Principal Commissioner Of Income Tax, 12 v. Hindustan Oil Exploration Company Ltd

1 / 11 04-ITXA-184-17.odt IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.184 OF 2017 Principal Commissioner of Income Tax, 12 .... Appellant versus Hindustan Oil Exploration Company Ltd.... Respondent….... Mr.Arvind Pinto, Advocate for Appellant.Mr.Arvind Pinto, Advocate for Appellant. Mr.Nishit Gandhi, Advocate for Respondent.Mr.Nishit Gandhi, Advocate for Respondent. CORAM : AKIL KURESHI & SARANG V. KOTWAL, JJ.DATE: 25[th] MARCH, 2019. P.C. : 1. This is appeal filed by the revenue to challenge the judgment of Income Tax Appellate Tribunal. Following questions are presented for our consideration; “1.Whether in law and on the facts of theinstant case, was the Tribunal justified in holding thatthe Company was eligible for deduction u/s 42(1)(a)ignoring the fact that the Company had not surrenderedits block; rather it had sought for an extension of time tofulfill its contract. 2.Whether in law and on the facts of theinstant case, was the Tribunal in error in itsinterpretation of Section 42(1)(a); that deals with thesurrender of an area of exploration and not therelinquishment of the contract as concluded by theTribunal.” 2. Brief facts are as under; Respondent-Assessee Hindustan Oil ExplorationCompany Ltd. is engaged in the business of exploration andextraction of oil. The issue pertains to the assessee's return ofincome for the year 2008-2009. The return filed by the assesseefor the said assessment year declared NIL income. In the return,the assessee had claimed a deduction of a sum of Rs.99.96Crores under section 42 of the Income Tax Act, 1961 (for short‘the Act’). 3. The assessee company had entered into a Production Sharing Contract (PSC) with Government of India on08/10/2001 for the purposes of oil exploration. As per the PSC,a consortium of three companies of which the assessee was a 3 / 11 04-ITXA-184-17.odtpart, was issued a license for carrying out exploration of oil inthe Kaveri Basin by the Government of India. The initial periodof contract was for three years. Entire oil exploration had to becompleted in seven years in three phases. At the end of the saidperiod, the company had asked for extension, which was deniedby the Government of India. The deduction of Rs.99.96 croreswas claimed by the company which was an expenditure in oilexploration on the ground that the block was surrendered on15/03/2008. Reliance in this respect was made to section 42(1)(a) of the Act. 4. The Assessing Officer was of the opinion that this wasnot a case of surrender of right to carry on oil exploration sincethe assessee was interested in extension of time, which wasdenied by the Government of India. The issue eventuallyreached the tribunal. Tribunal by the impugned judgmentrejected the revenue’s appeal and held that looking to thespecific purpose for which the section 42 of the Act was enacted,the purposive interpretation thereof was necessary and 4 / 11 04-ITXA-184-17.odt resultantly the present case would be covered by the deductionprovision contained in section 42 of the Act. The tribunal heldand observed as under; 4. The Assessing Officer was of the opinion that this wasnot a case of surrender of right to carry on oil exploration sincethe assessee was interested in extension of time, which wasdenied by the Government of India. The issue eventuallyreached the tribunal. Tribunal by the impugned judgmentrejected the revenue’s appeal and held that looking to thespecific purpose for which the section 42 of the Act was enacted,the purposive interpretation thereof was necessary and 4 / 11 04-ITXA-184-17.odt resultantly the present case would be covered by the deductionprovision contained in section 42 of the Act. The tribunal heldand observed as under; “We have heard the rival submissions and perused thematerial before us. We find that to encourage the oilexploration Government of India introduced a new policyand simultaneously made amendment in the Act, thatthe assessee had made an application in pursuance ofPSC and was allotted area for exploration w.e.f.16.03.2001, that it was allowed to explore the area forseven years in three phases, that it had informed the BSEthat it could not oil in two of the wells, that in the year2006 Government notified that extension could begranted to the earlier allottees, that vide its application,dated 16.1.2008, the assessee requested for an extension,that the DGHC rejected the application filed by it forextending the exploration period that the AO held thatthere was no voluntary surrender of the oil fields, thatthe assessee could not claim deduction u/s 42(1) of theAct. In our opinion, purposive interpretation of theprovisions of the Act will be useful to decide the issue.Section 42 of the Act was brought on statute with a veryspecific purpose- to encourage oil exploration. Purpose tointroduce it was to tide over the ever increasing importbill of petroleum products. PSC is the testimony of the efforts and intention of the