------------------------------------------- Pipeline 1,50,01,484 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee being a mineral oil concern. Therefore no disallowance is made. 13.8 Land based drilling platform on which expenditure of Rs. 23,04,579 is incurred is held to be related to drilling and exploration activities and the amount incurred is deductible under s. 42 of the IT Act, 1961. 13.9 An amount of Rs. 11,36,961 has been incurred on storage/trans/other/facility and the same is claimed to be deductible under s. 42 of the IT Act, 1961 on the ground that the said expenditure relates to drilling and exploration expenditure. The assets were used for storing oil and natural gas obtained from the oil and gas field. They are not connected or related to the drilling and exploration activities. Therefore the amount of Rs. 11,36,961 incurred on storage/trans/other/facility is held to be not deductible under s. 42 of the IT Act, 1961. It is accordingly disallowed. However, the assets used being plant and machinery are entitled to depreciation @ 25 per cent. Accordingly depreciation of Rs. 2,84,240 is allowed. 13.10 The assessee has incurred expenditure of Rs. 7,39,710 on land. It has not been established that land has got any connection with drilling and exploration activities. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , he held that only sub-cl. (b) would apply. He then referred to s. 42(1) with sub-cl. (b) and saw that for the purpose of allowing deduction/allowances in addition to the allowances admissible in other sections of this Act, the conditions to be satisfied are: (1) There should be an agreement of the person with Central Government (and agreement should be laid on the table of each house of the Parliament); (2) Only such allowances are allowed which are specified in the agreement, (3) Such specified allowances should be in relation to the expenditure incurred in respect of drilling or exploration activities or services or in respect of physical assets used in that connection and (4) Such allowances shall be computed and made in the manner specified in the agreement. Therefore, he concluded that firstly, there should be an agreement, of the assessee with the Central Government and the assessee has entered into agreement with the Central Government in respect of various fields, named as production sharing contracts (PSC); the second basic condition is that only those allowances are allowed which are specified in the agreement and that these allowances should be in relation to various s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords "including s. 42 of the IT Act", thus, making the phrase "as reduced by deduction allowable under the Act including s. 42 of the Act" even then one will have to revert back to s. 42 itself and thus, no additional allowance can be allowed to be deducted by virtue of s. 42, over and above, the normal allowance allowable under other section of the Act. He further observed that the aforesaid gets further fortified from the fact that not only these allowances should be specified in the agreement, but even the computation of such allowances has to be made in the manner specified in the agreement. The same is quite clear from the phrase used below sub-cl. (c) of s. 42(1), namely: "...and such allowances shall be computed and made in the manner specified in the agreement". He accordingly held that no such allowance which is allowed as deduction under s. 42 can be computed, in absence of manner of computation being specified in the agreement. 20. The contention of the assessee that s. 42 is an incentive provision for the concerns engaged in extraction and production of mineral oil and accordingly, it should be interpreted liberally and that the Supreme Court has held that where the pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the statute has to be read plainly and normally, to be read from the context in which they have been used. The rule of interpretation has only to be used when there is any doubt with regard to the express language used in the provision. In the instant case of the assessee, there is no any doubt in the language used in s. 42(1) of the IT Act as well as in PSC. The language used is quite unequivocal and there is no scope of any double interpretation. The principle of liberal interpretation has to be applied, even if it were to apply, it should not be to do violence to the plain language of the Act. 21. The argument of the assessee that when the plain interpretation produces a manifestly unjust result, the Court might modify the language was also rejected because in the instant case, the language of the statutory provision is not creating any unjust result. In fact the language of the provision namely, s. 42 is quite clear and unequivocal, inasmuch as that only those allowances are to be allowed which are specified in the agreement entered into by the assessee with Central Government. In fact PSCs do not specify any allowance and accordingly, no deduction can be allowed under s. 42. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all available to M/s GSPCL or not. Without prejudice to above, it may be mentioned that no detailed discussion has been done by the learned CIT(A) in the case of M/s GSPCL in relation to the basic issue of allowability of deduction under s. 42. In fact CIT(A) has discussed the allowability of specific expenditure with reference to the fact whether same can be considered as drilling and exploration expenses or not and is thus covered under cl. 'b' of s. 42(1) and not the basic issue whether all these expenses have been specified in the argument, which is a prerequisite before proceeding further to examine whether these expenses are part of drilling or exploration expenses." 23. Claim under s. 42(1): The learned counsel of the assessee submitted that agreements provide for the manner of deduction of expenditure; that s. 42 applies as the assessee is engaged in extracting mineral oil and the Government is a party to the agreement; Hazira agreement was tabled on the floor of the house, though for other agreements no information is available; and that the manner of expenditure is provided in the agreements and he referred to in this connection arts. 15, 24, Annex. 'c'. The CIT(A) r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 73, gas separator Rs. 1,87,92,603, and flood light mast Rs. 4,84,907. The expenditure of Rs. 12,14,56,473 is 1/3rd share of the assessee of Rs. 36,34,52,591 and was incurred in the course of drilling natural gas/oil wells below the ground at depths varying between 1,000 to 2,000 meters, and therefore wrongly disallowed by AO. Sec. 42 of the Act allows deduction for, inter alia, "drilling or exploration activities or services or in respect of physical assets used in that connection" in lieu of depreciation which would have otherwise been allowable on such expenditure. The terms "drilling" and "exploration" are not defined in the Act and there be understood on the industry practices, governing business laws, and relevant guidance notes for accounting, etc. Drilling is the core activity in the oil and gas producing industry. Oil and gas are contained in the pore spaces of a reservoir rock. Reservoir rocks are located in millions of layers in the earth and the seabed Drilling is required to explore (or discover) as well as extract such oil and gas. The drilling can be of two types: (i) Exploratory drilling for the purpose of searching for undiscovered oil and gas accumulations on any g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd bit when the pre-set depth (any where from a few hundred to a couple-thousand feet) is reached. 26. Para 8 of the Guidance Note on Accounting for Oil and Gas Producing Activities issued by the ICAI ("the Guidance Note") is referred to defining the exploration activities as: "Exploration activities cover the prospecting activities conducted in the search for oil and gas. In the course of an appraisal programme these activities include but are not limited to aerial, geological, geophysical geochemical, palaeontological, palynological, topographical and seismic surveys, analysis, studies and their interpretation. Investigations relating to the subsurface geology including structural test drilling, exploratory type stratigraphic test drilling, dulling of exploration and appraisal wells and other related activities such as surveying, drill site preparation and all work necessarily connected therewith for the purpose of oil and gas exploration." Para 9 of the Guidance Note deals with exploration costs as: "principal types of exploration costs cover all direct and allocated indirect expenditure which include depreciation and applicable operating costs of related support equipment and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercial production, to expenditure incurred by the assessee, whether before or after commercial production, in respect of drilling and exploration activities or services or in respect of physical assets used in that connection, (c) .........., and such allowances shall be computed and made in the manner specified in the agreement, the other provisions of this Act being deemed for this purpose to have been modified to the extent necessary to give effect to the terms of the agreement." 29. On a close reading of this section, we find that the deduction under this section is allowed for computing the profits and gains of the business of prospecting for or extracting or production of mineral oil, in relation to which, the Central Government has entered into an agreement. Only such deductions are allowed under s. 42(1) as are specified in the agreement and that also when they fall in any of the sub-cl. (a), (b) or (c) of s. 42(1). Sub-cl. (a) applies to an activity prior to beginning of commercial production and sub-cl. (b) applies to the situation, after the beginning of commercial production. Sub-cl. (c) applies to allowance in relation to depreciation on mineral oil in the year wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ains or receipts from petroleum operations as reduced by the allowable deductions." 