DCIT 9(2), MUMBAI V. HINDUSTAN OIL EXPLORATION, MUMBAI

ITA 6118/MUM/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8187 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 4 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2017
• Appeal Filed By: Department
• Bench Allotted: H
• Next Hearing Date: 19-09-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 01-10-2014
• Court: TRIBUNAL
• Department Lawyers: GULSHAN RAJ
• Assessee Lawyers: V CHANDRASHEKHAR
• Keywords: Business income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUMBAI BEFORE SHRI B.R. BASKARAN (AM) & SHRI AMIT SHUKLA (JM) I.T.A. NO. 6118 /MUM/ 2014 (ASSESSMENT YEAR 200 9 - 1 0 ) DCIT 9(2) ROOM NO. 218 2 ND FLOOR AAYAKAR BHAVAN M.K. ROAD MUMBAI - 400 020. VS. M/S. HINDUSTA N OIL EXPLORATION COMPANY LTD. ANAND HOUSE 13 TH ROAD, OFF LINKING ROAD, KHAR (WEST) MUMBAI - 400 052. ( APPELLANT ) ( RESPONDENT ) I.T.A. NO. 6424/MUM/2014 (ASSESSMENT YEAR 2009 - 10) M/S. HINDUSTAN OIL EXPLORATION COMPANY LTD. ANAND HOUSE 13 TH ROAD, OFF L INKING ROAD, KHAR (WEST) MUMBAI - 400 052. VS. ACIT 9(2)(1) ROOM NO. 218 2 ND FLOOR AAYAKAR BHAVAN M.K. ROAD MUMBAI - 400 020. ( APPELLANT ) ( RESPONDENT ) PAN NO . AAACH1407P ASSESSEE BY SHRI V. CHANDRASHEKHAR DEPARTMENT BY SHRI GULSHAN RAJ DATE OF HEA RING 8 .1 2 . 201 6 DATE OF PRONOUNCEMENT 15 . 2 . 201 7 O R D E R PER B.R. BASKARAN (AM) : - THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 2.7.2014 PASSED BY THE LEARNED CIT(A) - 20, MUMBAI AND THEY RELATE TO A.Y. 2009 - 10. THE ASSESSEE IS IN APPEAL IN RESPECT OF FOLLOWING ISSUES: - I) DISALLOWANCE OF EXPENDITURE CLAIMED U/S. 42(1)(B) OF THE ACT. M/S. HINDUSTAN OIL EXPLORATION CO. LTD. 2 II) INTEREST INCOME ASSESSED UNDER THE HEAD OTHER SOURCES AS AGAINST CLAIM OF BUSINESS INCOME. III) DISALLOWANCE U/S. 14A IV) DISALLOWANCE OF FOREIGN EXCHANGE LOSS . THE REVENUE IS IN APPEAL CHALLENGING THE DECISION OF THE LEARNED CIT(A) IN ALLOWING DEDUCTION U/S. 80IB(9) OF THE ACT. 2. FACTS RELATING TO THE CASE ARE STATED IN BRIEF. THE ASSESSEE - COMPANY IS ENGAGED IN THE BUSINESS OF EXPLORATION AND EXTRACTION OF CRUDE OIL AND GAS. THE ASSESSEE CLAIMED A SUM OF ` 60.45 CRORES U /S. 42 OF THE ACT ON THE GROUND THAT THESE EXPENSES WERE INCURRED FOR EXPLORATION ACTIVITIES AND DRILLING ACTIVITIES IN BLOCK CY - OS - 90/1(PY - 3 FIELD) IN THE CAUVERY BASIN. PY - 3 FIE L D IS AN UNI NCORPORATED JOINT VENTURE ENTERED BETWEEN THE ASSESSEE (HOEC), HARDY EXPLORATION & PRODUCTION (INDIA) INC., OIL AND NATURAL GAS CORPORATION LTD AND TATA PETRODYNE LIMITED . IT IS SUBMITTED THAT M/S. HARDY HAS ACTED AS LEAD PARTNER . FURTHER THE ASSESSEE ALO NG WITH OTHER JOINT VENTURE PARTNERS HAS ENTERED INTO A PRODUCTION SHARING CONTRACT (PSC) WITH GOVERNMENT OF INDIA . IT WAS FURTHER SUBMITTED THAT COMMERCIAL PRODUCTION IN PY - 3 FIELD COMMEN C E D IN THE YEAR RELEVANT TO A.Y. 1998 - 99. 