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TMI Blog2023 (1) TMI 1284X X X X Extracts X X X X X X X X Extracts X X X X ..... 14,89,785/- which had been disallowed by the A.O on the ground that the assessee during the relevant previous year has contravened the provision of chapter XVII-B read with section 40a(i) and 40a(ia) of the Income Tax Act 1961 and these were also found unascertainable & unverifiable by the 2. Ld. CIT(A) has erred in allowing time cost and expenses of Rs. 11,88,89,517/- whereas the Assessing Officer had found these expenses without any actual evidences being made available for verification, their genuineness cannot be relied simply on the basis of certification/mechanism of charging such expenses to the UJV by the CA firm. Ld CIT(A) has also not gone in to the reasonableness and genuineness of the total claim made by the Appellant. 3. Ld. CIT(A) has erred in allowing expenses of Rs. 16,95,79,348/- without discussing the basis of issue raised by the A.O and has based on the finding given by the CIT(A) in earlier year where these expenses were allowed as deferred revenue expenses in 5 years starting from A.Y. 2010-11. 4. Ld. CIT(A) has erred in holding the interest of income Rs. 5,16,06,907/- and interest from FD Rs. 36,19,348/- as business income in place of income from othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost. The same has been disallowed by the AO as these were all estimated basis and no actual evidence was produced during the course of hearing. 3. Whether, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the payment of Rs. 12,06,69,199/- (being part of E & D expenditure of Rs. 1,46,39,18,152/-) made for parent company overhead which has been made from the books of Rajasthan block to parent company of operator, thus it was considered as head office expenditure covered u/s 44C for the block. The same has been disallowed by the AO as the same was on estimated basis without any evidence to support the same." 5. The assessee has raised the following grounds in ITA No. 6277/Del/2018 for Assessment Year 2013-14:- "1. That on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in confirming action of Ld. AO in allowing claim of additional depreciation amounting to Rs. 10,43,83,712 (Rs. 18,26,71,497-7,82,87,784) under section 32(1)(iia) of the Act and recomputed the deprecation of Rs 359,20,57,325 after giving effect to Assessment order of AY 12-13 despite the Appellant had not claimed the additional deprecation in Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were also found unascertainable & unverifiable by the assessing officer. 2. Whether, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the total time cost and expenses recharged by the operator to the Unincorporated Joint Venture (UJV) amounting to Rs. 3,06,62,31,823/- (being part of E & D expenditure of Rs. 8,79,43,82,537/-) which is the appellant share in the cost. The same has been disallowed by the AO as these were all estimated basis and no actual evidence was produced during the course of hearing. 3. Whether, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the payment of Rs. 23,73,64,140/- (being part of E & D expenditure of Rs. 8,79,43,82,537/-) made for parent company overhead which has been made from the books of Rajasthan block to parent company of operator, thus it was considered as head office expenditure covered u/s 44C for the block. The same has been disallowed by the AO as the same was on estimated basis without any evidence to support the same." 8. Cairn Energy Hydrocarbons Limited ('the Appellant' or 'CEHL' or 'the Assessee') is a company incorporated in Scotland, U.K. and is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... August 29, 2009 12. The Assessee does not have any other operations in India except, to the extent of PI in the aforesaid block. All the activities viz. seismic acquisition & survey, geological and geophysical studies, drilling of wells etc. for the exploration and development for the area are undertaken by the Operator i.e. CEIL. The Assessee as well as ONGC contribute their shares by way of cash calls in proportion to their PI in these expenses. ITA No. 6346/Del/2013: A.Y. 2010-11 (Assessee's Appeal) Ground No. 1 ITA No. 6357/Del/2013: A.Y. 2010-11 (Revenue Appeal) Ground No. 4 Interest Income from Temporary Investments -Rs. 51606907/- Interest income from FDs- Rs. 36,19,348/- 13. Facts relevant to the adjudication of this issue are that the assessee deposited their surplus funds in the bank on which an interest amounting to Rs.36,19,348/- was earned and the same offered to tax under the head 'income from business and profession'. The AO erred in treated the interest earned from fixed deposits under the head income from other sources. 14. The ld. CIT(A) confirmed treated income from FDs as income from other sources and interest income from temporary investments a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses." 17. Heard the arguments of both the parties and perused the material available on record. 