32. This article provides as to how the profits and gains of a company consisting of petroleum operations shall, for the purpose of levy of income-tax under the IT Act, 1961 be computed. It is on the basis of the value determined in accordance with art. 18, of its participating interest share of crude oil produced and saved and sold, or otherwise disposed of, from the contract area and from any revenue realised on the same or disposal of associated or non-associated natural gas referred to in art. 20 as well as any other gains or receipts from petroleum operations as reduced by the allowable deductions. The assessee submits that the phrase used in above article is "allowable deductions". It is to be read as "allowable deductions under the Act including s. 42 of the Act". We are afraid, it cannot be read like that because the PSC is an agreement between the Government of India and assessee and GSPCL and was laid/to be laid on the table of both the houses of Parliament. It being a legal document, no word or phrase can be added. It has to read as it is. Accordingly, the CIT(A) is right in not acceptin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made in lieu of, or in addition to, the allowances admissible under this Act, such allowances as are specified in the agreement in relation". Nothing is specified in the agreements and, therefore, deduction under s. 42 would not be granted for any expenditure except that is allowable under the Act otherwise. 36. An expenditure on storage, transportation and other facilities is more relatable to the production and/or sale rather than exploration and drilling. Exploration is an activity carried out to find out the possibility of oil/gas by collecting geological data and seismic survey etc. and thereafter the drilling is done at a place where probability of finding the oil/gas is comparatively high. At the time of exploratory drilling, these facilities have hardly any role to play. Similarly, the land in question was taken by the assessee basically as a passage to the oil field land and also to have its supporting structure including building. This is quite separate from the land allotted by the Government for the purpose of drilling the oil/gas well. Accordingly, this land and building has no exploratory drilling activity. 37. The contention that s. 42 is an incentive provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has allowed but that does exonerate the assessee from complying with the requirement in these agreements appearing in this year. The letters exchanged between two Departments of the Government to this effect also do not help the assessee as they only requested for clarification and nothing more. No action taken thereon for a long time might be indication or an impression otherwise. It only proves that while entering into these contracts with the assessee and GSPCL, the Central Government at that time have not thought it fit to provide special deduction under s. 42 of IT Act and therefore, no benefit thereof can be given in the circumstances. A plain reading of the statute is not producing any mainfestly unjust results and accordingly, there is no merit in reading down or modifying the language of the statutory provisions. We, therefore, hold that the CIT(A) is right in denying the claim of the assessee and in holding that the assessee is not entitled to any deduction under s. 42. 40. As before the CIT(A), the assessee before us also raised a contention based on discrimination on the basis of Canada tax treaty that the assessee cannot be subjected to a more burdensome basis of ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... installed which is known as "installing the christmas tree". The wells are drilled below the ground to extract the gas from its natural reserves in the various layers of the earth. When the drill bit becomes worn out or damaged, entire drill pipe has to be removed by the process known as "tripping out". 45. Claim of the assessee is that it incurred expenditure of Rs. 12,14,56,473 on drilling tangibles and services towards drilling wells below the ground. It claims that in the business of mineral oil, which is extracted from the earth, the only way to access the natural resources and extract the same is through drilling a well. It is stated that the 'well' is thus the fundamental apparatus for production of mineral oil and hence qualifies as a 'plant'. The term 'plant' is defined in s. 43(3) of the Act by way of an inclusive definition and is intended to include not only those items which are commonly known as plant but also those which are enumerated therein. The assessee treated it as a plant and claimed depreciation @ 100 per cent on the cost on drilling the wells as per Entry III (3)(ix)(b) of the Appendix I of the IT Rules, 1962. It claimed that it would have been impossible f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, it is held, it could not be regarded as building. The ratio is squarely applicable to the case of the assessee as there is no construction other than the well and hence the same cannot be regarded as building by any stretch of imagination. The assessee thus claimed that 100 per cent depreciation be allowed on the capitalised value expenditure of Rs. 12,14,56,473 on drilling of wells. 47. The view of AO is that the well constitutes building. It is specifically included in the definition of building given as per Note No. 1 below Appendix I of IT Rules, 1962 which includes both well and a tube well in the definition of the building. 48. The CIT(A) held that oil well is undisputedly a specialised kind of well unlike normal water well; that even at the time of boring or drilling the well, drilling fluid or drilling mud is constantly circulated down the well bore; that after every 30 ft., as the hole is deepened, the joint of drill pipe is added by a process known as mouse hole connection; that when the drill bit becomes worn out or damaged, entire drill pipe was to be removed by the process known as "tripping out" that afterwards casing of stainless steel was set for the completion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... situation, depreciation on these wells is allowable @ 50 per cent, as these have been used for less than 180 days during the previous year relevant to asst. yr. 2001-02. The cost of well Nos. 8, 12, 13 and 14 as shown during the assessment proceedings is Rs. 1,41,88,962, Rs. 2,05,26,337, Rs. 1,67,94,696 and Rs. 1,60,78,880 respectively totaling to Rs. 6,75,88,875. Accordingly, only 50 per cent of the above being Rs. 3,37,94,437 would be allowed and balance amount was to be disallowed for the year under consideration in respect of aforesaid four wells. 50. The submission of CIT-Departmental Representative is that the CIT(A) is wrong in allowing depreciation at 50 per cent of Rs. 6,75,88,875 on these wells by treating them as plant under sub-cl. (b) of cl. (ix) of item No. III (3) of Appendix I. According to him the AO was right in allowing 10 per cent depreciation on well cost of Rs. 14,07,98,333 by treating them as building as per Note No. 1 below Appendix I of IT Rules, 1962. He submitted that when the well has been specifically included in the buildings, there is no need to refer to the interpretation of the meaning of the well and to be treated as plant. The CIT(A) has not exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue whether tube well is a plant but whether the expenditure on tube well is a capital or revenue. 53. The learned Departmental Representative in reply submitted that link to building theory as propounded by the learned counsel fails in the case of a bridge included in the definition of "building" and, therefore, the definition cannot be restricted to the items connected only with the building. 54. Our finding: Sec. 32 prescribes 4 broad categories of assets for granting depreciation. These are: (i) buildings, (ii) machinery, (iii) plant, and (iv) furniture. The depreciation is allowed on these various assets as per rates prescribed in the IT Rules Appendix 1. The term building is not defined in the Act, though now it stands defined in Appendix 1 to the Rules as including 'roads' 'bridges' 'culverts' wells' and 'tube wells' by the IT (Fourth Amendment) Rules, 1983 w.e.f. 1st April, 1983. In Webster's New International Dictionary a building is defined to mean "that which is built specifically: As now generally used, a fabric or edifice, framed or constructed, designed to stand more or less permanently and covering a space of land for use as a dwelling, storehouse, factory, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as a plant. The functional test is whether a structure is used for carrying on the business and hence a tool of the trade or whether it is only the place of business in which the business is carried on. Cold storage, silos and well are such of the items which have been interpreted to fall within the term "plant". 56. To determine as to whether an asset is a 'plant', the Supreme Court in the case of Scientific Engineering House (P) Ltd. lays down certain tests. These are: "Does the article fulfil the function of a plant in the assessee's trading activity? Is it a tool of his trade with which he earned on his business? If this answer is in the affirmative, it will be a plant". The Supreme Court also referred to the material passage from the speech of Lindley J., in Yarmouth us. France (1887) 19 QBD 647 where a carthorse was held to be a plant by observing: "...that plant would include any article or object fixed or movable live or dead used by a businessman for carrying on his business and it is not necessarily confined to an apparatus which is used for mechanical operations or processes or is employed in mechanical or industrial business". 