DCIT (OSD) Range I, V. Dolphin drilling Ltd,

ITA 266/DEL/2007

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 1017 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 26-10-2009
• Assessment Year: 2004-2005
• Appeal Filed On: 15-01-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: DHRUV SANGHAVI
• Keywords: Depreciation; Cost of acquisition; Valuation report
• Section: 92E; 251

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B : NEW DELHI BEFORE SHRI D.R.SINGH, JM AND SHRI R.C.SHARMA, AM ITA NO.266/DEL/2007 ASSESSMENT YEAR : 2004-05 DY.COMMISSIONER OF INCOME TAX (OSD), RANGE-1, DEHRADUN. VS. M/S DOLPHIN DRILLING PTE.LTD., C/O S.R.BATLIBOI & CO., 2 ND FLOOR, THE CAPITAL COURT, LSC, PHASE-III, O/OF PALME MARG, MUNIRKA, NEW DELHI 110 067. PAN NO.AACCD0288Q. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ASHWANI KUMAR MAHAJAN, CIT-DR. RESPONDENT BY : SHRI AJAY VOHRA AND SHRI DHRUV SANGHAVI, ADVOCATES. ORDER PER R.C.SHARMA, AM : THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A) DATED 15.11.2006 FOR THE AY 2004-05. 2. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PER USED. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE, A NON RESIDENT COMPANY, INC ORPORATED IN SINGAPORE FILED ITS RETURN OF INCOME ON 29.10.2004 DECLARING LOSS OF RS .94,43,72,830/-. THE ASSESSEE COMPANY HAS GIVEN ON HIRE ITS DRILLSHIP BELFORD DO LPHIN TO ITS SISTER CONCERN, M/S DOLPHIN DRILLING LTD. IN CONNECTION WITH EXECUTION OF THE CONTRACT WITH ONGC. THE ASSESSEE DECLARED CONTRACT REVENUES AT RS.58,42 ,15,200/- AND AFTER CLAIMING DEPRECIATION OF RS.147,60,49,666/- DECLARED LOSS OF RS.94,43,72,830/-. THE AO HOWEVER REJECTED THE BOOKS OF ACCOUNT ON THE GROUND THAT NO CORRECT INCOME CAN BE DEDUCTED THEREFROM PARTICULARLY IN VIEW OF THE M ETHOD OF TRANSLATING BUSINESS TRANSACTIONS INTO CURRENCY OF ACCOUNTING, INCORRECT REPORT IN FORM 3CD ETC. AND ESTIMATED THE INCOME OF THE ASSESSEE U/S 44BB(1) @ 10%. ITA-266/D/2007 2 3. IN AN APPEAL FILED BY THE ASSESSEE, THE CIT(A) A LLOWED ASSESSEES CLAIM OF PROPER ACCOUNTING OF INCOME RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE AND ALSO ON ACCOUNT OF CLAIM OF DEPRECIATION. WITH REGARD TO A DDITION MADE U/S 40A(I), THE CIT(A) RESTORED THE MATTER BACK TO THE FILE OF THE AO FOR DECIDING AFRESH AFTER VERIFICATION OF THE EXPENSES. AGGRIEVED BY THIS OR DER OF CIT(A), THE REVENUE IS IN FURTHER APPEAL BEFORE US. 4. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND FOU ND FROM THE RECORD THAT THE AO HAS DECLINED ASSESSEES CLAIM OF PROPER ACCO UNTING OF FOREIGN TRANSACTION BY OBSERVING THAT THE ASSESSEE HAS CLAIMED TO HAVE MAINTAINED ITS BOOKS OF ACCOUNT IN US$ AND HAS ALSO RECEIVED REVENUES IN US$, THE A SSESSEE THEREFORE, SHOULD HAVE CONVERTED THE BUSINESS TRANSACTIONS IN OTHER CURREN CIES INTO US$ ON THE DATE OF SUCH TRANSACTIONS WHILE THE ASSESSEE HAS CONVERTED ALL TRANSACTIONS ON 31.3.2004 IN INR WHICH IS NOT IN ORDER IN VIEW OF ACCOUNTING PRI NCIPLES. AS PER AO, CORRECT PROFIT OR LOSS CANNOT BE ASCERTAINED IF THE EXPENDI TURES AND RECEIPTS ARE CONVERTED ON THE LAST DAY OF THE YEAR AFTER ALL SUCH TRANSACT IONS ARE OVER. THEREFORE, SUB- CLAUSE (C) OF CLAUSE (2) OF EXPLANATION TO RULE 115 (1) HAS NO APPLICATION TO THE BUSINESS TRANSACTIONS AS CLAIMED BY THE ASSESSEE. W E HAVE CONSIDERED THE RIVAL CONTENTIONS AND GONE THROUGH THE ORDERS OF THE AUTH ORITIES BELOW AND DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) FOR ACCEPTING ASSESSEES METHOD OF CONVERSION OF FOREIGN TRANSACTION INTO INDIAN CURRENCY ON THE LAST DATE OF ACCOUNTING YEAR. SUB-CLAUSE (C) OF CLAUSE (2) OF EXPLANATION TO RULE 115(1) REFERS TO THE CONVERSION OF INCOME FROM BUSINESS AND PROFESSION AND NOT TO T HE DAY TO DAY TRANSACTIONS OF BUSINESS. THE PROVISION READS AS UNDER:- 115. RATE OF EXCHANGE FOR CONVERSION INTO RUPEES O F INCOME EXPRESSED IN FOREIGN CURRENCY. (1) THE RATE OF EXCHANGE FOR THE CALCULATION OF THE VALUE IN RUPEES OF ANY INCOME ACCRUING OR ARISING OR DEEMED TO ACCR UE OR ARISE TO THE ASSESSEE IN FOREIGN CURRENCY OR RECEIVED OR DEEMED TO BE RECEIVED BY HIM OR ON HIS BEHALF IN FOREIGN CURRENCY SHALL BE T HE TELEGRAPHIC TRANSFER BUYING RATE OF SUCH CURRENCY AS ON THE SPE CIFIED DATE. AND ITA-266/D/2007 3 THE SPECIFIED DATE AS HAS BEEN DEFINED IN SUB-CLAUS E (C) OF CLAUSE (2) OF EXPLANATION READS AS UNDER: (C) IN RESPECT OF INCOME CHARGEABLE UNDER THE HEAD S INCOME FROM HOUSE PROPERTY, PROFITS AND GAINS OF BUSINES S OR PROFESSION NOT BEING INCOME REFERRED TO IN CLAUSE (D) AND INC OME FROM OTHER SOURCES (NOT BEING INCOME BY WAY OF DIVIDENDS AND INTEREST ON SECURITIES, THE LAST DAY OF THE PREVIOUS YEAR OF T HE ASSESSEE; 5. IT IS CRYSTAL CLEAR THAT RULE 115 PROVIDES FOR C ONVERSION OF INCOME IN FOREIGN CURRENCY USING THE EXCHANGE RATE ON THE S PECIFIED DATE. THE RULE DOES NOT REQUIRE THE ASSESSEE TO FIRST CONVERT THE INCOM E INTO USD OR ANY OTHER CURRENCY AND SUBSEQUENTLY CONVERT THE SAME INTO INR. INCOME FROM PROFITS AND GAINS OF BUSINESS IS THE CULMINATION OF THE DAY TO DAY BUSIN ESS TRANSACTIONS. IN OTHER WORDS, THE REQUIREMENT UNDER RULE 115 TO CONVERT I NCOME FROM PROFITS AND GAINS OF BUSINESS AT THE YEAR END RATE EFFECTIVELY IMPLI ES