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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 ..... mmediately required for utilization in business be treated as business income as the commercial production has started from 29.08.2009. Ergo, the assessee gets relief of an amount accordingly. Earning of interest from FDs - assessee has invested the surplus funds in the FDs has nothing to do with the business connection - In the instant FDs, we find that there was no compulsion on the part of the assessee to invest in bank FDs as a part of an agreement. No business contingency was brought 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 - Ergo, appeal of the assessee on this ground is dismissed. Prior period expenses - correct assessment year - expenses on account of Exploration - AO disallowed the expense on the basis that the same shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO on account of exploration development expenditure per se and on account of infraction of provisions of Section 40(a)(ia) of the Income Tax Act, 1961 are liable to be deleted. Disallowance of Time Cost Expenses u/s 40A - HELD THAT:- In the present case, it is an admitted position that the assessee does not have any other business in India except PI in the block and has not incurred any expenditure itself, rather it has made contribution to the cash calls made by the operator which has incurred the expenditure. It is a settled position of law that for making a disallowance u/s 40A of the Act, the onus is on the AO to establish that the payments made by the assessee were excessive and unreasonable. In the present 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. Disallowance of Overhead Expenses - AO disallowed the Parent Company Overheads as Head office expenditure by treating the same as expenditure under section 44C - CIT(A) deleted the addition holding that the addition made in the earlier years was due to the fact that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enuineness 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 other sources, whereas in both the cases the investments have been made out of the excess/surplus funds which was found idle by the appellant at the stage of investment with a sole purpose of earning interest. As such these interest incomes are Income from other sources on which no netting/set off is available as there is no such diminishing provision in section 57 of the Income Tax Act. 5. Ld. CIT(A) has erred in allowing in u/s 80IB even though the assessee was statutorily required to mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Income Tax Return of the AY 2013-14. 1.1. That on the facts and circumstances of the case in law, the Ld. CIT(A) erred in confirming Ld. AO s allegation that the claim of additional depreciation was to be mandatorily allowed in terms of Explanation 5 to section 32(1) of the Act, without appreciating that additional depreciation being optional in nature, is not covered within the purview of the said Explanation. 1.2. That on the facts and circumstances of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 wholly owned subsidiary of Cairn India Holdings Limited, a company registered in Jersey Channel Island. The assessee is primarily engaged in the business of prospecting, drilling, exploring, producing and generally dealing in minerals, oils, gas and other related by-products. 9. The assessee acquired 50% Participating Interest ( PI ) in the contract area RJ/ON-90/1 (located in Rajasthan) ( Rajasthan Block or Block ) with the appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said Block October 15, 2004 9. ONGC, as per clauses of PSC, exercised its option to acquire 30% interest in the Rajasthan Development Area. January 13, 2005 10. Commercial Production started in said block 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. This income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as capital. In other words, 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 interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on ble Apex Court in the case of CIT vs. Bokaro Steel Ltd. 236 ITR 315 (SC) and the specific facts involved in that case and the ratio laid down thereof. It reads , We will take the first three heads under which the assessee has received certain amounts. These are, the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including 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 clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g any income. This Court held that if a person borrows money for business purposes, but utilizes that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilized by the assessee whichever way he likes. Merely because he utilized it to re-pay the interest on the loan taken, will not make the interest income as a capital receipt. The department relied upon the observations made 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 intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcavating stones to be used in the construction work of assessee's steel plant. The cost of the plant to the extent of such royalty received, is reduced for the assessee. It is therefore, rightly taken as a capital receipt. In the assessment year 1971-72, the assessee had shown in its books of accounts a sum of Rs.7,39,232/- as income from interest received from M/s. Hindustan Steel Ltd. for the eight locomotives supplied by the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial production has started from 29.08.2009. Ergo, the assessee gets relief of an amount of Rs. 5,16,06,907/-. 21. With regard to earning of interest of Rs. 3619348/- from FDs wherein the assessee has invested the surplus funds in the FDs has nothing to do with the business connection. In the instant FDs, we find that there was no compulsion on the part of the assessee to invest in bank FDs as a part of an agreement. No business contingency was brought 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal) Ground No.1 Additional Depreciation u/s 32(1)(iia): 28. The assessee aggrieved with mandatory allowance of additional depreciation in terms of Explanation -5 to Section 32(1) of the Income Tax Act, 1961 without appreciating that the additional depreciation has not been claimed by the assessee and deduction u/s 80IB was recomputed after allowing additional depreciation. The issue to be decided is whether the additional depreciation is a Mandatory Claim or an optional claim 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respective Acts. 35. Accordingly, the AO has rightly allowed the additional depreciation in this case even without its claim by the assessee. The appeal of the assessee on this ground is dismissed. ITA No. 6357/Del/2013: A.Y. 2010-11 (Revenue Appeal) ITA No. 5988/Del/2018: A.Y. 2013-14 (Revenue Appeal) ITA No. 5989/Del/2018: A.Y. 2014-15 (Revenue Appeal) Ground No.1 Exploration Development Expenditure u/s 40(i)(ia): 36. For the year under consideration, the company filed its return of income on 13.10.2010 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 clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appendix C of PSC and in terms of the aforesaid Articles, the operator namely CEIL is required to maintain, on behalf of all contractor parties, all the accounts of the Petroleum Operations in accordance with the provisions of the PSC and also timely filing of reports and payment of fees, levies, taxes etc. Such expenditure/sums paid by the operator on behalf of all contracting parties and thus allocated to the parties, based upon which profit/loss accounts are drawn. Thus disallowance under section 40(a)(i) and 40(a)(ai) is totally unwarranted and uncalled for. Though, even after mentioning 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The AO held that the same is not allowable u/s 40A of the Act being excessive in nature on the following grounds: The charges computed by the operator are notional and on estimated basis. ii. Development cost was charged on notional basis without actual evidence being made available for verification. These charges, being part of the total exploration and development cost claimed by the Assessee and hence, are not allowable under section 42 of the Act. Also, these expenses being treated as excessive, unreasonable and unverifiable cannot be allowed as per the provisions of section 40A of the Act read in conjunction with 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred as part of or in conjunction with other business, then the Assessing Officer having regard to facts and circumstances, shall allow only a fair proportion thereof. In the present case, it is an admitted position that the assessee does not have any other business in India except PI in the block and has not incurred any expenditure itself, rather it has made contribution to the cash calls made by the operator which has incurred the expenditure. 49. It is a settled position of law that for making a disallowance under section 40A of the Act, the onus is on the AO to establish that the payments made by the assessee were excessive and unreasonable. In the present 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be made, in computing the income chargeable under the head Profits and gains of business or profession , in respect of so much of the expenditure in the nature of head office expenditure as is in excess of the amount computed as hereunder, namely: (a) an amount equal to five per cent of the adjusted total income; or (b) [***] (c) the amount of so much of the expenditure in the nature of head office expenditure incurred by the assessee as is attributable to the business or profession of the assessee in India, whichever is the least : Provided that in a case where the adjusted total income of the assessee is a loss, the amount under clause (a) shall be computed at the rate of five per cent of the 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are basically paid to the Parent company of the operator as per the PSC to support and manage the petroleum operations under the contract. 57. Section 44C of the Act provides for a ceiling on allowance in respect of the Head Office expenditure which is in the nature of executive and general administrative expenses incurred by the foreign head offices in so far as such expenses can be related to their business or profession in India. 58. The AO disallowed the Parent Company Overheads as Head office expenditure by treating the same as expenditure under section 44C of the Act. The AO further stated that the said expenses were not to be allowed as revenue expenditure even in the year of commencement of production i.e. the relevant assessment year. 59. Reliance is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act for a period of 7 consecutive years i.e. from FY 2009-10 (AY 2010-11) to FY 2015-06 (AY 2016-17). 64. While filing the income tax return as per section 139(1) of the Act read with Rule 12 of the Income Tax Rules, 1962, since the same had to be filed in the electronic form without annexing any statement, the Assessee could not file Form 10CCB providing the computation u/s 80IB(9) of the Act at the time of uploading the tax return and the same was furnished during the course of the assessment proceedings. 65. The aforesaid eligibility for deduction under section 80IB(9) of the Act is only evident from the report issued by the Chartered Accountant on deduction under section 80IB(9) of the Act in compliance with Form no. 10CCB under Rule 18BBB of the Income Tax Rules, 1962. The report says, the company 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopted for claiming refunds and reliefs. 71. The assessee would further like to submit that eligibility to get the benefit of deduction under section 80IB(9) of the Act being an undisputed fact, the AO was bound by law to allow the claim made by the Assessee so that a fair amount of income and tax thereon could be assessed. 72. The Ld. CIT(A) has allowed the deduction claimed under section 80IB by holding as under: (a) The appellant has submitted that since its returned income was nil, there was no occasion to claim deduction u/s 80IB in its return of income. However, in the tax audit report, it has been expressly mentioned that the appellant is eligible for deduction u/s 80IB and it is not being claimed in view of nil returned income. (b) Further, the appellant has also furnished its report in Form 10CCB during the assessment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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