M/s. Hardy Exploration & Production (India) Inc, CHENNAI V. ADIT, CHENNAI

ITA 2154/CHNY/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4954 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 31-05-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 22-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Audit objection; Tangible material; Bad and doubtful debts; Difference of opinion; Unabsorbed depreciation; Change of opinion; Revenue expenditure; Capital expenditure
• Section: 143(3); 234B; 115JB; 32; 147; 68; 148; 263; 63; 132; 15; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH A CHENNAI BEFORE DR. O.K. NARAYANAN, VICE PRESIDENT AND SHRI GEORGE MATHAN, JUDICIAL MEMBER .. I.T.A. NOS. 2154, 2155, 802 & 803/MDS/2010 ASSESSMENT YEARS : 2002-03, 2003-04, 2005-06 & 2006 -07 M/S. HARDY EXPLORATION & PRODUCTION (INDIA) INC., FLOOR 5, WEST MINISTER BUILDING, 108, DR. RADHAKRISHNAN SALAI, CHENNAI-600 004. V. THE ASSISTANT DIRECTOR OF INCOME-TAX, INTERNATIONAL TAXATION, CHENNAI. (PAN: AAACV2469H) AND I.T.A. NO. 1077/MDS/2010 ASSESSMENT YEAR : 2006-07 THE ASSISTANT DIRECTOR OF INCOME-TAX, M/S. HARDY EXPLORATION & INTERNATIONAL TAXATION, PRODUCTION (INDIA) INC ., CHENNAI CHENNAI-600 004. (APPELLANTS) (RESPONDENTS) ASSESSEE BY : SHRI RAJAN VORA DEPARTMENT BY : SHRI SHAJI P. JACOB O R D E R PER GEORGE MATHAN, JUDICIAL MEMBER : ITA NO. 2154/MDS/2010 AND 2155/MDS/2010 ARE APPEAL S FILED BY THE ASSESSEE AGAINST THE ORDERS OF THE DISPUTE RESOLUTI ON PANEL (DRP), CHENNAI IN F. NO. DRP/CHENNAI/SECTT./029 & 30/2010-11 DATED 15-09-2010 FOR THE ASSESSMENT YEARS 2002-03 AND 2003-04 RESPECTIVELY. ITA NO. 802/MDS/2010 ITA NOS.802,803,1077,2154 & 2155/MDS/2010 2 IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDE R OF THE LEARNED DIRECTOR OF INCOME-TAX, INTERNATIONAL TAXATION, CHENNAI IN D.C. NO. 1143(4)/2008-09 DATED 29-03-2010 FOR THE ASSESSMENT YEAR 2005-06 PA SSED U/S 263 OF THE INCOME TAX ACT, 1961. ITA NO. 803/MDS/2010 IS AN A PPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LEARNED CIT(A)-IV , CHENNAI IN APPEAL NO. CIT(A)-IV/CHE/105/09-10 DATED 22-03-2010 FOR THE AS SESSMENT YEAR 2006- 07. ITA NO. 1077/MDS/2010 IS AN APPEAL FILED BY TH E REVENUE AGAINST THE ORDER OF THE LEARNED CIT(A)-IV, CHENNAI IN APPEAL N O. CIT(A)-IV/CHE/105/09- 10 DATED 22-03-2010 FORE THE ASSESSMENT YEAR 2006-0 7. AS IDENTICAL ISSUES ARE INVOLVED IN ALL THESE APPEALS, THEY ARE BEING D ISPOSED OF BY THIS CONSOLIDATED ORDER. 2. SHRI RAJAN VORA, CA REPRESENTED ON BEHALF OF THE ASSESSEE AND SHRI SHAJI P. JACOB, LERNED SR. DR REPRESENTED ON BEHALF OF TH E REVENUE. 3. ON MERITS IT WAS SUBMITTED BY THE LEARNED AUTHOR ISED REPRESENTATIVE THAT THE ASSESSEE IS A COMPANY INCORPORATED IN USA AND W HICH HAS ESTABLISHED PROJECT OFFICE IN INDIA. THE ASSESSEE HAD ENTERED INTO A PRODUCTION SHARING CONTRACT (PSC FOR SHORT) WITH THE GOVERNMENT OF I NDIA ALONG WITH ONGC AND OTHERS FOR EXPLORATION, DEVELOPMENT AND PRODUCTION OF OIL AND GAS IN THE EAST COAST OF INDIA. THE LEARNED AUTHORISED REPRESENTAT IVE FILED DETAILED WRITTEN SUBMISSIONS WHICH ARE EXTRACTED AS FOLLOWS : ITA NOS.802,803,1077,2154 & 2155/MDS/2010 3 B EF OR E T HE IN C OM E T A X APPELLAT E TRIB UN AL ' A ' B E NCH, CHENNAI IT A NO . 803 / CHNY - 20 1 0 - ASSESSEE'S APPEAL IN THE CA SE OF HARD Y E XPLORATION & PRODUCTION (INDI A ) INC ( AS S ESSMENT YEAR: 2006 - 07) 1. BACKGROUND 1.1.PROFILE OF THE COMPANY H A R D Y EX PL O R A TI O N A ND PR O DUCTI O N ( I N D I A) IN C ( ' H E PI ' OR ' THE A P P E LL A NT ' ) I S A CO M PA N Y IN CO RP O R ATE D IN TH E UNIT E D S T A T ES OF A M ER I C A , W HI C H H A S ES T A BLI S H E D A PR OJEC T OF FI CE IN I NDIA ( ' I PO ' ) W ITH THE A PPR OVA L OF T H E R ESE RVE B A N K OF INDIA . TH E A PP E L LANT H AS ENT E R E D I N T O A PR O DUCT I O N SH A R ING CONTRACT ( ' PS C ' ) W ITH TH E GOV E RN M E N T OF IN DI A ('G O I ' ) A L O N G W ITH ONGC A N D OT H E R S F O R EX P L OR A TI O N , D EVE LOPM E NT AND PR O DU CT I O N O F O IL A N D GAS IN TH E EAS T C OA S T O F INDI A . T H E APP E LL A NT C A RR I ES O U T THE O PERATI O N S UND E R TH E PR O V I S I O N S OF R E L E V A NT JOINT OP E RATIN G A G R EE M E N T S E N TE R E D INTO W I TH T H E JO I NT V E N T UR E P A RTN E R S , A N D LI N E W I TH THE P R OV I S I O N S OF TH E R ES P EC TIV E P S CS . 1.2. BRIEF BACKGROUND OF THE OIL AND GAS ACTIVITY U NDERTAKEN BY THE COMPANY W E S UBMIT TH A T OIL A ND G A S A CTIVITI E S U N D E R TA K E N B Y TH E CO MP A N Y C O N S I S T OF E XP L O R A TI O N , W HI C H M AY R ES ULT IN DI SCOVE R Y OF O IL A ND GAS. A FT E R TH E D ISCO VER Y , A PPR A I SA L WE LL S A R E DRI L L E D T O A SS E SS T H E CO MM E R CIA L POT E NTIAL O F T H E D I S CO VE R Y. O N C E IT I S ES TAB L I S H ED TO B E C OMM E R C I A L , D EVE L O PM E NT O F TH E DI S C O V E R Y I S M A D E B Y DRI L LIN G A N D CO N S TRU C TIN G TH E W E LL S T O EX TR A CT T H E O IL A ND GAS A ND CE RT A I N FA C IL I TI ES S U C H A S FL OW LIN E S A ND VA RIOU S PL A NT A N D E QUIPMENT S A RE I N S TA LL E D A ND C O MM I SS I O N E D FOR CO L LECT I ON AND PRO CE S S I N G OF O IL T O M AK E I T A S S AL E AB L E C R U DE OIL . AFTE R TH E F I E L D I S FULL Y EX PL OI T E D , TH E L EAS E A R E A IS TO BE R E S TO R E D B A CK TO TH E O RI G IN A L CO NDITI O N AS MUCH AS PO SS I BL E A N D IN ADDI T I ON TH E PLANT A ND E QUIP M EN T IN S T A LLED A RE TO B E R E MOV E D WHICH I S R E F E R R ED T O A S S IT E RE S T O R AT I ON WORK . A B RI E F S UMMAR Y OF THE VA R IO U S ACTIV I TIE S UNDE R T A K E N IN EA CH PH ASE I S S UMMARI Z ED A S F O LL O W S: A) EXPLORATION ACTIVITIES A S PER P SCS, CE R TA IN M INIM U M EX PL O R A TI O N WO RK PR OG R A M S S UCH AS GEO L OG I CA L S UR VEY, AC QUI S I T I O N OF SE I S M IC D A T A , A ND DRILLIN G OF C E R TA IN EXP L O R A TI O N W E LL S A R E T O B E CA RRI E D O U T T O ES TA BLI S H TH E ITA NOS.802,803,1077,2154 & 2155/MDS/2010 4 P R E S E N CE O F O I L A ND GA S . S UB S T AN TI A L C OS T S A R E I NC U RR E D FO R GEO L OG IC A L /S E I S MI C S UR VEY , PROCE SS I N G OF S E I S M I C D A T A AND I N T E R PR E TIN G T H E S EI S M I C A N D GE O L OG I C A L D A T A T O I D E NT I F Y D RI L L ABL E E X PL O R A T I O N L OCAT I O N S . I F TH E S T U D I ES IN DI CA T E TH E P R ESE N C E O F O IL AN D GAS, EX PL O R ATIO N WEL L S WI L L B E DR I L L ED W I T H S U B S T A NTI A L CO S T S. TH E CO S T S IN C URR ED F O R EX P L O R A T I O N I S PROVED TO B E U SE F UL IN CA SE OF A D I S COVE R Y O F O IL A N D GAS A N D I N S U C H C AS E S F URTH E R A PPR A I S A L OF TH E D I S COV E RY I S M A D E . B) APPRAISAL ACTIVITIES . O N CE TH E DI S C O V E R Y I S M A D E , TH E A R E A L EX T E N S I O N OF TH E DI S COVE R Y A N D TH E P OTE NTI A L V O LUM E OF TH E DI S COV E R Y H A V E TO BE M A PP E D. IN E S S ENC E , T H E A PP R A I S A L A C T IV I T Y REL A T E S T O T H E DE LIN E ATION O F TH E P E TR O L E UM R ESE R V ES T O W H I CH T H E D I S COVE R Y R ELA T E S I N T E RM S O F T H ICKN E SS A ND T H E L A T E R A L E X T E N T A N D D E T E RMININ G TH E C H A R AC T E RI S TIC S TH E R E O F AND TH E QU A NTIT Y O F R E C OVE R A B L E P E TR O L E UM T H E R E I N . T HI S IN VO L V ES A DDITIO N A L CAP IT A L E X P E NDITUR E S U C H AS DR IL LIN G O F A PP RAI SA L W E L L S A ND FURTH E R G E O L O G I CA L , GEO P H YS ICA L A ND RE SE R VO IR S T UDI ES. AFT E R T HE A PPRAI SA L , I F C O MM E RC IA L VO L U M ES O F O IL A ND G A S A R E PR ES E NT A D E V E L O PM E NT PL A N I S M A D E A N D E X E C U T E D FOR TH E C O MM E R C I A L E X TR AC TI O N O IL AND G A S . IN S U C H CA SES, A L L TH E COS T OF S U C C E S S FU L E X P L OR A T I O N A ND A P PR A I SA L A R E CA PIT A LI Z E D . C. ) DEVELOPMENT ACTIVITES A F T E R ES T A BLI S HM E NT O F CO MM E R C I A L IT Y . A D EVE L OP M E NT PL A N I S B E IN G S U BMITT ED T O GO I FO R AP PR OV A L W HI C H H A S D ET A I L E D E N G I NE E R IN G O F T H E P R O JECT T O B E E XEC UT E D . D UR I N G TH I S P H A S E , S UB S TA NT I A L C AP I T A L CO S T S A R E IN C URR E D F O R : A. D R I L L I N G OF D EVE L O PM E N T WE LL S FOR EXT R A CTIN G T H E OI L A ND G A S FR O M TH E RE S E R VO I R S A T T H E S UB - S U RF A C E . B. CO MPL E T ION OF TH E W E L L S W I T H E QUIPM E N TS S U C H AS WE LL H E AD S A N D CHR I S TM AS TR EE W H I C H I S A C O MBIN A TI O N O F M A N Y M AC HIN E R Y , E Q UI PM E NT A ND V A L VE S TO C O NTR O L TH E F L OW OF TH E O IL A ND GAS. C. CONNECTING THE EQUIPMENT SUCH AS CHRISTMAS TREE FRO M THE OIL WELL TO THE FLOW LINES. D. COLLECTING THE OIL AND GAS FROM THE FLOW LINE AND SEPARATE THE SAME AS OIL, GAS AND WATER. E. STORING THE PROCESSED OIL AND TRANSPORTATION FOR CO MMERCIAL SALE. T HI S I S C A R R I E D O UT IN AC C O RD A NC E WITH TH E D E V E L O PM E NT PL A N A ND A T EVE R Y S T A G E, CE RT A IN A DDITI O N A L C A PI TA L C OS T S A R E A L S O INCUR RED T O DRI L L F URTH E R D E V E L OPM E NT W E L L S. ADDITI O N A L CA PIT A L CO S T S A R E F U RT H E R IN C URR E D T O M A INT A IN TH E R ESE R V O I R PR ESS UR E S U C H AS G AS LIFT A ND WATE R INJ EC T I O N SYS T E M A L O N G WIT H T H E OTH E R E QU I PM E NT S. ACCO RDIN G L Y , THE E N T I R E EX P E ND I T U RE I N C URR E D F OR I N S T A LLIN G TH E PL A N T A N D E Q UI PM E N T S F O R EX T RACT I O N OF O IL A ND GA S I S N O M E N C L ATE D AS ' D E V E L O PM E NT C OS T S'. T H ESE ITA NOS.802,803,1077,2154 & 2155/MDS/2010 5 E NTIR E CO S T S A R E CA P I T A LI Z E D I N T H E B OOKS OF T H E ACCOUNTS A ND IT I S A PAR T OF T H E CAP I T A L AS S E T S O F A N Y O IL A ND G A S CO M PANY. T H E ' D E V E L OP M E NT ' A CT I V I T Y C A N BE S UMM A R I ZE D I N S IM P L E T E R M S A S C R EA T I O N OF F A C I L I TI ES/ IN F R AS T R UC T U R E TH A T E N A B L E EX TR A C T I O N O F O IL & GAS I N TH E S AM E M A NN E R T H A T A FA CT O R Y A ND I T S P L A NT A N D M AC HIN E R Y A R E S E T- U P T O F A C IL I T AT E PRO DU C T ION O F GOO D S. D) PRODUCTION ACTIVITIES A F TE R TH E F I E LD I S D E V E L O P E D , T H E COM M E R C I A L P R OD U C TI O N W IL L CO MM E N CE . T HI S AC TI V I TY COV E R S A L L O P E R AT I O N S R E L A TI N G T O T H E L I F TIN G , PROCE SS IN G , T R A N S POR T I N G A ND IN AD DI TI O N OP E RA TI O N A N D M A IN T E N A N CE OF PL A N T A N D E Q U I PM E NT S E S T A B L I S H E D I N TH E PR E CED I N G PH A S E. T H E S E CO S T S IN C LUD E M A N POW E R R E QUIR E D FO R PR O C E SS I N G T H E O IL , H EA LTH SA F E T Y E N V I RO NM E NT , R E P A IR S A N D M A IN T E N A N CE, A N D T R A N S POR T A TI O N E TC . E) ABANDONMENT OR SITE RESTORATION A F T E R TH E F I E L D I S FUL L Y E X P L O I T E D A N D N O FURT H ER CO M M E R C I A L P R OD U CT I O N I S P O SS IBL E , T H E FI E LD I S T O B E AB A ND O N E D . IN O RD E R TO A B AN D O N T H E F I E L D , C E RT A IN AC TI V I T I E S A R E T O B E CA RRI E D O U T TO R E TU R N T O TH E S I T E T O I T S N A TU R A L S T A T E O R R E N D E R T H E S ITE C O M P A TI B LE WIT H IT S INT E ND E D U S E A FT E R T H E C ESSA TI O N O F P E TR O L E U M O P E R A T IO N S. T H ES E A C TI VIT I E S INC L UD E PR O P ER AB AND ON M E NT OF T H E W E LL S, R E M OVAL OF E Q UI P M E N T , S T R U CT UR ES A ND D E BR I S E T C . IT I S IN S I S T E D B Y TH E LI C E N S EE A ND T H E G O I T H AT A T EC HN I CA L ES T I M A T E O F TH E CO S T S S HO U L D B E D E T E RMI N E D AND A PROV I S I O N T O BE M A D E B Y W AY O F A S IT E R ES T O R A TI O N F UND T O M EE T TH I S O B L I G A TI O N . W E S UBMIT TH A T A L L T H E CA PIT A L C O S T S F O R EX PL O R A TI O N , A PPR A I SA L A ND D E VEL O PM E NT A R E C A P I T A L I ZE D A N D D E PR E C I A T ED / D E PL E T E D B Y ' U NIT OF PR O DU C TI O N M E TH OD ' . A LL C O S T S A SS OC I A T E D W ITH PR OD U C T I O N AC TI V IT I ES A R E C H AR G E D A S R EV E N U E E X P E N DIT U R E . T H E A B OV E ACCO UN T I N G TR EA TM E NT I S G L O B A L L Y A CCE PT E D A ND I S A L SO P R E S C R IB E D B Y TH E I N S TI TU TE OF C H A RT E R E D A CC O UNT A NT S OF IN D I A F O R ACCO UN TI N G O F O I L A N D G A S AC TI VI TI E S I N INDI A. 1.3. FACTS OF APPELLANTS CURRENT CASE D UR IN G TH E YE A R UNDE R APPE A L , T H E APP E L L A NT R E TUM E D NI L INC O M E UN D E R TH E N O RM A L P RO VI S I O N S O F T H E I NCO M E TAX A C T , 1 96 1 ( ' TH E A C T ' ) A F TE R SE TT IN G OF BR O U G H T FO R WA R D L OSS E S A ND U N A B SO R B E D D E PR EC I A TI O N . A S T H E B O O K PR O FIT UND E R S EC T I O N 11 5 J8 OF TH E AC T WA S M O R E T H A N TH E N O R M A L P R O V I S I O N S OF TH E ACT , T H E APP E LL A N T RE TU R NE D A TO T A L INC O M E OF IN R 1 6 , 34 ,9 6 ,7 76 U N D E R SE CT I O N L1 5 JB OF TH E A CT . W E H AV E PR OV ID E D BE L OW TH E SE QU E N C E OF E VE N T S AS R E G A R D S T H E P R O C EE DI N G S IN I TIAT E D FOR T H E A SSES S M E NT YEAR ( ' A Y ') 2006 - 0 7 A T T HE VA R IO U S L E V E L S. ITA NOS.802,803,1077,2154 & 2155/MDS/2010 6 143(2) T H E L EARNE D ASSESS IN G OFF I CE R ( ' AO') CO MP L ETE D TH E A SS E S SMEN T UN DER SEC T ION 1 43(3) OF TH E ACT VIDE ORDE R D A T ED 3 1 DECEMBE R 2008. O R D E R B Y TH E CI T ( A ) V I D E I T S O RD E R D A T E D C IT ( A ) 22 M A R C H 2 01 0 DIR E C T E D TH E AO N O T T O A DD B ACK TH E PR OVI S I O N FO R S I T E R ES T O RATI O N WH I L E CO MPUTIN G BOO K PR O FIT S F O R T H E PURP O SE OF SE C T I O N 11 5 JB. H O W EVE R THE A PPEL L A NT 'S C L A IM FO R A D J U S T MENT OF D EP L E T I O N IN CO M P U TI N G B OO K P R O FIT UN DER SEC TI O N 1 1 5 J B W A S R EJE CT E D B Y T H E C I T( A ) . TH E AO P ASSE D TH E O R DE R AND M ADE T H E FO L L O WIN G A DJU ST M E N TS: DI SA L L OWED PROV I S I O N FO R S I TE R ESTO R AT I ON ; A ND EXC LU DE D DEP L ET I ON W HIL E COM PUTI N G T H E TOTA L D E P REC I ATIO N L OSS U N D E R SE CT IO N 1 1 5 J B OF TH E AC T T H E APPE LL A N T P R E F E R R E D AN A P P EA L BEF O R E T H E CO M MI S S I O N E R O F IN C O M E - TA X (A PP E A L S) ('C IT (A) ' ) T H E APP E L L A NT H A S PREF E RR E D A N A PP EAL B E F O R E T H E H O N ' B L E T RIBU NA L A G A IN S T T H E O R D E R O F C I T ( A ) CHALLENGING O N F ACT U A L G R O UND TH A T D E PR E C I A T I O N IN C LUD E S D E PL E T I O N IN O I L A ND G A S INDU ST R Y . D E PL E TI O N I S N O THI N G BUT D E P R E CIATI O N AS P E R T H E G UI D A N CE NO T E O F T H E I CA I . ACC O R D IN G L Y, F O R CO MPUT AT I ON OF B OO K P R O F I T S UN D E R SEC T I O N I 1 5JB , D E PL E TI O N S HO U L D F O R M P A R I OF U N A B SO RB E D D EP R EC I AT I O N . T H E AO HA S FIL E D A N A P PE A L B E F O R E TH E H O N ' B L E TRI B UN A L A G A I N S T TH E O RD E R OF C IT (A) O N S I T E R E S TORATIO N . OUR SUBMISSION : 2,1 DEVELOPMENT COSTS ARE CAPITAL EXPENDITURE IN NA TURE . AS M E N TI O N E D IN P A R AG R A PH I , TH E O I L & GAS AC T I V I T Y I N V O L V ES DI F F E R E N T P H ASES S U C H A S EX PL O R A T I O N , D EVE L O PM E N T A N D P R O D U C TI O N W H I L E TH E D EVE L O P M E NT PH A SE I S C RITI CA L I N T E R M S O F IN C UR R IN G S UB S T A N T I A L CA P IT A L COS T S O N A SSE T S S U C H AS D EVE L O PM E NT W E LL S . WA T E R IN JEC TI O N WE LL S, WE LL H EA D S AN D C HRI ST M A S T R EES , FLOW L INE S , C ONTR O L U MBI L IC A L , PL A T FO R MS. SE PAR A T O R S , TA N K AGE, P U MP S , A RTIFI C I A L LI FT A N D O T H E R P R OD U CT I O N A ND I N JEC T I O N F AC I L I TI ES E T C . T H E D EVE L O PM E N T P H ASE I S A F U ND A M E NT A L ITA NOS.802,803,1077,2154 & 2155/MDS/2010 7 FOUND A TION OF DRI LLIN G AND CON S TRU CTIN G W E L L S FO R E XTRAC T ION OF OIL AND GA S AND E R E CTIN G VARIOU S PL A N T AND MACHI N E R Y FOR COMMENC E ME N T OF COM M E R C I A L P R ODUCTIO N . THI S PHA SE INVO L V ES SE TTIN G UP TH E ASSE T S T H AT A RE U S ED TO EX T R A CT O IL A ND GAS F ROM THE R E S E R VO I R S IN THE M I NI N G AR E A OV E R A P E RIOD OF TIME . A C C ORDIN G L Y , WE S UBMIT THAT TH E D EV ELOPM E NT CO S T S A R E CAPITAL IN NATUR E A ND DEPL E T I ON (D E PRECI A TION) IS CHAR G ED ON T HE BA SIS T HE ' UNIT O F PR O DUCTION M E TH O D ' . 2.2. ACCOUNTING TREATMENT FOR DEVELOPMENT COSTS I T I S A G E N E RA LL Y ACCE P TED ACCO U NT I NG P R ACT I CE TO C A PITALIZE T HE S E COST S AS A SS ETS IN T H E B OOK S OF ACCOU N T S. I N A N Y O IL A N D GAS CO M P A N Y TH E DEVE L O PM E NT C OST I S A S UB S T A NTI A L COS T OF IT S PLA NT A N D MAC HI NE R Y A N D IS CL U BBED A N D N O M EN C L ATE D A S DEVE L O PM E NT CO S TS , IN TH E BOOKS OF ACCO U NT S . A S PER P A RA 38 O F TH E G U I D A N CE NO T E I S S U E D B Y T H E IN S T I T U TE OF C HART E R ED ACCO UNT AN T S O F I ND IA ( ' I CA ! ' ) : ' WH E N A W E LL I S R E A D Y T O CO MM E N CE CO M M E R C IA L P R ODU C TI O N , D E V E LOPM E NT CO ST CO RR ES P O NDIN G T O P R O V E D D E V E L O P E D O I L A ND G AS R E S E RV E S S HOULD B E C AP I TA L IZ E D ' . T H E DEVE L O P M E NT A SSE TS W HI C H A R E CA PITALI Z E D N EED T O BE A M ORT I ZE D DUE TO U SAGE , WEA R A N D T E AR A N D EFF LU X OF T IM E . A S IS A GENE R A L A C CO UN T IN G N O R M, A LL C A PITA L ASSETS A R E S UBJ EC T T O D EP R EC I ATIO N IN TH E BOO K S OF ACCO UNT S . WE H AV E D I S C U S SED IN THE S UB SEQ U E NT PARA G R AP H S , THE M ET H ODO L OGY F O R COMP U TA TI ON OF DEP R EC I AT I ON O N DEVELO P ME NT ASSETS A ND TH E N O M ENC L A TUR E U SE D TH E R EI N . 