57. Applying these functional tests, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1981) 132 ITR 540 (MP)] because construction of metal roads for hauling compost cannot be an expenditure on plant and machinery. 59. The view of the AO that a well constitutes a building in a mineral oil concern may also be not wrong, if we see it with the definition of a building which includes a well and a tube-well within its meaning. In CIT vs. Gwalior Rayon Silk Manufacturing Co. Ltd. the road was held to be a building and the view was supported by the amendment in the Rules. The Court observed "While enacting the IT (Fourth Amendment) Rules, 1983, the rule making authority accepted this interpretation" consistently laid down by various High Courts that building includes roads and also elongated bridges, culverts, wells and tube-wells as building but, prescribed fixed rates of depreciation setting at rest the variable rates claimed by the assessee. Rules validly made have the same force as the sections in the Act. The contention of the respondents that unless the Act itself is amended, the Rules would not cut down the meaning of the word "building" is without substance. The inclusive definition of "building" to include roads, etc., enlarges the scope of s. 32 and does not whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he basis of the Supreme Court decisions in Getti Chettiar and Tirath Ram Ahuja would not assist us in taking a view and holding that a gas oil well is a plant in contradiction to its specific inclusion in the term 'building'. 63. In N.S. Getti Chettiar the Supreme Court dealt with the term 'transfer' of property in s. 2(xxiv). The Court observes that cl. (xxiv) enumerates several types of transfers and not to any other transactions; that it is also necessary to attach significance to the words "or other alienation of property" immediately after setting out the various types of transfers; that if we read the clause as a whole, it is clear that it deals with transfer of properties in various ways. The Court also noted the observations in Craies on Statute Law (Sixth Edition, p. 213), to the effect that an interpretation clause which extends the meaning of a word does not take away its ordinary meaning. An interpretation clause is not meant to prevent the word receiving its ordinary, popular and natural sense whenever that would be properly applicable, but to enable the word as used in the Act, when there is nothing in the context or the subject matter to the contrary, to be applied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te. He becomes entitled to a share in the family property only after the partition. Therefore, there is no question of his either diminishing directly or indirectly the value of his own property or of increasing the value of the property of anyone else. The 'transaction' referred to in cl. (d) of s. 2(xxiv) takes its colour from the main clause, viz., it must be a transfer of property in someway. This conclusion of ours gets support from sub-cls. (a) to (c) of cl. (xxiv) of s. 2, each of which deals with one or the other mode of transfer. If Parliament intended to bring within the scope of that provision partitions of the type with which we are concerned, nothing was easier than to say so. In interpreting tax laws, Courts merely look at the words of the section. If a case clearly comes within the section, the subject is taxed and not otherwise." 64. Similarly in Jagatram Ahuja vs. CCT (2000) 164 CTR (SC) 1 : (2000) 246 ITR 609 (SC) again it is held that in an unequal distribution of assets between the partners there is no transfer in general law and therefore s. 2(xxiv)(d) would not apply. 65. The assessee dug the well and put steel pipes therein to reach the reservoirs of oil an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d considered the rival submissions. The gas separator separates the gas and oil from the mix and is thus a machine used for the production of natural gas and as the name suggests, it has to be a plant. 'Flood light masts' is used to provide lighting at the field site to help in the production activity and would be similarly a part of plant and machinery. In any case, same has not been separately classified and included in the term 'building' in Appendix I of IT Rules the same cannot be considered as building. In view of these facts and circumstances the same is considered as plant. Accordingly, we hold that the CIT(A) is right in allowing depreciation on gas separator and flood light masts @ 25 per cent and in directing to allow half of the allowable depreciation as the assessee has not furnished the dates of installation of these two assets if the AO found that these have been installed and have been put to use for less than 180 days. 70. In the appeal of the assessee (ground No. 4.1) these expenditure along with others were claimed and allowed as deductible under s. 42, but the CIT(A) held them not allowable as the assessee, according to him, did not satisfy the condition laid t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in view of these facts, the depreciation cannot be allowed on expenditure incurred on dry well. He held that it was a capital expenditure not allowed to be deducted under any provisions of the Act. He also mentioned that such type of expenditure has been considered to be allowable under s. 42 of the IT Act as the assessee is engaged in the business of prospecting for or production of mineral oils, provided the various conditions stipulated in s. 42 are satisfied. Accordingly, it would lead to very anomalous situation and will also be totally unjust, as such type of expenditure was not infrequent for the mineral oil concerns. However as discussed in the earlier paras, the assessee is not entitled to deduction under s. 42. Here in the case of the assessee, incidentally the aforesaid amount of expenditure on dry well is not allowable under any of the section of IT Act. 74. The assessee submitted that well No. 12 was installed on 1st Oct., 2000. It was found to be an unproductive well and, therefore, assessee wrote it off. It is contended that (i) it is revenue expenditure because the oil is stock-in-trade; (ii) if oil were found, it would have been a plant and (iii) it was used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r s. 42. The CIT(A) found that the assessee has reclaimed the sea bed and this land based drilling platform has been constructed about 1-1/2 to 2 kms. inside the sea; that on this platform, having area about 2 sq. kms. well Nos. 8 to 23 have been drilled (till the year under consideration well Nos. 8 to 15 have been drilled). This platform supports the various wells; that this platform has been prepared by highly specialized technical expertise and therefore, it is clear that the aforesaid amount included not only amount of expenditure incurred on platform itself but also on the approach road/path developed to reach to the platform. According to him at least, the approach path/road cannot be considered to be plant. He therefore allowed depreciation @ 10 per cent on the expenditure incurred on approach path/road. He further noted that expenditure of Rs. 23,04,579 consisted of expenditure of escape bridge of Rs. 14,93,855 and expenditure on bituman road on causeway of Rs. 8,10,724, both being related to the approach path to the land based drilling platform and accordingly, he allowed depreciation @ 10 per cent as building. He thus rejected the claim of the assessee and he confirmed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etting the claim of deduction under s. 42 and as that was not allowed, the ground was taken in the appeal before the CIT(A). The assessee filed the details of deduction before the CIT(A) who sent the details to AO for examination, scrutiny and his comments. 82. Preliminary objection was raised by the AO in his report for entertaining the ground by the CIT(A) mentioning in the report as under: "The assessee company has filed its return of income on 30th Nov., 2001 for year 2001-02 declaring total income of Rs. 11,02,58,873. In this return, or in the computation of income, the assessee has not claimed any deduction under s. 80-IB(9) of the Act. The assessee has filed a revised computation vide letter dt. 6th Jan., 2004 to recalculate MAT credit due to completion of assessments of past years. No claim under s. 80-IB is made in the revised computation of income also. However, the assessee mentioned in its letter dt. 8th Dec., 2003 as under: 'As you are aware, Niko has commenced commercial production on some of the wells after 1st April, 1997. Each well being a separate undertaking, Niko reserves its right to claim deduction in respect of profits derived from such wells under s. 80-I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee which should not be allowed by observing as under: "12.5 I have considered the argument taken by the appellant and also the objections raised by the AO. It is undisputed that the appellant had requested the AO for reserving its rights for making claim under s. 80-IB, which was not made considering that appellant may get deduction under s. 42 of the IT Act. There was reasonable cause before the appellant for quantifying the claim under s. 80-IB for the first time before the CIT(A), though, the intention to claim the deduction was already put up and made known to the AO during the assessment proceedings. The AO was given opportunity by the undersigned to examine the claim of the appellant regarding deduction under s. 80-IB and furnish his report. It may be mentioned that the appellant has not taken any additional ground before the CIT(A) but this ground was included in the appeal originally filed before the CIT(A). Thus, it is not a new ground taken by the appellant. In view of the facts and circumstances of the case, it is held that the claim of the appellant under s. 80-IB is required to be decided on its merits and same is, not ab initio rejected." 