government to deal with theoil crisis. To encourage the oil exploration area incentivein form of introduction of section 42(1)was given to theassessees. As an exception capital expenditure and otherexpenditure are fully allowed, under section 42(1)(a)ofthe Act, even when the exploration of oil results infailure. Such expenditure is not being amortised or not isbeing allowed partially year after year-it has to beallowed in full. If the background of the legislation isconsidered it becomes clear that there was no scope forbringing in the concept of voluntarily surrender/forcedsurrender. The Act has not provided such terms in thesection and therefore there was no justification indenying the assessee a legitimate benefit. As per Article 4 of PSC had distinguished relinquishment andtermination of contracts. As per Article 4 of PSC(Pg-.19of the PB)'if the contractor exercises the option providedin paragraph (b)of Article 3.5 the contractor shall, afterany development area has been designated, relinquishedall of the contract area not included within the saiddevelopment area'.Article-30 of PSC (pg. 1.84) deals withtermination of contract. It provides 10 circumstancesunder which the government could terminate thecontract. Clearly relinquishment and termination ofagreement are two different concepts as per the PSC. Inhis letter, dated 28.03.2007, the DGHC has informed theassessee that its contract stood relinquished. We wouldlike to reproduce the relevant portion of the letter and same reads as under; “Since Phase-llI exploration period is expired on16.3.2008 and the consortium has not fulfilled theterms laid down for extension as per policy forextension beyond exploration period, hence the blockCY-OSN-97/1 stands relinquished as per Article 4.3of PSC w.e.f the date of completion of phase-III i.e.15.3.2008.” same reads as under; “Since Phase-llI exploration period is expired on16.3.2008 and the consortium has not fulfilled theterms laid down for extension as per policy forextension beyond exploration period, hence the blockCY-OSN-97/1 stands relinquished as per Article 4.3of PSC w.e.f the date of completion of phase-III i.e.15.3.2008.” The termination condition of the PSC deals with totallydifferent situations. We find that the letter dt.28.3.2007talks of Article-$ and not of the PSC. Clearly, the case ofthe assessee does not fall in the category of termination.Considering the above, we are of the opinion that theorder of the FAA does not suffer from any legal or factualinformation. So, confirming his order, we decide effectiveground of appeal against the AO.” 5. The facts as noted are not seriously in dispute. The assessee having been awarded a contract for oil exploration inKaveri Basin for a total period of 7 years could not complete, theKaveri Basin for a total period of 7 years could not complete, the project within such time[1]. The assessee therefore had to1. The contract envisaged oil exploration in three phrases; initialphase would be completed within three years and thereafter there would be two 7 / 11 04-ITXA-184-17.odtsurrender the block to the Government of India. Admittedly,commercial production of oil had not commenced. In view ofsuch facts, the question is, whether the tribunal was correct inholding that the assessee's claim of deduction under section 42of the Act was justified. 6. Section 42 of the Act pertains to special provision fordeduction in case of business for prospecting etc. for mineral oil.We are concerned with sub-section (1) of the section 42 whichreads as under; Special provision for deductions in the case of business forprospecting, etc., for mineral oil. [(1)] For the purpose of computing the profits or gains of anybusiness consisting of the prospecting for or extraction orproduction of mineral oils in relation to which the CentralGovernment has entered into an agreement with any person forthe association or participation [of the Central Government or anyperson authorised by it in such business] (which agreement hasbeen laid on the Table of each House of Parliament), there shall be phases of 2 years each. Thus, the total period of contract was for 7 years. At theend of the period of 7 years, the assessee asked for extension of time which theGovernment of India denied. 8 / 11 04-ITXA-184-17.odt made in lieu of, or in addition to, the allowances admissible underthis Act, such allowances as are specified in the agreement inrelation— (a) to expenditure by way of infructuous or abortiveexploration expenses in respect of any areasurrendered prior to the beginning of commercialproduction by the assessee; exploration expenses in respect of any areasurrendered prior to the beginning of commercialproduction by the assessee; (b) after the beginning of commercial production, toexpenditure incurred by the assessee, whetherbefore or after such commercial production, inrespect of drilling or exploration activities orservices or in respect of physical assets used in thatconnection, except assets on which allowance fordepreciation