2.3. DEPLETION (DEPRECIATION) IS CALCULATED BASED ON UNIT OF PRODUCTION METHOD . WE S U B MI T TH A T DE PL E T IO N ( D EP R EC I A T IO N ) O N DEVE L O PM E NT C O S T I S CA L C UL A T E D B A S E D O N UNIT OF P R ODUCTIO N MET H OD, W HI C H I S A GE N E R A L L Y A CCE PT E D A C C OUNT I N G ME T H O D A N D I S F O LL O W ED BY A LL ACCO U N TI N G S T A N DA R DS I N T H E WO RLD IN C LUD ING T H E G UID A N CE NO T E I S SUE D BY T H E I CA I . TH E G U I D A NC E NO T E D E S CR I B ES TH E M E TH O D A S UND E R: ' TH E M E THOD OF D E P R E CIA T IO N ( D E PLETI O N ) UN D ER W H I C H D EP R EC I A T ION ( DE PL E T ION) I S C AL C ULAT E D O N TH E BA S I S OF TH E NUMB E R OF PR O DU C T ION OR S I MI L AR UNI T S E XP E CT E D T O B E O BTAIN E D F RO M TH E A SSE T B Y TH E E NT E R PRIS E '. ITA NOS.802,803,1077,2154 & 2155/MDS/2010 8 IN SHORT, THE DEPRECIATION (DEPLETION) IS CALCULATE D BY THE FOLLOWING FORMULA: CAPITA L I S E D CO S T S - - ----- - ------- - -------------- - - -- - - - - - - - - X VO LUM E O F PROD U CTI O N O F O I L F O R TH E YE AR TO TAL V O LUM E O F O IL RE S ER V ES W E F U RT H E R S U B MIT TH AT T H E UNIT O F P ROD U C T IO N M ETHO D IS I NTE RNA TI O N AL L Y RECO G N I SE D M E T H OD FOR CO M P U T IN G DE PR EC I AT I O N (DE P L E TI O N ) I N O I L A ND G AS I N D U S TR Y . PARA 40 OF THE GUIDANCE NOTE OF OIL AND GAS PRODUC ING ACTIVITIES ISSUED BY THE ICAI ' D E P R EC IA T ION ( D E P L E T I O N ) IS C A L C UL A T E D U SI N G TH E UNIT O F PR O DU C TI O N M E TH O D. TH E A PPLI C A T I O N OF T HI S M E TH O D R ES UL T S I N O IL A ND G A S ASS E T S B E I N G W R ITT E N OF F AT TH E S AM E R A T E A S T H E QU A N T I T A T I V E DEP L E T ION OF T H E R E L A T E D R E S E RV E . ' S T ATE M E N T OF R ECO M M E N D E D PR AC T I C E ( ' SOR P ' ) O N ACCO U N TIN G F O R O I L A ND GA S I ND U S TR Y I S S U E D B Y T H E A CCO UNTIN G S T A ND A R D BOA R D , UK P R O V I D ES FO R S U GGES T E D F O RM A T S F O R DI S C L O S U R E OF DE P R EC I A TI O N AS 'ACCU MUL A T E D D E PR E C I A TI O N . D EP L E T IO N A ND A M O R T I ZA TI O N ' . P E R T H E S ORP , COS T S P E RT A I N I N G T O EX P L O R A TI O N A N D D E V E L O PM E N T S H O U L D B E CA P I T A L I Z E D A S P A R T OF T H E RE S P E CTI VE C O S T P OO L S . S U C H COS T P OO L S ARE R E QU IR ED T O B E D E PR E CIAT E D B A S E D O N ' UNIT OF PRODUCTION METHOD' . P A R A G R AP H S 6 8 T O 7 0 [ P A G E 99 O F T H E PAP E R -BOO K- I ] OF T H E SO RP PR OV ID E F O R ' D E PR EC IATI ON ' O N TH E EX PL O R A T I O N A ND D EVE L O P M E NT COS T P OO L S . T H E VE R Y R E F E R E N CE T O 'D E P R E C I A TIO N ' O N EX P L ORAT I O N A ND D EVEL O P M E NT C OS T S IND I CA T E S T H A T ' D E P L E TI O N ' I S N O THIN G BU T ' D E P R E CI A T I O N ' IN TH E OI L A ND GAS I N D U S TR Y. IN OT H E R WOR D S , TH E EX P R ESS I O N DE P R E C I A TI O N A N D DE P L E T ION I S U SE D IN T E RC H A N GEA B L Y T O C H A R GE T H E CA PIT A L C OS T IN T H E P R O FI T A N D LOS S ACCO UN T . P A R A 35 O F TH E ' T H E S TAT E ME NT OF FI N A N C I A L A CCOU N T IN G S T A N D A RD 1 9' R E L A TI N G T O FI NA N C I A L A CCO U N TIN G A N D R E P OR TI N G B Y OI L A ND G A S PR O D U C IN G CO M P A N I ES I SS U E D B Y F IN A N C I A L ACCO UNTIN G S T A N D A R D B OA RD P R OV ID ES TH A T ' . .. C AP I T A LI S E D D EVE L O P M E NT COS T S S H AL L BE AMORTISED (DEPRECIATED ) B Y TH E UNIT- O F - PR O DU C TI O N M E THOD SO THA T E A C H UNIT P RO DU CE D I S ASS I G N E D A PR O R A T A P O R T I O N O F TH E UNA M O R T IZ E D CO S T S ' [PAG E N O 1 3 7 OF T H E PAP E R B OO K-I) . TH E S TA T E M E NT R E I TE R A T ES T H E FACT T H A T DE PL E T I O N I S N O THIN G B U T DEP R EC I AT I O N IN TH E FI E L D OF O I L A N D GAS INDU S TR Y ITA NOS.802,803,1077,2154 & 2155/MDS/2010 9 THEREFORE IT IS AN INTE R NAT I ONAL P R ACTICE TO DEPLE T E ( DEPREC I ATE) DEVELOPMEN T COST OVE R A PE RIOD O F T I M E BY THE UNI T O F P R OD U CTION M ETHOD . 2 . 4 DEPLET I O N IS N OTHING BUT DEPREC I AT I ON I N OIL A ND GAS IND USTRV. FO R T H E PURPOSE OF COMPUTATION OF B OOK PR OF I T WE H AVE SUBMITTED BE L OW THE REASO N S T O CO N S I D E R DEP L ET I O N AS PAR T OF DEP R ECIAT I O N IN COM PUT ATIO N OF BOOK PROF I TS AS PE R SECTIO N 115JB: I T I S A WELL-ACCEPTE D P R IN C IPL E IN TH E F I E LD OF ACC O U NT I N G T H A T WEAR A ND TEA R IN RELA T ION TO A WASTING ASSE T S U C H AS A MIN E I S N O M ENC LA TE D AS DE P LE T ION I N STEAD OF D EP R ECIATI O N SECT I O N 1 1 5 J B C L EA RL Y S T ATES T H A T P R O FIT AN D LO SS AC C O UN T PREPAR E D A S PE R ACCOUNTI N G STA N DARDS AN D AC C O UN TI N G P O L IC IE S S H A L L B E CO N S I D E R E D F OR T HE P U RP OSE OF C O MPU T I N G B OO K PR OF I TS. AS PE R G UIDA N C E N O T E O F O IL A N D G A S PRO DU C IN G A CTI V IT I ES I SS U E D B Y T H E IC A L , 'DEP R EC I AT I ON ALSO I N CL U DES DEPLE T IO N ' F U RT H ER EC H OI N G THE I N D I A N G UI D ANCE , TH E S TA T E M E N T OF REC OMM E ND E D P RACT I CE (' SO RP ') O N ACC O U N T IN G FO R OIL AND G A S IND U S T RY I SS U E D B Y T HE A CCOUNTI N G S T A ND ARD BOA R D, U K P R O V I D ES F O R D EP R EC I ATIO N OF D EVE L OPM E N T CO S T S BA SE D ON TH E UN I T OF P RODUCTION M E T HOD. T H E S TA T EM E NT OF F IN ANC I A L ACCOU N T IN G ST A N DA R D 1 9 RELAT IN G TO FINAN C I A L A CCOU N T I N G A N D R EPO RTIN G BY O I L A ND G A S PR OD UC I N G C OM P A N IES I SS U ED BY F I N A NC I A L A C C O U NTI N G S T A ND A RD BO A R D, US A P R O V I D ES T HAT S UCCES S F UL E XP L O R A T I O N AN D D EVELOPME N T CO S T S SHA L L B E A M ORTI ZE D (D E P RE C I A TE D ) B Y T H E UN IT - OF - P RODUCTION METHOD T O S UM MARISE, D E P L ET IO N OF DEV E LO PM E N T CO S T S I S NO T HI N G BUT DE PREC I ATI O N I N TH E O I L A N D GAS IN D U ST R Y. TO ACCEPT T H E DEPA RTM E NT 'S PO S I TIO N I S AKI N TO D E N Y I N G A MANU FA CTU RER OF GO OD S TH E RIGH T TO C L A IM DEP R E CIA TI O N ON T H E P R OD U C I NG ASSE T , V I Z TH E F AC T O R Y COM PRI S IN G I N TE R A L I A OF P L A NT A ND MA CH I N E R Y . OUR DETAILED SUBMISSION IS AS BELOW : 2.4.1 DEPLETION AND DEPRECIATION ARE ONE AND THE S AME IN OIL AND GAS INDUSTRY. I T I S A WEL L- ACC E PTE D PRI N C I P L E IN T H E F I ELD O F A C C O UN TIN G T H A T WEA R A N D T EA R I N R E L A TI O N T O A WA S T IN G ASSE T S UCH A S A MI N E I S N OM E N C L A T E D A S DE PL E TI O N IN S T EA D O F D E PR EC I A TI O N . T H I S V I E W I S GE N E R A LL Y A CCE P T E D A C CO UN T IN G P RI N C I P L ES A ND I S A L S O S UP P O RT ED B Y TH E G U ID A N CE NO T E O F O I L A N D G AS P R O D U C IN G A C TIV I TI E S I S S U E D B Y TH E I CA I W HI C H S T A T E S A S UND E R : P A R A - 4 ' D E P R EC I A TI O N I S A M E AS UR E OF TH E W E A R IN G O UT ; CO N S UM P T I O N O R O TH E R L OSS OF VA LU E OF A D E PR EC IABL E A S S E T A RI S IN G F R O M U S E .. . D E PR E C IA T I O N ALSO I N C L U D E S 'D E PL E T I ON' O F NATURAL RE SO UR CES T H ROUG H T HE PR OCESS O F EXT RA CT I O N O R U S E . ' [ P A G E N O 69 OF T H E PAP E R BO O K - I] ITA NOS.802,803,1077,2154 & 2155/MDS/2010 10 P AR A - 4 0 ' D E PR EC IATIO N (D E P LET I O N ) IS C A L C U L A T E D U S I N G TH E U NIT OF P R O D U C TI O N M E T H O D . TH E A PPLIC A T I O N OF T H I S M E TH O D R E S UL T S I N O IL A N D G A S ASS E T S B E I N G W R I TT E N OF F AT T H E S A M E R A T E A S T H E Q U A NT ITA T I VE D E P L E TI O N OF T H E R E LA T E D R E S E R V E . ' .I N T H E A B S E N CE O F A CC O UNTIN G S TA N D A RD S IN INDI A , TH E C OMP A NI E S E N GAGE D I N O I L A ND PR OD UC I N G AC TI VI T I E S A R E R E Q UI R E D T O F O L LO W TH E G U I D A NC E NOTE I S S U E D B Y I C A I F O R A CC O UNT IN G I T S EX P L O R A T I O N A N D P R OD UCT I O N A CTIV I TI E S . T H IS V I EW H A S B EE N P U B L I S H E D A S A RTI C L E IN TH E J O UR N A L OF TH E I C A I , A B O D Y W H I C H H A S A L S O I SS U E D TH E ACCOU N T I N G ST A N D A R D S [ P A GE N O 7 0 & 77 OF TH E P A P E R B O O K- I ] 2.4.2. JUDICIAL PRECEDENTS ON ACCEPTABILITY OF GU IDANCE NOTE AND ITS RELEVANCE TO SEC.115JB T H E F A CT T H AT GU I D A N CE N O T E I SS U E D B Y I C A I C A N B E RE LI ED UP O N I N INT E RPR E TI N G ACCO U NT I N G T E RM S O R UND E R S T A N D I N G A CCO U N TI N G M E T H O D S I S A L S O E N D O R S E D B Y TH E S U P R E M E CO URT IN T H E CASE OF C OLL E CT O R O F CE NTRAL EX CIS E, PUNE VS DAI LCHI KARKARIA L IMIT E D [ G J X 0503 - SC] 1 9 99 WHICH H E L D A S U ND ER: ' (26 ) TH E VI E W W E T A K E A BO UT TH E COS T OF T H E R A W M A T E R IA L I S BO RN E O U T BY TH E G U IDA N CE N O T E O F TH E INDI A N IN S TIT U T E O F C H A R T E R E D A C C O UN T ANT S, AN D TH E R E C A N B E N O D O U B T T HA T T HI S I N S T I T U T E I S A N A U TH O R I TAT IV E B O DY I N TH E M A TT E R OF L AYIN G D O W N AC CO U N T A N CY S T A ND A R D S ' . [ P A GE N O 1 8 7 OF TH E P AP E R B OO K - I ] F URTH E R , TH E MA DH YA PR A D ES H HI G H CO L L L I I N T H E CA S E OF CO MM ISSIONER OF IN CO M E TA X V S S TATE B A NK OF IND O R E 20 05 -( IT4 ) - G J X-03 11 -MP [PA G E N O 1 8 9 O F T H E PAP E R B OO K - LJ H AS A L S O UPH E L D T HE A B O V E P RIN CIP L E . SECT I O N 11 5 J 8 C L EA RL Y S TATE S THAT T H E PR OF I T A N D LOS S ACCOU N T PREPA R ED A S P ER ACCO U NT IN G ST A NDARD S A N D ACCO UN TING PO L IC I E S S H A L L BE CO N S ID E R E D FOR TH E PURPO SE OF C O MPUT I N G BO O K PROFIT S . I N TH E A B S E N C E OF A N ACCOUNTIN G ST A NDARD F O R OIL AND GAS ACCO U NTIN G I N I NDIA , TH E G UI DA N CE NOTE I S S U ED B Y TH E SUP R EME ACCOU NT ING BODY OF IND I A (TH E IN S T I T U TE O F C H A R TE R ED ACCO UN TA N T S OF INDI A) I S TH E O NL Y B AS I S TO B E A D O P TE D FO R CO M P U TI N G D E PR EC I ATIO N / PR OF I TS A ND L OSS A ND S U C H M O D E O F AC C O UNTIN G S HOULD B E T H E BA S I S F O R CO MPUTIN G B OOK PR O F IT S A ND UND E R S T A N D IN G O F T H E M E ANIN G OF ' D E PR EC I AT I O N ' UND E R S EC TI O N I 1 5 J B 2.4.3. INDUSTRY PRACTICE . THE FA C T TH A T BOTH DE PR E CI A TI O N A ND D E PL ET ION ARE A M EAS UR E M E NT OF WE ARING OUT ASSETS C A N B E I NF E RR E D F R O M T H E AN N UAL R E PO R T OF OIL A ND NATUR A L G AS CO RP ORA T I O N LIM IT E D FO R TH E Y EA R E N D E D 31 5 1 M A R C H 20 10 [ P AGE N O 1 77 OF TH E PAP E R B O O K - I ] . 2.4.4 DICTIONARY MEANING WI K I PE DI A, TH E E NC Y CLOP E DI A IN EX PL A I N I N G ABO U T D E PL ET I O N PR O V I D ES T HA T ' D E PL E TI O N I S SI IM IL AR T O D E PRECIATION IN T H A T, IT I S A CO ST RE CO VE R Y SYSTE M FOR ACC O UNTIN G AND T AX RE P O RTIN G ' [PA GE N O 6 7 OF TH E PAP E R BOO K-I] . ITA NOS.802,803,1077,2154 & 2155/MDS/2010 11 WE S UBMIT T H A T TH E L E ARN E D C I T(A ) HA S ERRE D IN S T AT IN G THAT DE PL E TION I S NO T D E PR E CIATION IN O I L A ND GAS INDU ST R Y. DEPL ET I O N I S N O TH I N G BUT D EP R E CI AT ION IN THE O IL A ND G A S I NDU S TR Y . 2.5 S P EC I F IC OB S E R VA TI O N S B Y C ITCA) IN TH E O RD ER F OR TH E A Y 20 06 - 07 AND O U R R ES P O N S ES T O TH E SA M E PA R A C I T(A)'9 OB S EN ' ATI : OL 1 OU R C O M M E N TS R EF 6.2 (I ) D E PLE TI O N MA Y I N C LU D E D EP R EC I A TI ON WIT H RE S PECT T O THE A B OV E , W E W I S H TO S UB MI T TH AT AS P E R I CA I G U IDE LIN ES B UT W E HA VE L E AR N ED C I T(A) HA S IN CO RR ECT L Y CONCLUD E D TH A T TH E T O A N ALY ZE S EC. 32 W H I CH IS TH E MA IN M EA NIN G OF D E PR E CI A TI O N HA S T O B E B O R R OW E D F R O M S EC T I O N D E ALI NG WIT H D E P R E C I A TI O N S ECTI O N 3 2 O F TH E ACT WH E N TH E I S S U E UND E R A N D U N ABSO R B E D D E P R EC IA T I O N A N D C ON S IDERAT I ON PERT A I N S T O SEC TI O N 11 5 J8 , W HI CH I S A WH IC H IS PA R T OF I T ACT 1 96 1 . SO TH E N O N- O B S TANTE C L AU SE . M E AN I N G FO R DEPR E C I A T I ON AS P E R SEC T I O N 32 W ILL BE P R EF E R R ED OV E R AS P E R SEC T I O N 1 1 5JB OF T H E AC T : T H E M E A N IN G A S P E R IC AL GUID E LIN E .. . SI M ILA RL Y D E FI NITI O N OF ' EV ER Y A SSESSEE, BE IN G A C O MP A N Y , S H A LL , F O R TH E DEP R E CIA T IO N U N D E R C O MPANI ES A C T PURPO S E S OF T H I S S EC TI O N , PR E P A R E I TS PR OF IT A N D L O SS I S IR R E L E VAN T AC C O UNT FO R TH E R E L EVA N T P REV I O U S YEA R IN ACCO R D A N CE W ITH TH E PROVI S I O N S OF PART S I I A ND III OF SC H E DUL E V I ITA NOS.802,803,1077,2154 & 2155/MDS/2010 12 PARA C I T(A ) ' S OB S E R V A TIO N OU R COM M EN T S R E F T O T H E CO MPA N I ES ACT , 1956 (1 OF 1 956 ): ' PR OVID E D THAT WH IL E P R E PARI N G TH E ANN U A L ACCO U N T S IN C L U D IN G PROFI T A N D L O S S AC C OU NT , - ( I ) TH E AC CO U NT IN G PO L I C I E S; ( II ) TH E A C C O U NTI NG S T ANDA R DS AD OP T E D F O R P R E PAR IN G S UC H A CCO U NT S IN C L UD IN G PR O FI T A N D L O S S A CCO UN T ; (I I I) THE M ET H O D A N D RAT ES AD OPT E D FO R C A L C ULA T IN G T H E D E PR E C I A TIO N , S H A LL B E TH E SAM E AS H AVE B EE N ADOP T E D FO R T H E P URP O SE O F P R E PA RIN G S U C H ACCO UN T S I N C LU DI N G PROFIT A N D L OSS ACC O U NT AND LAID B E FO R E TH E C O M P A N Y A T I T S A NNU A L GE N E RAL M EE T I N G I N A CC O RD A N C E W ITH T H E P R OV I S I O N S OF SEC T IO N 2 1 0 O F T H E CO M PA NI E S A C T , 1 956 ( L OF 1 956) ' . F URTH E R , W E A L S O PL ACE R E L I A N CE O N T H E FO LL OW I N G D E C I S I O N S W H E R E I N I T WA S H E LD T HAT TH E M E A NI N G O F TH E T E M 1 ' DEPRECIATION ' H A S T O B E UN D E R S T OO D F R OM TH E C O MP A N Y L AW P R OV I S I O N S A ND NO T A S P E R T H E A CT F O R T H E A P P L I CA B IL IT Y O F 1 1 5 J B T H E S UP R E M E CO UR T I N T H E C A SE OF S UR A N A S T EE L PRIV A TE LI M ITE D V S DEPUT Y CO MMI SS I O N E R O F INCOME-TA X (237 ITR 777) H A S OB S E R V E D T H A T ' T H E R E IS N O R E ASO N T O ASS I G N / 0 TH E T E R M ' L O SS ' A S OC C UR RI N G I N SEC T ION 2 05 , P R OV I S O C L A U S E (B ), OF T H E CO MP AN I ES AC T , A M EA N I N G D I FFE R E N T FR O M T H E ONE IN W H I C H IT I S UND E R S T O OD TH E R E I N SO L E L Y B ECA U SE I T I S B E I N G R E A D A L O N G ' WITH SEC T IO N 115J OF T H E I N CO M E -T A X AC T ' . TH E P RIN C IP L E T H A T W H A T I S P E RM I SS IB L E U ND E R CO MPAN Y L AW IN V I EW O F TH E F A CT S TH A T I T H AS TO B E CO M P UT E D I N T E R M S O F P A RT I I A ND P A R T II I OF SC H E D U L E V I I O F T H E COMP A NI ES 1 9 5 6 W O U L D DI CTA T E C O M PUT A T I O N E X CEP T TO T H E EX T EN T TO W H IC H A D J U S TM E N T A R E R E QU I R ED T O B E M A D E O TH E R WI SE B Y A S P E C IFI C P R O V I S I O N . ITA NOS.802,803,1077,2154 & 2155/MDS/2010 13 PA R A CIT( A) S OB SE R VAT I O N OUR CO M MENTS R E F [ N BUT T W E L D ED T O O L S PRI V ATE L IMIT E D VS AC I T ( 39 ITD 43 2 ) T H E CHEN N A I T RI BU N A L I N T H E CO NT EXT O F SEC T ION 1 1 5 J OBSERV E D T H A T T H E F A CT T H A T C O M PA NY L AW P R OVI S I O N S A R E I N CO RP O R A T E D I N 1 15 J INDIC A T ES C L EA R LY TH A T TH E OBJECT OF TH E L AW FO R L EVYI N G M INI M UM A LT E R N A T E TA.X I S LI N KED TO T H E B OO K P R OF IT AN D TH E M EA NI N G C O N S ON A N CE T H E R EO N U N D E R T H E CO M PA NI ES A C T . IN KRI S HNA OIL EX TRACTION L IMI TE D VS C IT(19 9 8) 23 0 ITR 806 (MP H I G H CO URT ) IN T H E CO NT EX T O F 1 1 5 J , I T WAS OB S E R VED TH AT TH E B AS I C ID E A O F I NC O R PO R A T IN G T H E PR OV I S I ON OF C O MP A N Y L A W I S T O W OR K OU T T H E T AXA B L E B OOK P ROF IT S IN TH E L I G HT O F C O M PA N Y L A W. S I MI L A R V I EWS WE R E T A KE N IN TH E C ASE OF CI T VS AD OO N E LECTRONIC S PRIVATE LIMITED 232 ITR 528 . F U RT H E R , TH E MUM B A I I T AT IN TH E CA S E OF K F A CORPORATION LTD . VS JCIT (ITA N O . 5147/MU M /2002 ) H A S A L S O O B S ER V E D TH A T WH E N T H E S T A R TI N G PO IN T OF M AT P ROV I S I O N S I S N E T P R OF I T AS P E R T H E P & L ACCO UNT P R EPA R E D IN ACC O R D A NCE W ITH T H E C OM P A NI ES ACT A N D T H E R EFO R E TH E S T AR TIN G P O INT F O R CO N S I D E R I N G BR O U G H T FORW A RD L OSS O R U N A B S O RB ED DE PR EC I A TI ON H AS T O B E V E RY S A M E SE T OF A C C O U NT S O NL Y. I T I S IMP O RT A NT T O NOT E T HAT S E CTI O N 2 11 ( 3A) O F T H E C O MP A NI E S A CT , 1956 R E QUIR E S C O MP A N I ES T O PREP A R E TH EI R F I NANCI A L S TA T E MEN T S IN CO MPLI A NCE WI TH TH E ACC OUNT I N G S T A ND A RD S I SS U E D B Y TH E IN S T ITU TE OF C HA RT E R E D ACCO UNT A NT S O F INDI A . I N THE AB S E NC E OF A N Y ACCO UNTIN G S T A ND A R D O F T H E I CA I FO R O I L A ND G A S CO MP A NI E S , T H E G U I D A N C E N OT E OF T H E I C A I I S R E LI ED U P O N B Y TH E ASSESSEE . 