84. The learned CIT-Dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prior to 1st Apri1, 1997. The AO .......... computing deduction under s. 80-IB of the Act..... (These re-extracts of statement of facts and not grounds as stated by the CIT-Departmental Representative)". 86. He further submitted that the language used in the ground of appeal is basically wrong as-(a) no claim was made before the AO; (b) no P&L a/c and balance sheet was filed for the claim; (c) no audit report in Form No. 10CCB was filed which is a primary condition to entertain claim under s. 80-IB; (d) the assessee has not filed everything, nor satisfied all the conditions and the AO is also not satisfied with the claim; (e) an audit report is not furnished along with the return, which is mandatory to be filed. Even if the furnishing of audit report during assessment proceedings is deemed to be declaratory, then also the audit report should be filed before the completion of assessment; and (f) the claim cannot be allowed on reserving or dereserving any right but allowed on fulfilment of conditions laid down in the provisions of the Act as before the AO the assessee made only a plea that it reserves the right to claim exemption under s. 80-IB(9) in respect of the well which bega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ); Tara Devi Goenka vs. CIT (1980) 122 ITR 14 (Cal); CIT vs. Jay Textile Mills (1981) 21 CTR (P&H) 115 : (1981) 128 ITR 480 (P&H); and Bay Nath vs. CIT (1981) 132 ITR 7 (P&H), wherein it is held that me CIT(A) is vested with the power of making further enquiry in the matter and allow the assessee to produce additional papers or additional evidence. It was also submitted that the AO is fastened with the responsibility of drawing attention of the assessee to claims/relief which an assessee is entitled to in the course of assessment proceedings vide Circular No. 14 (XL -35), dt. 4th April, 1955 of CBDT. Accordingly, even if the assessee had not claimed the deduction, it was to be entertained. The Supreme Court decision is also referred to, which had the occasion to comment on the circular in the case of CIT vs. Mahendra Mills observing to the effect that the circular imposes a duty on the officers of the Department to assist the taxpayers in every reasonable way, particularly in the matter of claiming and securing relief. 89. We have heard the parties and considered the rival submissions. The assessee did put a note in the return of income reserving a right for making claim under s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaking H-2. The undertaking H-2 has commenced commercial production on 27th Aug., 1998 and hence it is eligible for deduction under s. 80-IB(9) of the IT Act. It is further submitted that the undertaking H-2 comprises of well Nos. 6 and 7. The assessee has submitted a copy of letter dt. 25th Feb., 1997 from the Director General of Hydrocarbons, New Delhi regarding permission of drilling well No. 6. The assessee has further submitted the production details of different wells for the financial year 1998-99 wherein it is mentioned that in the month of August, 1998 the production of natural gas of 395.958 (standard cubic meter) in well No. 6 and in well No. 7 in the month of September, 1998, 53.474 (s.c.m) natural gas was produced. The assessee has submitted the figures of yearly production of natural gas from well Nos. 6 and 7 for the financial years 1998-99 and 2000-01 also. The assessee has contended that the word mineral oil includes petroleum and natural gas as defined in s. 44BB of the IT Act but this definition is relevant only for that section, the word mineral oil has not been defined in s. 80-IB(9) and therefore, it has to be understood in the common parlance. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... phrase used in other sub-sections of 80-IB, namely, sub-ss. (4) and (5), as applicable to other businesses where the phrase used is "the amount of deduction in the case of an industrial undertaking". 92. The CIT(A) in view of meaning given to the term 'undertaking' as held by the Supreme Court decisions of Textile Machinery Corporation Ltd. vs. CIT 1977 CTR (SC) 151 : (1977) 107 ITR 195 (SC), CIT vs. Indian Aluminium Co. Ltd. (1977) 108 ITR 367 (SC) and CIT vs. Orient Paper Mills Ltd. (1989) 176 ITR 110 (SC); held that each well or a cluster of wells is a physically separate independent unit, which existed on its own as a viable unit capable of earning income would be an undertaking by itself; that each well has got substantial investment and therefore resulted in the creation of separate, distinct and new undertaking; that the total capital investment in undertaking H2 is to the tune of Rs. 3.44 crores and H3 to the tune of Rs. 30.22 crores as on 31st March, 2001; that each well produced revenue independently; that the undertaking H2 produced marketable quantity of gas and generated revenue on its own; that operation of undertaking H2 was not affected by other wells in the field ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncludes petroleum and natural gas, as per s. 3(b) of the aforesaid Act; that similarly, as per Oil Industries Development Act, "mineral oil" includes petroleum and natural gas as per s. 3(h) of aforesaid Act; that opinion of the Attorney General as mentioned in the case of Dy. CIT vs. Schlumberger Seaco Inc. (1995) 51 TTJ (Cal) 72 : (1994) 50 ITD 348 (Cal) also so stated that petroleum and natural gas are mineral oils. He therefore held that mineral oil includes natural gas and accordingly, the assessee is also covered under s. 80-IB(9) for deduction. He also noted that in the case of M/s Gujarat State Petroleum Corporation Ltd. (asst. yr. 2001-02), who is a joint venture partner of the assessee in relation to all the five PSCs, the learned CIT(A), Gandhinagar has held that the assessee is entitled to deduction under s. 80-IB. 94. To quantify the deduction he noted that the assessee's working of deduction under s. 80-IB amounted to Rs. 3,85,73,368 wherein he found that though the production expenses and the revenue has been taken on the basis of actual sales related to each undertaking, the administrative expenses have been divided on the basis of investment made in each undertaki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of s. 80-IB(1) applicable to the eligible business and not to the individual wells. The assessee on its own benefits treated combination of wells as three separate industrial undertakings because it started commercial production before 1st April, 1997 and thus in H-1 cluster it included well Nos. 1 to 5, in H-2 cluster well Nos. 6 and 7 and in H-3 cluster well Nos. 8 to 15 (later 8 to 23). He further submitted that while deciding the issue of wells as separate undertakings, the CIT(A) has not examined whether the wells are separate units or not. This issue has been examined by the AO for the asst. yr. 2003-04. The finding of AO has been reproduced by the CIT(A) in his appellate order for asst. yr. 2003-04 which order is available in Appeal Nos. 97 and 412/Ahd/2007 filed by the Department as well as assessee in January, 2007. These are: (a) That the explored gas from wells in being carried through a common pipeline into a separator plant. There is no separate unit for processing and selling for each well separately; (b) Gas merges in common pipeline for carrying it to the plant for processing and selling. At the time of processing and selling, there are no well-wise or undertakin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petroleum and natural gases"; vii) the legislature restricted the meaning of mineral oil only to those sections specifically which show that the legislature did not want it to be generally applied. 97. He also mentioned that this issue was examined by the CIT(A) while deciding the case of the assessee for the asst. yr. 2003-04 and referred to the relevant discussion in paras 7.20 to 7.26 pp. 66 to 76. He relied on the finding of the CIT(A) that mineral oil does not include natural gases and assessee will not be entitled for deduction under s. 80-IB as the assessee has produced the natural gases and not mineral oil. 98. Submissions of assessee as advanced by learned counsel of the assessee Shri S.E. Dastur, on the other hand, are that the CIT(A), in asst. yr. 1983-84, accepted that the assessee complied with the conditions and allowed the deduction but disallowed only on the ground that it was not producing mineral oil. Referring to the various parts of the section he submitted that sub-s. (3) provides deduction for 25 per cent to an industrial undertaking for 10 years; sub-s. (4) provides 100 per cent deduction to an industrial undertaking for five years if the industrial undert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Textile Machinery Corporation Ltd.; Indian Aluminium Co. Ltd. as well as the Government approval. He submitted that the assessee is an operator with a joint venture with Gujarat Gas Company having 33 per cent and 1/3rd share of profit. He then referred to the decision of the Madras High Court in the case of CIT vs. Premier Cotton Mills Ltd. (1999) 154 CTR (Mad) 538 : (1999) 240 ITR 434 (Mad), the decision of Bombay High Court in the case of CIT vs. Associated Cement Companies Ltd. (1979) 118 ITR 406 (Bom), the decision of Patna High Court in the case of CIT vs. Hindusthan Malleables & Forgings Ltd. (1991) 191 ITR 70 (Pat) and the decision of Bombay High Court in the case of CIT vs. Metropolitan Springs (P) Ltd. (1991) 95 CTR (Bom) 265 : (1991) 191 ITR 288 (Bom). 