is admissible under section 32:expenditure incurred by the assessee, whetherbefore or after such commercial production, inrespect of drilling or exploration activities orservices or in respect of physical assets used in thatconnection, except assets on which allowance fordepreciation is admissible under section 32: (b) after the beginning of commercial production, toexpenditure incurred by the assessee, whetherbefore or after such commercial production, inrespect of drilling or exploration activities orservices or in respect of physical assets used in thatconnection, except assets on which allowance fordepreciation is admissible under section 32:expenditure incurred by the assessee, whetherbefore or after such commercial production, inrespect of drilling or exploration activities orservices or in respect of physical assets used in thatconnection, except assets on which allowance fordepreciation is admissible under section 32: [Provided that in relation to any agreement entered intoafter the 31st day of March, 1981, this clause shallhave effect subject to the modification that thewords and figures “except assets on whichallowance for depreciation is admissible undersection 32” had been omitted; and] after the 31st day of March, 1981, this clause shallhave effect subject to the modification that thewords and figures “except assets on whichallowance for depreciation is admissible undersection 32” had been omitted; and] (c) to the depletion of mineral oil in the mining area inrespect of the assessment year relevant to theprevious year in which commercial production isbegun and for such succeeding year or years as maybe specified in the agreement;respect of the assessment year relevant to theprevious year in which commercial production isbegun and for such succeeding year or years as maybe specified in the agreement; 9 / 11 04-ITXA-184-17.odtand such allowances shall be computed and made in the mannerspecified in the agreement, the other provisions of this Act beingdeemed for this purpose to have been modified to the extentnecessary to give effect to the terms of the agreement. 7. In terms of sub-section (1) of section 42, for thepurpose of computing the profits or gains of any businessconsisting of the prospecting for or extraction or production ofmineral oils in relation to which the agreement has been enteredinto with the Central Government in lieu of or in addition to, theallowances admissible under the Act such allowances as arespecified in agreement in relation to inter alia, in terms of clause(a) of any expenditure by way of infructuous or abortiveexploration expenses in respect of any area surrendered prior tothe beginning of the commercial production by the assesseewould be admissible. For the applicability of clause (a) of sub-section (1), the elements vital are that the expenditure shouldbe infructuous or abortive exploration expenses and that thearea should be surrendered prior to beginning of the commercialproduction by the assessee. In other words, as long as these two 10 / 11 04-ITXA-184-17.odtrequirements are satisfied, the expenditure in question would berecognized as a deduction. The emphasis of this provision is ofinfructuous or abortive exploration expenses and that there issurrender prior to the beginning of the commercial production.The term ‘surrender’ in this clause, therefore, has to beappreciated in light of these essential requirements of thededuction clause. The revenue in our opinion has putunnecessary stress on the term ‘surrender’ while the main focusof the clause is on infructuous or abortive explorationexpenditure in respect of area surrendered prior to thebeginning of the commercial production. As long as thecommercial production has not begun and the expenditure isabortive or infructuous exploration expenditure, the deductionwould be allowed. The term ‘surrender’ itself is flexible one anddoes not always connote the meaning of voluntarily surrender.As in the present case, the surrender can also take place undercompulsion. The assessee had no choice but to surrender the oilblocks, because the Government of India refused to extend thevalidity period of the contract. Nevertheless, the act of the 11 / 11 04-ITXA-184-17.odt 11 / 11 04-ITXA-184-17.odt assessee to hand over the oil blocks before the commencementof commercial production would as well be covered within theexpression; “any area surrendered prior to the beginning ofcommercial production by the assessee.” The revenue does notdispute that the expenditure was infructuous or abortiveexploration expenditure. 8. In the result we do not find that the tribunal hascommitted any error. 9. Section 42 of the Act recognizes the risks of the business of oil exploration which activity is capital intensive andhigh in risk of entire expenditure not yielding any fruitful result.Entire purpose or enactment would be destroyed if the rigidinterpretation of the revenue is accepted. 10. In the result Income Tax Appeal is dismissed. (SARANG V. KOTWAL, J.) (AKIL KURESHI, J.)