6.2( III ) SEC TI O N 11 5J B I S A SE L F CO NT AI N E D S E C TI O N 11 5JB I S A NO N- O B S T ANT E C L A U SE A ND C O D E D OES N O T M E AN THA T T H E MEA NIN GS / D E FIN ITI O N S AS UND E R S T OOD FO R N ORMA L M E ANIN G OF D E PR E C IA T I O N W I L L HAV E P R OV I S I O N S SHA LL N O T B E A PPLI CA B L E FO R TH E T O B E BO RR O W E D FR O M OU T S I D E W H E N P URPO SE OF SE CT I O N I 1 5 J B. ITA NOS.802,803,1077,2154 & 2155/MDS/2010 14 F. ITS M E ANIN G CAN B E INF E RRED F R OM S E CTI O N 32 IF THE IT ACT 1961 ITS E L F A N D D E PRE C IATION A ND DEPL E TION ARE SEPARAT E LY US E D I N SEC T IO N 4 2. 6.2(IV) I N T H E P & L A LE I T S E L F FO R TH E R E L EVAN T YEAR, D E P R EC I A T IO N A ND DEP L E TIO N ARE SEPARATE L Y M E NTI O N ED . T H E DEP R EC I A TI ON ON FIXE D ASSE T S A ND DEP L E T ION T O WA R D S DEVE L O PM E NT E XPE ND I TUR E ARE SEPA R A T E L Y M E NT IO N E D IN SC H- 14 OF TH E P & L A/C SECT I ON 1 1 5J 8 , I N F ACT , S PECIFICAL L Y RE QUIR ES TH AT ' D E PR E CI A TION ' AS PER BOOK S OF ACCOUNT S S HOU L D BE A D OP T ED FO R COMP U TIN G B OOK - PROFIT S . ACC ORDIN GLY, MEAN I N GS / AL L OWANCES U N D E R OTHER SECT ION S A R E N O T TO B E CO N S I DE R ED FOR TH E PURPO S E O F SE CT I ON 1 1 5 J B . R EFE R EN C E TO SECT I O N 32 / SEC TI O N 42 I S IR RE L EVA N T I N T H E IN S T A NT CASE. J UST AS OTHER PROV I S I O N S F OR T H E PU RP O S E O F N O RM AL COM P U TATIO N [ SECTION 37, SE CTION 3 6 E TC ] DO N OT APPLY F O R COMP UT ING BOOK PR O F I T S U N D ER SECT I O N 1 15J 8 . TH E L E ARN E D C I T(A) HA S F A I L E D T O A PPR EC I ATE T H AT DEPLE T ION O F DEV E L OPM ENT C OS T S I S NO T HIN G B U T D EP R E CIAT I ON IN TH E O I L A ND G A S I N D U S T R Y. T O A C CEPT THE PO S IT I ON O F TH E CIT(A ) IS AKIN TO DE N YIN G A M A N UF AC T U R E R O F G OO D S T HE R I G HT TO C LAI M DEPR EC I A TIO N ON THE PR O D U C IN G A SSET, V I Z THE FACTORY COMPRI S IN G INT E R A LI A O F PL A NT A ND M A CHI NE RY. M E R E U SE OF DI FFE R E NT NO M E N C L A TUR E I N A CCORDA N C E W I T H A CCO UN TI NG G U I D A N CE DOE S N OT S I G NI FY T H AT ' D EP L ET I O N ' I S N OT ' D E P REC I AT I ON ' . THE C I T(A) O U G H T T O H A V E APPRECIA T E D T H A T ' DEPL E T ION' I S, IN S UB ST A N C E ' D EP R E CI AT I O N ' . THE G U IDANC E NOT E IS S UED BY TH E L C A I FO R O I L AN D G AS AC C O UNT IN G S P ECIF I C A L L Y S T A T ES T H A T 'DEP R EC I ATION ' AND ' DEPLET I ON ' A R E ON E A N D T HE S AM E. TH E S UP R E M E C O URT I N TH E CASE OF CCE V S DAI L C H I KARKAR I A LIMIT E D [G J X - 0 503 -S C] 1999 H AS HELD THAT GU I DANC E N O TES S H O UL D B E CON S ID E R E D FOR UNDE R S T A N D I N G ACC OU N T I N G A N D THE I CA I I S AN A U THORIT A T I VE BO D Y IN L AY IN G D OW N A CCOUNTIN G S TAND A RD S . TH E P OSI TION A DOP TE D B Y TH E A S SES S EE [ THA T D E PL E TI ON I S S A ME AS DE PR EC I AT I O N] I S A L S O IN LIN E WIT H T H E A CC OU N TI NG PR A C T I CES A ND G U IDANCE FOR OI L A ND GAS C O M PA NI ES GLOBA L LY. ITA NOS.802,803,1077,2154 & 2155/MDS/2010 15 PA R A CIT(A)'S OBSE R VA T IO N OUR COMMENTS R E I ' 6. 2 ( VII ) TH E O B SE RV A TI O N OF TH E AA R IN TH E TH E L EA RN E D C I T(A) H A S E RR E D IN PL AC IN G C A SE OF R AS H TRI YA L SPA T N I G AM LT D . R E LI A N CE O N T H E D EC I S ION OF TH E AA R IN T H E C ASE S QU A R E L Y A PP LI ES IN THI S C A SE I N TH A T OF R AS H T RI Y A I S PA T NI GA M LTD A S TH E S AID TH E A CC O UNT S P R E P AR E D UN DE R TH E DE C I S I ON D O E S NOT D E AL W ITH THE I S S U E O F WH E TH E R CO M P AN I ES AC T MU S T B E M O D I FI E D ' D E PL E TI O N ' F O RM S P A II O F ' UNAB S O RB E D W H E R EE V E R N E C E SS AR Y T O CO M P L Y D E P R E CIAT IO N'. TH E S A I D DECI S I O N I S O F N O W ITH TH E P R O VI S I O N S OF S EC T ION R E L EVA N C E TO TH E FA C T S OF THE IN S T A NT C A SE . 11 5 J B . SO D E P R EC I A T I O N M U S T B E TR E AT E D D IF FE R E NTLY FR O M SECTION 115 . 1 B D O ES NOT REQUI R E MODIF I CAT I O N OF D E PR EC I A TI O N A N D UN A B SO R B E D F I G U R ES W I T H R ES PECT TO UNAB S O R B E D D E PR E CI A TI O N / D E P R EC I A TI O N M E A NIN G TH E R EBY TH A T L OS S. T H E S ECTION INFACT S TAT E S T H AT FI G UR ES A S P E R D E PL E TI O N WILL B E P A RT O F B U S IN E SS ACCOU N TS S H OU L D BE ADOPTED. L O SS A ND N O T P A RT OF D E PR EC IATI O N W E S UBMIT THAT TH E A PP E LLANT H AS C OMPLI E D WITH SCHEDULE VI REQUIR E M E N TS F O R TH E PURP OSES O F S ECTI O N 115JB AND H AS PR E PAR E D IT S ACCOUNTS BA SE D ON THE G UI DA N CE N O T E O F TH E I CA I A ND IN ACCORDANCE WI T H T HE GE N E RALL Y ACCEPT E D A CCOUNTING PRIN C IPL ES . 2.6 NON APPLICABILITY OF MAT TO THE APPELLANT WITH O U T PR E J U DIC E T O TH E A BOV E A R G U M E N T S, W E HUMBLY S UBM I T TH A T TH E P ROVIS ION S O F S E C TI O N 11 5 . 1B A R E NOT A PP L IC A BLE TO TH E APPE LL A N T , IN TER M S OF THE P SC E NT E R E D B Y TH E APP E LLA NT WITH TH E GOVE RNM E N T OF IND I A . ART I C L E 1 6 . 4 OF TH E PR O DU CTIO N S H A R I N G CO N T R A CT (PSC) [PA GE N O 1 9 5 O F PA PE R B O O K-I } S T A TE S A S UND E R : ' NO T W ITH S TANDING ANYTHING CO N TAIN E D ILL AN Y AC T (OR TH E TIM E B E ING IN F O R CE [ EMP H A S I S S UPPL I E D] , IT I S E XP R ES S L Y A G R EE D A M O N G S T PARTI E S THAT TH E CO M P A NI ES S H A LL N O T B E LI AB L E T O TH E G O V E RNM E NT O R ANY S T A T E G O V E RNM E NT F O R PAYM E NT OF T H E FO LLOW I N G AMOUNT S: (C) A N Y O TH E R T A XES CA L C UL A T E D W ITH R E F E R E N C E T O I N C O M E FRO M P E TR O L E UM E X CE P T IN CO M E T A X ES P AY AB L E T O TH E GO V E R NM E NT A S S P E C IFI E D ILL ARTI C L E I6 ' [ EMP H A S I S S U PP LI ED] W I TH R E G ARD TO THE ABOVE , WE W I SH TO S U BMI T T H A T UND ER ARTI C L E 1 6 OF THE PSC , REFE R ENC E I S M ADE O NL Y TO PR O VI S I O N S OF S ECTION 4 2 O F THE AC T A N D N O REFE R E N C E I S MADE TO T AX UNDER S E CTION 1 1 5 . 1B O F T H E A CT . A CCO R DIN G L Y , T H E APP E L L A NT I S NOT LIAB L E TO TA X UNDER THE SA ID PR OV I S I ON . IT IS C L EA R THA T BA SE D ON THE P S C TH A T THE PROVI S ION S O F SE CTI O N 115JB AR E N O T A PP L IC A BL E T O T H E A PP E LL A N T . 3. OUR PRAYER THE ORDER OF THE CIT(A) DESERVES TO BE QUASHED HAV ING REGARD TO THE FOLLOWING: T H E C I T(A) H AS ER R ED I N HO LD I N G TH AT MEA N ING OF D EPREC I ATIO N HA S TO B E ADOPTED AS P ER SECT I O N 32 O F T H E ACT WH E N T H E ISS U E UND E R CO N S ID E R A TI O N P ER T A IN S T O SECT I O N 11 5 J B W H I C H I S N ON - OB S TA N TE P R OV I S I O N . ITA NOS.802,803,1077,2154 & 2155/MDS/2010 16 O N T H E BA S I S OF A LL OF TH E A B OVE S UB M I S S I O N S, I T I S PR AYE D TH A T A P PE L L A NT 'S AP PE A L B E A LL OWE D A ND JU S TI CE RE ND E R E D . TH E ORD E R OF TH E C IT (A) TO T H E EXT ENT P R EJ U D I C I A L T O T H E A P P E LL A N T IS B A D I N L A W A ND D ESE R VE S TO B E Q U AS H ED. APPELLANT EXECUTIVE SUMMARY ON MERITS ISSUES RAISED BY AO APPELLANTS SUBMISSIONS DEPRECIATION DOES NOT IT IS A WELL-ACCEPTED PRIN CIPLE IN THE FIELD OF ACCOUNTING THAT INCLUDE DEPLETION WEAR AND TEAR IN RELATION TO A WASTING ASSET SUCH AS A MINE IS NOMENCLATED AS DEPLETION INSTEAD OF DEPRECIATION SECTION 115JB CLEARLY STATES THAT PROFIT AND L OSS ACCOUNT PREPARED AS PER ACCOUNTING STANDARDS AND ACCOU NTING POLICIES SHALL BE CONSIDERED FOR THE PURPOSE O F COMPUTING BOOK PROFITS. AS PER GUIDANCE NOTE OF OIL AND GAS PRODUCING ACTIVITIES ISSUED BY THE ICAI, DEPRECIATION ALSO INCLUES DEPLETION FURTHER ECHOING THE INDIAN GUIDANCE, THE STATE MENT OF RECOMMENDED PRACTICE (SORP) ON ACCOUNTING FO R OIL AND GAS INDUSTRY ISSUED BY THE ACCOUNTING STANDARD BOARD, UK PROVIDES FOR DEPRECIATION OF COSTS BASED ON TH E UNIT OF PRODUCTION METHOD. THE STATEMENT OF FINANCIAL ACCOUNTING STANDARD 19 RELATING TO FINANCIAL ACCOUNTING AND REPORTING BY OIL A ND GAS PRODUCING COMPANIES ISSUED BY FINANCIAL ACCOUN TING STANDARD BOARD, USA PROVIDES THAT SUCCESSFUL E XPLORATION AND DEVELOPMENT COSTS SHALL BE AMORTIZED (DEPRECIATED) BY THE UNIT-OF-PRODUCTION METHOD. TO SUMMARISE, DEPLETION OF DEVELOPMENT COSTS I S NOTHING BUT DEPRECIATION IN THE OIL AND GAS INDUSTRY. TO ACCEPT THE DEPARTMENTS POSITION IS AKIN TO DENYING A MAN UFACTURER OF GOODS THE RIGHT TO CLAIM DEPRECIATION ON THE P RODUCING ASSET, VIZ. THE FACTORY COMPRISING INTER ALIA OF PLAN T AND MACHINERY. ITA NOS.802,803,1077,2154 & 2155/MDS/2010 17 B E FOR E TH E INCOME T A X APPELL A T E TRIB UN AL ' A' BENCH , CH E NNA L ITA NO . 107 7 /CHNY - 2010 - DEPARTMENT ' S APPEAL IN THE CASE O F H ARDY EXPL O RATION & PRODUCT I ON (INDIA) IN C (ASSESSMENT Y E AR : 2006 - 07) I. PROVISION FOR SITE RESTORATION IS AN ASCERTAINED LIABILITY. 1.1. BACKGROUND OF SITE RESTORATION IN OIL INDUST RY AND THE FACTS RELEVANT TO THE APPELLANT. H E PI H AS E N T E R ED INT O A PR O DUCTI O N S H A R IN G C ONT R ACT ( ' PSC ' ) W ITH TH E G O V E RNME N T OF INDI A A N D O TH E R J O INT V E NTUR E P AR TN E R S WITH R ES P ECT T O T H E CONTR AC T A R EA C Y -OS- 9 0 1 I ON 30 D E CE MB ER 199 FO R EX P L ORA T ION A N D PROD U CT I O N O F O IL A ND GAS. AS P E R ART I CL E 1 2.9 ( B ) O F T H E PS C EXE CUTED W I T H THE GO VE RNMENT O F L ND I A , TH E S IT E R ES T O R ATI O N AC TIVITI E S IN ACC ORD A N C E WIT H G O O D INT E RNATIONAL P E TRO L EUM INDU S TR Y PR A C TI CE S H O U LD B E M A DE TO PR E V E N T H A Z A RD S TO T HE E NV IR O N M E N T [ P AG E NO 251 OF TH E PA PE R B O OK - I) . 1 .1 . 1 SI T E R E S T O R A TI O N IS A LIAB ILI T Y M A N DA T ED BY P SC , P E TR OLE U M A N D NA TUR A L GA S RUL E S - 1 959 (' P& N G RUL ES') A ND DI R EC T O RA T E G E N E R A L OF H YD R OCA R BO N S (' D G H '), THE OB LI GA TION OF S ITE R ES T O RAT I O N S TA L 1 S A S S OON AS A WE L L I S D RILLED A ND TO CON S T RU C T / IN S TA LL A F AC I L IT Y FOR EX TR A CTIN G O IL A ND GAS F R O M TH E S U B- S U RFACE IN A NY AREA , WHICH N E ED S TO BE ES TIMATED A ND PR OV I DE F O R T O M EET TH E EVE NTU A L OBL I GA TION AT TH E E ND OF TH E FIE L D L I FE. A RT ICL E 1 .77 OF S U C H PSC D EFI N ES 'SITE RESTO R AT I O N ' TO MEAN ALL A C TI VI TI ES R E QUIR E D T O R E TURN A S I T E TO ITS NA TURAL S T A T E O R TO R E N D E R A S IT E C OM P AT I BL E WITH IT S INT E ND ED AF TE R-U SE (T O TH E EX T E NT R EASO N A B L E, HA V IN G R EG ARD T O IT S FORM ER U S E , IF A NY , A ND S T A T E), AFT E R CESS ATI O N O F P ET R O L E UM O P E RATI O N S IN REL A TI O N T HERET O A N D SHA LL I N C L U DE , WHERE A PPROP RI A T E, PR O P E R A B A NDONM E NT O F W E LL S O R O TH E R FA CI LI TI ES, R E MO VA L OF E QUIPM E NT , S TRUCTUR ES AND DEBRI S, ES T A B L I S HM E N T O F COMP AT IBL E C O NTO UR S A ND D R A IN AGE , R E PL A C E M E NT OF TOP S O IL , R E - VEGET A TI O N , S L OP E S TABI LI SAT I O N , I N FILLIN G OF EXCA V A TI O N S O R A N Y OTH E R A PP R O PRIAT E A CTION S IN TH E CIRCUM S TA N C ES [PAGE N O 2 4 8 OF TH E PAP E R B OO K -I ) . O N C E TH E W E L L S CEA S E T O PR O DU CE, IT I S M A ND A T O R Y OBLI G A TI O N UND E R TH E P&NG RUL ES A M E ND E D FR O M TIM E TO T IM E A ND UND E R V A RI O U S O TH E R G UID E LIN ES I SS U E D THAT WEL L SHOULD B E PROPER L V B E ABANDONED B V PUTTING APPROPR I ATE BARRI E RS S UCH A S C E MENT PLUGS IN THE WELL TO AVOID ANY POSSIB L E L EAKA G E AND T H E CONSEQUENT POLLUTIO N THE R EBV. ITA NOS.802,803,1077,2154 & 2155/MDS/2010 18 F URTH E R , T O E N S UR E THAT TH E OI L A ND GAS CO MP A NI E S AR E FULL Y FU N D E D T O CO MP L Y WI T H TH E S TATUT O R Y OB L I G ATION O F RE S TORIN G T H E S IT E TO AVO I D ENVIRO N MENTA L H A Z ARD , IT I S IN S I S T E D B Y DGH T H AT A FUN D S HOUL D B E C R EATE D TO M EET T H I S OB LIG A T IO N O F S IT E R EST ORA TIO N . IT I S FUR T H E R I M PORTAN T TO ST AT E TH A T THE FUND CA NN OT BE WIT H D R AW N A N D CO ULD B E U SED O NL V FO R TH E PURP OSE OF SI T E R ESTORA TI O N . 1.2 ACCOUNTING TREATMENT OF SITE RESTORATION 1.2.1 ACCOUNTING TREATMENT AS PER GUIDANCE NOTE IS SUED BY ICAI A S P E R C L A U S E 53 O F THE G UIDANCE N O T E I SS U E D BY T H E ICA I ON ACCOUNT I N G FOR OI L A ND GA S PR O DU C IN G AC T I VIT I E S ' A B A ND O NM E NT C O ST S A R E TH E C OS T S IN C URR E D ON DI S CO NTINUAN C E OF AL L OP E RA T IO N S A ND S URR E ND E R I N G TH E P R O P E RT Y BA C K T O TH E O W N E R , TH OS E C OS T S R E LAT E T O PLU G GIN G A ND AB A N DO NIN G OF W E LLS , DI S M A NTLIN G OF W E LL H E AD S, P R O D U C TI O N A N D TR A N S PO RT F A C ILITI E S AND T O R E S T O R A TI O N OF P R O DU C IN G AR E AS IN A CC O R DAN CE W ITH LI CE N SE R E QUIR E M E N T S A ND TH E R E L E VANT L EG I S LATI O N . FURTHER CLAUSE 54 STATES THAT ' TH E F ULL EVE NTUAL LIABILIT Y FOR ABANDONM E NT COS T N E T OF SALVAGE VALU ES S HOULD B E R EC OGNI ZED A T T H E O UT SE T O N TH E G ROUND TH A T A LIABILIT Y T O R E M OVE AN IN S TALLATION E XI S TS TH E M O M E NT IT I S IN S TALL E D . THU S , A N E NT E R P RIS E S H O ULD C APITALIZ E AS A PAR T O F T H E C OST C E NTR E TH E A M O UN T OF PRO V IS I ON R E QUIRED TO B E C R E A T E D F O R S U BS E Q U E NT ABA N D O NM E NT . 1.2.2. ACCOUNTING TREATMENT AS PER INTERNATIONAL A CCOUNTING STANDARD (IAS)16 CLAUSE 15 OF (IAS) 16 STIPULATES THAT 'A N IT E M O F PR OPE R T Y, P L AN T A N D E QUI P M E NT TH A T QU A LI FI E S F O R R ECO G NITI O N AS A N AS SE T S HA LL B E M EAS UR E D A T COS T. C LAU S E 1 6 S TIPULAT E S TH A T ' TH E CO S T OF AN IT E M O F PR O P E RT Y , P L A NT AND E Q U IP M E NT C O M P RI SES .. ( C) T H E I NITI A L ES TIM A T E O F TH E COS T S O F D I S M A NTLIN G A ND R E M OV IN G TH E I T E M A N D R ES T O RIN G TH E SI T E O N W H I C H IT I S L OCA T E D , T H E O BLI G ATI O N F O R WH I CH AN E NT I T Y IN C UR S E ITH E R W ITH TH E IT E M S AC QU I R E D O R A S A CO N S E QU E N C E OF H A VIN G U S E D T H E IT E M DU R ING A PARTI C U LA R P E R IOD FOR PURPO S ES OTHER TH AN T O PRODU C E I N V E NT O RI E S DURIN G THAT P E RI O D ' . F R O M TH E ABO V E IT COULD BE S E E N THAT THE LIABILIT Y FOR S IT E R E STORAT I ON I S C A P I TALI Z ED ALON G WITH TH E O T H E R CO S T S AT THE B E GINNIN G OF TH E LIF E OF THE ASSE T . ITA NOS.802,803,1077,2154 & 2155/MDS/2010 19 1.3. MEANING OF THE TERM CONTINGENT LIABILITY T H E T E RM 'CO NTIN GEN T L I A BI L ITY ' I S N O T DE FINED I N SEC T I O N 1 1 5 JB OR UND E R ANY OT H ER P R OV I S I O N OF T H E IN CO M E TA X AC T A N D T H ERE F O R E I T S H O ULD B E I N I T S L EGA L SE N SEI AS I N N O RM A L PR A CTI CE. FU R T H E R F O R INT E R P R E T A TI O N O F THE T E RM 'CO N TIN GE NT LIABI LI T Y', T H E R A T I O NAL I T Y O F V A R I O U S JU D I C I A L P R ECE D EN T S I S S U B MI TTED FOR CO N S I DE R A TI O N AS B E L OW. F UR T H ER , T H E C H E NN AI I T A T IN TH E C ASE O F A S S ISTAN T DIR ECTO R OF I N CO M E TAX VS. M/S. CAI RN E N ERGY INDI A PT Y LTD 2 01 0- T I I -115-I TAT-MA D- I N TL [PAG E N O 216 O [TH E PAP E R B OO K- I ] W H EREIN TH E R ES P ON D E N T WAS E NGAG E D I N TH E BU S IN ESS O ( E X PL O R A T IO N , D E V E L O PM E NT AND P ROD U C TION O(OI L A N D N AT UR A L G AS H ELD TH A T ; ' T H E A S SE SSEE IS C L EAR L Y OBLIG E D UND E R TH E PSC T O UND E R T AKE SI T E R ES T ORA T I O N AC T IV IT I E S A S PAR T O F T H E E XPLO R A T I O N OR PR O D U C TION O P E RA T IONS I. E . TO R E TU RN THE S IT E T O I T S N ATURA L STA T E OR REND E R TH E SI T E CO MPATIBL E WITH ITS INT E N D E D U SE AFT E R CE SSA TI O N OF E XP L O R A T ION AND , PR O DU C T I O N O P E R A TI O N AN D, O T H E R O P E RA T IO N S IN R E LA T ION T HE R E T O , ' W H IC H IN VOLVES RE M OVAL OF FAC ILIT I ES, E Q U IP M E N T , S TRU C TU R E S AND D E BRIS , ES T AB LI S H MEN T OF CO M PATIB L E C O NT OU R S A N D DR AI N AG E, R E P L AC E M E N T OF TOP SO I L, R E -V EGE T A T ION , S LOP E S T AB IL IZA T ION , INFIL L I N G O F E XCAVA T IO N S A N D C A RR YIN G OU T O TH E R APP R O PRIAT E A C T I O N S; TH E PR O VISI O N FOR SI T E R E S T ORA T ION AROSE AS A R E SU LT OF TH E PSC WI T H T H E GOV E RNM E N T O F INDIA A N D , I S AN A SCE R T AIN E D LIAB IL IT Y AN D , T H E R EF O R E C LAUSE (C ) OF EXPLANATI O N TO SEC TION 1 1 5J A IS INAPP L I C AB L E T O TH E F AC T S OF TH E ASS E SSE E CO M PANY . ' SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS LI MITED 245 ITR 428 TH E L A W IS S E TT L E D ; IF A BU S IN E SS L IABI LIT Y HA S D EF IN IT E L Y AR I S E N IN TH E A CCO UNTIN G YEA R , TH E D E DU C T I O N S H O U L D B E AL L OW E D A LT H O U G H TH E LIABILI T Y M AY H AVE T O B E Q U AN T IFI E D A N D D I S C H A R G E D A FUT U R E DA T E . W H A T S H O UL D B E CE RT AI N I S TH E I NC U R R I N G OF TH E L I AB ILI TV. IT S H O UL D A L SO B E CAPA BL E OF B E ING E S T IM A T ED WI T H R E ASO N ABL E C ER T A IN TV T H OUG H TH E ACT U AL Q U A NTI FICA TI O N M AV NO T BE PO S S I B L E. SUPREME COURT IN THE CASE OF SHRI GOVERDHAN LTD. 69 ITR 675 'T H E L EG A L POSI TI O N I S T H A T A L I AB I L I T Y D E P E N D IN G UP O N A CO N T ING E N CY I S N O T A D E BT I N P R AES E N T I O R IN FU T UR O T IL L TH E C O NTI NGEN CY H APPENS . B U T I F IT IS A DEB T TH E FACT TH A T T H E A M OUN T H AS T O B E AS CE R T AIN E D DO E S N O T M A K E IT ANY TH E L ES S A D E B T I F TH E LIAB ILIT Y I S CE R T A IN A N D W H A T R E MA IN S I S ON L V A Q U A NT ITI C A TI ON O F T H E A M O U N T : D E BI TUM IN PRA ESE NTI , SO L V E N DUM IN F UT URO. ' ITA NOS.802,803,1077,2154 & 2155/MDS/2010 20 SUPREME COURT IN THE CASE OF CALCUTTA CO LTD. LIMIT ED 37 ITR 1 ' I F T HA T UN D E RT AKI N G I M P O R T E D A N Y L IAB ILIT Y O N TH E APP E LL AN T T H E L I AB ILIT Y H AD A LR EADY AC C R U E D O N T H E DA T E S O F TH E D EE DS . ( SA L E , T H O U G H TH A T LIA BI L I T Y WAS T O B E DI SC H A R GED A T A F UTU R E D A T E. IT WAS T HUS AN ACCR U E D LI ABI L IT Y A N D TH E ES TIM A T E D EX P E NDI T UR E WHI C H WO UL D B E INC U R R ED I N D I SC H A R G I NG TH E SA M E C OULD V E RY WE LL B E DE DU C T ED FRO M TH E P R OFI T S A N D G AI NS OF TH E BU S INESS .. ' ACCO RDIN G L Y , IT CA N B E S UMM A RI Z E D A ND S UBMITTED FR O M TH E A B OVE TH A T A L I AB IL IT Y IS N O T T O BE S A ID AS CO N T IN GE NT L I A BI LI T Y IN TH E E VEN T THAT T H E R E I S CE R T A IN TY I N TH E INCUR R E NC E OF TH E L I A BI L IT Y; AND I T I S CA P A BL E OF BEIN G ES TIM A T E D W ITH R E A SO N A B L E C E R T A I NT Y. 1.4. PROVISION FOR SITE RESTORATION IS PURSUANT TO AN AGREEMENT BETWEEN THE PARTIES. A J O IN T O P E R A TIN G AG R EE M E NT ( ' J OA') [P AGE N O 2 5 2 OF T H E PAP E R BO O K -I } H A S B EE N E NT E R ED INT O BETWEEN T H E P A RTI ES U ND ER T A K I N G D E V E L O PM E NT O F THE B L OC K C Y - O S - 90 / 1 . AS P E R TH E T E RMS O F TH E J OA: ARTICLE 7.12 DEALING WITH ABANDONMENT COSTS ' TH E C O S T S , E XPE N S E S , OB LI GA TI O N S A ND L IA B ILIT IES OF O R IN CO NN EC TI O N WITH TH E ABANDO NM E NT S H ALL B E PAID , BO R N E A N D D I SC H ARG E D B Y TH E PAR TI E S IN PR OPO RTI O N T O TH E IR R E SP EC TI V E PAR T I C IPA T ING I NT E R E S T S. APPENDIX C TO ARTICLE 7 .12 WHICH DEALS WITH SECURITY FOR ABANDOMENT COSTS 3. 