18. We have gone in details the judgment of Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC). It says, "Under the IT Act, 1961, the total income of the company is chargeable to tax under Section 4. The total income has to be computed in accordance with the provisions of the Act. Sec. 14 lays down that for the purpose of computation, income of an assessee has to be classified under six heads: (A) Salaries. (B) Interest on Securities. (C) Income from house property. (D) Profits and gains of business or profession. (E) Capital gains. (F) Income from other sources. By an amendment made in 1988 Interest on securities has been made chargeable to tax as business income when such interest forms part of business profits and in all other cases under s. 56(2)(id) as income from other sources. The amendment made in 1988 has no relevance for the purpose of this case. We shall take this Act as it stood at the material time in the asst. yr. 1983-84. The computation of income under each of the above six head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the capital of a company is fruitfully utilised instead of keeping it idle the income thus generated will be of revenue nature and not accretion of capital. Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the purpose of earning income that income will have to be taxed in accordance with law. Income is something which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income. It was rightly pointed out in the case of Kedar Narain Singh vs. CIT that "anything which can properly be described as income is taxable under the Act unless expressly exempted". The interest earned by the assessee is clearly its income and unless it can be shown tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng certain amenities granted to the staff by the assessee. Secondly, hire charges for plant and machinery which was given to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these three receipts are directly connected with or are incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertain to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee's plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee had provided these facilities. The same is true of the hire charges for plant and machinery which was given by the assessee to the contractor for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in that judgment (at page 179) to the effect that it the company, even before it commences business, invests surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head "capital gains". Similarly, if a company purchases rented house and gets rent, such rent will be assessable to tax under Section 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under Section 56 of the Income-tax Act. This Court also emphasised the fact that the company was not bound to utilize the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company to them. The entry in this regard was reversed in the next year since M/s. Hindustan Steel ltd. had replaced the eight locomotives lent by the assessee-company to it by new ones. The entire nature of the transaction was changed between the parties. There was a resolution of the assessee-company in this regard and the income from interest did not result at all as the original agreement ceased to be operative ab initio. The entry in the books which was made was about a hypothetical income which did not materialise and the entry was reversed in the next year. Both the Tribunal as well as the High Court have held that since this entry reflected only hypothetical income, it could not be brought to tax as income. Only real income can be brought to tax. In support of this finding, the assessee has drawn our attention to a decision of this Court in Godhra Electricity Co. Ltd. v. Commissioner of Income-tax ([1997] 225 ITR 746) where the Court, inter alia, examined the case system and the mercantile system of accounting in the context of hypothetical income. The computation of income is made in accordance with the method of accounting regularly employed by the assessee. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught out whether in this case the surplus funds have been kept as fixed term deposits in the bank which yielded interest. It is a passive income which is not directly relatable to the main functions of the business or the venture of oil exploration. This interest would be received even in the absence of lull/cessation of exploration activity. The interest was received is to be treated under a separate head for the purpose of tax as per the provisions of Section 14 of the Income Tax Act, 1961 which reads as under: "14. Heads of income Save as otherwise provided by this Act, all income shall, for the purposes of charge of income- tax and computation of total income, be classified under the following heads of income:- A.- Salaries. 1 B.-] C.- Income from house property. D.- Profits and gains of business or profession. E.- Capital gains. F.- Income from other sources. A.- Salaries." 22. Further, Section 56 of the Income Tax Act reads as under: "Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income tax under any of the heads specified in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the convenience of the assessee or not. 29. It is a fact on record that the assessee has not claimed additional depreciation admissible under clause (iia) of section 32(1). The assessing officer decided in the Assessment Order that the assessee has no choice not to the claim of additional depreciation under clause (iia) of section 32(1) in pursuance to the Explanation 5 which reads as under: "[Explanation 5.