THAT THE DAY TO DAY TRANSACTIONS ARE REQUIRED TO BE CONVERTED AT THE YEAR END RATE. CLAUSE 2(C) OF THE EXPLANATION TO RULE 115(1) PROVIDES THAT THE EXCHANGE RATE AS ON T HE LAST DAY OF THE RELEVANT FINANCIAL YEAR IS TO BE ADOPTED FOR THE PURPOSE OF CONVERSION OF INCOME FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION INTO IN DIAN RUPEES. INCOME IS DEFINED IN SECTION 2(24) TO INCLUDE PROFITS AND GAINS OF BU SINESS OR PROFESSION AND IS CONSTRUED AS REVENUES LESS DEDUCTIONS OF EXPENSES A LLOWED UNDER THE ACT. ACCORDINGLY, THERE IS NO INFIRMITY IN THE ORDER OF CIT(A). 6. WITH REGARD TO GROUND TAKEN FOR DENIAL OF CLAIM OF DEPRECIATION, WE FOUND THAT THE ASSESSEE COMPANY HAS CLAIMED DEPRECIATION OF RS.1,68,51,28,493/- ON THE DRILLSHIP BELFORD DOLPHIN. THE ASSESSEE WAS REQU IRED TO SUBSTANTIATE THE OWNERSHIP OF DRILLSHIP AND JUSTIFICATIONS OF DEPREC IATION THEREON. IN REPLY VIDE LETTER DATED 22.3.2006, THE ASSESSEE HAS GIVEN THE BREAK-UP OF COST OF ACQUISITION OF DRILLSHIP AS UNDER:- DRILL COST USD 26,03,65,218.00 INVENTORY USD 69,97,903.00 CWIP USD 26,36,879.00 TOTAL USD 27,00,00,000.00 ITA-266/D/2007 4 7. IN SUPPORT OF TOTAL COST, COPY OF A MEMORANDUM O F AGREEMENT HAS BEEN FILED. FOR THE PURPOSE OF CARRYING ON ITS BUSINESS ACTIVITIES DURING AY 2004-05, THE ASSESSEE HAD ACQUIRED THE DRILLSHIP BELFORD D OLPHIN. THE ASSESSEE HAD SUBMITTED THE FOLLOWING DOCUMENTS IN SUPPORT OF THE SAME DURING THE COURSE OF ASSESSMENT PROCEEDINGS VIDE LETTER DATED 22.3.2006 :- (I) THE AGREEMENT UNDER WHICH BELFORD DOLPHIN WAS P URCHASED FOR USD 270,000,000 WHICH, INTER ALIA, ALSO CATEGORICALLY M ENTIONED THE MANNER IN WHICH THE CONSIDERATION WOULD BE SETTLED I.E. TH E MODE OF PAYMENT COPY ON PAGES 99-104 OF PAPER BOOK. (II) IN ORDER TO SUBSTANTIATE THE VALUE OF ACTUAL C OST ADOPTED BY THE APPELLANT FOR BELFORD DOLPHIN, THE AUDITORS CERTIFICATE CERTI FYING THE ACTUAL COST OF BELFORD DOLPHIN IN THE BOOKS OF ACCOUNT MAINTAINED BY THE APPELLANT IN SINGAPORE COPY ON PAGES 106-107 OF PAPER BOOK. (III) CERTIFICATE OF REGISTRATION ISSUED BY THE REG ISTRAR OF SINGAPORE SHIPS STATING THAT THE APPELLANT IS THE OWNER OF BELFORD DOLPHIN; COPY ON PAGES 98 OF PAPER BOOK. (IV) THE MANNER IN WHICH THE AGGREGATE CONSIDERATIO N OF USD 270,000,000 WAS ACCOUNTED FOR IN THE INDIAN BOOKS OF ACCOUNT WH ICH IS AS FOLLOWS:- PARTICULARS AMOUNT (USD) COST OF BELFORD DOLPHIN 260,365,218 INVENTORY 6,997,903 CAPITAL WORK IN PROGRESS 2,636,879 TOTAL 270,000,000 THE MANNER IN WHICH THE WRITTEN DOWN VALUE OF USD 2 61,494,428, ON WHICH DEPRECIATION HAS BEEN CLAIMED, HAD BEEN ARRIV ED AT I.E. THE