3. DURING THE YEAR RELEV ANT TO THE A.Y. 2009 - 10, JOINT VENTURE HAD DRILLED ONE PRO DUCER WELL PY3 - D4 - RL IN PY - 3 FI E L D IN CAUVERY BASIN . T HE ASSESSEE S SHARE OF EXPENSES WORKED OUT TO ` 59.65 CRORES. ACCORDINGLY, THE ASSESSEE CLAIMED ` 60.45 CRORES AS DETAILED BELOW U/S 42(1)(B) O F THE ACT : - NAME OF THE PROJECT DETAILS OF CLAIM U/S. 42 (IN INR) PY - 3 59,65,97,874 NORTH BALOL (11,231) ASJOL 25,00,046 PALEJ 54,14,794 TOTAL 60,45,01,483 THE ASSESSEE CLAIMED THE ABOVE SAID SUM U/S. 42(1)(B ) OF THE ACT WITH THE SUBMISSION THAT ANY EXPENDITURE INCURRED AFTER BEGINNING OF COMMERCIAL M/S. HINDUSTAN OIL EXPLORATION CO. LTD. 3 PRODUCTION IN RESPECT OF DRILLING OR EXPLORATION ACTIVITIES IS ALLOWABLE AS DEDUCTION U/S. 42 OF THE ACT. 4. THE ASSESSING OFFICER AFTER ANALYSING VARIOUS CLAUSES OF THE CONTRACT CAME TO THE CONCLUSION THAT THE WORK CARRIED OUT DURING THE YEAR RELEVANT TO A.Y. 2009 - 10 WAS NOT IN RESPECT OF DRILLING OR EXPLORATION ACTIVITIES BUT IT WAS RELATED TO THE DEVELOPMENT OF EXISTING WELL IN ORDER TO ENHANCE THE RECOVERY OF PETROLEUM I.E. PURPOSE OF THE CURRENT PROGRAMME WAS TO REENTER AN ALREADY EXISTING WELL THROUGH SID E TRA CK AND ENHANCE THE RECOVERY OF PETROLEUM. ACCORDINGLY , THE ASSESSING OFFICER TOOK THE VIEW THAT THIS ACTIVITY WOULD FALL UNDER THE CATEGORY OF DEVELOPMENT AND NOT EXPLORA TION AS CLAIMED BY THE ASSESSEE. ACCORDINGLY, THE ASSESSING OFFICER DISALLOWED THE CLAIM OF ` 60.45 CRORES. THE LEARNED CIT(A) ALSO CONFIRMED THE SAME. 5. WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD. LEARNED AR SUBMITTED THAT THESE EXPENSES HAVE BE EN INCURRED JOINTLY BY ALL THE JOINT VENTURE PARTNERS AND HENCE ENTIRE EXPENDITURE HAS BEEN SHARED BETWEEN THE JOINT VENTURE PARTNERS IN ACCORDANCE WITH THE RATIO OF PARTICIPATING IN TEREST IN THE TRUST. THE RATIO OF PARTICIPATING INTEREST OF JOINT VENTURE PARTNERS IS AS GIVEN BELOW: - OIL AND NATURAL CORPORATION GAS LTD. : 40% HOEC (HEREIN THE ASSESSEE) : 2 1 % TATA PETRODYNE LIMITED : 21% HARDY EXPLORATION & PRODUCTION (INDIA) INC. : 18% TOTAL : 100% HE FURTHER SUBMITTED THA T ALL THE JOINT VENTURE PARTNERS HAVE MADE IDENTICAL CLAIM S U/S. 42(1)(B) OF THE ACT AND THEY HAVE BEEN ALLOWED IN ASSESSMENT OF THE RESPECTIVE JOINT VENTURE PARTNERS. LEARNED AR ALSO FURNISHED COPIES OF THE ASSESSMENT ORDER PASSED IN HANDS OF JOINT VENTUR E PARTNERS FOR A.Y. 2009 - 10. ACCORDINGLY, HE SUBMITTED THAT THE ASSESSING OFFICER, IN THE INSTANT CASE M/S. HINDUSTAN OIL EXPLORATION CO. LTD. 4 SHOULD NOT HAVE BEEN TAKEN DIFFERENT VIEW OF THE MATTER , SINCE IDENTICAL CLAIM MADE HAS BEEN ALLOWED IN THE HANDS OF JOINT VENTURE PARTNERS. 