1 ' T H E OPE R A T O R S H A L L IN C L U D E I N E A C H WOR K PR OG R A MM E AN D B U DG E T ... (I) IT S ES TIM A T E (OR R EV I SE D ES T IMAT E AS TH E CASE M AY BE) OF AB A ND O NM E N T COS T S A ND T H E P R ODUC TI ON P R OF IL E DU RI NG TH E PR O DU C TI O N P E RI OD . ( I I) E A C H P AR TV 'S PA RTI C I P ATI N G I N T E R ES T S H A R E O F TH E AB A ND O NM E NT COS T S FO R T H E IMM E D I A T E L Y FO LL OW IN G YEAR ' A S I S EV I D E N T F R O M T H E A B O VE , C OS T S IN R E L A T I O N TO T H E S I T E R E S TOR A T I ON I S T E CHNIC A L L Y D E T E R MIN E D A ND P AY M E NT S A R E BE IN G M A D E B Y TH E P A R TI ES. T H E S U M CO N T RI B UT E D BY TH E PAR TI E S T O T H E CO N T R ACT I S B E IN G D E P OS I T E D W I T H T H E STATE BA N K O F I ND I A U NDE R TH E S IT E R E S T ORATIO N F U ND SC H E M E, I 999 [ PA GE N O 2 5 7 O F ' T H E PAPE R BOO K-I ) . ACCORDINGL Y, WE S UBMIT THAT THE S ITE RE S TORATION COSTS CANNOT BE CON S IDERED IN TH E NATURE O F CONTINGENT O R UN AS C E RTAINED LIABILITY. IT IS A CASE OF THE RESPONDENT T HAT A DETAILED ITA NOS.802,803,1077,2154 & 2155/MDS/2010 21 BUD G ET AND S CIENTIFIC ES TIMATION OF S ITE RESTOR A TION EXPENDITURES ARE DETERMIN E D TO E FFECT TH E SA M E WITH S TAT E BANK OF INDIA TOWARDS THE ASCE R T A INED LIABILITY FOR SITE RESTORATION. 1.5 PROVISION FOR SITE RESTORATION IS DETERMINED O N A SCIENTIFIC BASIS W E WI S H T O S U BMIT TH A T TH E PR OV I S I O N F O R S IT E RE S T ORA TI O N EX PEN S E S H AS BE E N D E B I T E D T O T H E PR O FIT A ND L OSS ACCO UNT OF T H E R ES P O ND E NT A NNU A L L Y B ASE D ON S CI E N T I F ICA L L Y EST IM A T ED C OS T S U S IN G TH E UNI T OF PR O DU C TI O N M E TH O D ('U O P') . UND E R TH E' UO P ' METHOD , T H E D E PR EC I A TIO N OR D E PL E TION IN MI N IN G A SS ET S I S CAL C ULAT E D ON TH E B AS I S OF TH E NUM BE R OF UNIT S PR O DU CE D AS NUME R A T O R AND TH E D E N O MIN A T O R B E IN G TH E T O T A L EX P EC T ED NUM BE R OF UNI TS TO B E PRODU CE D FR O M THE A SSE T B Y TH E E NT E R PR I SE. IN TH E IN S T A NT C A SE , THE PROVI S ION F O R S I T E R ES TORAT I ON COST IS C A L C ULAT E D B Y MULTIP L YIN G THE UOP R A TE WI T H TH E PR O DUCTION F O R T H E PERI O D. T H E AO , IN TH E A SSESS M E NT O R D E R , H AS HOWEVER INC R EA S ED THE BOOK PROFIT BY P R OVI S ION FOR S IT E R ES TO R A T I ON , S T A TIN G IT AS A C ONTIN GE N T LI A B I LIT Y. WE HUMBL Y S UBMIT THAT TH E C O NT E NTION O F THE R E V E NU E THAT TH E PR OV I S ION FO R S IT E R ES T O RATI O N H AS NOT B E E N S CI E NTIFICALL Y ES TIMA T E D IS INCORREC T . 1.6. ACCOUNTING LITERATURE ON CONTINGENT LIABILITY GI VE N TH A T SE CTION 1 1 5JB I S A L EVY OF I N COME-TAX ON ' B OO K PR O F IT S ' COMPUT E D B AS ED ON N E T PROFIT A S S HOWN I N T H E PROF I T A N D L OSS ACCOU N T , IT IS A L S O R E L EVA N T T O EXA MI NE A C CO UN T IN G LIT E R AT UR E FOR I N T E RPR E T A T IO N O F T E RM S U S ED THER E I N A S T H E TA X E MA N ATES FROM THE CONC E P T OF BOOK P R OF I T . 1 . 6 . 1. ACCO UN T IN G LIT E RATUR E UND E R INDIAN G AA P A N D INT E R N A TI O NAL FI NAN C IA L R E P O RTIN G S T A N DA R DS (' I F R S ' ) T H E T E R M CONTIN GE N T LI A B IL IT Y I S D E FI N E D I N IN D I AN ACCO U NTING STA N DARD -29 I SS U ED B Y THE IN S T I TUT E OF C H A RTE R E D ACCO UN T A NT S OF I NDIA ( ' L CA I ') [PA GE N O 2 7 3 O F /H E PAP E R B OO K- I ] AS (A ) A PO SS IB L E O B L IG A TION THAT A R IS E S F R OM P A S T EVE N TS A N D T H E E X I S TE N CE OF W HI C H WI LL BE CO N F IRM E D ON L Y BV T H E OCCURRE N C E OR NON - OCC UR RE N CE OF O N E OR MO R E UN CERTA IN F U T U RE EVE N TS N O T WHO LL Y W I T HIN T H E CO N TRO L OF THE ENT E R P R I SES ; OR (B) A PRESENT OBLIGATION THAT ARISES FROM PAST EVENTS BUT IS NOT RECOGNIZED BECAUSE: ( I ) IT I S N O T P R O B A BL E TH A T AN OUTF L OW OF R ESOURC ES E M BODY I N G E CON O MIC BEN E FIT S W ILL B E RE QUIR E D TO S ETTLE TH E OBLI G ATION; OR ITA NOS.802,803,1077,2154 & 2155/MDS/2010 22 ( I I ) A RE LI ABLE ES TIM A TE O F THE A M O U NT OF TH E OB L I G AT I ON CANNOT BE MADE . IT I S F U RTH E R S UB M ITTED THAT ABOVE DEF I N I TIO N I S AK I N TO THE INTE R NAT I ONAL ACCO UNTI N G STANDARD ( ' I AS ') 3 7 [PAG E NO 335 O F TH E PAP E R BOO K - 1.6.2 ACCOUNTING LITERATURE UNDER 90: US FINANCIA L ACCOUNTING STANDARDS (USFAS) T H E G E N E R A L R ECO G N IT I O N CRIT ER I A FO R C O N TI N GE N T LI A BI L I TY AS P E R FAS 5 I SS U E D B Y TH E U NIT E D ST A T E S F I N A N C I A L ACCO UNTIN G STA N DA RD S B OA RD A R E A L S O S IMIL A R T O I A S 37 . F AS 5 D EF IN ES C O NTIN GE N CY AS A N EX I S T IN G CO N D ITI O N , S ITU A TI O N , O R SE T OF C IR C U M S TA N CE S THAT IN V OL VE UN CE RT AI NT Y AS T O TH E P OSS IBL E GA IN OR L O SS TO AN E N TE RPR I S E. T H E UN CER TAIN TY W ILL UL TI M A T E L Y BE R ES O L V E D ONL Y WH E N O N E O R MOR E FUTUR E EVE NT S OCC U R O R FA IL T O OCC UR [P AGE N O 30 7 OF TH E PAP E R BOO K- I ] . 1.6.3. JUDICIAL PRECEDENT T H E S UPR E M E CO U R T I N THE C ASE O F CIT VS W OODWAR D G O VERNOR I NDIA ( P ) L T D AND HO N DA S I E L POWE R P RODUCT S L T D [ 200 9 ] 312 L T R 2 54 HA S H E L D T H A T ' TH E M E TH O D OF ACCO UNTIN G UND E RTAK E N B Y TH E AS SES S EE C ONTINU O U S LY IS CO RR EC T. GIV E N TH A T TH E INTE R P R E T A TI O N O F TH E T E RM CO NTIN G E NT LI AB ILIT Y C AN B E E XAMIN E D FR O M TH E PE R S P EC TIV E OF T H E A CC O UNTIN G LIT E R A TU R E APP LI C ABL E IN INDI A A N D O TH E R W E LL E STA B LISH E D AND WID E L Y R E LI E D UP O N S TAND A RD S . S U C H AS TH OS E OF INT E RNA TI O NA L A C C O UNTIN G S T A N DARDS B OARD ( ' I AS B ' ) AND U N I T E D S TAT E S F IN A N C I A L AC C O UNTI N G S T A N DARDS B O A R D (U S F A S B ' ) AN D S T A T E M E NT O J R E CO MM E ND E D PRA C T IC E (' S ORP ') O N AC C O UNTIN G F O R O IL A N D GAS I NDU S TRY I S S U E D BY TH E ACCO U N T I N G STA N DA R D B OARD , UK G I V E N TH E A BOV E. IT I S C L E A R( V E V I D E N T TH AT S IT E R E S T O R A T I O N I S N O T A CO NT IN GE N T [UNA SCE RT A INED) LI AB ILI TY A N D I S A N AS CE RT AI N E D LIABI LI T Y ' . 1.6.4. SUMMARY KEY ASPECTS OF CONTINGENT LIABILITY-SUMMARISED T H E K EY A S P E CT S OF CO N TIN G ENT L I A BI L IT Y A S E V I DE N CE D B Y T H E E X TRACT S OF AS 29 OF ICA I , I AS 37 O F I FRS A ND FAS 5 OF US FASB AR E S UMM ARI ZE D A S F OLLOW S : (I ) T H E R E I S A PO S S IB L E OBLI G ATI O N ; AND ( II ) T H E O BLI G AT I ON S HOULD A RI SE FR O M P AS T E VENTS; AND ( II I ) T H E EX I S T E N CE OF TH E OB L I GA TI O N WILL B E CO N FIRMED B Y OCCURR E NC E OR NON-OCCURR E N CE OF O N E O R MOR E UN CE RT A IN F UTUR E EVE NT S; A ND ( I V) S U C H EVE NT S A R E NOT W HO L L Y WITHIN TH E CONTROL OF T H E E N TE RPRI SES; A ND (V) IT I S N O T PROBABL E THAT AN O U T F LO W O F R ESO URCE S F O R FUTUR E ECO N O MIC B E NEFIT S WILL B E R E Q U IR E D ; A ND ( I V) A R E LI A BL E ES T I M A T E OF TH E A M O UNT O F OBLI GA TION C A NN O T B E M A D E. ITA NOS.802,803,1077,2154 & 2155/MDS/2010 23 F R O M TH E ABOVE, IT I S CLEA R TH AT T HE L I A BILI TY FOR SITE R ESTO R A TI O N WHI C H I S C A PIT A L IZ E D A S A SS ET I N TH E BOOK S FOR N OT M E ET IN G ANY OF T HE A BOVE CRI TE R I A T O B E CON S I DE R E D AS C ONT I N GE NT LI A B IL I T Y . 2. NO N A PPLIC A BILI TY O F T H E D E C I S ION S I N TH E CA SES O F T N SMALL INDU S T R I ES DEV E LOPM E N T CO RPORATIO N A ND INDIAN M O LAS S E S COMPANY PRIVAT E LIMI T ED TO THE RE S P O ND E NT W E HUM B L Y S UBMIT T H A T TH E REVE N U E H AS E RR E D I N C O N S ID E RIN G TH E D E C I S I O N S O F TH E M A DR AS H I G H CO U R T I N TH E CA SE OF TN SM A L L IND U STRIE S DEV E LOP M E N T CO R PORATION (2 4 2 ITR 122) A N D T H A T OF TH E S UPR E M E C OU RT I N T H E C ASE OF INDIAN MO L ASSES CO M PANY PRIVATE LIM I TED (37 ITR 66) AS R E L E VA NT A N D A P PL ICA BL E TO T H E R ES P O N D E NT F O R T H E FO L L OW IN G R E A S O N S : B O TH T H E A B OVE M E NTIO N ED C AS E S D EA L W I T H D E DUCT IO N IN TH E N A T URE OF G E N ER A L EX PE N S E S A S P ER SE CTI O N 3 7 O F T H E I N CO M E - TAX AC T , 1 96 1 ( ' THE AC T ') IN C OMP UT IN G TA X A BL E INC O M E UN D E R NO RM A L PR O VI S I O N S OF TH E A CT . T H E I N S T A NT CASE D EA L S WIT H C O MPUT A TI O N O F I N CO M E UN D E R S EC TI O N 11 5 JB OF TH E AC T A N D I T I S T H E IT E M IN TH E F IN A N C I A L S T A T E M E NT S OF T H E T A X P AY E R A ND S P E C I F I C EX C L U S I O N S / DI SA LL OWA N C ES PRE S CR I B E D U N D E R SE CT I O N 11 5 JB TH A T A R E R E L E V A NT FOR D E T E RM IN IN G D E DUCTIBIL I T Y I N CO MP U T I N G B OO K PR OF IT . WI T H O U T P R EJ U DI CE T O T H E ABO VE, E V E N IN A S C E N A R I O W H E R E TH E R E V E NU E INT E N D S TO CO N S I D E R A L L OWANCES / D I SA L L OWAN CES PR ES C RIB E D F O R NORM A L PR OVI S ION S IN CO MP U T IN G B O O K PR OFI T S UN DE R SEC T I O N 1 1 5 JB , I T I S S U BM I T T ED T H A T A L L O W A N C E IN R ES P E C T OF S I T E R ES TO R AT I O N E X P E N D I T U R E I S A VA I LABLE UN D E R N O RM A L PR OV I S I O N S OF T H E A C T A S W E L L (SEC T I O N 33 ABA ). IN T H E CA SE O F T N S M A LL INDU S T R I ES DE V E L OPM E N T C ORPOR A TI O N ( S UPR A ) , T H E I SS U E I NV OLV ED W AS D E D U C TIBILIT Y O F IN T E R ES T O N TH E C O S T OF L A ND AC QUIR ED F R O M T H E G O V E R NM E NT . I N TH E F ACT S OF TH E SA ID CAS E , LI A BI L IT Y T O P AY T H E I N T E R E S T H A D N O T A CCRU E D W HI L E IN TH E CA SE O F H E PI , UN D E R T H E PSC E NT E R E D I N T O W I T H TH E GOV E RNM E NT OF LNDI A , TH E LI A BI LI T Y F O R S IT E R E S T O R A TI ON AC CRU ED I MME D I A T E L Y O N CO MM E N CE M E N T O F E X P L O R A T I O N O P E R A T I O N S . I N T H E C A SE O F I N DI A N M O L A SS E S CO ( S U P R A) , T H E I SS U E INV O L VE D WA S DE DU C TIBILIT Y O F A M OU NT S SE T AS I D E T O W A R D S CON T R IBU TIO N S I N D EFER R ED A NNUIT Y P O L ICY F O R T H E M A N AG IN G DIR E CT O R . T H E S AID CO NT R IB U TI O N S W E R E P AY AB L E I N T H E H A PPE NI N G OF A C ONT I N G ENC Y . IT WA S A C CO RDI N G L Y H E L D T H A T S U C H P AY M E N T S WE R E NOT D E DU CT I B L E IN C O M P UTIN G T AX A BL E I N C O M E . F R O M TH E ABOVE, I T I S EV ID E NT THAT SECT ION 3 3 ABA ALLOWS FO R A D E DU CTIO N AS A N D W H E N THE SUM IS DEPOSITED IN THE SITE RESTORATION FUND AND T HE CONTENTION OF THE REV. THAT THE EXPENDITURE, FOR THE PURPOSE OF DEDUCTION SHOULD AC TUALLY BEEN INCURRED, IS INCORRECT. ITA NOS.802,803,1077,2154 & 2155/MDS/2010 24 3. OUR PRAYER : IT IS OUR HUMBLE PRAYER THAT THE REVENUES APPEAL D ESERVES TO BE QUASHED HAVING REGARD TO THE FOLLOWING: * IT IS EVIDENT FROM TH E A B OVE S U B MI SS I ON A ND F R O M T H E OR D E R OF TH E C I T(A) T H A T T H E P R OVIS I O N FO R S IT E R ESTORAT I O N I S A N ASCERTA IN E D L I AB I L ITY ; T H E P R OV I S I O N FOR S IT E RESTO R A T IO N H AS B EE N ES T I MA TE D B Y TH E R ES P O N DE N T U S IN G A SC I E N T I F I C M E T HOD A N D THE REVEN U E H AS ER R ED IN T R EA TIN G T HE SAME AS A M E R E EST I M AT E ; A ND T H E DEC I SIONS RE L IED BY T H E REVE NU E A R E NOT AP PLI C AB L E T O TH E RES P O N DE N T 'S CASE . ON THE BASIS OF ALL OF THE ABOVE, IT IS PRAYED THA T REVENUES APPEAL BE QUASHED AND JUSTICE RENDERED. RESPONDENT ISSUES RESPONDENTS SUBMISSIONS PROVISION FOR SITE RESTORATION IS UNASCERTAINED LIA BILITY : PROVISION FOR SITE RESTORATION IS ASCERTAI NED LIABILITY AS LLIABILITY ARISES AS SOON AS THE WELL IS DRILLED. FURTHER SITE RESTORATION IS A MANDA TORY LIABILITY AS PER PSD, P&NG RULES, DGH IN FOLLOWING JUDICIAL PRECEDENTS IT HAS BEEN HELD THAT WERE A LIABILITY TO PAY ARISES, THE SAME WOULD CONSTITUTE ASCERTAINED LIABILITY EVEN THOUGH THE AMOUNT CANNOT BE DETERMINED WITH CERTAINTY. SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS LIMITED 245 ITR 428 SUPREME COURT IN THE CASE OF SHRI GOVERDHAN LTD. 69 ITR 675 SUPREME COURT IN THE CASE OF CALCUTTA CO. LTD. 37 ITR 1 COURT IN TH E CA S E OF SHRI GOVERDHAN LTD. 69 I TR 675 ITA NOS.802,803,1077,2154 & 2155/MDS/2010 25 F URTH E R TH E C H E NN A I IT AT IN TH E CA S E O F ASS I STA N T DI RECTOR OF I N COME TAX VS. M/S CA IRN E N E R GY I N DIA P TY LT D 2010-TH- L LS I TAT-MA D - INTL H A S H E LD T H A T PR OV I S I O N F O R S ITE R E S T O R A T I O N I S AS CE R TA IN E D LI A BILIT Y FOR TH E PURP O S E OF D E T E RMINI N G B OOK P R OF IT S U N D E R S EC TI O N I 1 5 J B OF TH E A C T 4. IT WAS THE SUBMISSION THAT THERE WAS NO DISPUTE IN REGARD TO THE NORMAL COMPUTATION UNDER THE REGULAR PROVISIONS OF THE INC OME-TAX ACT, 1961 (THE ACT FOR SHORT). IT WAS THE SUBMISSION THAT WHEN THE AS SESSEE WAS FILING ITS RETURN, IT WAS FILING IT BY APPLYING THE PROVISIONS OF SECTION 42 OF THE ACT, WHICH RELATED SPECIFICALLY TO THE COMPUTATION OF TOTAL INCOME IN REGARD TO THE ASSESSEE WHICH IS DOING THE BUSINESS OF OIL EXPLORATION. IT WAS THE FURTHER SUBMISSION THAT THE DISPUTE WAS IN REGARD TO THE COMPUTATION UNDER THE PROVISIONS OF SECTION 115JB OF THE ACT. IT WAS THE SUBMISSION THAT AS PER THE PRO VISIONS OF SECTION 115JB WHAT WAS DEDUCTIBLE WAS THE LOSS BEING THE DEPRECIATION LOSS OR THE BUSINESS LOSS WHICHEVER WAS LOWER. IT WAS THE SUBMISSION ALL THE EXPENDITURES INCURRED BY THE ASSESSEE IN CONNECTION WITH THE EXPLORATION AND DEV ELOPMENT OF THE OIL WELL ARE TREATED BY THE ASSESSEE AS FIXED ASSET AND THIS EXP ENDITURE IS WRITTEN OFF ON THE ESTIMATED LIFE OF OIL BASIN. IT WAS THE SUBMISSION THAT THIS WRITE OFF OF THE EXPENDITURE HAD BEEN CLAIMED BY THE ASSESSEE AS DEP LETION. IT WAS THE SUBMISSION THAT THE ASSESSEE HAD CLAIMED THIS DEPLE TION AS DEPRECIATION. THE ASSESSING OFFICER HAS NOT DISTURBED THE QUANTIFICAT ION OF THE DEPLETION. HOWEVER, HE HAS HELD THAT THE DEPLETION IS NOT DEPRECIATION. CONSEQUENTLY, THE ACTUAL DEPRECIATION BEING THE DEPRECIATION ON THE OFFICE M ACHINERY ETC. WAS ONLY ALLOWED ITA NOS.802,803,1077,2154 & 2155/MDS/2010 26 AND THE DEPLETION CLAIMED BY THE ASSESSEE WAS TREAT ED AS A BUSINESS LOSS. IT WAS THE FURTHER SUBMISSION THAT IN REGARD TO THE ASSESS MENT YEAR 2006-07 THE ASSESSING OFFICER HAD ALSO NOT GRANTED THE ASSESSEE THE DEDUCTION IN RESPECT OF THE SITE RESTORATION EXPENDITURE CLAIMED BY HOLDING THAT THE SITE RESTORATION EXPENDITURE WAS ONLY A CONTINGENT LIABILITY. ON AP PEAL, THE LEARNED CIT(A) HAD HELD THAT THE SITE RESTORATION EXPENDITURE WAS NOT A CONTINGENT LIABILITY AND WAS ALLOWABLE AS A DEDUCTION. IT WAS THE SUBMISSION TH AT THE SITE RESTORATION EXPENDITURE WAS AS PER THE PSC ENTERED INTO WITH TH E GOVERNMENT OF INDIA AND THE LIABILITY WAS ASCERTAINED AND ALLOWABLE. IT WA S THE SUBMISSION THAT THE APPELLATE AUTHORITIES HAD NOT ALLOWED THE CLAIM OF THE ASSESSEE THAT THE DEPLETION AS CLAIMED BY THE ASSESSEE WAS PART OF DEPRECIATION . IT WAS THE SUBMISSION THAT AGAINST THE ACTION OF THE LEARNED CIT(A) AND THE DR P IN NOT ACCEPTING THE CLAIM OF THE ASSESSEE THAT THE DEPRECIATION WAS LIABLE TO INCLUDE THE DEPLETION THE ASSESSEE WAS IN APPEAL FOR THE ASSESSMENT YEARS 200 2-03, 2003-04 AND 2006-07 AND AGAINST THE ACTION OF THE LEARNED CIT(A) IN HOL DING THAT THE SITE RESTORATION EXPENDITURE IS AN ASCERTAINED LIABILITY THE REVENUE IS IN APPEAL IN ITA NO. 1077/MDS/2010 FOR THE ASSESSMENT YEAR 2006-07. IT WAS THE SUBMISSION THAT IN THE ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2005- 06 IN ITA NO. 802/MDS/2010 THE ASSESSEE HAS CHALLENGED THE ACTION OF THE LEARN ED DIT IN INVOKING THE POWERS U/S. 263 OF THE ACT IN DIRECTING THE ASSESSING OFFI CER TO RE-DO THE ASSESSMENT AFTER EXAMINING THE ISSUE OF THE ALLOWABILITY OF DE PLETION AS DEPRECIATION IN COMPUTING THE BOOK PROFITS OF THE ASSESSEE U/S 115J B OF THE ACT. IT WAS THE FURTHER SUBMISSION THAT FOR THE ASSESSMENT YEARS 20 02-03 AND 2003-04 THE ASSESSEE HAS ALSO CHALLENGED THE RE-OPENING OF THE ASSESSMENT UNDER SECTION 148 OF THE ACT. IT WAS THE SUBMISSION THAT THOUGH THE ASSESSMENT YEARS 2002-03 AND ITA NOS.802,803,1077,2154 & 2155/MDS/2010 27 2003-04 IN ITA NOS. 2154 & 2155/MDS/2010 THE ORIGIN AL ASSESSMENT HAD BEEN MADE U/S. 143(3), STILL THE RE-OPENING OF THE ASSES SMENT WAS DONE BEYOND THE PERIOD OF 4 YEARS AND CONSEQUENTLY IT SHOULD BE DEE MED TO BE A CHANGE OF OPINION ON WHICH THE RE-OPENING SHOULD NOT BE PERMI TTED. 5. IN REGARD TO THE CHALLENGING OF THE REVISION U/S . 