M/S.cairn Energy (India) Limitedwellington Plaza, 2[Nd] Flooranna Salai, Chennai-600 002 v. The Joint Commissioner Of Income-Taxspecial Range I121, Nungambakkam High Roadchennai-600 034

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 14.03.2007 CORAM: THE HONOURABLE MR.JUSTICE P.D.DINAKARANandTHE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMAN T.C. (Appeal) Nos.251 and 252 of 2007 M/s.Cairn Energy (India) LimitedWellington Plaza, 2[nd] FloorAnna Salai, Chennai-600 002. .. Appellant in both Tax Cases versus The Joint Commissioner of Income-taxSpecial Range I121, Nungambakkam High RoadChennai-600 034. .. .. Respondent in both Tax Cases----- PRAYER: T.C.No.251 of 2007 is filed under Section 260A of theIncome Tax Act, 1961, against the order dated 28.7.2006 in ITANo.273/MDS/2001 on the file of the Income Tax Appellate Tribunal,Chennai Bench 'A' and T.C.No.252 of 2007 is filed under Section260A of the Income Tax Act, 1961, against the order dated28.7.2006 in ITA No.1567/MDS/2000 on the file of the Income TaxAppellate Tribunal, Chennai Bench 'A'. ----- For appellant :Mr.V.RamachandranSenior Advocatefor Dr.Anita SumanthFor respondent :Mrs.Pushya SitaramanSenior Standing Counsel forIncome Tax ----- JUDGMENT (Judgment of the Court was delivered by CHITRA VENKATARAMAN,J.) These two Tax Cases are filed by the assessee, seekingadmission. The appeals relate to the assessment years 1996-97 andhttps://hcservices.ecourts.gov.in/hcservices/1998-99. 2. The following are the substantial questions of lawraised seeking admission in respect of T.C.No.251 of 2007: (i) Whether on the facts and in the circumstances of thecase, the Tribunal is right in law in confirming thedisallowance of Rs.88,05,226/- relating to the explorationexpenses in respect of the following:(a) Cambay offshore exploration permit :Rs.69,94,968/- (ii)Whether on the facts and in the circumstances of thecase, the Tribunal is right in law in confirming thedisallowance of pre-effective cost of Rs.2,72,93,866/-? (iii)Whether, on the facts and in the circumstances of thecase, even assuming without conceding that the expenditure isnot allowable as a deduction in computing the income for theprevious year, the Tribunal ought not to have directed thegrant of allowance of the aforesaid expenditure on theprinciple of amortization? 3. The substantial questions of law in respect of (i) Whether on the facts and in the circumstances of the case, theTribunal is right in law in disposing of the appeal withoutconsidering the contention with regard to the validity of theorder made under Section 143(1)(a)? (ii) Whether on the facts and in the circumstances of thecase, the Tribunal is right in law in not holding that theorder made under Section 143(1)(a) adding to the incomedeclared in the return, the claim on account of SiteRestoration Cost is not valid in law?(iii) Whether on the facts and in the circumstances of thecase the Tribunal is right in law in not holding that in sofar as the income has been declared in terms of Section 115JA,the claim on account of site restoration cannot be added backto the income declared?(iv) Whether on the facts and in the circumstances of thecase, the Tribunal is right in law in holding that the claimon account of Site Restoration Cost is not allowable as adeduction in computing the income? 4. The assessee is a foreign company engaged in thebusiness of prospecting the production of mineral oil in India.The assessee appellant carried on the exploration and productionactivities under a multi-partite agreement between the assesseecompany, other joint venture partners and the Government of Indiaunder Production Sharing Contracts in various contract areas. Inhttps://hcservices.ecourts.gov.in/hcservices/respect of the assessment year 1996-97, the assessee filed a lossreturn. The assessment was completed under Section 143(3), 4. The assessee is a foreign company engaged in thebusiness of prospecting the production of mineral oil in India.The assessee appellant carried on the exploration and productionactivities under a multi-partite agreement between the assesseecompany, other joint venture partners and the Government of Indiaunder Production Sharing Contracts in various contract areas. Inhttps://hcservices.ecourts.gov.in/hcservices/respect of the assessment year 1996-97, the assessee filed a lossreturn. The assessment was completed under Section 143(3), assessing the loss at Rs.40,21,92,229/-. It is stated that duringthe assessment year under consideration, the assessee was engagedin exploration and production activities in the contracted areaidentified as "Ravva Oil and Gas Field". The Assessing Officerdisallowed claim of expenditure claimed to a sum of Rs.88,05,226/-relating to the exploration cost of three projects, namely,Cambay Offshore Exploration Permit, Krishna Godavari OffshoreExploration Permit and India General Evaluation. The AssessingAuthority disallowed the said claim on the ground that a sum ofRs.81,86,965/- related to the earlier assessment year as per theTax Audit Report filed. Further, the expenses were not incurredin relation to the Ravva Oil Field and they were totallyunconnected to the said project; that they related to two otherprojects for which permits had been obtained and ProductionSharing