AGGREGATE OF THE COST OF ACQUISITION OF USD 260,365 ,218 AND CAPITALIZED ITA-266/D/2007 5 WORK-IN-PROGRESS OF USD 1,129,210 AND THE EXCHANGE RATE USED FOR THE PURPOSE OF CONVERSION INTO INDIAN RUPEES, WHICH IS AS FOLLOWS: PARTICULARS AMOUNT (USD) EXCHANGE RATE AMOUNT (RS.) COST OF BELFORD DOLPHIN 260,365,218 45.15 (DATE OF PURCHASE OCTOBER 10, 2003) 11,755,489,586 CAPITALIZED WORK IN PROGRESS 1,129,210 45.42 (DATE OF CAPITALIZATION JANUARY 1, 2004) 51,288,718 TOTAL 11,806,778,304 THE FOLLOWING DOCUMENTATION IN RELATION TO CUSTOMS CLEARANCE OF BELFORD DOLPHIN COPIES ON PAGES 109-120 OF PAPER BOOK. - BILL OF ENTRY; - BILL OF LADING; - ESSENTIALITY CERTIFICATE DATED NOVEMBER 10, 2003 ISSUED BY THE DIRECTORATE GENERAL OF HYDROCARBONS; AND - FAIR MARKET VALUATION CERTIFICATE AS ON NOVEMBER 10, 2003 FROM NOBLE DENTON, A DISTINGUISHED INDEPENDENT EXPERT VA LUER. 8. WE FOUND THAT DURING THE COURSE OF ASSESSMENT PR OCEEDINGS, THE ASSESSEE HAD FILED ADEQUATE DOCUMENTS IN SUPPORT OF THE VALU E OF THE DRILLSHIP. THE TOTAL PURCHASE CONSIDERATION OF USD 270,000,000 PAYABLE T O FRED OLSEN ENERGY AS, IS CLEARLY REFLECTED IN THE PURCHASE AGREEMENT AND THE SAME IS ADEQUATE AND CONCLUSIVE PROOF OF THE SAME. WHEN THE ACTUAL CONS IDERATION IS DULY EXPLAINED AND ITA-266/D/2007 6 AGREED AS PER THE AGREEMENT BY WHICH THE DRILLSHIP CHANGED HANDS, THERE IS NO QUESTION OF THE SAME BEING CERTIFIED BY ANY COMPETE NT AUTHORITY. THE CIT(A) HAS RECORDED A CATEGORICAL FINDING TO THE EFFECT THAT T HERE IS NO DOUBT WHATSOEVER THAT THE ASSET BELFORD DOLPHIN IS OWNED BY THE ASSESSE E AND THAT IT HAS BEEN USED BY THE ASSESSEE. IF THE ASSESSEE IS IN THE BUSINESS O F GIVING DRILLSHIP ON HIRE, SUCH INCOME HAS TO BE ASSESSED UNDER THE HEAD PROFITS A ND GAINS OF BUSINESS OR PROFESSION AND IF NOT, SUCH INCOME HAS TO BE ASSES SED UNDER THE HEAD INCOME FROM OTHER SOURCES. HOWEVER, IN BOTH CASES, ASSES SEE IS ENTITLED TO DEPRECIATION ON THE DRILLSHIP. THE SHIP HAS BEEN PURCHASED FROM ITS SISTER CONCERN AND CONSIDERATION HAS BEEN PAID BY WAY OF ALLOTMENT OF 270 MILLION SHARES OF ONE DOLLAR EACH TO ITS SISTER CONCERN NAMELY FRED OLSEN ENERGY AS. IN SUPPORT OF THE MARKET VALUE OF THE DRILLSHIP, ASSESSEE HAS SUBMITT ED TWO VALUATION REPORTS, ONE BY R.S.PLATOU WHO ESTIMATED THE COST BETWEEN 260-270 M ILLION DOLLARS AND SECOND BY NOBLE DENTON WHO ESTIMATED THE COST AT 270 MILLION DOLLARS. THE CHRONOLOGY OF EVENTS REGARDING THE DRILLSHIP BELFORD DOLPHIN IS T HAT IN NOVEMBER, 2001 NAVIS EXPLORER AS SOLD THIS SHIP TO FRED OLSEN DRILLING A S FOR 344 MILLION DOLLARS. IN OCTOBER, 2003 FRED OLSEN