263 OF THE ACT FOR THE ASSESSMENT YEAR 2005-06, IT WAS THE SUBMISSION THAT THE ASSESSMENT ORDER WAS UNDER SECTION 143(3) AND ALL THE ISSUES HAD BEEN CO NSIDERED BY THE ASSESSING OFFICER IN THE COURSE OF ORIGINAL ASSESSMENT AND TH E ACTION OF THE LEARNED DIT WAS ON ACCOUNT OF AN AUDIT OBJECTION WHICH HAD BEEN RAI SED. IT WAS THE FURTHER SUBMISSION THAT EVEN FOR THE ASSESSMENT YEARS 2002- 03 AND 2003-04 THERE WAS AUDIT OBJECTION. 6. IN REPLY, THE LEARNED DR FILED WRITTEN SUBMISSIO NS WHICH ARE EXTRACTED AS FOLLOWS: HARDY EXPLORATION & PRODUCTION (INDIA) INC., CHENN AI. V. ADIT (INT. TAX.), CHENNAI. WRITTEN SUBMISSION ITA 2154/CHNY/10 A.Y.2002-2003 GR.1 : GENERAL GR.2 : JURISDICTION TO INITIATE ACTION U/S 147 A) THE RETURN WAS ONLY PROCESSED U/S 1 4 3(1) AND NO A S S E SSMENT U/ S 1 4 3 (3 ) M A DE EA RLIER . HENCE THERE IS NO QUESTION O F CHANGE O F OPIN I ON A S THE R E IS NO SCOPE FOR A.O. TO FO R M AN Y OP INION WHILE PROC E SSING THE RETU RN U/S 1 43 (1). I RELY ON THE FOLLO W I NG DE CISIONS : ACIT VS R A JES H J HAV ERI S T OC K BR O K ERS P . L T D . (SC) 2 9 1 ITR 500 WCI ( M AD R AS ) ( P ) LTD . VS AC IT ( MAD ) 3 24 IT R 181 CLT VS RAV IN DRA N PRAB H AK AR ( M AD) 32 6 IT R 363 ITO V S K . M . PA C H I APPA N ( M AD) 3 11 I TR 31 ACIT VS MA HIN DRA H O LI DAYS & R ES O RT S (INDIA) LTD . (ITA T, SBCHENNAI) 3 ITR (TRIB) 600 B) REASONS WERE R E CORD E D B Y TH E A . O . BEFO RE ISSUIN G TH E NOTICE U /S 1 4 8 [PAGES ITA NOS.802,803,1077,2154 & 2155/MDS/2010 28 10 ' &11 F O R A . Y . 2002-03 A N D 1 2 & 13 FOR A . Y . 2003 - 04 OF PAPER BOO K] . C) COPY OF REASON S RECORD E D WA S FUR NI S H E D TO THE ASS E SS E E VIDE L E TT ER DATED 23- 09-2009 [ PAGE 4 6 & 2 88 OF ASSESSEE'S PAPER BOOK ] . SUBSEQUENTLY, ASSESSEE FILED ITS OBJ E CTIONS TO RE-OPENING AND A . O . PASSED A SEPARATE SPEAKING ORDER ON 17-11-20 09 DISPOSING SU C H OBJECTIONS [ PAGES 55 TO 57 AND 297 TO 299 OF ASSESSEE ' S PAPER BOOK ]. ASSESSEE ACCEPTED THIS ORDER AND NO APPEAL/PE T ITION WA S F I LED BEFORE AN Y AUTHORITY TILL DATE. D) FOR RE-OPEN I NG U/S 1 47 , TANGIBLE MATERIAL NEED NOT BE FROM OUT S IDE THE RETURN OF I NCOME AS HELD IN A CI T VS KANGA & CO. ( 201 0 -TIOL - 464 . ITAT-MUM) E) RE-OPENING OF ASSESSMENT UND E R I DE NTICAL SITUATION WAS UPHEL D BY ITAT CHENNA I BENCH I N LAKSHMI MACHIN E WORKS LTD . VS A CIT REPO RTED IN 126 I TD 343. F) AUDIT OBJECTIO N POINTING OUT FA CTU A L OMISSIONS IS NOT A BA R T O INITIATION OF PROCEE D INGS U/S 1 48 ESPE CI A LL Y IN A CASE WHERE THE RETURN WAS ONLY PROCESSED U/S 1 43 ( 1) AS HELD IN ACIT VS RAJESH JH A V E RI ST OCK BR O KE R S P . LT D . (SC) 291 IT R 5 0 0. DECISION OF APEX C OURT IN C I T V S P .V . S. B EEDIE S (P ) L TD . REPORT E D IN 237ITR 13 IS A L S O RE L EVANT . G) WITHOUT PREJUDICE TO THE ABOVE IT IS SUBMITTED THAT THERE WAS NO AUDIT OBJECTION IN THIS CASE. ON THIS ISSUE, WHAT WAS NOTED BY THE AUDIT PARTY IS ONLY AN OBSERVATION AS EVIDENT FROM THE NOTE PREPARED BY THE REVENUE AUDIT PARTY [PAGE 14 TO 22 OF PAPER BOOK PP 17] AS EVIDENT FR OM THIS NOTE, NO INTERPRETATION OF LAW WAS MADE BY THE AUDIT PARTY AND IT ONLY OBS ERVED CERTAIN FACTS OMITTED TO BE CONSIDERED BY THE A O. GR. 3 & 4 : DEDUCTION OF DEPLETION IN BOOK PROFITS THI S GR OUND IS MI S CONC E I VE D AS A . O . D I D N O T M AKE A N Y SU CH ADJUSTMENT TO THE BOOK PROFI T S. HE ONLY DEDU C TED LOSS BROUGH T FORWARD O R U N A BSORBED DEPRECIATION, W HICH E VE R IS L ESS IN ACCO RD A N CE W I T H C1. (II I ) OF EXP L . 1 TO SEC . 115JB. B) A S PER EXPL . 1 TO SEC . 115JB , FOR THE PU R POSE O F C OMPUT ATION OF ' BOOK PROFIT ' UNDER THAT SECTION , THE NET PROFIT AS S HOW N I N TH E PROFIT AND L OSS ACCOU N T FOR THE RELEVANT PREVIOUS YEAR PREPARE D IN ACC O R DA NC E W I TH THE PROVISIONS OF PART S II AND III OF S C HEDULE V I TO THE CO M PA N IE S AC T I S THE STARTING POINT . A . O . CANNOT CHA N G E THIS F IGUR E. TH I S I S T HE V I EW HELD BY APEX COURT I N APOLLO TY R ES V S C I T (255 IT R 2 7 3 ). THERE IS NO DIS P U TE O N TH IS I S S UE . A . O. HAS NOT MODIF I E D THIS FIGURE IN THE ASSESSMENT O R DER . C) A . O. HAS THE POWER TO MAKE ADJUSTMENTS TO BOOK PROF I T S AS ' MENTIONED IN EXPL . 1 TO SEC. 115JB AS HELD IN : I. CIT VS HCL COMNET SYSTEMS & SERVICES LTD . (SC) 30 5 I T R 4 0 9 II. AJA N TA PHARMA LTD . V S CIT (SC) 327 ITR 3 05 III . I ND O RAMA SYNTHETICS (I) LTD. VS CIT (S C ) 330 IT R 363 . ITA NOS.802,803,1077,2154 & 2155/MDS/2010 29 D) A S PE R EXP L . 1 ( I I I ), T HE BOO K PROFIT S SO ARRIVED AT HAS TO BE REDUCED BY ' THE AMOUNT OF LOSS BROUGH T FO R WA R D O R UNA B SORBED DEPRECIATION , WHICHEVER I S LES S A S PE R BOO KS O F A CC OUNT S '. E) AS P E R T HE BOO KS OF ACCOUNT O F T HE CO MPAN Y , ALL EXPENSES INC LUD I NG DEPREC I AT I ON IS D E BITE D T O THE P & LAIC AND O NLY THE NET FIGUR E OF PROF I T I L OSS IS CA RRI E D FOR WARD TO SUBSEQUE NT YE ARS. THUS IN THE SUB SEQ U E NT Y EARS ONLY C O NS OL I DATED F I G U R E OF LOSS AS ON DATE (INCLUDING UNABSO RBED DEP RECI A TI O N) IS A VAILABLE . HOWEVER SEPARATE FIGUR ES OF L OS S B ROUGHT FORW A RD A ND U NA BSORBED DEPRECIATION AS PER BOOK S OF ACCOUNT ARE N ECE SSARY FOR IMPLEMENTING TH E ST ATUTORY P R OV I S I O NS CONTAINED IN C1 . ( III) OF E XPL . 1 TO SEC . 115JB . F) HE NCE A.O. RELIED O N THE FIGURES [ P ARA. 7.3 OF T HE ASSE S S MENT ORDER] AS P E R THE RESPECTIV E P R OFIT AND LOSS A/C APP EA R ING I N TH E PRINTED A N NU AL A CCOLJT1 T S OF T HE ASSESSEE C O MPANY F O R F. Y . 1 995 -96 TO 1999 00 WH ICH WERE APPRO VED BY THE BOA RD OF DIR E CTOR S A ND PLACED BEFORE THE A NNUAL G ENERAL MEETING . CO P Y OF SUCH AC COUN T S ARE A VAILAB L E IN PAGES 1 TO 4 O F DEPA RTM E NT'S P A P ER BOOK . H OWEVER THE FI GURES SHOW N BY THE ASSESSEE IN T HE I NCOM E COMPUT ATION STA TEMENT [ PAGE 38 & 280 OF AS S E SS EE 'S PAPE R B OO K ] ARE AT VARI ANCE WITH THE SE FIGURES. TH I S CLEARLY S HOWS THAT A . O . FOLLOW ED THE PRINCI PLES LAID DOW N BY THE APEX C OURT IN APOLLO TYRE S VS CIT (255 ITR 273) . THERE IS NO B A SIS F O R THE ASSESSEE TO SHOW DIFFER ENT F IG UR ES IN RESPECT OF F . Y. 1995 - 9 6 T O 1999 - 00 F R OM THE FIGU RES WHICH W ERE APPROVED BY TH E BOAR D OF D I RECT ORS AND PLACED BEFORE THE A NN U AL GENERAL MEE T I N G . G) THESE DOCUMENTARY EVIDENCE CLEARLY PROVE THAT THE P &T A/C OF THE ASSESSEE COMPANY FOR F.Y.1995-96 TO 1999-00 DID NO T INCLUDE DEPLETION/ABANDONMENT COSTS AS PART OF DEPRECIATIO N. FROM A . Y . 2 00 0-01 ONWARDS ASS E SS EE I S EAR N ING BOOK PROFIT A ND THE ISSUE OF LOSS I UNA BSORBE D D EP R E C I ATION I DEPLETIO N E T C . DOES NOT AR I SE A S NET PROFIT WAS EARNED AFTER DEDUCT I NG ALL SU C H EXPENDITURE. H) A S SESSMEN T S IN R ESPECT OF THE I . T . RETURNS F I LED B Y ASSESSEE C ORRESPONDING TO F . Y . 1995 - 96 TO 1999-00 ( A . Y . 1 996-97 TO 2000- 01 ) HAS BECOME F INA L AS ON DATE . THESE ASSESSMENTS WERE CO MPLETED BY ACCEPTING THE RETURNED FIGURES AND N O APPEAL WAS F I LE D BY ASSESSEE . HENCE ASSESSEE CANNOT SEEK L ATERON TO CHANGE I M ODIFY T H E FIGURES O F BROUG H T FORWA R D L OSS I DEP R E CI A TI O N D ETE R M INED FO R SU CH YEARS IN T H E PR ESENT APPEAL PROCEED I NGS . T H IS VIEW W A S UPHELD BY HON ' BLE SUPREME COURT IN CLT & AM . VS DALM I A CEMENT (BHA RAT) L T D . R EPORTED IN 2 1 6 I TR 79 . TH I S WAS FOLLOWED BY JURI SD I C TIONAL HIGHC OURT IN S . K . V . SELVARAJ VS CIT (MAD) 240 ITR 217 . I) INSTEAD O F R E L Y I NG O N THE F I G U RES AS PER THE P R OF I T AND L OSS A/C APPEARING IN T H E P R INTED ANNUAL ACCOUNT S OF THE AS S E SSEE COMPA N Y FOR F . Y . 1995- 9 6 TO1 999 -0 0 WHICH W E RE A PP ROVED BY T HE B O A R D O F D IR EC T O RS A N D PLACED BEFORE THE ANNUA L GENERAL M E ETING , A S SESSEE IS NOW RELYIN G ON CER TA IN NEW ITA NOS.802,803,1077,2154 & 2155/MDS/2010 30 FIGURES. DECISION O F T H E A PEX COU R T I N APOLLO T Y RES VS CLT (2 5 5 IT R 273) IS EQUALLY APPLICAB LE FO R THE AS S ESSEE AS HELD BY ITAT CHENNAI BE N CH I N DCL T V S THANGAVEL SP I NNING MILLS LT C. REPORTED IN 97 ITD 262 . A F ORM C A N NE VE R H AV E ANY EFFE C T O N THE I NTERPRETATION OR OPERAT I ON OF THE PARE NT ST ATU T E AS HELD B Y THE APEX COURT IN CLT VS TU L SYA N NEC L T D . ( 330 I TR 2 2 6 ). J) A S HE L D BY A . O ., AS ON 31 - 03-2000 TOTAL BROUG HT FORW A R D DEPREC I AT I O N I S RS . 8 , 20 , 73 ,1 83 AND TOTA L B R OUG H T FORWA R D L O S S I S R S . 90 ,1 3 , 66 , 873 . THE L ESSER AMONG THIS I S BROUGHT FORWA R D DEPREC I AT ION OF R S . 8 , 20 , 73 , 183 . AFTER ADJUSTING THIS AGAINST PROFITS OF F . Y . 2000 - 01 IE . A . Y . 200 1 -02 , T H E UN ABSORBED DEPRECIAT I ON BROUGHT F ORWA R D IS ONLY R S. 4 1 , 2 2 , 660 [ P A R A. 1 5 OF ASSESSMENT ORDER] WHICH WAS ALLOWE D BY THE A . O . AS DE D UCTI O N IN VIEW OF C1 . (III) OF EXPL . 1 TO SEC . 1 15JB . K) R E DU C T I O N M ADE T O BOOK LOSS O R DEPREC I AT I ON IN ONE YEAR MUS T F ORM THE BAS IS FO R C OMPUTAT I ON OF MAT L I AB IL ITY FOR THE SUBSEQUEN T YE AR , AS H E L D IN I. RA S HTR I YA I SPAT NIGAM LTD . , IN RE (AAR) 285 ITR 1 I I . LAKSHMI MACH I NE WORKS LTD. VS ACIT (IT AT , CHEN N A I) 126 ITR 3 4 3 L) IN TH I S BACKGROU ND, ANY D I SCUSS I ON ON WHETHER DEP L ET I ON SHOULD FORM PA R T OF DEP R ECIATION OR N OT , I S I RRELEVANT AS ASSESSEE H A S NOT INCL UDED DEPLETIO N IN THE DEPRECIATION CLAIM MADE IN THE P R OF IT AND L OS S A/ C WHICH FO R MED PA R T O F THE PRINTED ANN U A L ACCOU NTS OF THE ASSE S SEE COMPANY F O R F . Y . 1995-96 TO 1999-00 WHICH WE R E A P PROVED BY THE BOARD OF D I RECTORS AND PLACED BEFORE THE ANNUA L G E NERAL M EET IN G. THE I SSUE R EAC H ED F I NALITY LONG BACK . M) FUR T HER , R ELIANCE PLACED BY ASSESSEE ON GUIDELINES I SSUED BY ICAI I S ALSO NO T R E L EVA NT S IN CE SUCH GUIDE LI NE S WERE ISSUED I N 2003 W HEREAS THE DISPUTE RELATE TO F . Y. 1995 - 96 TO 1999 - 00 PE RI OD . NO GUI D EL INES CAN BE RETROSPECTIVE IN OPERATIO N AS GUIDANCE IS ALW A Y S PROS PECT I VE IN NAT U RE . N) DEDUCTION U/S.42 NOT AVAILABLE WHILE COMPUTIN G INCOME U/S.115JB AS HELD BY ITAT AHMEDABAD BENCH IN GUJARAT STATE PET ROLEUM CORPORATION LTD. VS. JCIT IN 123 ITD 335. O) IN THIS C ASE , GOVT . OF I ND I A HAS ENTERED INTO A PRODUCTION SHARING CONTRACT (PSC) WITH THE ASSESSEE COMPANY AND SUCH CONTRACT WAS ITA NOS.802,803,1077,2154 & 2155/MDS/2010 31 PLACED BEFORE BOTH THE HOUSES OF PARLIAMENT. AS HEL D BY HON ' BLE SUPREME COURT IN C I T & ANR. VS ENRON OIL & GAS INDIA LTD. [ REPORTED I N 305 ITR 75 ] SAID PSC IS AN INDEPENDENT ACCOUNTING REGIME WHICH INCLUDES TAX TREATMENT OF COSTS , EXP ENSES , INCOME, PROFITS ET C . IT PRESCRIBES A SEPARATE RULE OF ACCOUNTING. PSC REPRESENTED AN INDEPENDENT RE G IME A ND TH E S H AR E S OF GO V ERNMENT AND CONTRAC T ORS WE RE D E T E RMINE D ON TH A T BA SIS. EX PE NSES HAD TO BE ACCOUNT E D FOR ONLY AS CONT E M P LATED BY THE P SC. IN VIEW OF THE SPECIAL ACCOU NT ING PROCED U RE AS PRESCRIB E D BY P S C , RELIANCE ON ANY OTHER ACCOUN T ING SYSTEM HAS TO BE RULED OUT AS HELD BY THE APEX COURT . P) ARTICLE 16 OF PSC PROVIDES FOR ' TAXES , ROYALTIES , RENTALS ETC .' [ PAGES 558 TO 562 OF ASSESSEE ' S PAPER BOOK ] . AS PER THIS ARTICLE , TH E ONLY EXPENSES DEDUCTIBLE WHILE COMPUTING PROFITS AND GAINS FROM THE BUSINESS OF PETROLEUM OPERATIONS ARE: 100 % OF REVENUE AND CAPITAL EXPENDITURE INCURRED IN RESP E CT OF EXPLORATION OPERATIONS AS PER APPENDIX C - SECTION 2.2 AND DRILLING OPERATIONS AS PER APPENDIX C - SECTION 2.3.1 A N D 2 . 3.2 EXPENDITURE INCURRED IN RESPECT OF DEVELOPMENT OPER ATIONS AS PER APPENDIX C - SECTION 2.3 (OTHER THAN D R ILLING OPERAT I ONS COVERED ABOVE) AND PRODUCTION OP E RATIONS AS PER APPENDIX C - SECTION 2 . 4 WILL BE ALLOWABLE AS PER THE PROVISIONS OF ! . T . ACT. Q) COPY OF APPENDIX C - SECTION 2 IS AVAILABLE I N PAGES 5 TO 8 O F DEPARTMENT PAPER BOOK . AS PER THIS , E XPLORA T I O N COSTS A R E EXPENDITURE IN SEARCH FOR PETROLEUM . DRI LL IN G COS T S ARE EXPENDITURE , FOR DRILLING AS WELL AS FOR BRINGING A W E LL INTO USE AS A PRODUCING WELL . DEVELOPMENT COSTS ARE EXPENDITURE INCURRED FOR DEVELOPMENT OF THE CONTRA CT AREA . PRODUCTION COSTS ARE EXPEN D ITUR E INCURRED ON PRODUCTION OPERATIONS IN RESPECT OF THE CONTRACT AREA. R) IN SHORT , EXPENDITURE BY WAY OF 'DEPLETION ' IS NOT AN ALLOWABLE EXPENDITURE AS PER THE PSC. THE REASON FOR OMISSION OF THE SAME A S AN EXPENDITURE IN THE PSC IS THE FAC T THAT ASSESSEE IS NOT THE OWNE R OF SUC H NATURAL RESOURCES AND HENCE ASSESSEE NEED NOT BE COMPENSATED FOR SUCH REDUCTION IN NATURAL R ESOURCES . THIS ASPECT IS DISCUSSED IN DETAIL BY THE APEX COURT IN CIT & AN R . VS ENRON OIL & GAS INDIA LTD. [ REPORTED IN305 ITR 75 ] . AS PER ARTICLE 297 OF T H E CONSTITUTION, ALL THE NATURAL RESOURCES VESTS WI TH THE UNION GOVERNMENT . THE INTERNATIONAL PRINCIPLE OF PERMANENTSOVEREIGNTY OVER NATURAL RESOURCES WAS ADOPTED BY THE U . N . GENERALASSE M BLY IN RESOLUTION 1803 . ASSESSEE DOES NOT HAVE ANY RIGHT IN A L LOCATION OF SUCH RESOURCES O R I TS PRICING , MARKETING ETC . AS HELD UNDER S I M I LA R CIRCUMSTANCES BY THE APEX COURT IN RELIANCE NATURAL RESOURCESLTD . VS RELIANCE INDUSTRIES LTD . IN CIVIL APPEAL NOS . 4273 TO 4277 OF 2010 BYORDER DATED 07-05 - 2010. OBITER DICTA OF ITA NOS.802,803,1077,2154 & 2155/MDS/2010 32 HON ' BLE SUPREME COURT I S ALSO BINDING IN VIEW OF TATA IRON & STEEL CO . LTD.VS V . R . BAPAT (BOM) 101 ITR 292 . S) IN FACT THE VARIOUS PAPERS FILED BY THE ASSESS EE IN SUPPORT OF ACCOUNTING OF DEPLETION, ARE ALL IN RESPECT OF ENTERPRISES WHI CH ACQUIRED MINERAL INTERESTS IN PROPERTIES AND IN SUCH CIRCUMSTANCES IT. WAS HE L D TO BE A DEDUCTIBLE EXPENDITURE . SUCH AN ACCOUNT ING PRACTICE IS PERMISS I BLE WHE N A S SESSEE IS THE O W NER OF THE R ESOU RCES AND NOT I N TH E T Y PE OF PRE S E NT P SC , AS HELD B Y THE APEX COUR T IN THE DECISION CI TED S UP R A . T H E ACCOU NTING ST ANDA RDS PRESCR I BED THE REIN ARE UNDER THE A S SUMPTION THAT TH E N A TURAL RESOURCES IS AN ASSET OWNED BY AND BELONG I NG TO THE COM P ANY ENGAGED I N THE BU SI N ESS OF EXPL O R A TION AND E XT RACT I O N OF SUCH NATURAL R ESOURCES A ND THER EFO RE S UC H D E P L ETI ON IS T O BE CH A RGED ON ITS PROFIT AND LOS S ACC OU NT . CI . 2 I N PAGE 412 OF ASSESSEE ' S PAPER BOOK WHICH SPE CI F IES THE OBJECTIVE OF THE GUIDANCE NOTE CI . 41 I N PAGE 419 OF ASS E SSEE ' S PAPER BOOK WHICH SPEC I FIES THE METHOD OF CALCULAT I ON OF DEPLETION COST CI . 