Contract was yet to be entered into. As regards IndiaGeneral Evaluation, he held that the company was exploring thepossible areas where oil exploration was feasible. Accordingly,the Assessing Officer made the addition and noted the assessee'splea that these expenses would be considered at a later date whenthe exploration in Cambay Offshore Exploration Permit andKrishna Godavari Offshore Exploration Permit materialised. TheAssessing Authority further disallowed the claim ofRs.2,73,93,866/- as relatable to pre-incorporation expenses. TheAssessing Authority took the view that no deduction had beenprovided for either in Section 35-B or in any other provisions ofthe Act on the claim of pre-effective cost. 5. The assessee challenged this finding before theCommissioner of Income Tax (Appeals), who, however, rejected thesame and confirmed the findings of the Assessing Officer.Aggrieved by this, the assessee preferred further appeal beforethe Tribunal. 6. After hearing both sides, on perusing the recordsproduced by the assessee, the Tribunal came to the conclusion thatthe finding of the authorities below that the expenditure inquestion related to earlier years could not be assailed by theassessee. The Tribunal confirmed the view that the audit reportshowed that the expenditure related to the prior period. Thus,the expenditure incurred in respect of Ravva Oil Fields wasrejected as totally unsupported by any material to connect it asrelevant to and related to the year under consideration. On thequestion of pre-effective cost, the assessee contended that thesame were allowable as per the provisions of Section 35-D over aperiod of ten years, subject to certain limits and restrictions.The Tribunal found that the expenses to the extent ofRs.2,72,93,866/- were incurred by the holding company relating tothe formalities of the company. The Tribunal noted that theCommissioner as well as the Assessing Officer found that theexpenses were admittedly incurred by the holding company. TheCommissioner observed that there was no denial of the fact thatthese expenses were incurred relating to the formalities of thecompany and that even before the Tribunal, the assessee could nothttps://hcservices.ecourts.gov.in/hcservices/give any evidence that it had incurred expenses as post-incorporation expenditure. In the light of this, the Tribunal rejected the plea, confirmed the orders of the authorities belowand thus, dismissed the appeal. rejected the plea, confirmed the orders of the authorities belowand thus, dismissed the appeal. 7. The Revenue also preferred an appeal before the Tribunalin respect of the Assessment Year 1998-99 with reference to theprovision for Site Restoration Cost. The Revenue disputed theclaim under Section 42 that unless the agreement provided for SiteRestoration Fund, it being only a provision, the same was notallowable either under Section 37 or under Section 42. TheRevenue placed reliance on the decisions reported in 271 ITR 322(GEM GRANITES Vs. C.I.T.) and 262 ITR 417 (C.I.T. Vs. POOSHYAEXPORTS P. LTD.). The Tribunal, following the said decisions heldthat the agreement is silent as regards the claim allowable underSection 42. Consequently, it held that the assessee was notentitled to the Site Restoration Cost. Thus the Tribunal allowedthe Revenue's appeal. 8. Aggrieved of the view taken by the Tribunal in allowingthe appeal by the Revenue, the assessee has preferred appealsagainst the orders passed in its appeal as well as the one whichwent in favour of the Revenue. 9. Learned senior counsel appearing for the assesseesubmitted that the Tribunal ought to have seen that theexpenditure relating to the exploration ought to have beenadjudged business-wise with each operation constituting a singleintegrated business. Consequently, the Tribunal erred indisallowing the claim relating to the exploration expenses that itrelated to the earlier years. Learned senior counsel alsoquestioned the view of the Tribunal on the claim of theexpenditure post-incorporation. He pointed out that theexpenditure were incurred by the holding company only on accountof the appellant company and that the claim had been made on theappellant company only during the relevant previous year. In thecircumstances, the learned senior counsel sought for an admissionon the said question. 10. As regards T.C.No.252 of 2007, learned senior counselsubmitted that the Tribunal failed to see that the Commissioner ofIncome Tax (Appeals) allowed the appeal only on the ground thatthe issue relating to the Site Restoration Expenditure was adebatable issue and hence, could not be considered in anintimation under Section 143(1)(a) and that the Tribunal erred innot dealing with this issue covered under the said order. He alsoquestioned the correctness of the Tribunal placing reliance on thedecisions reported in 271 ITR 322 (GEM GRANITES Vs. C.I.T.) and262 ITR 417 (C.I.T. Vs. POOSHYA EXPORTS P. LTD.). Hence, heprayed for admission of the case relating to the Assessment Year1998-99. 