-For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income;]" 30. The assessee contended that the said explanation is not applicable to the provisions of clause (iia) of section 32(1) because the explanation is placed before the said clause In the act. The assessee relied on the judgment in the case of Commissioner of Agricultural Income Tax Vs. The Plantation Corporation of Kerala Ltd AIR 2000 SC 3714, M/s. Patel Roadways Ltd. vs. M/s. Prasad Trading Co AIR 1992 SC 1514) and Mohanlal Hargovinddas vs. State of M.P. AIR 1967 SC 1022/ to stress on the relevance of positioning of explanation. 31. The ld. CIT(A) held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .10.2010 declaring Nil income under the normal provisions of the Act and Rs.34,54,72,045/- under MAT as per provisions of Section 115JB of the Act. During the year under assessment, the Assessee claimed the exploration and development expenses of Rs.205,14,89,785/- under section 42 of the Act read with the terms of PSC. 37. The AO disallowed entire expenditure on following grounds: * The claim of the assessee regarding exploration cost in the Profit and Loss Account as well as the total development and exploration cost as reflected in the Balance Sheet has been disallowed in earlier years. * The entire edifice of the assessee's claim is hovering around its incorrect interpretation of the various clauses of PSC. The assessee has intentionally and deliberately avoided clauses 16.2 and 16.2.2 of the PSC which clarifies the impugned issue satisfactorily and logically. * The said expenditure being unapproved and unauthorized cannot be allowed. * Due to the same being unascertainable and unverifiable, the entire development cost as claimed in the return of income is disallowable. * Such disallowance of development expenditure is therefore, permanent in nature and only expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioning that the commercial production has been started which was one of the main reasons for disallowance in earlier years, however, the AO erroneously disallowed the total development and exploration cost amounting to Rs.205,14,89,785/- alternatively by invoking the provisions of Section 40(a)(i). * Article 6.4 of PSC reveals that the operating functions will be performed by the operator i.e. CEIL. * The said Article reads as under: "The operating functions required of the Contractor under this contract shall be performed by the Operator on behalf of the all constituents of contractor, subject to, and in accordance with the terms and provisions of this Contract and generally accepted international petroleum industry practice." * The operator is also responsible for the maintenance of books of accounts and others records including audit thereof in accordance with the terms of the PSC. Article 1.4.4 of Appendix C of the PSC provides that Operator shall be responsible for maintaining at business office in India, on behalf of the contractor, all the accounts of the Petroleum Operations in accordance with the provisions of the Accounting Procedure and the contract. Also, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 16.2.1(b) of the PSC. 43. The ld. CIT(A) in its order for AY 2003-04 to 2006-07 has allowed these expenses as deferred revenue expenses for 5 years starting from the AY 2010-11 i.e. the relevant assessment year in the present case. For the same, the CIT(A) has relied upon the judgment of the ITO vs. Aravali Swachalit Vahan P. Ltd. [(1987) 27 TTJ 161]. The ld. CIT(A) after going through the earlier orders held that since the production has commenced now and the AO has not given any reasons for invoking the provisions of Section 40A are not attracted. The ld. CIT(A) held that these expenses are otherwise allowable as deduction now and earlier the same were disallowed owing to unreasonable delay in starting commercial production. 44. Heard the arguments of both the parties and perused the material available on record. The entire issue is as under: 45. During the year under consideration, the UJV in which the assessee has a participating interest made payments to the operator i.e. Cairn Energy India Pvt. Ltd. for the time cost and expenses incurred by operator at aforesaid contract area at cost. The same has been certified by the Auditor that the payments were at cost reimb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent case, the AO made disallowances without discussing even the nature of expenses and its reasonableness. Hence, the disallowance proposed to be made is bad in law and deserves to be deleted. Ergo, the decision of the Ld. CIT(A) is hereby affirmed. Ground No.3 Disallowance of Overhead Expenses: 50. The Parent Company overheads are primarily overhead payments by the operator to its parent company under the PSC to support and manage petroleum operation under the contract. During the year under assessment, the company has accounted for its share of cost of Parent Company Overheads which was Rs.16,95,79,248/-. 51. The AO disallowed these charges for the following stated reasons: * In the assessment orders of the earlier assessment years, it has been categorically held that such expenditure is permanently disallowable. The allowability will not change after commercial production; * It is evident from the reply of the assessee that the impugned amount was paid to the parent company of operator from the UJV; * It is merely an attribution of an estimated expenditure incurred at the head office without any evidence to support the same; * The fact that there exists no separ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he average adjusted total income of the assessee. Explanation.- For the purposes of this section,- (i) "adjusted total income" means the total income computed in accordance with the provisions of this Act, without giving effect to the allowance referred to in this section or in sub-section (2) of section 32 or the deduction referred to in section 32A or section 33 or section 33A or the first proviso to clause (ix) of sub-section (1) of section 36 or any loss carried forward under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A or the deductions under Chapter VI-A; (ii) "average adjusted total income" means,- (a) in a case where the total income of the assessee is assessable for each of the three assessment years immediately preceding the relevant assessment year, one-third of the aggregate amount of the adjusted total income in respect of the previous years relevant to the aforesaid three assessment years; (b) in a case where the total income of the assessee is assessable only for two of the aforesaid three assessment years, one-half of the aggregate amount of the adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed on the decision of CIT Vs. Emirates Commercial Bank [(2003) 262 ITR 55 (Bom)] wherein Bombay High Court held that section 44C of the Act contemplates allocation of expenses amongst various entities. The expenditure which is covered by section 44C of the Act is of common nature, which is incurred for the various branches or which is incurred for the head office and the branch. Expenditure incurred by the head office exclusively for the Indian branch will not be subject to ceiling under section 44C of the Act. This judgment was followed by the Hon'ble Bombay High Court in the case of John Wyeth And Brother Ltd. vs. CIT [(2008) 174 Taxman 451 (Bom.)] and also by the Mumbai Tribunal in the case of ADIT vs. Bank of Bahrain and Kuwait [(2011) 44 SOT 693 (Mum)]. 60. It was argued that the assessee would qualify for head office expenditure, on the grounds that, * that section 44C of the Act begins with a non obstante clause; * it restricts deduction to least of two parameters mentioned in clauses (a) and (c) of section 44C of the Act and in the absence of any one out of the two prescribed parameters, the entire section becomes non-workable. Consequently, the Assessee would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any is eligible for deduction u/s 80-IB(g) of the Income Tax Act, 1961 in respect of commercial production of mineral oil. However, no deduction is being claimed for the year under assessment as he assessee is expecting a negative Gross Total Income. However, the gross total income is subject to final determination." 66. The Assessee submitted that despite the fact that deduction under section 80IB(9) of the Act was available, since the returned income was Nil there was no occasion to claim deduction under section 80IB(9) of the Act. Further, the Assessee also submitted that during the assessment proceedings, vide letter dated 8 March 2013, that disallowances of expenses under normal provision will not affect the taxability under normal provision since to the extent of increase in taxable income on account of disallowance, amount of tax holiday will also increase. 67. During the assessment proceedings, the assessee submitted the revised calculation of deduction u/s 80IB(9) of the Act vide letter dated 22 March 2013. It was submitted before the AO that the Assessee being eligible for deduction u/s 80IB(9) of the Act, in case if there is a positive income due to addition made, a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment stage as at the time of filing of return, the same could not be uploaded as it was filed electronically where no annexures are required to be uploaded. The appellant has relied upon various case laws in support of its claim. (c) It is noted that the AO has not commented upon the eligibility of the appellant for claiming deduction u/s 80IB. The AO has simply commented that since deduction has not been claimed in the return of income, it cannot be allowed. This argument is fallacious as when there is no taxable income in the return, then how can the appellant claim such a deduction. (d) Therefore, there is no valid reason to deny such deduction to the appellant if during assessment proceeding, there comes some positive income. The AO is therefore directed to allow the claim of deduction u/s 80IB of the Act, if there is a positive income after giving effect to this order. The ground of appeal is accordingly allowed. 73. We are in agreement with the finding of the ld. CIT(A), the AO has simply commented that since deduction has not been claimed in the return of income, it cannot be allowed. This argument is fallacious as when there is no taxable income in the return, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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