Assistant Commissioner Of Income-Tax (Osd) Range-1, Dehradun. Range-1, Dehradun v. M/S Enron Oil And Gas India Limited

IN THE HIGH COURT OF UTTARANCHAL AT NAINITAL COURT’S ORDER WHETHER THE CASE IS OR IS NOT APPROVED FOR REPORTING [Chapter VIII, Rule 32(2)(b)] Description of case Decided on: 17[th] Jan., 2008 I.Tax Appeal No. 74 of 2007 Along with I.Tax Appeal No. 76 of 2007 And I.Tax Appeal No. 77 of 2007 A.F.R. (Approved for Reporting)Not approved for Reporting Date. 17.01.2008 (Initial of Judge) Reserved Judgment IN THE HIGH COURT OF UTTARAKHAND AT NAINITAL Income Tax Appeal No. 74 of 2007 1.The Commissioner of Income-tax, Dehradun. 2.Assistant Commissioner of Income-tax (OSD) Range-1, Dehradun. Range-1, Dehradun. ……. Appellants Versus M/s Enron Oil and Gas India Limited C/o Nangia and Company, 757, Rajpur Road, Dehradun. ……… Respondent Mr. Arvind Vashisth, Advocate for the appellants. Mr. S. Ganesh, Sr. Advocate assisted by Mr. Tarun Gulati, and Mr. Vipul Sharma, Advocates for the respondent. Along with Income Tax Appeal No. 76 of 2007 1.The Commissioner of Income-tax, Dehradun. 2.Assistant Commissioner of Income-tax (OSD) Range-1, Dehradun. Range-1, Dehradun. …… Appellants Versus M/s Enron Oil and Gas India Limited C/o Nangia and Company, 757, Rajpur Road, Dehradun. …. Respondent Mr. Arvind Vashisth, Advocate for the appellants. Mr. Sudhanshu Dhulia, Sr. Advocate assisted by Mr. Vipul Sharma, and Mr. Tarun Gulati, Advocates for the respondent. And Income Tax Appeal No. 77 of 2007 1.The Commissioner of Income-tax, Dehradun. 2.Assistant Commissioner of Income-tax (OSD) Range-1, Dehradun. ….. Appellants Versus M/s Enron Oil and Gas India Limited C/o Nangia and Company, 757, Rajpur Road, Dehradun. …….. Respondent Mr. Arvind Vashisth, Advocate for the appellants. Mr. Sudhanshu Dhulia, Sr. Advocate assisted by Mr. Vipul Sharma, and Mr. Tarun Gulati, Advocates for the respondent. Coram: Hon’ble Prafulla C. Pant, J. Hon’ble Dharam Veer, J. [Per Hon’ble Prafulla C. Pant, J.] All these three appeals, are directed against the same judgment and order dated 29[th] September 2006, passed by the Income Tax Appellate Tribunal, Delhi Bench ‘H’, New Delhi, in Income Tax Appeal No. 1821 of 2005; Income Tax Appeal No. 1823 of 2005 and Income Tax Appeal No. 1824 of 2005, relating to assessment years 1999-2000, 2000-2001 and 1998-1999, respectively, whereby the depreciation on account of foreign exchange loss allowed to the assessee by the Commissioner of Income-tax Income-tax (Appeals), Dehradun, vide his order dated 11.02.2005, is affirmed. 2) Heard learned counsel for the parties and perused the record. 3) Following are the substantial questions of involved in these appeals: law In I.T.A. No. 74 of 2007: Whether, Income Tax Appellate Tribunal erred in law in upholding the decision of CIT(A) on facts and circumstances of the case, in allowing foreign exchange loss of Rs. 11,58,44,887/- under 42 of the Income Tax Act, 1961, Section without appreciating the fact that the loss is only a book entry and no loss was incurred by the company / assessee? In I.T.A. No. 76 of 2007: Whether, Income Tax Appellate Tribunal erred in law in upholding the decision of CIT(A) on facts and circumstances of the case, in allowing foreign exchange loss of Rs. 46,54,30,105/- under Section 42 of the Income Tax Act, 1961, without appreciating the fact that the loss is only a book entry and no loss was incurred by the company/ assessee? In I.T.A. No. 77 of 2007: Whether, Income Tax Appellate Tribunal erred in law in upholding the decision of CIT(A) on facts and circumstances of the case, in allowing foreign exchange loss of Rs. 38,63,38,980/- under Section 42 of the Income Tax Act, 1961, without Section entry and no loss was incurred by the company / assessee? In I.T.A. No. 76 of 2007: Whether, Income Tax Appellate Tribunal erred in law in upholding the decision of CIT(A) on facts and circumstances of the case, in allowing foreign exchange loss of Rs. 46,54,30,105/- under Section 42 of the Income Tax Act, 1961, without appreciating the fact that the loss is only a book entry and no loss was incurred by the company/ assessee? In I.T.A. No. 77 of 2007: Whether, Income Tax Appellate Tribunal erred in law in upholding the decision of CIT(A) on facts and circumstances of the case, in allowing foreign exchange loss of Rs. 38,63,38,980/- under Section 42 of the Income Tax Act, 1961, without Section appreciating the fact that the loss is only a book entry and no loss was incurred by the company / assessee? In substance, in all the three appeals the same question is to be decided, whether the foreign exchange loss claimed by the assessee company was admissible under Section 42(1) of the Income Tax Act, 1961, in terms of agreement entered into between the parties on account of foreign exchange loss? BRIEF FACTS OF THE CASE: 4) M/s Enron Oil and Gas India Limited (in 1998-1999; 1999-2000 and 2000-2001, in production Limited and M/s Reliance Industries Limited under of India. During the assessment year 1998-1999, assessee NRC has debited foreign exchange loss Rs. 46,54,30,105/- to its Profit and Loss account assessee NRC has debited foreign exchange loss assessment year debit of foreign exchange loss to the tune short hereinafter referred as EOGIL) is a non-resident company (NRC), engaged during the relevant assessment years viz. of crude oil from Panna and Mukta oil fields along with its joint venture partners M/s Oil and Natural Gas Corporation the Production Sharing Contracts entered with the Government the of (P&L) account). During the assessment year 1999- 2000, the of Rs. 38,63,38,980/- to its P&L account. And, during the 2000-2001, the assessee NRC has claimed of Rs. 11,58,44,887/- to its P&L account. In all the three appeals, for translation purposes the previous month’s average daily means of the buying and selling rate of exchange as per State Bank of India are used for the month in which the transaction has occurred as provided under Production Sharing Contract. The assessee NRC draws monthly balances. And monthly balances are translated in the balance sheet at the prevailing exchange rates as on the date of balance sheet. Foreign currency loans are repaid out of the sale proceeds received, in US Dollars from M/s Indian Oil Corporation Limited and Gas Authority of India Limited. The assessee NRC admittedly borrows in US Dollars and repays it in the same currency. On these facts, the Assessing Officers in the aforesaid assessment years took the view that foreign exchange loss claimed by the assessee NRC was notional and the same was not month’s average daily means of the buying and selling rate of exchange as per State Bank of India are used for the month in which the transaction has occurred as provided under draws monthly balances. And monthly balances are translated in the balance sheet at the prevailing exchange rates as on the date of balance sheet. Foreign currency loans are repaid out of the sale proceeds received, in US Dollars from M/s US Dollars and repays it in the same currency. On these facts, the Assessing Officers in the aforesaid assessment years took the view that foreign exchange loss claimed by the not admissible to it as depreciation. The respondent assessee month’s average daily means of the buying and selling rate of exchange as per State Bank of India are used for the month in which the transaction has occurred as provided under draws monthly balances. And monthly balances are translated in the balance sheet at the prevailing exchange rates as on the date of balance sheet. Foreign currency loans are repaid out of the sale proceeds received, in US Dollars from M/s US Dollars and repays it in the same currency. On these facts, the Assessing Officers in the aforesaid assessment years took the view that foreign exchange loss claimed by the not admissible to it as depreciation. The respondent assessee NRC preferred appeals against the orders of the Assessing Officers before the Commissioner of Income-tax (Appeals), Dehradun [for brevity CIT(A)], who registered the same as Appeal No. 21 / DDN / CIT(A)-II / 2004-05 against the order passed by Assessing Officer in respect of assessment year 1999-2000; Appeal No. 22 / DDN / CIT(A)-II / 2004- 05 against the order passed by Assessing Officer in respect of assessment year 1998-1999 and Appeal No. 51 / DDN / CIT(A)-II / 2004-05 against the order passed by Assessing Officer in respect of assessment year 2000-2001. After hearing the parties, the CIT(A) Dehradun, allowed all the three appeals, accepting the assessee NRC’s claim of After of foreign exchange loss vide his order dated 11.02.2005 in the