1 IN PAGE 476 OF ASSESSEE'S PAPER BOOK WHICH SPE C IFIES T HE OBJECT I VE O ( THE ACCOUNTING STANDARD HOWEVER THE SITUATION IS DIFFERENT IN THE PRESENT C ASE WH E RE ONLY PSC WAS ENTERED INTO BY THE GOVERNMENT AND THE NATURAL RESO URCE S OWNED BY GOVT. WERE NOT PARTED WITH . ASSESSEE D I D NOT ACQUIRE SUCH ASSET S A T ALL . NO SUCH ASSET APPEA R S I N THE BALANCE SHEET OF THE ASSESSEE. C LA I M OF THE ASSESSEE FOR DEPLET I O N COSTS A RI SES ONLY IF THE ASSESSEE PURCH AS E S / ACQ UIRES SUC H NATU R AL R ESOURCES AND THE EXPENDITURE INCURRED FOR TH E S A M E I S T R EATED A S CAP I TA L EXPEND I TURE IN I TS BOOKS . T) IT IS NOT A BOT CO N TRACT BUT A PSC WHERE ASSESSEE WILL BE REIMBURSE D THE EXPENDITURE INCURRED BY IT AND IN ADDIT I ON WILL GI V E A SHAR E O F P R OFIT . G OV ERNM E NT , TH E OWNER OF SUCH NATURAL RESO U RCES IS G E TT I N G . PART OF T HE PROFIT FO R ALLOWING ITS NATURAL R E SOURCES TO DEPLETE . I N TH E C I RCUMSTANCES , ONLY G O VT . W HOSE N AT UR A L R E SOURCES GET DEPLETE D CAN CLAIM DEPLETION COS T S AN D N O T T H E A S SE SSEE WHO ONLY EA R N S PROFIT BY EXPLOITI N G SUCH NATURAL R E SO U RCES O W NED BY GOVERNME NT THROUGH THE PSC . . U) WHEN THE PSC WHICH WAS PLACED BEFORE BOTH THE HOU S E O F PARLIAMENT DID NOT PROVIDE FOR DEDUCTION ON ACCOUNT OF ' DEPLETION ', COURTS CANNOT GRANT SUCH DEDUCT I ON I N V I EW OF TH E PRINCIPLE OF ' CA S US OMIS S U S'. I R E L Y O N L AXMANDAS PRANCHAND & O RS . V S UNION OF INDIA & ORS ( MP ) 234 I T R 261 . V) THE R E I S NO SCOP E F O R I MPORTING I NTO THE STATUTE WO R DS WH I C H AR E NOT THERE . EVE N I F TH E RE I S A CASUS OMISSUS , THE DEFEC T C A N BE R EM EDIED ON L Y BY L EGIS L ATI O N AND NOT BY JUD I CIAL INTE R PRETATION . THE I N TEN T I ON OF THE ITA NOS.802,803,1077,2154 & 2155/MDS/2010 33 LEGISLATURE IS PRIMARI L Y TO BE GA T HERED FROM THE WORDS USED I N TH E STATUTE . ONCE I T I S SHOWN THAT THE CASE OF THE A SSESSEE C OMES W I T HIN THE LETTER OF THE L AW , HE MUST BE TAXED , HOWEVE R, GREA T T HE HARDSHIP MAY APPEAR TO THE JUDICIA L MIND TO BE AS HELD IN TA R ULATA SHY AM & ORS . VS CIT (SC) 108 I T R 3 4 5. SIMILAR VIEW WAS ALS O H E LD IN PADMASUNDARA RAO ( DE CD . ) & ORS . VS STATE OF TAMIL NADU & O RS. ( SC ) 255 ITR 147. W) LE GI S L AT U R E IN ;1S WISDOM H AS NOT MADE ANY ALLO W ANCE TOWARD S ' DEPLETION ' I N THE PSC S INC E GOVE R NME N T IS T HE O W NER O F SU CH NATURAL RESOURCES AND ASSESSEE ONLY MAKES INVESTMENT TOWARDS EXPLORATION OF OIL WELLS AND PRODUCTION OF OIL THEREFROM. ASSESSEE IS NOT AFFECTED ANYWAY ON ACCOUNT OF DEPL E TION OF N A TURAL RESOURCES AND HENCE TH E RE IS NO N EED TO M A KE PR OV ISI O N TH E REOF . TH E INTERP R E TAT ION AS SUGGESTED BY TH E ASS E SS E E TO ALLOW 'DEPLE T ION ' OF AN AS SE T NOT O W NED BY THE ASS E SSE E , W ILL MAKE TH E PROVI S I O NS CON T AIN E D I N PS C O T IOSE. HEN CE S U CH A N INT E RPRE T ATION NEEDS T O B E A V OI DE D A S H EL D BY K ARNATAKA HI G H C O U RT IN CH A R T ERED HOU S I N G VS APP R OPR I ATE A U T H ORI T Y & ORS R E P O R T ED IN 2 5 0 I T R 1. EVE N THOUGH A LIBERAL INTERP R E TAT ION HAS T O B E GIV E N T O A N INC E N T IVE P RO V ISION , T H E INT E RPR E T A T ION H A S T O B E AS PE R . THE W O RD IN G S OF T HE SE CTION , AN D T H E B E NEFITS WHICH ARE NOT AV A IL A B LE U N D E R THE S EC TION CANNOT BE CONFERRED B Y IGNORING O R MIS I NTERPR ET ING C LEA R WO R D S IN THE S E CTI O N. G R . 5 : P R OV I SION FOR S I TE RESTORATION WHETHER TO BE ADDED TO BOOK PROF IT S U / S 1 1 5JB THOUGH SUCH EXPENSES ARE DEB I TED TO P & LAIC , IT IS NOT AN ALLOWAB L E EXPENDITURE AS PER ART I C L E 16 OF PSC , WH I CH I S A S ELF - CONTAINED COD E . A R GUMENTS SIMILAR TO GR . 4 & 3 ABOVE . DECISION OF IT A T IN THE CASE OF CAIRN ENERGY INDIA PTY . LTD . IS DISTINGUISH ABLE ON FACTS AS IT WA S BASED ON A D I FFERENT PSC . DECISION O F IT AT V I SAKHAPATANAM BE N CH I N HINDUSTAN SH I PYA R D LTD . VS DCIT REPORTED I N 6 ITR (TR I B) 4 07 IS RELIED UPON . GR . 6 . : NEW C LAIM F O R BAD DEBT S WHETHER TO BE DEDUCTED FROM BOOK PROFIT S U/ S 1 1 5JB NO SUC H CL AIM FOR BAD DEBTS WAS MA DE I N THE PROFIT AND L O S S A/C APPEAR I NG IN THE PRI N TED ANNUA L ACCOUNTS OF TH E ASSESSEE COMPA N Y FOR WHICH WERE APPROVE D BY T H E BOARD OF DIRECTORS AND P L A C E D BEFO RE T HE ANNUAL GENERAL MEET I NG . DECISION OF THE APE X C OU R T IN AP OL L O TYRES VS C L T (25 5 ITR 273) IS EQUALLY APPLICABLE FOR THE A SS ES SEE AS HELD B Y IT A T CHENNA I BEN C H IN DCIT VS THANGAVEL SPINNING MILLS LTD . REPOR T ED IN 9 7 ITD 2 6 2 . GR.7 APPLICABILITY OF SEC.115JB ASSESSEE CONTENDS THAT PROVISIONS OF SEC . 115JB IS NOT APPLICABLE IN VIEW OF THE PSC ENTERED INTO WITH THE GOVERNMENT . I N THIS REGARD , I SUBM I T AS U NDE R : A) ART I CLE 16 .1 OF PSC [ PAGES 558 T O 562 OF ASSESSEE ' S PAPER BOO K] SA Y S TH A T ASSE S SEE SHALL BE SUBJECT TO ALL F ISCAL L EG ISLA T ION I N I N DIA EXCEPT SPECIFICALLY EXEMPT E D UNDER ANY LA W . A RT . 1 6 . 4 REITERATE S ' THIS POSITION. SEC. 115J B IS ALSO AN INTEGRAL PART OF THE ! . T . A CT . A S SE SS EE HAS NOT PRODUCED ANY ORD E R OF ANY AUTHORITY ITA NOS.802,803,1077,2154 & 2155/MDS/2010 34 EXEM P TI NG IT FROM THE PROV I SIO N S OF ! . T . ACT OR ANY SP E CIFIC SECTION CONTA INED THEREIN . H E NCE THE CONTENTION OF THE ASSESSEE IS DEVOID OF MER ITS . B) THIS I SSUE STAN D S COVERED BY THE DECISION OF AAR IN NIKO RE SO U RCES L TD . , IN RE REPORTED I N 23 4 I TR 828. GR.8 L EVY OF INTEREST U/S.234B ON BOOK PROFITS COM PUTED U/S.115JB COVERED IN FAVOUR OF REVENUE BY DECISION OF HONBLE SUPREME COURT IN JCIT VS. ROLTA INDIA LTD (330 ITR 470). HARDY EXPLORATION & PRODUCTION VS. ADIT (I NDIA) WRITTEN SUBMISSION ITA 2155/10 A.Y. 2003-04 GR.1 : GENERAL GR . 2 : JURISDICTION TO INITIATE ACTION U/S 147 S I M I LAR TO GR. 2 IN ITA 2154/10 GR.3 & 4 : DEDUCTION OF DEPLETION IN BOOK PROFITS SIMILAR TO GR.3 & 4 IN ITA NO.2154/10 GR.5 APPLICABILITY OF SEC.115JB SIMILAR TO GR.7 IN 2154/10 GR.6 : INCORRECT SETOFF IN RESPECT OF BROUGHT FORWA RD LOSSES UNDER NORMAL PROVISIONS NO SUCH ISSUE RAISED BEFORE A.O. AND DRP. NOT A LE GAL ISSUE. ALL THE FACTS ARE NOT AVAILABLE ON RECORD . GR. 7 : LEVY OF INTEREST U/S 234B ON BOOK PROFITS C OMPUTED U/S 115JB SIMILAR TO GR. 8 IN ITA 2154/10 HARDY EXPLORATION & PRODUCTION V. ADIT (INT. TAX.), (INDIA) INC., CHENNAI. CHENNAI. ITA NOS.802,803,1077,2154 & 2155/MDS/2010 35 WRITTEN SUBMISSIONS ITA 802/CHNY/10 A.Y. 2005-06 GR. 1 : GENERAL GR. 2 TO 4 : JURISDICTION TO INITIATE PROCEEDINGS U /S 263 A. C L T IN PARA. 3 OF HIS ORDER HAS CLEARLY DEMONSTRATED T HE E RR O R COMMITTED BY . A .O. WHILE ALLOWING SET-OFF OF BROUGHT FORW ARD DEPRECIATION AGAINST BOOK PROFITS COMPUTED U/S 115JB . TH E MA IN REASON FOR COMMI T TING SUCH AN ERRO R I S NON-VERIFICATION OF ASSES S M ENT RECORDS OF EARLIER YEARS. PERUSAL OF THE ASSESSMENT ORDER SHOW S T HAT A.O. HAS NOT MADE ANY ENQUIRY REGARD I NG EL I GIBILITY AS W ELL AS QUANTUM OF BROUGHT FORWARD LOSS OR DEPRECIATION ALLOWABL E FOR S E T OFF DUR I NG THE CURRENT YEAR . ASSESSEE HAS NOT FURN I SHED ANY EV I DE NCE TO SHOW THAT THIS I SSUE WAS EVER DISCUSSED DURING THE COURSE OF ASSESSMENT PROCEEDINGS. B IN MALABAR INDUS T RIAL CO. LTD . VS CLT REPORTED IN 2 4 3 ITR 83 A P E X COURT HELD THAT WHE N AN ASSESSMENT ORDER WAS PASSED W I T HOUT APPL I CATION OF M I ND IN ALL P E RSPECTIV E , IT IS AN E R RONEOU S O RDER. S IM ILAR VIEW WAS ALSO HELD IN RAMPYARI DEVI SAROAGI VS C L T (SC) 6 7 ' IT R 84 . C. I N GEE VEE ENTER P R I SES VS ADD! . CIT ( REPORTED IN 99 ITR 375 ) DEL HI HIGH COURT HELD THAT THE ITA BEING NOT ONLY AN ADJ U D I CATOR BUT A LSO A N I NVEST I GAT OR . HE CANNOT REMA I N PASSIVE IN THE FACE OF A RE T URN WHICH IS APPARENT L Y I N ORDER BUT CALLS FOR FURTHER ENQUIRY IN TH E F ACTS AND CIRCUMSTANCES OF THE CASE AND THE WORD 'ERRONEOUS ' IN S. 2 6 3 I N C LUDES THE FA IL U R E TO MAKE SUCH AN ENQUIRY . SIMILAR VIEW WAS HELD IN RAJALAKSHM I MILLS LTD. VS ITA (ITAT , SB-CHENNAI) 1 2 1 ITD 343 SRM SYSTEMS & SOFTWARE PVT . LTD . VS ACIT 2010-TIO L -646-H C MAD-IT ACCE L I C I M FRONTLINE LTD. VS C L T IN I TA 1597 /1 0 - O RDER DA T ED 13-01-11 BY I TAT CHENNAI BENCH D. ASSESSEE ' S RELIANCE ON IT A T ORD E R FOR A . Y. 2 004 -05 IS MISPLAC ED AS TH E SAID ORDER WAS PASSED BY IT AT ONLY ON THE REASON I NG TH AT IN T HE I MPUGNED ORDER OF THAT A PPE A L , CIT FAILED TO POINT OUT WHA T IS E RR ONEOUS IN THE ASSESSMENT ORDER [ P AR A. 10 OF IT AT ORDER] W H E RE A S IN T HE I M PUGNED O R DE R U/S 263 FOR THIS APPEAL , C IT CL EARL Y DEMONSTRATED THE ERROR IN PARA . 3. ITA NOS.802,803,1077,2154 & 2155/MDS/2010 36 GR. 5 & 6 : INCORRECT SET-OFF OF BROUGHT FORWARD LO SS/DEPRECIATION A) A S PE R EXPL . 1 T O SE C. 11 5JB , FOR THE PURPOSE OF COMPU TA T I O N OF ' BOOK PROFIT ' UNDER THAT SECTION , THE NET PROFIT A S SHOWN IN TH E PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YE A R PREPA R ED IN ACCORDANCE WITH THE PROVISIONS OF PARTS II & III PF SCHEDULE VI THE COMPA NI ES AC T I S THE STARTING POINT . A . O . CANNOT CHANGE THIS FIGURE . THIS IS THE VI E W HELD BY APEX COURT IN APOLLO TYRES V S C1T ( 2 5 5 IIR 273) . THERE IS NO DISPUTE ON THIS ISSUE. C1T HAS NOT MODIFIED TH IS F I GURE IN THE ORDER U/S 263. B) A . O . HAS THE POWER TO M A KE ADJUSTMENTS TO BOOK PROF I TS AS MENTIONED I N EXPL.1 . 1 TO SEC. 115J B AS HELD I N : I. CIT VS HCL COM NET SYST E MS & SERVICES LTD. (SC) 305 ITR 409 II . AJANTA PHARMA LTD. VS CIT (SC) 327 ITR 305 III) . INDO RAMA SYNTHET I CS (I) LTD. VS C1T (SC) 330 ITR 363. C) AS PER EXPL . 1 (III) , THE BOOK PROFITS SO ARRIVED AT HAS TO BE REDUCED BY ' THE AMOUN T O F LOSS B RO UG HT F ORWA R D O R UNA B S O RBED DEPRECIATION , WH I CHEVER IS LESS AS PE R BO OK S OF ACCOUNTS '. D) AS PER THE BOOKS OF A CC O UNT OF THE COMPANY, ALL EXPEN SES INCLUDING D EPRECIATION IS D E BITED TO THE P & LAIC AND ONLY THE NET FIGURE OF PR OFIT I L OSS IS CARRI E D FORWARD TO SUBSEQUENT YEARS . THU S I N THE SUBSEQUENT YEARS ONLYCONSOLIDATED FIGURE OF LOSS AS ON DATE (I NCLUDING UNABSORBED DEPRECIATION) IS AVAILABLE . HOWEVE R SEPARATE FIGURES OF LOSS BROUGHT FORWARD AND UNABSO R BED DEPRECIATION A S PER BOOKS OF ACCOUNT ARE NECESSARY FOR I MPLEMENTING THE STATUTORY PROVISIONS CONTAINED IN C1 . (II I ) OF EXP L . 1 TO SEC . 115JB. E) THOUGH ASSESSEE C L A I MED THAT IT HAD CERTAIN AMOUNT O F B R OU G H T FORWARD LOSSES AND DEPRECIATION TO BE SET OFF AGAINST THE CUR R E NT YEAR ' S PROFIT , NO DETAILS AS TO HOW SUCH A FIGURE IS ARRIVED AT , WA S PRODUCED . ON THE CONTRARY, CIT R ELIED ON THE FIGURES AS PER THE PR O FIT AND LOSS A/C APPEAR I NG I N THE PRINTED ANNUAL ACCOUNTS OF THE ASSESSEE COMP ANY FOR F.Y . 1995-96 TO 1999-00 WHICH WERE APPROVE D BY THE BOARD O F DIRECTORS AND PLACED BEFORE THEANN U AL GE NER A L MEETING. COPY OF SUCH ACCOUNTS ARE AVAILABLE IN PAGES 1 TO 4 OF DEPARTMENT ' S PAPER BOOK. HOWEVER THE FIGURES SHOWN BY T H E ASSESSEE IN THE INCOME COMPUTATION STATEMENT [ PA GE 232 OF ASSESSEE'S PAPER BOOK] ARE AT VARIANCE WITH THESE FIGURES . TH IS CLEARLY SHOWS THAT A.O. FOLLOWED THE PRINCIPLES LAID DOWN BY THE . APEX COURT IN APOLLO TYRES VS CIT (255 ITR 273) . THERE IS NO BASI S FO R THE ASSESSEE TO SHOW DIFFERENT FIGURES IN RESPECT OF F . Y . 1 995-96 TO 1999-00 FROM THE FIGURES WHICH WERE APPROVED BY THE BOARD O F DIRECTORS AND PLACED BEFORE ITA NOS.802,803,1077,2154 & 2155/MDS/2010 37 THE ANNUAL GENERAL MEETING . F) THESE DOCUMENTARY EVIDENCE CLEARLY PROVE THAT TH E P R O F IT & LOSS A/C OF THE ASSESSEE COMPANY FOR THE F.Y. 1995-96 TO 1999-00 D ID NOT INCLUDE DEPLETION/ABANDONMENT COSTS AS PART OF DEPREC I AT I ON . FROM A . Y . 2000-01 ONWARDS ASSESSEE IS EARNING BOOK PROFIT AND THE IS SUE OF LOSS I UNABSORBED DEPRECIATION I DEPLETION ETC . DOES N O T ARISE AS NET PROFIT WAS EARNED AFTER DEDUCTING ALL SUCH EXPENDITU R E . G) ASSESSMENTS I N RESPECT OF THE I.T . RETURNS FILED BY ASSE S SE E CORRESPOND I NG TO F.Y . 1995 - 96 T O 1999-00 ( A . Y . 1996-97 TO 2000-0 1 ) HAS BECOME FINAL AS ON DATE. THESE ASSESSMENTS WERE C OMPLET E D BY ACCEPTIN G THE RETURNED INCOME AND NO APPEAL W A S FILED BY ASSESSEE . HENCE ASSESSEE CANNOT SEEK TO CHANGE I M ODIFY T HE FIGURES OF BRO U GHT FORWARD LOSS I DEPRECIATION DETERMINED FO R SUCH VEAR S IN THE P RESENT APPEAL PROCEEDINGS. THIS V I EW WAS UPHELD BY HONBLE SUPREME COURT IN COMMISSIONER OF INCOME TAX VS. ANR. VS. DALMIA CEMENT (BHARAT) LTD., IN 216 I TR 79 THIS WAS FOLLOWED BY JURISDICTIONAL HIGH COURT IN S. K V SELVARAJ VS. C OMMISSIONER OF INCOME TAX (MAD.) 240 ITR 217. H) INSTEAD OF RELYIN G ON THE F I GURES AS PER THE PROFIT AND LOSS ALC APPEARING IN THE PRINTED ANNUAL ACCOUNTS OF THE ASSESSEE COMPANY FOR F . Y . 1995- 96 TO 1999-00 WHICH WERE APPROVE D B Y T HE BOARD OF DIRECTORS AND PLACED BEFORETHE ANNUAL GENERA L ME E TING, ASSESSEE I S NOW RELYING ON CERTAIN FIGURES APPEARING IN FORM 2 9 B PREPARED BY I TS AUDITOR FOR THE CURRENT YEAR . DEC I SION OF T H E A PEX COURT IN APOLLO TYRES VS CIT (255 ITR 273) IS EQUALLY APPLICABL E FOR T HE ASSESSEE AS HELD BY ITAT CHENNAI BENCH IN DCIT VS T HANGA V EL SPINNING MILLS LTD . REPORTED IN 97 ITD 262 . A FORM PRESCRIBE D UNDER THE RULES CAN NEVER HAVE ANY EFFECT ON THE INTERPR ETA T I O N OR OPERATION OF THE PARENT STATUTE AS HELD BY THE APEX COUR T IN CL T V S T UL S YAN NEC LTD . (330 I TR 226) . I) A S HELD BY CLT , AS O N 31-03-2000 TOTAL BROUGHT FORWARD DEPR ECIATION . IS RS . 8 , 20 , 73 , 183 AND TOTA L BROUGHT FORWARD LOSS IS RS . 90 , 1 3, 66 , 873 . THE LESSE R AMONG THIS IS BROUGHT FORWARD DEPRECIATIO N O F R S . 8 , 20 , 73 , 183 . AFTER ADJUSTING THIS AGAINST PROFITS OF F . Y . 2000 -01 (R S. 4 , 74 , 34 , 847) AND F .Y . 2001 - 02 (RS . 9 , 20 , 82 , 168) , NOTHING R EMA INS T O BE BROUGHT FORWARD T O SUBSEQUENT YEAR . ITA NOS.802,803,1077,2154 & 2155/MDS/2010 38 J) R E DUCT I O N MADE TO BOOK LOSS OR DEP R E C IAT I O N IN ONE Y E A R MUST FORM THE BASIS FOR COMPUTATION OF MAT L I ABILITY FO R THE SUBSE Q UE N T YEAR, AS H ELD I N I . RASHTR I YA I SPAT NIGAM LTD . , I N RE ( AAR) 285 IT R 1 II . LAKS H M I MACHINE WORKS LTD . VS AC I T (I T AT , C H E NNAI) 126 ITD 343 K) I N T HIS BACKGROU ND, A NY DISCUSS I ON ON WHETHER DEPLET ION SHOULD F ORM PA R T OF DEPREC I AT I O N OR N OT , I S I RRE L EVA N T AS A SSESSE E H A S NOT IN C LUDED DEPLET IO N IN THE DEPREC I A T ION CLA I M MADE IN THE P RO F IT AND L OSS AL C WHICH FO R MED PART OF THE PRINTED ANNUAL ACCO UNTS OF THE ASSESSEE C O MP A N Y FOR F.Y. 1995-96 TO 1999 - 00 WHICH WERE APPROVED B Y THE BOARD OF DIRECTORS AND PLACED BEFO R E THE ANNUA L GENERAL MEETING . THIS ISSUE REACHED FINALITY L ONG BACK . L) F URTHER , RELIANCE PLACED BY ASSESSEE ON GU I DEL I NES I SSUED BY I CA I IS ALSO NOT RELEVANT SINCE SUCH GUIDELINES WERE ISSUED IN 2003 WH E REAS TH E DISPUTE RE LAT E TO F . Y . 1995-96 T O 1999-00 PERIOD . NO G UID EL INES CAN BE RETROSPE C TI V E I N OPERAT I ON AS G U IDANCE IS AL W AYS PROS PECTIVE IN NATURE . M) DEDUCTION U LS 42 NOT AVAILABLE WHILE COMPUTING INCOME ULS 115JB AS HELD BY ITAT AHMEDABAD BENCH IN GUJARAT STATE PE T RO L EUM C ORPORATION LTD . V S JCIT REPORTED I N 123 ITD 335 . N) IN T HI S C ASE , GOVT . OF INDIA HAS ENTERED I NTO A PRODU C TI ON SHARING C ONTRACT (PSC) WITH THE ASSESSEE COMPANY AND SUCH C O N T RACT W AS PL ACED BEFORE BOTH THE HOUSES OF PARL I AMENT . AS HELD B Y HO N'B L E SUP R EME COURT I N CL T & ANR . VS ENRON O I L & GAS INDIA L TD . [ REPORTED IN 30 5 I TR 7 5 ] S A I D PS C IS AN I NDEPENDENT ACCOUNT I NG REGI ME WHICH INCLU DE S TAX ITA NOS.802,803,1077,2154 & 2155/MDS/2010 39 TR E A TMENT O F COS T S, EXPE NS E S, INCO ME , P R OFITS ETC . IT PRESCRIBES A SEPARA TE RULE OF ACCOUNTING . PSC REPRESENTED A N I NDEPEND E NT REGIME AND THE SHARES OF GOVERNMENT AND C ONTRACTORS WERE DETER M INED ON THA T BASIS . EXPENSES HAD TO BE A CCOUNTED FOR ONLY AS CONTEMPLATED BY THE PSC IN VIEW OF THE SPECIAL ACCOUNTING PROCEDURE AS PRESCRIBED BY PSC, RELIANCE ON ANY OTHER ACCOUNTING SYSTEM HAS TO BE RULED OUT AS HELD BY THE APEX COURT. O) ARTICLE 16 OF PSC PROVIDES FOR ' TAXES , ROYALTIES , RENTALS ETC .'[ PAGES 189 TO 193 OF ASSESSEE ' S PAPER BOOK] . AS PER THIS ART I CLE , THE ONLY EXPENSES DEDUCTIBLE WHILE COMPUTING PROFITS AND GAINS F R O M THE BUSINESS OF PETROLEUM OPERATIONS ARE : 100 % OF REVENUE AND CAPITAL EXPENDITURE INCURRED IN RESP EC T O F EXPLORATION OPERATIONS AS PER APPENDIX C - SECTION 2.2 A ND DRILLING OPE R AT I ONS AS PER APPENDIX C - SECT I ON 2 . 3 . 1 AND 2 . 3.2 EXPENDITURE INCURRED I N RESPECT OF DEVELOPMENT OPERATIONS A S PER APPENDIX C - SECTION 2 . 3 (OTHER THAN DRILLING OPERAT IONS COVERED ABOVE) AND PRODUCTION OPERATIONS AS PER APPENDIX C - SECT I ON 2 . 4 WILL BE ALLOWABL E AS PER THE PROVISIONS OF I . T. ACT . P) COPY OF APPENDIX C - SECTION 2 IS AVAILABLE IN P AGES 5 TO 8 O F DEPARTMENT PAPER BOOK . AS PER THIS, EXPLORATION COSTS ARE EXPENDITURE IN S EARCH FOR PETROLEUM. DRILLING COSTS ARE EXPENDITURE FOR DR I LLING AS WELL AS FOR BRINGING A WELL INTO USE AS A PRODUCIN G WELL . DEVELOPMENT COSTS ARE EXPENDITURE INCURRED FOR DEVELOPMENT O F T HE CONTRACT AREA . PRODUCTION COSTS ARE EXPENDITURE I NCURRED ON PRODUCTION OPERATIONS IN RESPECT OF THE CONTRACT AREA . ITA NOS.802,803,1077,2154 & 2155/MDS/2010 40 Q) IN SHORT, EXPE N D IT URE BY WAY OF ' DEPLETION ' IS NOT A N ALLOWA B L E EXPENDITURE A S PER THE PSC. THE R EASON FOR OMISS I ON OF THE SAME A S AN EXPENDITUR E IN THE PSC IS THE FACT THAT ASSESSEE I S NOT THE OWNE R OF SUCH NATU R AL R ESOURCES AND HENCE ASSESSEE NEED NOT BE C OMPENSATED FOR S U C H R EDU C T I ON I N N AT UR A L R ESOUR C ES . THIS ASPECT IS DISCUSSED I N D E T AIL BY THE APEX COURT I N CIT & ANR . VS ENRON OIL & GASINDIA LTD . [ REPORTED IN 305 I TR 75 ] . AS PER ARTICLE 297 OF THE CONSTITUTION , A LL THE NATURAL RESOURCES VESTS WITH THE UNION ' G OVERNMENT . T HE INTERNATIONAL PRINCIPLE OF PERMANENT SOVEREIGNTY OVER NATURAL RESOURCES WAS ADOPTED BY THE U.N . GENERAL ASSEMBLY IN RESOLUTION 1803 . ASSESSEE DOES NOT HAVE ANY RIGHT IN ALLOCATION OF SUCH RESOURCE S OR I TS PRIC I NG, MARKETING ETC . AS HELD UNDER SIMILAR CIRCUMSTANCES BY THE APEX COURT IN RELIANCE NATURA L RESOURCES LTD . VS RELIANCE INDUSTRIES LTD . IN CIVIL APPEAL NOS. 4273 TO 4277 OF 2010 BY ORDER DATED 07-05-2010 . OBITER DICTA OF HON'BLE SUPREME C OURT I S ALSO BINDING IN V I EW OF TATA IRON & STEEL CO. LTD . VS V . R. BA PAT (BOM) 101 1TR292 . Q) IN FA C T THE VAR I OUS PAPERS FILED BY THE ASSESSEE IN SUPP ORT OF ACCOUNT I NG OF ' DEPLETION ', ARE A L L IN RESPECT OF ENTERP RI SES W HICH ACQUIRED MINERAL INTERESTS I N PROPERTIES AND IN SUCH CIRCUMSTA NC ES I T WAS HELD TO BE A DEDUCTIBLE EXPEND I TURE. SUCH AN ACCOUNTIN G PRACTICE I S PERMISSIBLE WHEN ASSESSEE I S THE OWNER OF THE RESOU RC ES AND NOT IN THE TYPE OF PRESENT PSC , AS HELD BY THE APEX COURT IN THE DECISION CITED SUPRA . THE ACCOUNTING STANDARDS PRESCRIBED THEREI N ARE UNDER THE ASSUMPTION THAT THE NATURAL RESOURCES IS AN A S SET ' OWNED BY AND BELONGING TO THE COMPANY ENGAGED IN THE BUSI N ES S OF EXPLORATION AND EXTRACTION OF SUCH NATURAL RESOU R CES A ND THEREFORE SUCH DEPLETION I S TO BE CHARGED ON ITS PROF I T AND LO SS ACCOUNT . CI . 