6 . THE LEARNED AR SUBMITTED THAT THE VIEW TAKEN BY THE ASSESSING OFFICER THAT IT IS ONLY A CASE OF DEVELOPMENT OF EXISTING WELL IS NOT CORRECT IN THE FACTS AND CIRCUMSTANCES OF THE CASE. LEARNED AR SUBMITTED THAT PROVISIONS OF SECTION 42(1)(B) OF THE ACT PROVIDE S FOR ALLOWING ALL TYPES OF EXPENSES INCURRED AFTER BEGINNING OF COMMERCIAL PRODUCTION. HE FURTHER SUBMITTED THAT IN THE INSTANT CASE, THE ASSESSEE HAS UNDERTAKING DRILLING ACTIVITY IN A P LACE ADJACENT TO THE EXISTING WE LL AND THEN ENTERED THE EXISTING WEL L THROUGH SIDE TRACK AND HENCE THE SAID ACTIVITY WOULD ALSO FALL IN THE CATEGORY OF DRILLING OR EXPLORATION. ACCORDINGLY, HE SUBMITTED THAT THE ASSESSEE WOULD BE ENTITLED FOR DEDUCTION OF THE CLAIM MADE U/S. 42(1)(B) OF THE ACT. HE FURTHER SUBMITTED THAT THE VIEW TAKEN BY THE AO IS ACCEPTED AS CORRECT FOR A MOMENT, THEN ALSO THE EXPENDITURE INCURRED ON DEVELOPMENT OF EXISTING WELL IS ALLOWABLE UNDER NORMAL PROVISIONS OF THE ACT AND NOT NECESSARILY U/S 42(1)(B) OF THE ACT. 7. THE LD D.R, ON THE CO NTRARY, PLACED STRONG RELIANCE ON THE ORDERS PASSED BY THE TAX AUTHORITIES. HE SUBMITTED THAT THE METHOD OF DRILLING OF EXISTING WELL WAS NOT CONSIDERED TO BE THE ACTIVITY OF EXPLORATION OR DRILLING, BUT IT WAS CONSIDERED AS DEVELOPMENT AS PER THE AGREEMEN T ENTERED BETWEEN THE PARTIES. ACCORDINGLY HE SUBMITTED THAT THE TAX AUTHORITIES WERE JUSTIFIED IN REJECTING THE CLAIM OF THE ASSESSEE. 8. THE BENCH ASKED A SPECIFIC QUESTION TO THE LD A.R AS TO HOW THE JOINT VENTURE WAS NOT SEPARATELY ASSESSED AS AO P AS PER THE PROVISIONS OF THE ACT. THE LD A.R SUBMITTED THAT THE PROVISIONS OF SEC. 293A GIVES POWER TO THE CENTRAL GOVERNMENT TO MAKE EXEMPTION ETC., IN RELATION TO PARTICIPATION IN THE BUSINESS OF PROSPECTIVE FOR, EXTRACTION ETC., OF MINERAL OILS. HE SUBMITTED THAT THE CENTRAL GOVERNMENT HAS DIRECTED THAT THE INCOME SHALL BE ASSESSED M/S. HINDUSTAN OIL EXPLORATION CO. LTD. 5 SEPARATELY IN THE HANDS OF THE RESPECTIVE JOINT VENTURE PARTNER IN THE RATIO OF RESPECTIVE PARTICIPATING INTEREST. 9. FROM THE FOREGOING DISCUSSIONS, WE NOTICE THAT TH E EXPENDITURE HAVE BEEN INCURRED IN COMMON AND THEY HAVE BEEN DIVIDED BETWEEN THE PARTNERS IN THE PRE - DETERMINED RATIO. THE LD A.R FURNISHED ASSESSMENT ORDER COPIES OF OTHER JOINT VENTURE PARTNERS AND A PERUSAL OF THE SAME WOULD SHOW THAT THEIR RESPECTIVE CLAIM HAS BEEN ACCEPTED, I.E., NO DISALLOWANCE HAS BEEN MADE IN THEIR HANDS. ACCORDINGLY HE CONTENDED THAT THE AO SHOULD NOT HAVE TAKEN A DIFFERENT VIEW OF THE MATTER, WHEN THE VERY SAME EXPENDITURE HAS BEEN ACCEPTED IN THE HANDS OF OTHER JOINT VENTURE P ARTNERS. 10. THE LD A.R ALSO EXPLAINED THE METHODOLOGY FOLLOWED IN ENTERING INTO THE EXISTING WELL. HE SUBMITTED THAT THE SAID METHODOLOGY RESULTING IN DRILLING ACTIVITY AT A NEW PLACE. HE FURTHER SUBMITTED THAT THE EXPENDITURE INCURRED AFTER COMMENC EMENT OF PRODUCTION IS FULLY ALLOWABLE. ALTERNATIVELY HE SUBMITTED THAT THE EXPENDITURE SHOULD HAVE BEEN ALLOWED UNDER NORMAL PROVISIONS OF THE ACT. 11. THUS, WE NOTICE THAT THE ASSESSEE HAS MADE MANY NEW SUBMISSIONS AND THEY HAVE NOT BEEN CONSIDERED BY THE AO. WE NOTICE THAT THE ASSESSEES CLAIM THAT THE ASSESSEES SHARE OF EXPENDITURE WAS PART OF COMMON EXPENDITURE INCURRED BY ALL JOINT VENTURE PARTIES, HAS ESCAPED THE ATTENTION OF THE AO. THE METHODOLOGY EXPLAINED BY THE LD A.R WAS ALSO NOT CONSID ERED BY THE ASSESSING OFFICER. FURTHER THE AO HAS ALSO NOT ADDRESSED THE ALTERNATIVE CONTENTIONS OF THE ASSESSEE. UNDER THESE SET OF FACTS, WE ARE OF THE VIEW THAT THIS ISSUE REQUIRES FRESH CONSIDERATION AT THE END OF THE AO IN THE LIGHT OF DISCUSSIONS M ADE SUPRA. ACCORDINGLY WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE AO WITH THE DIRECTION TO EXAMINE THE SAME AFRESH IN THE LIGHT OF DISCUSSIONS MADE SUPRA. M/S. HINDUSTAN OIL EXPLORATION CO. LTD. 6 12. THE ASSESSEE DID NOT PRESS THE GROUND RELATING TO ASSESSING OF INTEREST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. HENCE THE SAME IS DISMISSED AS NOT PRESSED. 13. THE NEXT ISSUE CONTESTED BY THE ASSESSEE RELATES TO THE DISALLOWANCE MADE U/S 14A OF THE ACT. THE AO WORKED OUT THE D ISALLOWANCE UNDER RULE 8D OF THE I.T RULES AT RS.2.74 CRORES AS AGAINST THE DISALLOWANCE OF RS.15,45,496/ - MADE BY THE ASSESSEE. THE DIVIDEND INCOME EARNED WAS RS.39.43 CRORES. THE CONTENTION OF THE ASSESSEE IS THAT THE AO HAS MECHANICALLY APPLIED THE PR OVISIONS OF RULE 8D WITHOUT HAVING REGARD TO THE ACCOUNTS AND WITHOUT RECORDING DISSATISFACTION . HE SUBMITTED THAT THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE IS IN EXCESS OF THE VALUE OF INVESTMENTS AND HENCE THERE IS NO REQUIREMENT TO MAKE DISAL LOWANCE OUT OF INTEREST EXPENDITURE UNDER RULE 8D(2)(II) AS PER THE DECISION OF HONBLE BOMBAY HIGH COURT RENDERED IN THE CASE OF HDFC BANK LTD (366 ITR 505) . HE FURTHER SUBMITTED THAT THE AGGREGATE AMOUNT OF ADMINISTRATIVE EXPENDITURE INCURRED BY THE ASS ESSEE WAS RS.53.84 LAKHS ONLY AND HENCE RULE 8D(2)(III) CANNOT ALSO BE APPLIED. 14. WE HEARD LD D.R AND PERUSED THE RECORD. HAVING REGARD TO THE SUBMISSIONS MADE BY THE ASSESSEE, WE ARE OF THE VIEW THAT THIS ISSUE ALSO REQUIRES EXAMINATION AFRESH AT THE END OF THE AO. ACCORDINGLY WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE AO WITH THE DIRECTION TO EXAMINE THIS ISSUE AFRESH BY DULY CONSIDERING THE BOOKS OF ACCOUNTS AS WELL AS THE DECISION RENDERED BY JURISDICTIONAL HIGH COURT IN THE CASE OF HDFC BANK (SUPRA). 15. THE NEXT ISSUE CONTESTED BY THE ASSESSEE RELATES TO THE DISALLOWANCE OF FOREIGN EXCHANGE LOSS OF RS.2.35 CRORES. THE AO NOTICED THAT THE AGREEMENT ENTERED BETWEEN THE PARTIES PROVIDED THAT THE FOREIGN EXCHANGE LOSS CANNOT BE RECOVERABLE OR ALLOWABLE FOR COST RECOVERY OR PRODUCTION SHARING PURPOSES. M/S. HINDUSTAN OIL EXPLORATION CO. LTD. 7 ACCORDINGLY HE DISALLOWED THE CLAIM OF THE ASSESSEE AND THE LD CIT(A) ALSO UPHELD THE SAME. 16. WE HEARD THE PARTIES ON THIS ISSUE A ND PERUSED THE RECORD. THE EXPENDITURE CLAIMED BY THE ASSESSEE IS REQUIRED TO BE EXAMINED IN TERMS OF THE PROVISIONS OF INCOME TAX ACT. THE RESTRICTION PLACED IN THE AGREEMENT WILL BIND THE PARTIES TO THE AGREEMENT. IN ANY CASE, IT HAS ONLY BEEN STATED THAT THE FINANCIAL EXPENSES SHALL BE BORNE BY THE RESPECTIVE PARTIES AND THEY CANNOT BE CONSIDERED FOR DETERMINING COST RECOVERABLE OR FOR SHARING PURPOSES. IN OUR VIEW THE RESTRICTION SO PLACED IN THE AGREEMENT IS FOR THE PURPOSE OF DETERMINING COMMON C OSTS ONLY. IF THE EXPENDITURE IS OTHERWISE ALLOWABLE UNDER THE PROVISIONS OF THE ACT, THE SAME IS REQUIRED TO BE ALLOWED. ACCORDINGLY WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE AO WITH THE DIRECTION TO EXAMINE THE SAME IN TERMS OF THE PROVISIONS OF THE ACT. 17. WE SHALL NOW TAKE UP THE APPEAL FILED BY THE REVENUE, WHEREIN THE CLAIM MADE BY THE ASSESSEE U/S 80IB(9) IS BEING CONTESTED. WE NOTICE THAT THE LD CIT(A) HAS ALLOWED THE CLAIM BY FOLLOWING THE DECISION RENDERED BY THE CO - ORDINATE BENCH OF TRIBUNAL IN THE ASSESSEES OWN CASE IN ITA NO.179/MUM/2007 AND ITA NO.1711/MUM/2008 DATED 28.12.2011; ITA NO.1047 AND 955/MUM/2009 DATED 17.09.2013 AND ITA NO.61/MUM/2011 DATED 07.02.2014. HOWEVER, WE NO TICE THAT THE CO - ORDINATE BENCH HAS RESTORED AN IDENTICAL ISSUE TO THE FILE OF THE AO IN ITA NO.4042/MUM/2012 DATED 19 - 02 - 2016 RELATING TO AY 2008 - 09 TO THE FILE OF THE AO. ACCORDINGLY WE RESTORE THIS ISSUE ALSO TO THE FILE OF THE AO WITH THE DIRECTION TO DECIDE THIS ISSUE AFRESH BY DULY CONSIDERING THE RATIO OF THE DECISIONS RENDERED BY THE TRIBUNAL IN THE CASES, REFERRED SUPRA. M/S. HINDUSTAN OIL EXPLORATION CO. LTD. 8 18. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL OF THE REVENUE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER HAS BE EN PRONOUNCED IN THE COURT ON 15 . 2 .201 7 SD/ - SD/ - (AMIT SHUKLA ) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 15 / 2 / 20 1 7 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// ( DY./ASSTT. REGISTRAR) ITAT, MUMBAI PS