three appeals, mentioned above. Aggrieved by the same the Revenue filed Income Tax Appeal No. 1821 of 2005 against the order dated 11.02.2005, passed by CIT(A) in Appeal No. 21 / DDN / CIT(A)-II / 2004-05 in respect of assessment year 1999-2000; Income Tax Appeal No. 1823 of 2005 against the order dated 11.02.2005, passed by CIT(A) in Appeal No. 51 / DDN / CIT(A)-II / 2004-05 in respect of assessment year 1999-2000 and Income Tax Appeal No. 1824 of 2005 against the order dated 11.02.2005, passed by CIT(A) in Appeal No. 22 / DDN / CIT(A)-II / 2004-05 in respect of assessment year 1998- 1999. All the three appeals were heard and decided by the Income Tax Appellate Tribunal, Delhi Bench ‘H’, New Delhi, which allowed the three appeals vide its orders dated 29[[th]] September 2006. Hence, these appeals are preferred by the Revenue under Section 260 A of the Income Tax Act, 1961, on the substantial questions of law, mentioned above. same the Revenue filed Income Tax Appeal No. 1821 of 2005 against the order dated 11.02.2005, passed by CIT(A) Tax dated 11.02.2005, passed by CIT(A) in Appeal No. 22 / DDN / CIT(A)-II / 2004-05 in respect of assessment year 1998- 29[[th]] September 2006. Hence, these appeals are preferred by the Revenue under Section 260 A of the Income Tax Relevant provision of law and relevant clauses of the Agreement entered into between the parties: 5) Before further discussion, it is pertinent to mention here, the relevant provision of law applicable to the case. Section 42 of the Income Tax Act, 1961, reads as under: “42 Special provision for deductions in the case of business for prospecting etc., for mineral oil. For the purpose of computing the profits or gains of any business consisting of the prospecting for or extraction or production of mineral oils in relation to which the Central Government has entered into an agreement with any person for the Central Government or any person authorized by it in such the Table of each House of Parliament), there shall be made in lieu of, or in addition to, the allowance 5) Before further discussion, it is pertinent to mention here, the relevant provision of law applicable to the case. Section 42 of the Income Tax Act, 1961, reads as under: “42 Special provision for deductions in the case of business for prospecting etc., for mineral oil. For the purpose of computing the profits or gains of any business consisting of the prospecting for or extraction or production of mineral oils in relation to which the Central Government has entered into an agreement with any person for the Central Government or any person authorized by it in such the Table of each House of Parliament), there shall be made in lieu of, or in addition to, the allowance admissible under this Act, such allowances as are or any of production, assessee, commercial exploration physical on admissible agreement 1981, the “except is been mining relevant commercial succeeding the in other purpose to have been modified to the extent necessary to give effect to the terms of the agreement. Explanation – for the purposes of this section, “mineral oil” includes petroleum and gas. natural Now, we deem it proper to quote the Articles 1.6.1 and 1.6.2 of the production Sharing Contract provides accounting procedure. The same are reproduced below: (hereinafter referred as PSC) entered into between the parties, which being 1.6 Currency Exchange Rates: 1.6.1 For translation purposes between (or any other financial body as may used for the month in which the cost, expenditure, receipts or income non-US Dollar transaction in excess of equivalent of one hundred thousand Dollars (US Dollar 100,000), the into US Dollars shall be performed on basis of the average of the exchange rate for the day on which transaction occurred. United States Dollars and Indian Rupees or any other currency, the previous month’s average of the daily means of the buying and selling rates of exchange as quoted by the State Bank of India be mutually agreed between the parties) shall be revenues, are recorded. However, in the case of any single the US conversion the applicable the losses from the exchange of currency in respect of or the Indian United 1.6.1 and statements required to be submitted by the contractor in ARGUMENTS:- 6) Mr. Arvind Vashisth, learned counsel for appellants (Revenue) argued that the foreign exchange claimed by the assessee NRC in respect of book entry as the assessee NRC had invested the the same currency. However, as against this, on behalf exchange rates in other assessment years, the officers have charged and accepted the tax on such shown, therefore, for the assessment years in which has occurred, for the same reason the depreciation be denied. Lastly, it is submitted on behalf of the loss assessment years in question, is nothing but only a loss shown in the amount under the contract in US Dollar and it has been repaid in of the respondent / assessee NRC it is submitted that the loss claimed by the assessee NRC is the actual loss on account of change in the foreign exchange rates. It is contended on behalf of the respondent / assessee NRC that for the profits shown by the assessee NRC due to the change in foreign Assessing profits loss cannot the respondent / assessee NRC that when the other venturers, namely M/s Oil and Natural Gas Limited and M/s Reliance Industries Limited were depreciation on account of change of exchange rates, assessee being foreign company cannot be deprived of same. co- Corporation allowed the the DISCUSSION: Delhi, in O.N.G.C. Limited Vs. DCIT; is I.T.A. No. 2472 / DEL / by dated Gas On be NRC. order the of the and only in the account books it was shown as expenditure. In the case in hand, the facts are different and it is nobody’s relevant expenditure made by the assessee NRC, is it entitled to the the quoted the commercial behalf of the respondent / assessee NRC that for the profits shown by the assessee NRC due to the change in foreign Assessing profits loss cannot the respondent / assessee NRC that when the other venturers, namely M/s Oil and Natural Gas Limited and M/s Reliance Industries Limited were depreciation on account of change of exchange rates, assessee being foreign company cannot be deprived of same. co- Corporation allowed the the DISCUSSION: Delhi, in O.N.G.C. Limited Vs. DCIT; is I.T.A. No. 2472 / DEL / by dated Gas On be NRC. order the of the and only in the account books it was shown as expenditure. In the case in hand, the facts are different and it is nobody’s relevant expenditure made by the assessee NRC, is it entitled to the the quoted the commercial production of mineral oil is to be depreciated in terms of the agreement mentioned therein.It is not the case of the not covered or it does not fulfill the requirements under Section 42 of the aforesaid Act. It is clear from Article 1.6.1 of the the that co- be be determined at the end of the calendar month.The example quoted by CIT(A) in his judgment, passed in Appeal No. 21 / DDN / CIT(A)-II / 2004-05, is relevant to be reproduced “To understand the conversion loss, let us take an example in the case of borrowing; assessee borrows dollar one lac USD at Rs. 38/ a dollar in the year at which assessee receives is at Rs. 41/- a dollar as per the PSC. It repays the loan so borrowed out of sale proceeds converted at the rate of Rs. 41/- a dollar. Though he borrows in dollars and repays in dollar but actually he had incurred a loss of Rs .3/- per dollar because the dollar which the borrowed was at was converted at Rs. 41/-. Therefore, it is clear that he has incurred loss of Rs. 3 lacs. This kind case of currency appreciation. Under circumstances, to say that assessee notional loss, is incorrect.” of transaction may also result in gain or profit in the these incurring 9) For the reasons as discussed above, we agree with the reasoning given by the CIT(A) and the Income Appellate Tribunal in holding that the depreciation by the assessee NRC on account of foreign exchange Act, 1961, read with the clauses of the agreement, change in foreign exchange rates in other assessment accrued to the respondent / assessee NRC, it cannot depreciation on account of loss incurred for that reason. For the reasons as discussed above, we agree with the Tax claimed loss was admissible to it under Section 42 of the Income Tax quoted above. We are also of the view that when the Revenue is accepting the tax on the profits / gains arisen out of the years deny 10) are answered against the Revenue. The appeals are to be dismissed. The same are dismissed. Accordingly, all the three substantial questions of law liable (Dharam Veer, J.) (Prafulla C. Pant, J.)