DRILLING AS TRANSFERRED IT TO FRED OLSEN ENERGY AS FOR 270 MILLION DOLLARS AND IN THE SAME MONTH IT WAS SO LD BY FRED OLSEN ENERGY AS TO DDPL ALSO FOR 270 MILLION DOLLARS. THE ASSESSEE HA S ALSO SUBMITTED DETAILS OF THE WDV OF THE DRILLSHIP IN THE HANDS OF THE PREVIOUS O WNER NAMELY, FRED OLSEN ENERGY AS. THE WDV OF BELFORD DOLPHIN AS ON OCTOBE R 2003 WAS US$ 331428774 WHILE IT HAS BEEN SOLD BY FRED OLSEN DRIL LING US$ 27000000. THUS THE ACTUAL COST OF THE DRILLSHIP TO THE ASSESSEE IS WHAT HAS BEEN CLAIMED BY IT BEFORE THE AO. THE ASSESSEE HAS DULY FURNISHED FROM 3CEB WHICH IS A REPORT U/S 92E OF THE IT ACT ALONGWITH ITS RETURN OF INCOME BEFORE TH E AO. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) FOR ALLOW ING CLAIM OF DEPRECIATION. 9. IN GROUND NO.3, THE REVENUE IS AGGRIEVED FOR RES TORATION OF MATTER REGARDING DISALLOWANCE OF EXPENSES U/S 40(A)(I). ITA-266/D/2007 7 10. RIVAL CONTENTIONS HAVE BEEN CONSIDERED. WE FOU ND THAT AO HAS DECLINED ASSESSEES CLAIM OF THE EXPENSES INCURRED BY THE AS SESSEE BY INVOKING THE PROVISIONS OF SECTION 40(A)(I) ON THE GROUND THAT T AX HAS NOT BEEN DEDUCTED THEREFROM EVEN THOUGH THESE EXPENSES WERE NOT TAXAB LE IN INDIA AND THERE WAS NO REQUIREMENT TO DEDUCT TAX THEREON. WHILE RESTORING THE MATTER, THE CIT(A) HAS DULY DIRECTED TO EXAMINE THE BOOKS OF ACCOUNT MAINT AINED BY THE ASSESSEE WITH REFERENCE TO VOUCHERS AND ALSO TO EXAMINE WHETHER T HESE EXPENSES ARE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE ASSESSEE WAS ALSO DIRECTED TO PRODUCE THE AFORESAID DETAILS AND SATIS FY THE AO ABOUT THE DEDUCTIBILITY OF ALL SUCH EXPENSES CLAIMED IN THE PROFIT & LOSS A CCOUNT. THE LEARNED AR INVITED OUR ATTENTION TO THE ORDER PASSED BY THE AO U/S 251 , TO GIVE EFFECT TO THE ORDER OF CIT(A) WITH REGARD TO THE RESTORATION OF THE MATTER , WHEREIN VIDE ORDER DATED 8.3.2007 THE AO HAS RE-DECIDED THE ISSUE. EVEN THO UGH CIT(A) WAS NOT EMPOWERED DURING THE RELEVANT TIME FOR RESTORATION OF THE MATTER, HOWEVER THE TRIBUNAL IS EMPOWERED TO CONSIDER THE FACTS AND CIR CUMSTANCES OF THE CASE AND KEEPING IN VIEW THE NATURE OF EXPENSES INVOLVED, WE FOUND THAT IT REQUIRES EXAMINATION ON THE PART OF THE AO. ACCORDINGLY, TH E GROUND TAKEN BY REVENUE REGARDING RESTORATION OF THE MATTER TO THE FILE OF THE AO IS DISMISSED. 11. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. DECISION PRONOUNCED IN THE OPEN COURT ON 26 TH OCTOBER, 2009. SD/- SD/- (D.R.SINGH) (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 30.11.2009. VK. COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT DEPUTY REGISTRAR ITA-266/D/2007 8