2 IN PA GE ~ 69 OF ASSESSEE ' S PAPER BOOK WHICH SPECIFIE S THE OBJECTIVE OF THE GUIDANCE NOTE ITA NOS.802,803,1077,2154 & 2155/MDS/2010 41 CL.4 IN PAGE 76 OF ASSESSEES PAPER BOOK WHICH SPEC IFIED THE METHOD OF CALCULATION OF DEPLETION COST CI . 1 IN PAGE 132 OF AS SE SS EE 'S PA P ER BOOK WHICH SPEC I F I ES THE OBJECTIVE OF THE ACCOUNTI NG STAN D ARD HO W EVER THE SITUATION IS DI F F E R E NT IN TH E PR ESE N T CASE W H E R E ON L Y PSC WAS ENTERED INTO BY TH E G OV E RNM E NT AND TH E N A TURAL RESOU RC E S OWNED BY GOVT. W E RE NOT PAR TE D WITH . A S S E SSEE DID NOT A C QUIRE SUCH ASSETS AT AL L . NO SU C H ASSE T A PPE ARS IN TH E B A LANCE SHEET OF THE ASSESSE E . C L A IM OF THE AS S E SSE E F O R D EP LETI O N COSTS ARISES O N LY IF THE ASS E SSEE PURCH AS ES / A CQ UIRE S S U CH NATURAL RESOURCES A N D THE ' EXPENDITURE INCURR E D FOR THE S A ME IS T RE ATED AS CAPITAL EXPEND I TURE IN ITS BOOKS. R) IT IS NOT A BOT CONTRACT BUT A P SC W H E R E ASSESSEE WILL BE REIMBURSED THE EXPENDITU R 7' INCURRED BY IT AND IN ADDITION W I LL GIVE A S H ARE OF PROFIT . GOVERNMENT , THE OWNER OF SUCH NATURAL RESOURCES IS GETTIN G PART OF THE PROFIT FO R ALLOW I NG ITS NATURAL RESOUR C ES T O DEPLET E . I N TH E CIRCUMSTA N CES , ONL Y GOVT. WHOSE NATURAL RESOURCES GET DEPLETED CA N CLAIM DEPLETION COSTS AND NOT THE ASSESSEE WHO ON L Y EA R N S PROFIT BY EXPLOI T ING SUCH N AT URAL RESOURCES OWNED BY GOVER N MEN T TH R OUGH THE PSC . S) WHEN THE PSC WHICH W AS PL A CED BEFORE BOTH THE HO U SE O F HOWEVE R THE S I TUAT I ON IS DIFF E R E NT IN THE PRESENT CASE WHERE O N L Y PSC WAS ENTERED INTO BY THE G O VE RNM E NT. T) W H EN THE PSC WHICH WAS PLACED BEFORE BOTH THE H OUSE O F PARLIAMENT DID NOT PR O V I DE F O R DEDUCTION ON ACCOUNT OF ' '' DEPLETION '', COURTS CANNOT GRANT SUCH D ED UCTION IN VIEW OF THE P RI NC I PLE OF ' CASU S OMISSUS ' . I R E LY ON LAXMANDAS PRANCHAND & OR S. VS UNION OF INDIA & ORS (MP) 234 ITR 261 . U) THERE IS NO SCOPE F OR IMPORTING INTO THE STATUT E WORDS WHICH ARE NOT THE R E. EVEN I F THERE I S A CASUS OMISSUS , THE DE F ECT CAN BE REMEDIED ONLY BY LEGISLAT I O N AND NOT BY JUDICIAL INTERPRETATION . THE INTE N TION O F THE LEG I SLATURE I S PR I MARILY TO BE GATHERED FROM THE WORDS USED IN THE STATUTE. ONCE I T I S S HOWN THAT THE CASE OF THE ASSESSEE COME S W I T H IN THE L ETTE R O F THE L AW , HE MUST BE TAXED , HOWEVER , GREAT THE H ARDS HIP MAY APPEAR TOTHE J UD I C I AL M I ND TO BE AS HELD I N TARULATA S H YA M & ORS . VS CIT (SC) 108 ITR 345. SIMILAR VIEW WAS ALSO HELD IN PADM A SUN DA RA RAO (DECD . ) & ORS . VS STATE OF TAMIL NADU & OR S . (SC) 25 5 IT R 147 . V) LEGIS L ATURE IN I TS WISDOM HA S NOT M ADE ANY A L LOWANCE T O WARDS ' DEP L ET I ON'IN THE PSC SINCE GOVERNMENT I S THE OWNE R OF S U C H NATURAL RESOURCES AND ASSESSEE ONLY MAKES INVESTMENT TOWAR D S E XPLORAT I O N OF ITA NOS.802,803,1077,2154 & 2155/MDS/2010 42 OI L RESOURCES , DEVELOPMENT OF OIL WELL S A N D P R ODUCT I ON OF OIL THEREFROM . ASSESSEE IS NOT AFFECTED ANYWAY O N ACCOUNT OF DEPLETION OF NATURAL RESOURCESAND HENCE THERE IS NO N EED TO MAKE PROV I S I ON THEREOF. THE I NTERPRETATION AS SUGGESTED BY T HE ASSESSEE TO ALLOW ' DEPLET I ON ' OF AN ASSET NOT OWNED BY THE ASSESSEE , WILL MAKE THE PROVISIONS CONTAINED I N PSC OTIOSE . HE NC E SUCH AN INTERP R ETAT I ON NEEDS TO BE AVOIDED AS HELD BY KA R NATA K A H I GH COURT IN CH A RT E RED HOUSING VS APPROPRIATEAUTHORITY & O RS REP O R T ED IN 25 0 ITR 1 . E VEN THOUGH A LIB E RAL INTERPRETATION HAS TO BE GIVEN TO AN INCENTIVE PROV ISION , THE INTERPRETATION HAS TO B E A S PE R T H E WO R DI N G S O F T HE SE CTI O N, AN D TH E BE N EF ITS W HIC H AR E NOT AVAILAB L E UNDER T HE SECTION CANNOT BE CONFERRED BY IG NOR IN G OR MI S I NTERPRET I NG CL EAR WO R DS I N THE SECT I ON . GR.7 APPLICABILITY OF SEC.115JB A) ASSESSEE CONTENDS THAT PROVISIONS O F S E C. 115J B IS APPLICABLE I N V I EW O F T HE PSC EN T E R ED I NTO WITH THE GOVERNMENT . B) A R TICLE 16 . 1 OF PSC [ PAGES 189 TO 193 OF ASSESSEE ' S PAPER BOOK ] S AYS THAT ASSES S EE SHALL BE SUBJECT TO A L L FISCAL LEGISLATION I N IN D IA EXCEPT SPECI F ICALLY EX E MPTED UNDER ANY LAW . ART . 16 . 4 REITERA T E S T HIS POSITION. S E C . 115JB IS ALSO AN I NTEGRAL PART OF TH E I . T . A CT. ASSESSEE HAS NOT PRODUCED ANY O RD ER O F ANY A UTHORITY EXEMPT IN G IT F R OM THE PROVIS I ONS OF LT. ACT OR A N Y SPECIF IC S ECT I O N CON T A I NED TH EREIN . HENCE THE CONTENT I ON OF THE ASSESSEE I S DEVO I D O F M E RI T S . C) T H I S ISSUE S TANDS C O V E R ED BY THE DE C IS I O N OF AAR IN N I K O R ESOURCES LTD. , IN RE R EPORTED I N 234 I TR 828 . I TA 803 / CHNY /10 A .Y . 2006 - 0 7 ISSUE SI MI L A R T O G R . 5 TO 7 IN ITA 802 / CH N Y / 1 0 IT A 1 077 / CHNY /1 0 A . Y . 2006 - 07 SITE RESTORATION EXPEN S E S - WHETHER C AN BE ADDED BACK TO BO O K PROFITS C OMPUTED U / S 1 1 5JB TH OUG H SUCH EXPENSE S ARE DEBITED T O P & L A/C , I T IS NOT AN ALLOWA BLE EXPEND I TURE AS PER ART I C L E 16 OF PSC , WHICH IS A SELF - CONTAINE D C ODE . ARGUMENTS SIMILAR TO GR. 5 & 6 IN ITA 802/CHNY /10 . DE CI S I O N O F IT A T I N THE C ASE OF CA I RN ENERGY INDIA PTY . LTD . IS DISTINGU I SHABL E O N FA C TS AS I T WAS BASED O N A DIFFERENT PSC . I.T.A. NOS. 802,803,2154,2155 & 1077/MDS/2010 43 7. IT WAS SUBMITTED BY THE LEARNED DR THAT IN REGAR D TO THE ASSESSMENT YEARS 2002-03 AND 2003-04 IN VIEW OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ASSISTANT COMMISSIONER OF INCOME-TAX V. RAJESH J HAVERI STOCK BROKERS P. LTD, REPORTED IN 291 ITR 500 (SC), THE RE-OPENING WAS LI ABLE TO BE UPHELD. IT WAS THE FURTHER SUBMISSION THAT IN REGARD TO THE ASSESSMENT YEAR 2005-06 EVEN THOUGH THE ASSESSMENT ORDER WAS PASSED U/S 143(3), THE ISSUES HAD NOT BEEN CONSIDERED AND THE ASSESSMENT ORDER WAS NOT SPEAKING ON THE ISSUES ALS O. IT WAS THE SUBMISSION THAT THE ASSESSMENT ORDER HAD BEEN PASSED WITHOUT APPLICATIO N OF MIND AND IN VIEW OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F MALABAR INDUSTRIAL CO. LTD. REPORTED IN 243 ITR 83) (SC), THE LEARNED DIT WAS R IGHT IN INVOKING HIS POWERS U/S 263 OF THE ACT. 8. ON MERITS IT WAS SUBMITTED BY THE LEARNED DR THA T ALL THE ASSESSMENTS WHICH WERE IN APPEAL BEFORE THIS TRIBUNAL WERE LIABLE TO BE SENT BACK TO THE ASSESSING OFFICER FOR RE-CONSIDERATION IN LINE WITH THE DECISION OF T HE HON'BLE SUPREME COURT IN THE CASE OF CIT V. ENRON OIL AND GAS INDIA LTD., REPORTED IN 305 ITR 75 (SC) WHEREIN THE HON'BLE SUPREME COURT HAS HELD AS FOLLOWS : THE ABOVE ANALYSIS OF THE PSC INDICATES THAT BOTH THE GOVERNMENT AND THE CONTRACTOR ARE ENTITLED TO THEIR 'TAKE' IN OIL AND NOT IN MONEY. THAT IS WHY THE CONTRACT IS CALLED AS PSC AND FOR THAT PURPOSE IT BECOMES NECESSARY TO TRANSLATE COSTS INTO OIL BARRELS. THIS IS DONE BY D IVIDING THE MONETARY VALUE OF COSTS BY THE AGREED PRICE OF OIL. THE PRICE OF O IL GENERALLY IS BENCHMARKED-X PER CENT ABOVE BRENT CRUDE QUOTATION, OR IT MAY DEPEND ON OIL MARKET PRICE. IN INDIA, OIL HAD TO BE SOLD DURING THE YEARS IN QUESTION BY THE CONTRACTORS TO IOC SO THAT IT WAS CONVENIENT TO HAV E A BENCHMARKED PRICE. IF THE PRICE OF OIL INCREASED, THE EXTENT OF PROF IT OIL WOULD ALSO INCREASE AND THEREBY THE SHARE OF THE GOVERNMENT WOULD AUTOM ATICALLY INCREASE. IT IS FOR THIS REASON THAT PSCS WERE CONSIDERED TO BE A B ETTER ARRANGEMENT FOR ENSURING THE SOVEREIGN GOVERNMENTS (OWNERS OF THE N ATURAL RESOURCES) THE MAXIMUM POSSIBLE 'TAKE'. AT THE SAME TIME, SUCH CON TRACTS ENSURE THAT THE PROJECTS REMAINED ATTRACTIVE ENOUGH FOR FOREIGN INV ESTORS. HOWEVER, DUE TO THIS KIND OF STRUCTURE OF THE PSC, INHERENTLY THERE HAS TO BE FREQUENT CONVERSION FROM ONE CURRENCY TO THE OTHER. CASH CAL LS WERE MADE IN USD; SOME OF THE CASH CALLS WERE REQUIRED TO BE CONVERTE D TO INR FOR LOCAL I.T.A. NOS. 802,803,2154,2155 & 1077/MDS/2010 44 EXPENSES; SOME OF THE EXPENSES STOOD INCURRED IN US D WHEREAS SOME TO BE INCURRED IN INR; THE SALE PRICE OF OIL WAS IN USD W HEREAS THE ACCOUNTS WERE DRAWN UP IN USD. WHEN SOME OF THE EXPENSES WERE INC URRED IN USD AND SOME INCURRED IN INR, CONVERSION HAD TO BE MADE AT THE PREVALENT RATES OF EXCHANGE TO BRING THEM ALL TO THE CONTRACT CURRENCY , I.E., USD. SIMILARLY, AS STATED ABOVE, THE SALE PRICE OF OIL WAS IN USD. AT THE TIME OF SALE, THE INR- USD RATE WOULD CHANGE FROM THAT ON THE DATE OF THE CASH CALLS. SIMILARLY, AS STATED ABOVE, THE ACCOUNTS WERE REQUIRED TO BE DRAW N UP IN USD. FOR THAT PURPOSE ALSO ONE HAD TO RECONVERT THE COSTS FROM BA RRELS TO MONETARY TERMS. FOR THE SAID REASONS, CLS. 1.6.1 AND 1.6.2 O F APPENDIX C' TO THE PSC ENVISAGED BOOKING OF ALL CURRENCY GAINS AND LOSSES IRRESPECTIVE OF WHETHER SUCH GAINS/LOSSES STOOD REALIZED OR REMAINED UNREAL IZED. IN CASE OF GAINS, A PART OF THE CREDIT WOULD GO TO THE GOVERNMENT, AND TAXES WOULD BE PAYABLE ON THE INCOME TO THE EXTENT OF SUCH GAINS CREDITED. THEREFORE, IN OUR VIEW, CURRENCY GAINS AND LOSSES CONSTITUTED AN INEXTRICAB LE PART OF THE ACCOUNTING MECHANISM FOR EXPENSES INCURRED ON THE DEVELOPMENT AND PRODUCTION OF OIL. SEC. 42 OF THE 1961 ACT WAS ENACTED TO ENSURE THA T WHERE THE STRUCTURE OF THE PSC WAS AT VARIANCE WITH THE ACCOUNTING PRIN CIPLES GENERALLY USED FOR ASCERTAINING TAXABLE INCOME, THE PROVISIONS OF THE PSC WOULD PREVAIL. SEC. 42 PROVIDES FOR DEDUCTION ON EXPENDITURE INCURRED O N PROSPECTING FOR OR EXTRACTION OR PRODUCTION OF MINERAL OIL WHEREAS S. 44BB CONTAINS SPECIAL PROVISION FOR COMPUTING PROFITS AND GAINS IN CONNEC TION WITH THE BUSINESS OF EXPLORATION OR EXTRACTION OR PRODUCTION OF MINERAL OILS. THE HEAD NOTE ITSELF INDICATES THAT S. 42 IS A SPECIAL PROVISION FOR DED UCTION ON EXPENDITURE INCURRED ON PROSPECTING, EXTRACTION OR PRODUCTION O F MINERAL OILS. PSC IS A CONTRACT IN WHICH THE CENTRAL GOVERNMENT IS NOT ONLY A PARTY, IT IS A PARTNER IN THE PROCESS. SUCH CONTRACTS ARE REQ UIRED TO BE PLACED BEFORE EACH HOUSE OF PARLIAMENT UNDER S. 42. ANALYSING S. 42(1), IT BECOMES CLEAR THAT THE SAI D SECTION IS A SPECIAL PROVISION FOR DEDUCTIONS IN THE CASE OF BUSINESS OF PROSPECTING, EXTRACTION OR PRODUCTION OF MINERAL OILS. AS STATED ABOVE, S. 42( 1) INTER ALIA PROVIDES FOR DEDUCTION OF CERTAIN EXPENSES. BROADLY SPEAKING, S. 42(1) PROVIDES FOR ADMISSIBI LITY IN RESPECT OF THREE TYPES OF ALLOWANCES PROVIDED THEY ARE SPECIFIED IN THE PSC. THEY RELATE TO EXPENDITURE INCURRED ON ACCOUNT OF ABORTIVE EXPLORA TION, EXPENDITURE INCURRED, BEFORE OR AFTER THE COMMENCEMENT OF COMME RCIAL PRODUCTION, IN RESPECT OF DRILLING OR EXPLORATION ACTIVITIES AND E XPENSES INCURRED IN RELATION TO DEPLETION OF MINERAL OIL IN THE MINING AREA. IF ONE READS S. 42(1) CAREFULLY IT BECOMES CLEAR THAT THE ABOVE THREE ALLOWANCES AR E ADMISSIBLE ONLY IF THEY ARE SO SPECIFIED IN THE PSC. FOR EXAMPLE, IN THE PS C IN QUESTION EXPENSES INCURRED ON ACCOUNT OF DEPLETION OF MINERAL OIL IS NOT PROVIDED FOR. THEREFORE, TO THAT EXTENT, RESPONDENT WOULD NOT BE ENTITLED TO CLAIM DEDUCTION UNDER S. 42(1)(C). UNDER S. 42(1) IT IS M ADE CLEAR THAT FOR THE PURPOSE OF COMPUTING THE PROFITS OR GAINS OF ANY BU SINESS CONSISTING OF PROSPECTING, EXTRACTION OR PRODUCTION OF MINERAL OI L, AN ASSESSEE WOULD BE ENTITLED TO CLAIM DEDUCTION IN RESPECT OF ABOVEMENT IONED THREE ITEMS OF EXPENDITURE IN LIEU OF OR IN ADDITION TO THE ALLOWA NCES ADMISSIBLE UNDER THE 1961 ACT. FURTHER, SUCH ALLOWANCES SHALL BE COMPUTE D AND MADE IN THE MANNER SPECIFIED IN THE AGREEMENT. IN SHORT, AN ASS ESSEE IS ENTITLED TO ALLOWANCES WHICH ARE MENTIONED IN THE PSC. ACCORDIN G TO THE DEPARTMENT, TRANSLATION LOSSES CLAIMED BY EOGIL ARE NOT SPECIFI ED IN THE PSC, HENCE THEY CANNOT BE CLAIMED AS DEDUCTION UNDER S. 42(1). I.T.A. NOS. 802,803,2154,2155 & 1077/MDS/2010 45 THE QUESTION WHICH THIS COURT NEEDS TO ANSWER IS ARE THE TRANSLATION LOSSES WITHIN THE SCOPE OF S. 42 ? IN ORDER TO ANSWER THE ABOVE QUESTION, WE ARE REQ UIRED TO ANALYSE CERTAIN PROVISIONS OF THE PSC IN QUESTION. ARTICLE 1 DEALS WITH DEFINITIONS. UNDER ART. 1.21 'CONTRACT COSTS' MEANS EXPLORATION COSTS, DEVELOPMENT COSTS, PRODUCTION COSTS AND ALL OTHER COSTS RELATED TO PETROLEUM OPERATIONS. SIMILARLY, 'COST PETROLEUM' IS DEFINED TO MEAN THE PORTION OF THE TOTAL VOLUME OF PETROLEUM PRODUCED WHICH THE CONTRACTOR I S ENTITLED TO TAKE FOR THE RECOVERY OF CONTRACT COSTS AS SPECIFIED IN ART. 13. UNDER ART. 13 THE CONTRACTOR IS ENTITLED TO RECOVER CONTRACT COSTS OU T OF THE TOTAL VOLUME OF PETROLEUM PRODUCED. THAT COSTS INCLUDE DEVELOPMENT AND EXPLORATION COSTS. SIMILARLY, ART. 1.69 DEFINES 'PROFIT PETROLEUM' TO MEAN ALL PETROLEUM PRODUCED AND SAVED FROM THE CONTRACT AREA IN A PART ICULAR PERIOD AS REDUCED BY COST PETROLEUM AND CALCULATED IN TERMS OF ART. 1 4. CONTINUING THE ANALYSIS OF PSC, ART. 7 INTER ALIA PROVIDES THAT TH E CONTRACTOR SHALL PROVIDE FOR ALL FUNDS NECESSARY FOR THE CONDUCT OF PETROLEU M OPERATIONS. ARTICLE 13 DEALS WITH RECOVERY OF COSTS, AS STATED ABOVE. ARTI CLE 15 DEALS WITH TAXES, ROYALTIES, RENTALS ETC. IT INDICATES THAT GOVERNMEN T OF INDIA IS ENTITLED TO GET TAXES APART FROM PROFIT PETROLEUM. ARTICLE 15.2.1 I NTER ALIA PROVIDES THAT IN ORDER TO COMPUTE PROFITS OF THE BUSINESS CONSISTING OF PROSPECTING, EXTRACTION OR PETROLEUM PRODUCTION THERE SHALL BE M ADE ALLOWANCES IN LIEU OF THE ALLOWANCES ADMISSIBLE UNDER THE 1961 ACT, SUCH ALLOWANCES AS ARE SPECIFIED IN THE PSC PURSUANT TO S. 42 IN RELATION TO THREE ITEMS OF EXPENDITURE SPECIFIED UNDER S. 42(1)(A), (B) AND (C ). UNDER ART. 15.2.1, TWO ALLOWANCES ARE PROVIDED FOR. THEY ARE FOR ABORTIVE EXPLORATION EXPENSES AND EXPENSES INCURRED AFTER THE COMMENCEMENT OF COMMERC IAL PRODUCTION IN RESPECT OF DRILLING OR EXPLORATION ACTIVITIES. IN O THER WORDS, TWO OUT OF THREE ALLOWANCES MENTIONED IN S. 42(1) ARE PROVIDED FOR I N ART. 15.2.1. THE ABOVE ANALYSIS SHOWS THAT S. 42 PROVIDES FOR DEDUCTION FOR EXPENSES PROVIDED SUCH EXPENSES/ALLOWANCES ARE PROVIDED FOR IN THE PSC. THE PSC IN QUESTION PROVIDES FOR BOTH CAPITAL AND REVENUE EXPE NDITURES. IT ALSO PROVIDES FOR A METHOD IN WHICH THE SAID EXPENSES HA D TO BE ACCOUNTED FOR. THE SAID PSC IS AN INDEPENDENT ACCOUNTING REGIME WH ICH INCLUDES TAX TREATMENT OF COSTS, EXPENSES, INCOMES, PROFITS ETC. IT PRESCRIBES A SEPARATE RULE OF ACCOUNTING. IN NORMAL ACCOUNTING, IN THE CA SE OF FIXED ASSETS, GENERALLY WHEN THE CURRENCY FLUCTUATION RESULTS IN AN EXCHANGE LOSS, ADDITION MADE TO THE VALUE OF THE ASSET FOR DEPRECI ATION. HOWEVER, UNDER THE PSC, INSTEAD OF INCREASING THE VALUE OF EXPENDI TURE INCURRED ON ACCOUNT OF CURRENCY VARIATION IN THE EXPENSES ITSELF, EOGIL WAS REQUIRED TO BOOK LOSSES SEPARATELY. THEREFORE, PSC REPRESENTED AN IN DEPENDENT REGIME. THE SHARES OF THE GOVERNMENT AND THE CONTRACTORS WERE A LSO DETERMINED ON THAT BASIS. SEC. 42 IS INOPERATIVE BY ITSELF. IT BE COMES OPERATIVE ONLY WHEN IT IS READ WITH THE PSC. EXPENSES DEDUCTIBLE UNDER S. 42 HAD TO BE DETERMINED AS PER THE PSC. THIS IMPLIED THAT EXPENSES HAD TO B E ACCOUNTED FOR ONLY AS CONTEMPLATED BY THE PSC. IF SO READ, IT IS CLEAR TH AT THE PRIMARY OBJECT OF THE PSC IS TO ENSURE A FAIR 'TAKE' TO THE GOVERNMEN T. THE SAID 'TAKE' COMPRISED OF PROFIT OIL, ROYALTY, CESSES AND TAXES. THE SAID PSC PRESCRIBED A SPECIAL MANNER OF ACCOUNTING WHICH WAS AT VARIANCE WITH THE NORMAL ACCOUNTING STANDARDS. THE SAID 'PSC ACCOUNTING' OBL ITERATED THE DIFFERENCE BETWEEN CAPITAL AND REVENUE EXPENDITURE. IT MADE AL L KINDS OF EXPENDITURE CHARGEABLE TO P&L A/C WITHOUT REFERENCE TO THEIR CA PITAL OR REVENUE NATURE. BUT FOR THE PSC ACCOUNTING THERE WOULD HAVE BEEN DI SPUTES AS TO WHETHER I.T.A. NOS. 802,803,2154,2155 & 1077/MDS/2010 46 THE EXPENSES WERE OF REVENUE OR CAPITAL NATURE. IN VIEW OF THE SPECIAL ACCOUNTING PROCEDURE PRESCRIBED BY THE PSC, AS-11 H AD TO BE RULED OUT. THE QUESTION BEFORE US STILL REMAINS AS TO WHETHE R THE PSC TALKS OF TRANSLATION, AND IF SO, WHETHER TRANSLATION LOSSES COULD BE CLAIMED BY EOGIL. IN THIS CONNECTION, WE NEED TO CONSIDER ART. 20.2 W HICH INTER ALIA STATES THAT THE RATES OF EXCHANGE FOR THE PURCHASE AND SALE OF CURRENCY BY THE CONTRACTOR SHALL BE THE PREVAILING RATES AS DETERMI NED BY THE SBI AND FOR ACCOUNTING PURPOSES UNDER THE PSC SUCH RATES SHALL APPLY AS PROVIDED FOR IN CL. 1.6 OF APPENDIX C' TO THE PSC. APPENDIX IS A P ART OF PSC. THE PURPOSE OF APPENDIX C' INTER ALIA IS TO PRESCRIBE THE ACCOUNT ING PROCEDURE. CLAUSE 1.1 OF APPENDIX C' PROVIDES FOR CLASSIFICATION OF COST S AND EXPENDITURES. THAT CLASSIFICATION IS WARRANTED AS PSC CONTEMPLATES COS TS RECOVERY BY THE CONTRACTOR(S), WHO HAS MADE INITIAL CONTRIBUTION/ I NVESTMENT OF FUNDS IN FOREIGN CURRENCY. THE SAID CLASSIFICATION OF COSTS AND EXPENDITURES IS ALSO INDICATED IN APPENDIX C' FOR PROFIT SHARING PURPOS ES AND FOR PARTICIPATION PURPOSES. APPENDIX C' PRESCRIBES THE MANNER IN WHI CH A CONTRACTOR IS REQUIRED TO MAINTAIN HIS ACCOUNTS. IT STIPULATES TH AT EACH OF THE CO-VENTURER HAS TO FOLLOW THE COMPUTATION OF INCOME-TAX UNDER T HE 1961 ACT. CLAUSE 1.6.1 OF APPENDIX C' REFERS TO CURRENCY EXCHANGE R ATES. IT STATES THAT FOR TRANSLATION PURPOSES BETWEEN USD AND INR, THE PREVI OUS MONTH'S AVERAGE OF THE DAILY MEANS OF BUYING AND SELLING RATES OF E XCHANGE AS QUOTED BY SBI SHALL BE USED FOR THE MONTH IN WHICH REVENUES, COST S, EXPENDITURES, RECEIPTS OR INCOMES ARE RECORDED. THEREFORE, IN OUR VIEW, CL . 