100. He further submitted that the same business theory will not deprive the claim because an assessee may have many businesses which may be or may not be same business. An undertaking does only one business which is a separate from the assessee. In this connection he relied upon the decision of Karnataka High Court in the case of International Instruments (P) Ltd. vs. CIT (1979) 9 CTR (Kar) 291 : (1980) 123 ITR 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of s. 9(1)(vii). He then referred to the decision reported as 1988 SOT 631, 641-42, wherein also it is held that mining included natural gas for the purpose of s. 9(1)(vii). He then referred to a decision of Madras High Court wherein the deduction is granted to meter for the four entry of electricity and the decision of Supreme Court in the case of CIT vs. Nirlon Synthetic Fibres & Chemicals Ltd. (1981) 22 CTR (SC) 130 : (1981) 130 ITR 14 (SC). 103. It is submitted that if the issue is considered with reference to the assessee, it could be said that it had started production before 1st April, 1997 but what s. 80-IB requires is the start of the production by an undertaking and not by the assessee. The assessee has many undertakings which are independent and separate undertakings by themselves. The undertaking H1 consisting of well Nos. 1 to 5 had started production before 1st April, 1997 but undertaking H2 consisting of well Nos. 6 and 7 for which the assessee has claimed deduction has started production in August-September 1998. The term 'undertaking' has to be construed as distinct from the 'assessee'. Unit H2 is a separate undertaking since it is a physically separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with petroleum industry practice and approved by the management committee of the Government as the case may. Thus the assessee can only operate from the specified territory of the Contract area. 107. It is further submitted that the Supreme Court held in the case of Indian Aluminum that the proximity between the new undertaking and the old undertaking is held could not be the basis for denial of benefits to the new undertaking. The view of the AO that undertaking should be considered as a whole and not unit-wise is contrary to the circular of the CBDT No. F. No. 15/5/63 - IT(AL), dt. 13th Dec., 1963 in which "the Board" agrees that the benefit of s. 84 of the IT Act, 1961 attaches to the undertaking and not to the owner thereof. The successor will be entitled to the benefit for unexpired period of five years provided the undertaking is taken over as a running concern, and also the Circular No. 281, dt. 22nd Sept., 1980 stating that "In computing the quantum of 'tax holiday' profits in all cases, taxable income derived from the new industrial units, etc., will be determined as if such unit were an independent unit owned by an assessee who does not have any other source of income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of any such industrial undertaking as is referred to in s. 33B, in the circumstances and within the period specified in that section; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India: Provided that the condition in this clause shall, in relation to a small scale industrial undertaking or an industrial undertaking referred to in sub-s. (4) shall apply as if the words "not being any article or thing specified in the list in the Eleventh Schedule" had been omitted. Explanation 1: For the purposes of cl. (ii), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely: (a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) such machinery or plant is imported into India from any count ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived from such industrial undertaking for five assessment years beginning with the initial assessment year and thereafter twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from such industrial undertaking: Provided that the total period of deduction doe& not exceed ten consecutive assessment years (or twelve consecutive assessment years, where the assessee is a co-operative society) subject to fulfilment of the condition that it begins to manufacture or produce articles or things or to operate its cold storage plant or plants during the period beginning on the 1st April, 1993 and ending on the 31st March, 2002: Provided further that in the case of such industries in the North-Eastern Region, as may be notified by the Central Government, the amount of deduction shall be hundred per cent of profits and gains for a period of ten assessment years, and the total period of deduction shall in such a case not exceed ten assessment years. (5) The amount of deduction in the case of an industrial undertaking located in such industrially backward districts as the Central Government may, having regard to the prescribed guidelines, by n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of deduction in the case of any hotel shall be- (a) fifty per cent of the profits and gains derived from the business of such hotel for a period of ten consecutive years beginning from the initial assessment year as is located in a hilly area or a rural area or a place of pilgrimage or such other place as the Central Government may, having regard to the need for development of infrastructure for tourism in any place and other relevant considerations, specify by notification in the Official Gazette and such hotel starts functioning at any time, during the period beginning on the 1st April, 1990 and ending on the 31st March, 1994 or beginning on the 1st April, 1997 and ending on the 31st March, 2001: Provided that nothing contained in this clause shall apply to a hotel located at a place within the municipal jurisdiction (whether known as a municipality, municipal corporation, notified area committee or a cantonment board or by any other name) of Calcutta, Chennai, Delhi or Mumbai, which has started or starts functioning on or after the 1st April, 1997 and before the 31st March, 2001: Provided further that the said hotel is approved by the prescribed authority for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of any company carrying on scientific research and development shall be hundred per cent of the profits and gains of such business for a period of ten consecutive assessment years, beginning from the initial assessment year, if such company- (i) is registered in India; (ii) has its main object the scientific and industrial research and development; (iii) is for the time being approved by the prescribed authority at any time after the 31st March, 2000 but before the 1st April, 2003; (iv) fulfils such other conditions as may be prescribed; (9) The amount of deduction to an undertaking which begins commercial production or refining of mineral oil shall be hundred per cent of the profits for a period of seven consecutive assessment years including the initial assessment year: Provided that where the undertaking is located in North-Eastern Region, it has begun or begins commercial production of mineral oil before the 1st April, 1997 and where it is located in any part of India, it begins commercial production of mineral oil on or after the 1st April, 1997: Provided further that where the undertaking is engaged in refining of mineral oil, it begins refining on or after the 1s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it begins to operate such business on or after the 1st April, 2001. (12) Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger- (a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and (b) the provisions of this section shall, as far as may be, apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place. (13) The provisions contained in sub-s. (5) and sub-ss. (7) to (12) of s. 80-IA shall, so far as may be, apply to the eligible business under this section. (14) For the purposes of this section.- (a) "cold chain facility" means a chain of facilities for storage or transportation of agricultural produce under scientifically controlled conditions including refrigeration and other facilities necessary for the preservation of such produce; (b) "hilly area" mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this behalf by notification in the Official Gazette; (g) "small-scale industrial undertaking" means an industrial undertaking which is, as on the last day of the previous year, regarded as a small-scale industrial undertaking under s. 11B of the Industries (Development and Regulation) Act, 1951 (65 of 1951)." 110. On a close reading of the provisions we notice that sub-s. (1) of s. 80-IB provides for the deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section where the gross total income of an assessee includes any profits and gains derived from eligible business referred to in sub-ss. (3) to (11) and (11A). The deduction is to be in accordance with and subject to the provisions of this section. 111. Sub-s. (2) provides that this section applies to any industrial undertaking which fulfils all the following conditions, namely;-(a) it is not formed by splitting up, or the reconstruction, of a business already in existence (except in respect of an industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment years where the assessee is a co-operative society) beginning with the initial assessment year on fulfilment of the conditions that: (i) it begins to manufacture or produce, articles or things or to operate such plant or plants at any time during the period beginning from the 1st April, 1991 and ending on the 31st March, 1995 or such further period as the Central Government may; by notification in the Official Gazette, specify with reference to any particular undertaking; (ii) where it is an industrial undertaking being a small scale industrial undertaking, it begins to manufacture or produce articles or things or to operate its cold storage plant (not specified in sub-s. (4) or sub-s. (5) at any time during the period beginning on the 1st April, 1995 and ending on the 31st March, 2002. 113. Sub-s. (4) provides 100 per cent deduction of the profits and gains derived from an industrial undertaking for five assessment years beginning with the initial assessment year and thereafter twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from such industrial undertaking in the case of an industrial undertaking in an indust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided that the ship-(i) is owned by an Indian company and is wholly used for the purposes of the business carried on by it; (ii) was not, previous to the date of its acquisition by the Indian company, owned or used in Indian territorial waters by a person resident in India; and (iii) is brought into use by the Indian company at any time during the period beginning on the 1st April, 1991 and ending on the 31st March, 1995. 116. Sub-s. (7) provides for deduction to an approved hotel at fifty per cent of the profits and gains derived for a period of ten consecutive years beginning from the initial assessment year if it is located in a hilly area or a rural area or a place of pilgrimage or a notified other place and it starts functioning at any time during the period from 1st April, 1990 to 31st March, 1994 or from 1st April, 1997 to 31st March, 2001, provided it is not located within the municipal jurisdiction of Calcutta, Chennai, Delhi or Mumbai started or starts functioning on or from 1st April, 1997 to 31st March, 2001. The deduction is thirty per cent for other hotel if started or starts functioning from 1st April, 1991 to 31st March, 1995 or 1st April, 1997 to 31st March, 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proved before the 31st March, 2001 by a local authority, if,-(a) such undertaking has commenced or commences development and construction of the housing project on or after the 1st Oct., 1998 and completes the same before the 31st March, 2003; (b) the project is on the size of a plot of land which has a minimum area of one acre; and (c) the residential unit has a maximum built-up area of one thousand square feet where such residential unit is situated within the cities of Delhi or Mumbai or within twenty-five kilometres from the municipal limits of these cities and one thousand and five hundred square feet at any other place. 121. Sub-s. (11) provides for 100 per cent deduction to an industrial undertaking deriving profit from the business of setting up and operating a cold chain facility for agricultural produce, irrespective cl. (iii) of sub-s. (2) and sub-ss. (3), (4) and (5), for five assessment years and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) not exceeding ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) and subject to fulfilment of the condition that it begins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... area to the delivery point together with all data and supporting information including out not limited to: (a) Characteristics of reservoir, data, production profiles, etc. (b) Outlines of the development project and/or alternative development projects, if any, describing the production facilities to be installed and the number of wells to be drilled under such development project and/or alternative development: projects, if any; (c)(d)(e) ..... (f) Work programme and budget for development and production operation; (g) and (h) .......... (ii) Submission of plan to the management committee for approval on the basis of the approved development plan, the assessee then undertakes various steps for development of wells and support production facilities; (iii) Development of wells/setting up of undertakings on the basis of approved development plan, the assessee initiates the process of making investments for discovery of gas and on developing the undertakings. In drilling operations-commercial production land based wells, on the basis of development plans approved by Director General of Hydrocarbons, the assessee drilled either one well or multiple wells for exploiting the field. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital investment in undertaking H2 as on 31st March, 2001) and Rs. 30,22,23,646 (total capital investment in undertaking H3 as on 31st March, 2001) and therefore result in the creation of separate, distinct and new undertaking. Each well produces revenue independently. The anatomy of oil exploration is determined by the nature of land. The methodology of the oil exploration business clearly depicts that in case of land based drilling operations, even a single oil and gas well fits within the characteristics of a 'new and separate undertaking'. The economics of land based drilling operations clearly demonstrates the independence and viability of each drilling operation as a separate independent undertaking capable of earning revenue and has independent working from other wells. The actual development of the onshore field clearly depicts that land wells have been drilled at intervals, as per the requirements of exploration and each well served the purpose of exploiting the reservoir. The operations of undertaking H2 are not affected by the other wells in the field. The assessee has separate approvals from the Director General of Hydrocarbons for land well Nos. 6 and 7 which indicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the benefit under s. 15C (of the old Act), the following facts have to be established by the assessee: (1) Investment of substantial fresh capital in the industrial undertaking set up. (2) Employment of requisite labour therein. (3) Manufacture or production of articles in the said undertaking. (4) Earning of profits clearly attributable to the said new industrial undertaking and (5) Above all, a separate and distinct identity of the industrial unit set up. (b) CIT vs. Indian Aluminium Co. Ltd.: In this case, there was a manufacturer of aluminium ingots from ore and it had four manufacturing centers at Belur, Kalwa, Alupuram and Hirakud. The assessee made an extension to the existing centers at Belur and Alupuram and installed new plant and machinery there. The production of aluminium ingots went up by double. The additional units set-up cost was over Rs. 50 lacs at Belur and about the same amount at Alupuram. It was held that in view of the nature of the investments that the units were new industrial undertakings by themselves, that these units were set up side by side with the old ones and added to the assessee's total output and therefore, the assessee was entitled to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than 99.9 per cent of the production of the undertaking is natural gas. Even if each well were producing a mix i.e., natural gas and crude oil, then also the metering system and the software available would enable the final production of the different products to be allocated to each well on a scientific basis. The production figures so derived are furnished to the Directorate General of Hydrocarbons ('DGH'). Ministry of Petroleum and Natural Gas, Government of India on monthly and quarterly basis. An extract of the monthly report to April, 2000 and the quarterly report for the last quarter viz. January to March, 2001 clearly indicate the well-wise production for each field. In fact the monthly report provides the details of field-wise production and the daily production of natural gas from each well and the quarterly report provides the details of cumulative production of each well from the inception of commercial production till the period covered by the report. The figures of month-wise production match the figures furnished in the report for the quarter. This shows that the production at each oil and gas well is distinctly identifiable and in fact has been ascertained and full ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Finance Minister by giving the salient features in his Speech, while presenting the Union Budget of 1997-98. The NELP was for exploration and production of mineral oil, which means petroleum and natural gas. Under NELP, the Government of India has awarded contracts under which the exploration for oil and natural gas in India could be done only in pursuance of the production sharing contract (PSC) entered into with the Government and on terms and conditions, which are approved by the Parliament. In the PSC signed between the Government of India and the successful bidding party, there has to be invariably a clause dealing with the tax payable by the bidding company on its profits and gains from the business of petroleum operations. As specific methodology is provided to compute in the profits and gains from such business, the IT Act as well as PSC have specific overriding provisions to compute the profit and gains of business, which included deductions under s. 42, computation of profit and gain under s. 44BB and under s. 293A of the IT Act, 1961, as well as deductions under ss. 80-IA/80-IB of the said Act. PSC is binding to all the parties entering into the contract includi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the context of the meaning of the word 'mineral oil' remains the same wherever used in the IT Act i.e. business of exploration, extraction or production of 'mineral oil'. 136. In Association of Natural Gas & Ors. vs. Union of India & Ors., natural gas, petroleum and mineral oil are described by the Supreme Court with reference to various dictionaries and statutes, Indian as well as foreign and Entries in List of the Constitution of India as: "20 In Kirk-Othomer: Encyclopaedia of Chemical Technology (3rd Edn.), Vol. 11, p. 630, "natural gas" is defined as a naturally occurring mixture of hydrocarbon and non-hydrocarbon gases found in the porous geologic formations beneath the earth's surface, often in association with petroleum. 21. To obtain a marketable product, the raw natural gas flowing from gas or oil wells must be processed to remove water vapour, inert or poisonous constituents and condensable hydrocarbons. The processed gas is principally methane, with small amounts of ethane, propane, butane, pentane, carbon dioxide and nitrogen. This gas can easily be transported from the producing areas to the market in underground pipelines under pressure or liquefied at low tempera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oleum can be defined. It is not surprising that the composition varies, since the local distribution of plant, animal and marine life is quite varied and, presumably, was similarly varied when the petroleum precursors were formed. 28. As per The New Book of Popular Science, Vol. 2, petroleum is an oily, inflammable liquid made up mostly of hydrocarbons - compounds containing only hydrogen and carbon. The hydrogen content of petroleum ranges from 50 per cent to 98 per cent. The rest is made up chiefly of organic compounds containing oxygen, nitrogen or sulphur. 29. According to a widely held theory, the remains of countless small marine animals and plants dropped to the ocean bottom and were covered over by mud. Many layers of mud and plant and animal remains accumulated in the course of time. These sediments were subjected to great pressure and heat and were often squeezed and distorted as the earth's crust moved. Gradually they were converted into layers of sedimentary rock. The plant and animal remains contained within them were transformed into petroleum and natural gas. The details of this transformation are not quite clear. 30. Gas and oil are found in huge subterranean cav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be extracted by destructive distillation." 39. Petroleum has been variously defined in different Acts noted hereinbelow: Petroleum (Production) Act, 1934 (UK) "Petroleum includes any mineral oil or relative hydrocarbon and natural gas existing in its natural condition in strata, but does not include coal or bituminous shales or other shales or other stratified deposits from which oil can be extracted by destructive distillation: Petroleum Act, 2000 (s. 4), Australia "Petroleum" means a naturally occurring substance consisting of a hydrocarbon or mixture of hydrocarbons in gaseous, liquid or solid state but does not include coal or shale unless occurring in circumstances in which the use of techniques for coal seam methane production or in situ gasification would be appropriate." Liquid Fuel Emergency Act, 1984 (s. 3) "petroleum" means: (a) any naturally occurring hydrocarbon or mixture of hydrocarbons, whether in a gaseous, liquid or solid state; or (b) any naturally occurring mixture of a hydrocarbon or hydrocarbons and of another substance or other substances, whether in a gaseous, liquid or solid state. 40. The various legislations passed by the Indian Parliament a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mixtures of two or more liquid products or by-products derived from oil condensate and gas or petroleum hydrocarbons not specified hereinbefore;" 41. Under Entry 53 of List I, Parliament has got power to make legislation for regulation and development of oilfields, mineral oil resources; petroleum, petroleum products, other liquids and substances declared by Parliament by law to be dangerously inflammable. Natural gas product extracted from oil wells predominantly comprises of methane. Production of natural gas is not independent of the production of other petroleum products; though from some wells natural gas alone would emanate, other products may emanate from subterranean chambers of earth. But all oilfields are explored for their potential hydrocarbon. Therefore, the regulation of oilfields and mineral oil resources necessarily encompasses the regulation as well as development of natural gas. For free and smooth flow of trade, commerce and industry throughout the length and breadth of the country, natural gas and other petroleum products playa vital role. 42. In Cauvery Water Disputes Tribunal, the right to flowing water of rivers was described as a right "publici juris" i.e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into by the Government of India, it makes it absolutely clear that treatment of 'oil and gas' has been made inseparable for all purposes including all the tax provisions. 138. This approach of the Government of India declared through Ministry of Petroleum was vetted by the Ministry of Finance as well. Accordingly, tax provisions were incorporated to allow deductions of unsuccessful exploration expenses, allowance of capital expenses as revenue and deduction of profits on exploration and production of oil and gas by way of ss. 80-IA/80-IB. 139. Rules of interpretation: One very important rule of interpretation is that "where the draftsman uses the same word or phrase in similar contexts, he must have presumed to intend it in each place to bear the same meaning"-Farrell vs. Alexander (1976) 2 All ER 721, 736 (HL); Central Bank of India vs. Ravindra AIR 2001 SC 3095, 3114; that words are generally used in the same sense throughout in a statute, unless there is something repugnant in the context-Justice Wanchoo in Boghilal Chunnilal vs. State of Bombay AIR 1959 SC 356; that the principles of harmonious construction also states that same meaning should be attributed to the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral oil to include petroleum and natural gas. Further the PSC has been placed before both houses of Parliament. Hence Parliament has also accepted the agreement clearly there is nothing in the Act or other statutes or commercial document which suggest that mineral oil does not include natural gas. The Mines and Minerals (Development and Regulation) Act, 1957, defines, by s. 3(b), the term "mineral oils" to include petroleum and natural gas. Sec. 3(h) of The Oil Industry (Development) Act, 1974 defines "mineral oils" to includes petroleum and natural gas. Under the Mines Act, 1952, "minerals" means oil substances which can be obtained from the earth by mining, digging, drilling dredging, hydrolyzing, quarrying, or by any other operation and includes mineral oils. The opinion of the Attorney General of India in the case of Dy. CIT vs. Schlumberger Seaco Inc. (1995) 51 TTJ (Cal) 72 : (1994) 50 ITD 348 (Cal) as quoted in the aforesaid judgment states that petroleum and natural gas are mineral oils and therefore, they are minerals and mines and consequently would fall within the expression "mining" as contemplated by Expln. 2 to s. 9(1)(vii). Explanation to s. 44BB defines mineral oil a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the wells but natural gas and oil separated/processed at the separate unit would be of no avail because of separate recording of well-wise production. It is not a fact that no separate books for each well/cluster of well or fields are maintained by the appellant or that it is not possible because there is no well-wise or field-wise sales or billing is available. The accounts are prepared on the basis of metered production well wise, in this case H2 cluster of two wells 6 and 7. There are no intermixing of employees. H2 undertaking has employees of their own and they exceeded 20 employees. The stock is not left at any stage as the entire stock is sold the moment gas is separated, therefore separate stock inventory question would not arise. It is also not a requirement to maintain separate excise/sales-tax records. As aforesaid the CIT(A) has considered the above things while in the appeal of asst. yr. 2003-04 and accepting the wells as separate undertaking. 145. The contention that the CIT(A) has ignored the provisions of s. 80-IB(13) and the definition of industrial undertaking as given in Explanation of s. 33B, namely 'industrial undertaking' means any undertaking which is main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... casting shop in 1966. The ITO held that the entire plant and machinery constituted a single industrial undertaking which commenced operation even as early as asst. yr. 1962-63 when they started production of dashboard instruments by mainly assembling imported parts. According to the assessee, however, each of the above so-called shops should be taken as separate and independent industrial undertaking and the profits of the same should be given the relief under s. 80J up to the limits prescribed in sub-s. (2) of that section. The Tribunal upheld the view of AO. The High Court observed that the principal grounds on which the relief was denied by the Tribunal were: (i) that all the new undertakings in respect of which relief was claimed, had come into existence as a result of a single collaboration agreement; (ii) that the manner of functioning by the assessee and its method of accounting showed that there were no independent units at all because no separate accounts had been kept for each unit; (iii) that there were no inter-Departmental sales noted and the cost of production in each stage had not been separately ascertained ; and (iv) that, in similar circumstances, the High Court o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n question, is erroneous. 148, In CIT vs. Rohtas Industries Ltd. the Calcutta High Court held that "It has been found that the new paper machinery, the chemical factory, the power house and the cement factory of the assessee are engaged in manufacture or production of articles yielding additional profit and these undertakings have been set up by fresh outlay of capital in separate and distinct units. The Tribunal has specifically found the amount of fresh capital employed for the setting up of these particular units. The Tribunal has also categorically found that the new industrial units are physically separate from the old units, they are using a separate building and they are fed with power from a new power house. No one challenged that they cannot exist on their own and function independently. At no earlier stage in the proceedings it was challenged by the Revenue that the productions which were the results of these new undertakings were being used by the assessee in its old undertaking. But even if the products are being so used, it would really make little difference to the position because such products have been found by the Tribunal to be distinct marketable products thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the first time in that year. The Bombay High Court observed that the judgment of the Calcutta High Court in CIT vs. Textile Machinery Corporation has been reversed by the Supreme Court in Textile Machinery Corporation Ltd. vs. CIT. The judgment in the case of CIT vs. Indian Aluminium Co. Ltd. has been confirmed in CIT vs. Indian Aluminium Co. Ltd. It has been held that a new activity launched by an assessee by establishing a new plant and machinery by investing substantial funds may produce some commodities of the old business or it may produce some other distinct marketable products or even commodities which may feed the old business. These products may be reconsumed by the assessee in his old business or may be sold in the open market. Such an undertaking cannot be said to have been formed by the reconstruction of the old business and denied the benefit of s. 15C which corresponds to s. 80J of the new Act merely because it goes to expand the existing business of the assessee in some directions. Two reasons given by the Addl. CIT and upheld by the Tribunal in this case for holding that the new unit started by the assessee is not an industrial unit within the meaning of s. 80J are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k of helping the Canadian companies, for which no payment is required to be made. Hence "Canadian Embassy" will not be the recipient of the amount. Out of the balance amount of Rs. 78,110/-, he allowed 50 per cent by partly agreeing with the claim of the assessee that same was spent towards business promotion for organizing lunch with business associates and contacts on several occasions as the assessee has not furnished the specific details of these expenses claimed to be business promotion expenses. 152. We have heard the parties and considered the rival submissions. It is true that the AO has erroneously held the expense as "donation" but it is also not actually in the nature of business promotion expenses incurred on grounds of commercial expediency. Out of a total expenditure of Rs. 1,28,110 the assessee had paid Rs. 50,000 to the Canadian Embassy on the occasion of "Canada Day" and the balance amount of Rs. 78,110 was spent towards business promotion expenses for organizing lunch/dinner meetings with business associates and contacts on several occasions. It is true that the assessee, being a Canadian company, needs to interact regularly with the Canadian Embassy in India, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Therefore, in his view the entire amount incurred on running and maintenance of guest house cannot be held to be relating to the business needs and accordingly, disallowed a sum of Rs. 1,00,000 as not been incurred for business purposes. 154. The CIT(A) restricted the disallowance to 10 per cent and upheld the addition of Rs. 70,000 by observing as under: "I have considered the argument taken by the assessee and perused the assessment order. It is noticed that the expenditure of Rs. 7,14,778 has been incurred on providing guest house accommodation at Baroda and Surat, as mentioned by the assessee. It is also undisputed fact that no records have been maintained as to who have availed of the guest house facility apart from the general manager of the company. The assessee also contended that by Finance Act, 1997, the artificial ceiling for the business expenditure by way of specific disallowance has been removed and accordingly, no disallowance be made. I have considered this argument. Prior to asst. yr. 1997-98, the Act itself has specific sub-section under s. 37, wherein, the ceiling on the expenditure was provided. That ceiling was operative even if the assessee proves that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of interest under s. 234B. AO charged it @ 18 per cent the rate applicable on 1st April, 2001. On the date of completion of assessment the rate was 15 per cent. The assessee, therefore, claims that interest should be charged @ 15 per cent in view of decision on s. 214 of Madras High Court in the case of Addl. CIT vs. Madura South India Corporation (P) Ltd. (1977) 110 ITR 322 (Mad), holding that it is the rate governed on the date of assessment which governed the chargeability and the decision of the Tribunal, Pune, Third Member Bench, in the case of ITO vs. B.A. Patravali & Sons (1995) 53 TTJ (Pune)(TM) 615 : (1995) 54 ITD 1 (Pune)(TM). 158. We have heard the parties and considered the rival submissions. In Addl. CIT vs. Madura South India Corporation (P) Ltd. the rate of granting interest was held to be as applicable on the date of assessment. It observed. "The liability to pay interest on the part of the Government and correspondingly the right of the assessee to receive interest arises only when the assessment is completed. So long as the assessment has not been completed." it will not be possible to find out whether the advance tax paid by the assessee is in excess of the ul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two per cent per annum on any amount payable in accordance with the provisions of this section before the 1st April, 1955, and paid accordingly; (ii) at four per cent per annum on any amount payable in accordance with the provisions of this section after the 1st April, 1955, and paid accordingly; from the date of payment to the date of the provisional assessment made under s. 23B, or if no such assessment has been made, to the date of the assessment (hereinafter called the 'regular assessment') made under s. 23 of the income, profits and gains of the previous year for an assessment for the year next following the year in which the amount was payable." Consequently, if the intention of the legislature was to pay interest at 6 per cent for the period anterior to 1st Oct., 1967, and to pay interest at 9 per cent only for the period on or after 1st Oct., 1967, it would have made specific provision in this behalf. An argument which appears to have been advanced before the Tribunal is that if it is held that s. 214 of the Act as amended w.e.f. 1st Oct., 1967, is to be applied to the period anterior to 1st Oct., 1967, it would give retrospective effect to the amendment, and the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demand and the assessee has challenged its validity. It refers to the initial stage only where an appeal, revision or other proceeding is pending merely. It does not proceed beyond that stage to the point where, in consequence of such appeal, revision or other proceeding, the tax liability has been found to be nil. Once it is determined that the tax liability is nil, it cannot be said that any amount of tax is outstanding. Such a situation does not bring s. 2(m)(iii)(a) into operation at all, as is clear indeed from its very terms. If upon the ultimate determination it is found that the amount of tax is nil, the assessee is denied the deduction claimed by him not on the ground of s. 2(m)(iii)(a) but because the superior authority has found that there is no tax liability whatever. It must be taken that in law there never was any tax liability. So far as the remaining tax liabilities are concerned, the Tribunal is right in allowing the income-tax, wealth-tax and gift-tax liabilities to be deducted in computing the net wealth of the assessee for the respective assessment years, even though the assessment orders were finalised after the respective valuation dates: We may point out th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r may be subjected to consideration in appeal before the AAC and thereafter the case may be carried in second appeal to the Tribunal, in reference to the High Court and ultimately in appeal before this Court. At every stage, the endeavour of the authority, Tribunal or Court is to adjudicate on questions which will lead in the final result to a true determination of the tax liability. There may be cases where the assessment finally made may be reopened in accordance with the procedure and subject to the conditions stated in the relevant statute. There may also be cases where a rectification of apparent errors is effected pursuant to jurisdiction granted by the relevant statute. Both these proceedings are similarly intended for the true quantification of the tax liability. When, in the course of a wealth-tax assessment, the assessee makes a claim to deduction on account of income-tax, wealth-tax and gift-tax liabilities subsisting as debts owed by him on the valuation date, it is the final quantification of the particular tax liability which must be taken into account. Where the wealth-tax assessment so made is carried in appeal, we have no doubt that the appellate authority will tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judgment of the Gujarat High Court in CWT vs. Kantilal Manilal (1973) 88 ITR 125 (Guj), does not conclude the question arising on this claim because the High Court was concerned with a claim to deduction on account of income-tax, wealth-tax and gift-tax liabilities which had arisen before the WTO had completed the assessment before him. Be that as it may, it is well settled that when an appeal is filed against an assessment order before the AAC, the assessment case is thrown open and the appellate proceeding constitutes a continuation of the assessment proceeding. Even if the tax liabilities, of which a deduction was claimed, were created by rectification orders or by assessment orders made after the date of the wealth-tax assessment order under appeal the law requires the claim to deduction being considered on the same basis as if it had been made in the original wealth-tax assessment proceeding. It is true that the rectification orders and the gift-tax assessments related to tax liabilities which were not claimed by the assessee in the course of the original assessment proceeding before the WTO, but, as the AAC permitted the claim to be made during the hearing of the appeal, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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