11. A perusal of the order of the authorities below showthat the applicant is a 100% subsidiary of an Australian Company.In respect of the expenditure of Rs.88,05,226/- relating to thehttps://hcservices.ecourts.gov.in/hcservices/exploration expenses, it was noted that the Tax Audit Report underSection 44-AB showed that an expenditure of Rs.81,86,965/- related to the earlier Assessment Year. It was further pointed out thatapart from this, the expenses had not been incurred by Ravva OilFields, which started commercial production only during the yearunder consideration and that they also related to two otherprojects for which the Production Sharing Contract was yet to beentered into. Considering the fact that as regards India GeneralEvaluation, the company was exploring the country regarding thepossible area for further exploration of oil, the AssessingAuthority disallowed the same. While considering the same, theAssessing Authority pointed out that the assessee admittedlystated that this expenditure related to earlier years and hence,considering the facts therein, the claim was rejected by theappellate authority also. Thus, the Commissioner of Income Tax(Appeals) concurred with the reasons given by the AssessingOfficer. 12. In the appeal preferred, the Tribunal, the secondappellate authority, referring to the audit report, confirmed thefindings of the Assessing Officer as well as the Commissioner ofIncome Tax (Appeals). Being pure questions of fact, we do notfind any merit to accept the plea raised herein by the learnedsenior counsel that the Tax Case raises questions of law foradmission. 13. We do not find any ground to accept the plea that theexpenses should be considered business-wise. On the secondquestion with reference to the disallowance of the pre-effectivecost of Rs.2,72,93,866/-, the Assessing Authority found that theseexpenses represent the preliminary expenses incurred by theholding company relating to the formation of the assessee company.Considering the nature of expenditure, the Assessing Authorityrejected the plea for deduction under Section 35-D. In the courseof its order, the appellate authority found that there was noground to differ from the finding of the Assessing Officer; thatconsidering the fact that these expenses were incurred by theholding company relating to the formation of the company and inthe absence of any material to accept the contention that theyrelated to post-incorporation, the findings of the Tribunal arepure questions of fact and we do not find any merit to call forany admission as giving raise to a question of law. 14. In the appeal preferred before the Tribunal, it notedthat the findings by the Commissioner of Income Tax (Appeals) werenot refuted and assailed by the assessee without any clinchingevidence. In these circumstances, the claim that the expensesrelated to post-incorporation was rejected. Thus, the Tribunalconfirmed the findings of the authorities below. 15. Learned senior counsel appearing for theassessee/appellant could not get over this finding of fact by theTribunal. In the circumstances, we do not find any ground tointerfere with the order of the Tribunal. In the light of theview that we have taken confirming the findings, we reject all thehttps://hcservices.ecourts.gov.in/hcservices/grounds as pure questions of fact. Consequently, T.C.No.251 of2007 stands rejected. 16. As regards T.C.No.252 of 2007, learned senior counselappearing for the assessee submitted that the Tribunal haddisposed of the appeal without considering the contention asregards the validity of the order passed under Section 143(1)(a).A perusal of the orders of the authorities below show that, in hisorder under Section 143(1)(a), the assessing authority madeadjustment in respect of Site Restoration Cost provision and thatthe examination of the nature of accounts maintained was clearlynecessary before resorting to the prima facie adjustment. TheCommissioner of Income Tax (Appeals), accordingly, agreed with thesubmission of the assessee that no prima facie adjustment shouldhave been made in the proceedings under Section 143(1)(a); thus,he allowed the appeal. On a further appeal by the Revenue, theTribunal considered the question on merits and thus allowed theappeal. Considering the question of law raised as regards thecorrectness of the order of the Tribunal in disposing of theappeal without considering the contention relating to the validityof the order passed under Section 143(1)(a), we directed thestanding counsel to take notice. Accordingly, after hearing bothsides, we feel that the order of the Tribunal deserves to be setaside and the order remanded back to the Tribunal to go into thequestion of jurisdiction to make adjustments in an intimationunder Section 143(1)(a) and pass orders in accordance with law. In the light of the above, while we dismiss T.C.No.251 of2007 on the ground that there is no substantial question of lawfor interference, the questions being pure questions of fact, weallow T.C.No.252 of 2007, setting aside the order of the Tribunaland remanding the matter back to the Tribunal to consider thequestion of jurisdiction under Section 143(1)(a) with reference tothe claim made by the assessee and considered by the authorities.Connected M.P.No.1 of 2007 stands closed. No costs. The Joint Commissioner of Income-taxSpecial Range I121, Nungambakkam High RoadChennai-600 034. + 1 cc M/s. Dr. Anita Sumanth, Advocate SR No.16056+ 2 ccs to M/s. Pushya Sitaraman, Senior St Counsel for I.T.Advocate SR No. 15769, 15770