1.6.1 OF APPENDIX C' PROVIDES FOR TRANSLATION. ON READING THE SAID PSC, ONE FINDS THAT IT NOT ON LY DEALS WITH ASCERTAINMENT OF PROFITS OF INDIVIDUAL STAKEHOLDERS INCLUDING GOVERNMENT OF INDIA BUT IT ALSO REFERS TO TAXES ON INDIVIDUAL SHA RES, CALCULATION OF COSTS AGAINST REVENUES FROM SALE OF PETROLEUM, ALLOWANCES ADMISSIBLE FOR DEDUCTION, TAXABILITY, VALUATION, RECOVERY, CONVERS ION ETC. IN OTHER WORDS, IT IS A COMPLETE CODE BY ITSELF. 9. IT WAS THE SUBMISSION THAT AS PER THE DECISION O F THE HON'BLE SUPREME COURT, THE ASSESSEE WAS NOT ENTITLED TO THE CLAIM OF DEPLE TION. THE LEARNED DR DREW OUR ATTENTION TO THE PSC BETWEEN THE ASSESSEE AND THE G OVERNMENT OF INDIA WHICH WAS SHOWN AT PAGE 558 OF THE ASSESSEES PAPER BOOK AS A LSO THE APPENDIX C TO THE SAID CONTRACT WHICH WAS SHOWN AT PAGE 5 OF THE DEPARTMEN TAL PAPER BOOK. IT WAS THE SUBMISSION THAT THE CONTRACT WAS SPECIFIC INSOFAR A S IT DID NOT INCLUDE THE DEPLETION COST. IT WAS THE SUBMISSION THAT THE DEPLETION COS T WAS NOT INCLUDED BECAUSE THE DEPLETION WAS IN REGARD TO OIL FIELD WHICH BELONGED TO THE GOVERNMENT OF INDIA AND CONSEQUENTLY THE ASSESSEE COULD NOT CLAIM DEPLETION IN REGARD TO THE OIL FIELD. IT WAS THE SUBMISSION THAT A PERUSAL OF THE ASSESSMENT ORD ER ITSELF CLEARLY SHOWED THAT THE I.T.A. NOS. 802,803,2154,2155 & 1077/MDS/2010 47 ASSESSING OFFICER HAD ALSO NOT CONSIDERED THE FACT THAT AS PER THE DECISION OF THE HON'BLE SUPREME COURT THE PSC WAS SPECIAL AND INDEP ENDENT ACCOUNTING REGIME. IT WAS FURTHER SUBMITTED THAT A PERUSAL OF PARA 8.2 OF THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 2002-03 CLEARLY SHOWED THAT THE ASS ESSEE HAD CLAIMED DEPRECIATION AND BUSINESS LOSSES AS SPECIFIED IN THE CHART THERE IN AND THE ASSESSMENTS TILL 1999- 2000 CANNOT BE ADJUSTED INSOFAR AS THE CLAIM OF THE ASSESSEE IS MADE IN THE RETURN AND SUCH RETURN HAS NOT BEEN REVISED OR DISTURBED. IT WAS THE SUBMISSION THAT AS THE RETURNS AS ALSO THE ASSESSMENT HAD NOT BEEN DON E IN LINE WITH THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF ENRON OIL AND GAS INDIA LTD., REFERRED TO SUPRA, AND AS THE DECISION OF THE HON'BLE SUPREME C OURT LAYS DOWN THE LAW ON THE ISSUE AS IT STOOD AND IT IS TO BE UNDERSTOOD, THE I SSUES IN THE APPEAL MAY BE RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR RE-ADJUDIC ATION IN LINE WITH THE DECISION OF THE HON'BLE SUPREME COURT. 10. IN REGARD TO THE ISSUE OF THE SITE RESTORATION EXPENDITURE, THE LEARNED DR VEHEMENTLY SUPPORTED THE ORDER OF THE ASSESSING OFF ICER. 11. IN REPLY, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THE ASSESSEE HAS NOT CLAIMED ANY DEPRECIATION/DEPLETION ON ACCOUNT O F THE DEPLETION TO THE OIL WELL/BASIN/NATURAL RESOURCES. IT WAS THE SUBMISSIO N THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON ACCOUNT OF THE EXPLORATION AND DEVE LOPMENT OF THE NATURAL RESOURCES HAD BEEN CLAIMED BY THE ASSESSEE AS A FIX ED ASSET IN ITS BALANCE SHEET. IT WAS THIS EXPENDITURE WHICH AS PER THE PROVISIONS OF PSC READ WITH SECTION 42 OF THE ACT WHICH THE ASSESSEE WAS ENTITLED TO A 100% DEDUC TION. IT WAS THE SUBMISSION THAT THIS EXPENDITURE HAD BEEN CLAIMED ON A YEARLY BASIS ON THE BASIS OF THE OIL EXTRACTED. IT WAS THE SUBMISSION THAT THIS WAS THE SCIENTIFIC METHOD FOR CLAIMING THE EXPENDITURE WHICH WAS SHOWN AS A FIXED ASSET IN THE BALANCE SHEET OF THE ASSESSEE AND THE REDUCTION IN THE VALUE OF THE FIXED ASSET H AD BEEN CLAIMED AS A DEPLETION. IT WAS THE SUBMISSION THAT THE VALUE OF THIS FIXED ASS ET WAS MULTIPLIED BY THE VOLUME OF THE OIL EXTRACTED AND DIVIDED BY THE ESTIMATED VOLU ME OF THE NATURAL RESOURCES I.T.A. NOS. 802,803,2154,2155 & 1077/MDS/2010 48 AVAILABLE IN THE BASIN. IT WAS THE SUBMISSION THAT THE ASSESSEE DID NOT OWN THE BASIN OR THE NATURAL RESOURCES AND IT HAD NOT CLAIM ED FOR DEPLETION OF THE NATURAL RESOURCES. THE LEARNED AUTHORISED REPRESENTATIVE D REW OUR ATTENTION TO THE PROFIT & LOSS ACCOUNT FOR THE YEARS ENDED 31.3.1996 AND 31.3 .1997 WHICH WAS SHOWN AT PAGE 1 OF THE DEPARTMENTAL PAPER BOOK TO SAY THAT T HE ASSESSEE HAD NOT CLAIMED DEPLETION FOR THE YEARS ENDED 31.3.1996 AND 31.3.19 97 AND ONLY DEPRECIATION HAD BEEN CLAIMED. HE FURTHER DREW OUR ATTENTION TO PAG E 3 OF THE DEPARTMENTAL PAPER BOOK WHICH WAS THE PROFIT & LOSS ACCOUNT FOR THE YE AR ENDED 31.3.1998 WHEREIN THE CLAIM OF DEPLETION AND ABANDONMENT HAS BEEN CLAIMED FOR THE FIRST TIME. HE FURTHER DREW OUR ATTENTION TO PAGE 4 OF THE DEPARTMENTAL PA PER BOOK WHICH WAS THE COPY OF THE PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31.3.2 000 WHEREIN THE DEPLETION, SITE RESTORATION AND DEPRECIATION HAVE BEEN SEPARATELY C LAIMED. HE FURTHER DREW OUR ATTENTION TO PAGE 24 OF THE ASSESSEES PAPER BOOK F OR THE ASSESSMENT YEAR 2002-03 WHICH WAS THE COPY OF THE SCHEDULES FORMING PART OF THE ACCOUNTS FOR THE YEAR ENDED 31.3.2002, MORE SPECIFICALLY SCHEDULE-3 REGARDING T HE DEVELOPMENT EXPENDITURE WHICH SHOWED THE NET BLOCK AT ` 19.09 CRORES AS ON 31.3.2002 AND ` 6.06 CRORES AS ON 31.3.2001. IT WAS THE SUBMISSION THAT THE ADDIT ION TO THE BLOCK WAS OF AN AMOUNT OF ` 22.13 CRORES AND THE DEPLETION WAS TO AN EXTENT OF ` 9.10 CRORES. THE LEARNED AUTHORISED REPRESENTATIVE FURTHER DREW OUR ATTENTION TO PAGE 20 OF THE ASSESSEES PAPER BOOK WHEREIN UNDER THE HEAD APPLI CATION OF FUNDS - FIXED ASSET, EXPLORATION AND DEVELOPMENT EXPENDITURES HAVE BEEN CATEGORICALLY SHOWN. IT WAS THUS THE SUBMISSION THAT EVEN THOUGH THE NOMENCLATU RE WAS DEPLETION, IT WAS ACTUALLY THE DEPRECIATION ON THE FIXED ASSET AS SHO WN IN THE BALANCE SHEET REPRESENTING THE EXPLANATION AND DEVELOPMENT EXPEND ITURE. IT WAS CATEGORICALLY COMMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THE DEPLETION CLAIMED BY THE ASSESSEE WAS NOT ON ACCOUNT OF ANY CLAIM OF DEP LETION OF THE NATURAL RESOURCES. IT WAS THE FURTHER SUBMISSION THAT CONSEQUENTLY THE DEPLETION HAVING TAKEN PLACED ON THE FIXED ASSETS IT ACTUALLY REPRESENTED DEPRECI ATION AND CONSEQUENTLY FOR THE I.T.A. NOS. 802,803,2154,2155 & 1077/MDS/2010 49 PURPOSE OF COMPUTATION OF THE BOOK PROFITS UNDER SE CTION 115JB DEPRECIATION WAS LIABLE TO INCLUDE DEPLETION. IT WAS THUS SUBMITTED THAT AS PER THE PSC ALL THE COSTS ARE ALLOWABLE AT 100% TO THE ASSESSEE. IT IS ONLY FOR THE PURPOSE OF COMPUTATION THE DEDUCTION OF ALL THE COSTS AS MENTIONED IN THE PSC THAT SECTION 42 OF THE ACT WAS APPLIED. 12. IN REPLY, THE LEARNED DR SUBMITTED THAT AS PER THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ENRON OIL AND GAS INDI A LTD., REFERRED TO SUPRA, IF A PSC WAS AVAILABLE, THEN SEC. 42 HAS NO APPLICABILIT Y AND THE COMPUTATION HAS TO BE DONE AS PER THE PSC ALONE AS IT WAS A SEPARATE CODE BY ITSELF. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. A PE RUSAL OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ENRON OIL AND GAS INDIA LTD., REFERRED TO SUPRA, CLEARLY SHOWS THAT THE HON'BLE SUPREME COURT HAS CATEGORICALLY HELD THAT THE PSC IS A CODE IN ITSELF. A PERUSAL OF THE PSC ARTI CLE 16 IN THE ASSESSEES CASE FOUND AT PAGE 558 OF THE ASSESSEES PAPER BOOK (VIDE ARTI CLE 16.1) CLEARLY SHOWS THAT THE PSC IS BOUND AND SUBJECT TO ALL THE FISCAL LEGISLAT ION IN INDIA. ARTICLE 16.2 OF THE PSC CLEARLY SHOWS THAT SEC. 42 OF THE INCOME TAX ACT, 1 961 HAS BEEN SPECIFICALLY RECOGNIZED FOR THE PURPOSE OF ALLOWANCE OF SPECIFIE D IN THE PSC WHEN COMPUTING THE PROFITS AND GAINS OF THE BUSINESS OF THE ASSESSEE. ARTICLE 16.2.1 SPECIFIES THAT DEDUCTION OF 100% SHALL BE ALLOWED ON ALL EXPENDITU RES, BOTH REVENUE AND CAPITAL, INCURRED IN RESPECT OF THE EXPLORATION OPERATION, D RILLING OPERATION, DEVELOPMENT OPERATION AND PRODUCTION OPERATION AS PER THE PROVI SIONS OF THE INCOME TAX ACT, 1961. ARTICLE 16.2.2 PERMITS THE DEDUCTION OF ALL ITS UNSUCCESSFUL EXPLORATION COSTS IN THE CONTRACT AREAS. ARTICLE 16.2.3 SPECIFIES THAT ALL ALLOWABLE EXPENDITURES INCURRED PRIOR TO THE FINANCIAL YEAR IN WHICH THE COMMERCIAL PRODUCTION COMMENCES SHALL BE AGGREGATED AND TREATED AS THE ASSESSED LOSS FOR THE FINANCIAL YEAR IN WHICH THE COMMERCIAL PRODUCTION COMMENCES AND SUCH ASSESSED L OSS TOGETHER WITH THE ASSESSED LOSS, IF ANY, IN THE ASSESSMENT YEAR RELEV ANT TO THE FINANCIAL YEAR IN WHICH COMMERCIAL PRODUCTION COMMENCES OR IN ANY SUBSEQUEN T ASSESSMENT YEAR, SHALL BE I.T.A. NOS. 802,803,2154,2155 & 1077/MDS/2010 50 CARRIED FORWARD TO THE SUCCEEDING ASSESSMENT YEARS AND SET OFF AS PROVIDED IN THE INCOME TAX ACT, 1961. THUS THE PSC RECOGNIZES THAT THE INCOME TAX ACT, 1961 IS TO BE APPLIED AND SECTION 42 IS TO BE THE CONTROLLING PROVISION IN REGARD TO THE ALLOWANCE OF EXPENDITURE. HERE WE MAY REITERATE TH AT AS PER THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ENRON OIL AND GAS INDIA LTD., REFERRED TO SUPRA, THE PSC IS TO BE CONSIDERED AS A SEPARATE CO DE IN ITSELF AND INSOFAR AS THE COMPUTATION OF THE INCOME AND EXPENDITURE OF THE AS SESSEE ONLY SUCH EXPENDITURES AS PERMITTED IN THE PSC ARE ALLOWABLE. DEPLETION T O THE NATURAL RESOURCES IS NOT AN ALLOWABLE CLAIM IN THE HANDS OF THE ASSESSEE HEREIN AS THE DEPLETION TO THE NATURAL RESOURCES IS NOT PROVIDED IN THE PSC HEREIN. HOWEV ER, AS HAS ALREADY BEEN DEMONSTRATED BEFORE US THE DEPLETION AS CLAIMED BY THE ASSESSEE IN THE PRESENT CASE IS NOT A CLAIM ON THE DEPLETION OF THE NATURAL RESO URCES. THE DEPLETION IN THE PRESENT CASE IS A REDUCTION TO THE VALUE OF THE FIXED ASSET CLAIMED BY THE ASSESSEE WHICH REPRESENTS THE EXPLORATION AND DEVELOPMENT COST INC URRED BY THE ASSESSEE. A PERUSAL OF THE PROVISIONS OF SECTION 42 OF THE ACT CLEARLY SHOWS THAT AS PER SEC. 42(1) (C) THE ALLOWANCE IS IN RESPECT OF THE DEPLETION OF MINERAL OIL IN THE MINING AREA IN RESPECT OF THE ASSESSMENT YEAR RELEVANT TO THE PREV IOUS YEAR IN WHICH COMMERCIAL PRODUCTION IS BEGUN AND FOR SUCH SUCCEEDING YEAR OR YEARS AS MAY BE SPECIFIED IN THE AGREEMENT, BEING THE PSC. ADMITTEDLY, IN THE P SC UNDER CONSIDERATION NO ALLOWANCE IN RESPECT OF THE DEPLETION OF THE MINERA L OIL HAS BEEN PERMITTED AND NONE HAS BEEN CLAIMED. SECTION 42(1) SPECIFICALLY PROVI DES THAT ALLOWANCES SHALL BE COMPUTED AND MADE IN THE MANNER SPECIFIED IN THE AG REEMENT (PSC), THE OTHER PROVISIONS OF THE INCOME TAX ACT, 1961 BEING DEEMED FOR THIS PURPOSE TO HAVE BEEN MODIFIED TO THE EXTENT NECESSARY TO GIVE EFFECT TO THE TERMS OF THE AGREEMENT. ADMITTEDLY, THE EXPLORATION AND DEVELOPMENT EXPENDI TURE IS INCURRED BEFORE THE COMMENCEMENT OF THE COMMERCIAL PRODUCTION. THE EXP ENDITURE INCURRED BY THE ASSESSEE ON ACCOUNT OF THE EXPLORATION AND DEVELOPM ENT BEFORE THE COMMENCEMENT OF THE ACTUAL COMMERCIAL PRODUCTION WOULD OBVIOUSLY HAVE TO BE TREATED AS A CAPITAL I.T.A. NOS. 802,803,2154,2155 & 1077/MDS/2010 51 EXPENDITURE. APPENDIX C OF THE PSC CLEARLY CLASS IFIES THE CLASSIFICATION, DEFINITION AND ALLEGATION OF COSTS AND EXPENDITURE. ON THE BA SIS OF THIS CLASSIFICATION AS SPECIFIED IN APPENDIX C THE CAPITAL EXPENDITURE A ND THE REVENUE EXPENDITURE WOULD HAVE TO BE DEMARCATED. AS PER THE ARTICLE 16 OF T HE PSC READ WITH SECTION 42 OF THE ACT, THE EXPLORATION AND DEVELOPMENT EXPENDITURE IS ALSO ELIGIBLE FOR 100% ALLOWANCE. BUT AS THE SAME IS A CAPITAL EXPENDITUR E A QUESTION WOULD ARISE AS TO HOW THE EXPENDITURE IS TO BE ALLOWED WHETHER IT I S ALLOWED IN A SINGLE YEAR OR IT IS TO BE ALLOWED OVER A NUMBER OF YEARS. THIS IS WHER E THE CLAIM OF THE ASSESSEE THAT THIS EXPENDITURE IS LIABLE TO BE ALLOWED AS A PROPO RTION TO THE NATURAL RESOURCES EXTRACTED AS AGAINST THE ESTIMATED NATURAL RESOURCE S AVAILABLE IS FOUND TO BE SCIENTIFIC AND APPROPRIATE. A DEDUCTION TO THE CAP ITAL EXPENDITURE WHICH IS RECORDED AS A FIXED ASSET WOULD CLEARLY BE A DEPRECIATION TO THE FIXED ASSET. IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE CLAIM OF THE ASSESSEE THAT THE DEPLETION CLAIMED (THOUGH WE MAY MENTION HERE THAT THE TERM U SED BY THE ASSESSEE IS INAPPROPRIATE) IS, IN FACT, DEPRECIATION AND IS LIA BLE TO BE TREATED AS SUCH. HOWEVER, AS IT IS NOTICED THAT THE DECISION OF THE HON'BLE S UPREME COURT IN THE CASE OF ENRON OIL AND GAS INDIA LTD., REFERRED TO SUPRA, HAS NOT BEEN CONSIDERED BY ANY OF THE LOWER AUTHORITIES AND HAS ALSO NOT BEEN VERIFIED BY THE LOWER AUTHORITIES THAT THE CLAIM OF DEPLETION BY THE ASSESSEE IS IN FACT DEPRE CIATION TO THE FIXED ASSET REPRESENTING EXPLORATION AND DEVELOPMENT EXPENDITUR E, WE ARE OF THE VIEW THAT THIS ISSUE IS LIABLE TO BE RESTORED TO THE FILE OF THE A SSESSING OFFICER FOR RE-ADJUDICATION AND WE DO SO. THE ASSESSING OFFICER SHALL RE-DO TH E ASSESSMENT IN LINE WITH THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F ENRON OIL AND GAS INDIA LTD., REFERRED TO SUPRA. THE ASSESSING OFFICER SHALL ALS O VERIFY THE CLAIM OF THE ASSESSEE AS TO WHETHER THE DEPLETION CLAIMED BY THE ASSESSEE IS ON ACCOUNT OF THE DEPLETION OF THE MINERAL OIL OR ON ACCOUNT OF A CLAIM OF DEDU CTION TO THE CAPITAL EXPENDITURE REPRESENTING THE EXPLORATION AND DEVELOPMENT EXPEND ITURE. IF THE CLAIM OF DEPLETION IS FOUND BY THE ASSESSING OFFICER TO BE REPRESENTIN G A DEPLETION OF THE MINERAL OIL, I.T.A. NOS. 802,803,2154,2155 & 1077/MDS/2010 52 THE SAME SHALL BE DISALLOWED IN ITS ENTIRETY. IF T HE CLAIM OF THE ASSESSEE IS FOUND TO BE ON ACCOUNT OF THE REDUCTION IN THE VALUE OF THE CAPITAL EXPENDITURE INCURRED BY THE ASSESSEE ON ACCOUNT OF THE EXPLORATION AND DEVE LOPMENT EXPENDITURE INCURRED BY THE ASSESSEE, THE SAME SHALL BE TREATED AS DEPRE CIATION. EVEN THOUGH IT HAS BEEN ARGUED BY THE LEARNED AUTHORISED REPRESENTATIVE THA T THE RETURNS FOR THE ASSESSMENT YEARS 1995-96 TO 1999-2000 HAVE BEEN FILED AND NO P ROCEEDINGS ARE PENDING FOR THESE ASSESSMENT YEARS AND AS IT IS NOTICED THAT TH E ISSUE OF DEPLETION COMES IN ONLY IN THE ASSESSMENT YEAR 1998-99, CONSIDERING THE FAC T THAT THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ENRON OIL AND GAS INDI A LTD. LAYS DOWN THE LAW AS IT STOOD AND AS IT IS SUPPOSED TO BE UNDERSTOOD WHILE COMPUTING THE UNABSORBED BUSINESS LOSS AS ALSO CARRIED FORWARD DEPRECIATION, THE ASSESSING OFFICER SHALL RE- WORK THE SAME FOR THE ASSESSMENT YEARS 1995-96 TO 1 999-2000 IN LINE WITH THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F ENRON OIL AND GAS INDIA LTD., REFERRED TO SUPRA, AS THE SAME WOULD HAVE AN IMPACT WHILE COMPUTING THE BOOK PROFITS AS ALSO THE REGULAR PROFITS FOR THE ASSESSM ENT YEARS WHICH ARE UNDER APPEAL BEFORE THE TRIBUNAL AS ALSO FOR THE ASSESSMENT YEAR S FOR WHICH PROCEEDINGS ARE OPEN. 14. IN REGARD TO THE CLAIM OF THE TREATMENT OF THE ALLOWANCE OF THE SITE RESTORATION EXPENDITURE WHILE COMPUTING THE BOOK PR OFITS U/S 115JB OF THE ACT IT IS FOUND THAT THE SITE RESTORATION EXPENDITURE IS IN L INE WITH THE PSC. AS ALREADY HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF ENRON OIL AND GAS INDIA LTD, AS THE PSC IS A CODE IN ITSELF AND AS IT IS NOTICED THAT THE SITE RESTORATION EXPENDITURE IS A CLAIM IN LINE WITH ARTICLE 12 OF THE PSC, THE SAME IS CLEARL Y AN ASCERTAINED LIABILITY AND IS IN NO WAY A CONTINGENT LIABILITY. IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE SITE RESTORATION EXPENDITURE IS AN ALLOWABLE EXPENDITURE WHEN COMPUTING THE BOOK PROFIT U/S 115JB OF THE ACT. 15. COMING TO THE ISSUE OF RE-OPENING OF THE ASSESS MENT FOR THE ASSESSMENT YEARS 2002-203 AND 2003-04 AS IT IS NOTICED THAT THE ORIG INAL ASSESSMENTS ARE MADE U/S I.T.A. NOS. 802,803,2154,2155 & 1077/MDS/2010 53 143(1) AND AS IT IS NOTICED THAT THE ASSESSING OFFI CER HAS RECORDED HIS REASONS FOR RE- OPENING OF THE ASSESSMENT, IN VIEW OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ACIT V. RAJESH JHAVERI STOCK BROKERS P. LTD. REPORTED IN 291 ITR 500 (SC), WE ARE OF THE VIEW THAT THE RE-OPENING FOR TH E ASSESSMENT YEAR 2002-03 IS VALID. 16. IN REGARD TO THE CHALLENGE TO THE POWERS U/S 26 3 BY THE LEARNED DIT FOR THE ASSESSMENT YEAR 2005-06, IT IS NOTICED THAT THE ASS ESSMENT ORDER PASSED BY THE ASSESSING OFFICER DOES NOT DISCUSS ANY OF THE ISSUE S WHICH HAVE BEEN RAISED BY THE LEARNED DIT IN HIS SHOW CAUSE NOTICE U/S 263 OR HIS ORDER PASSED U/S 263 OF THE ACT. IN THESE CIRCUMSTANCES, IN VIEW OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF MALABAR INDUSTRIAL CO., REFERRED TO SUPRA, WE FIND NO ERROR IN THE INVOCATION OF THE REVISIONARY POWERS U/S 263 OF THE ACT. 17. NONE OF THE OTHER GROUNDS IN THE APPEALS HAS BE EN SERIOUSLY AGITATED OR ANY SPECIFIC SUBMISSION RAISED AND CONSEQUENTLY THE SAM E ARE TREATED AS NOT PRESSED. IN THE CIRCUMSTANCES, THE APPEALS OF THE ASSESSEE IN I TA NOS. 2154 & 2155/MDS/2010 ARE PARTLY ALLOWED. THE APPEAL OF THE ASSESSEE IN ITA NO. 802/MDS/2010 IS PARTLY ALLOWED TO THE EXTENT THAT THE ORDER OF THE LEARNED DIT STANDS MODIFIED INSOFAR AS THE ASSESSING OFFICER WHILE RE-DOING THE ASSESSMENT SHALL FOLLOW THE DIRECTIONS GIVEN IN THE PRESENT ORDER IN REGARD TO THE APPLICABILITY OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ENRON OIL AND GAS INDI A LTD, REFERRED TO SUPRA, AS ALSO IN REGARD TO THE EXAMINATION OF THE ISSUE OF DEPLET ION. THE APPEAL OF THE ASSESSEE IN ITA NO. 803/MDS/2010 IS PARTLY ALLOWED. THE APPEAL OF THE REVENUE IN ITA NO. 1077/MDS/2010 STANDS DISMISSED. 18. THE ORDER WAS PRONOUNCED IN THE COURT ON 09/06/ 2011. SD/- SD/- (DR.O. K.NARAYANAN) (GEORGE MATHAN) VICE PRESIDENT JUDICIAL MEMBER CHENNAI, DATED THE 09 TH JUNE, 2011. H. COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE