Site Restoration Deduction Allowed as It Was a Mandatory Contractual Obligation

Vedanta Limited Vs ADIT (Madras High Court)

The Madras High Court heard cross appeals filed by the assessee and the Revenue against the common order of the Income Tax Appellate Tribunal (ITAT), Chennai, dated 22.08.2012, relating to Assessment Years (AYs) 2002-03 and 2004-05. The principal issue in the appeals was the allowability of deductions claimed towards provision for site restoration expenses.

The assessee filed appeals under Section 260-A of the Income Tax Act, 1961 against the ITAT’s order for AYs 2002-03 and 2004-05. The Revenue also filed separate appeals under Section 260-A against the same common order of the Tribunal for the corresponding assessment years.

The assessee, Cairn Energy India Pvt. Limited (CEIL), was a non-resident company incorporated in New South Wales, Australia, engaged in the prospecting and production of mineral oil and, in certain cases, gas in India through its project office at Chennai. It was a wholly owned subsidiary of Cairn Energy Asia Limited (CEAL), an Australian company.

The dispute arose from the Assessing Officer’s disallowance of the assessee’s claim for deduction of provision for site restoration expenses amounting to ₹6,84,14,348 for AY 2002-03 and ₹6,82,24,247 for AY 2004-05.

The substantial questions of law raised in the assessee’s appeals included whether the provision for site restoration costs was an allowable deduction under the Act, whether the deduction was allowable under Section 37(1) read with Section 42, whether the Tribunal had correctly rejected the claim without assigning reasons, and whether the liability represented an ascertained liability in light of the principles laid down in Calcutta Co. Ltd. v. CIT and Bharat Earth Movers Ltd. v. CIT.

The Revenue’s appeals questioned whether the Tribunal was correct in holding that the provision for site restoration expenses could not be added back as an unascertained liability while computing book profits under Section 115JB, despite upholding the disallowance under the normal computation provisions. The Revenue also challenged the Tribunal’s finding that the provision represented an ascertained liability.

The facts underlying the dispute showed that the assessee was engaged in petroleum exploration pursuant to a joint venture agreement dated 28.10.1994 entered into by a consortium of private companies with the Government of India and ONGC. In its returns for AYs 2002-03 and 2004-05, the assessee claimed deductions towards provision for site restoration expenses. The amounts were debited as operating expenses in the profit and loss account. The provision represented expenditure that would be incurred in the future for restoration of extraction sites after completion of natural resource extraction.

The assessee contended that the site restoration liability was an ascertainable liability and therefore deductible, relying upon the Supreme Court’s judgment in Bharat Earth Movers v. Commissioner of Income Tax. The Assessing Officer rejected the claim on the ground that no actual expenditure had been incurred during the relevant assessment years and that the provision represented a future liability which was not ascertainable.

The Tribunal, following its earlier consolidated order dated 04.06.2010 concerning the same assessee for previous assessment years, dismissed the assessee’s appeals. It observed that the pendency of appeals before the High Court against its earlier order did not prevent disposal of the present appeals.

The High Court noted that, in the appeals arising from the Tribunal’s earlier order for the same assessee, it had already decided the issue in favour of the assessee. Since the present appeals related to subsequent assessment years involving the same issue, the Court held that the assessee’s appeals deserved to be allowed.

With regard to the Revenue’s appeals, the Court observed that the issue concerning the allowability of provision for site restoration expenses had already been covered by its earlier judgment in the assessee’s own case relating to previous assessment years. The Court referred to its earlier conclusion that Section 33ABA is an incentive provision requiring pre-deposit for claiming the incentive and that availing such incentive is optional. In contrast, site restoration is a mandatory contractual requirement, and expenditure incurred towards such restoration is eligible for deduction under Section 37(1), which is the residuary provision, apart from other explicit deductions available under the Act.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

The Appeals and cross appeals are filed by the assessee and the revenue being aggrieved by the orders of the Income Tax Appellate Tribunal, Chennai in the batch of appeals in respect of the assessee returns filed for the AY 2002-2003 and 2004-2005.

(i) T.C.A.No.96 of 2013 under Section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Chennai Bench “C”, dated 22.08.2012 in I.T.A.No.207/Mds/2012 for the AY 2002-2003 and T.C.A.No.97 of 2013 under Section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Chennai Bench-”C”, dated 22.08.2012 in I.T.A.No.208/Mds/2012 for the AY 2004-05, are the appeals by the assessee.

(ii) T.C.A.No.456 of 2013 under Section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Madras “C” Bench, dated 22.08.2012 in I.T.A.No.327/Mds/2012 for the AY 2002-2003 and the T.C.A.No.457 of 2013 filed under Section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Madras “C” Bench, dated 22.08.2012 in I.T.A.No.328/Mds/2012 for the year 2004-2005, are by the Revenue.

2. The cross appeals by the assessee and the Revenue in respect of the assessment years 2002-03 and 2004-05 were disposed by the Income Tax Appellate Tribunal (ITAT) vide common order dated 22/08/2012. It partly allowed the appeals filed by the Revenue through common order. Being aggrieved, the assessee in T.C. (A).No.96 of 2010 and T.C.(A).No.97 of 2010 and the revenue in T.C.(A).No.456 of 2010 and T.C.(A).No.457 of 2010 are before us by way of respective appeals.

3. The company “Cairn Energy India Pvt. Limited (CEIL)” is a non­resident Company incorporated in New South Wales, Australia and engaged in prospecting and production of mineral oil and in some cases, gas also, in India its Project Office located at Chennai. The said Company is wholly owned subsidiary of Cairn Energy Asia Limited (CEAL), which is a company incorporated and registered in Australia.

4. The Assessing Officer disallowed the assessee’s claim in respect of provision for the site restoration amount to a tune of Rs.6,84,14,348/- for the Assessment Year 2002-03 and Rs.6,82,24,247/- for the Assessment Year 2004-05. This is the subject matter in these batch of appeals.

5. The ITAT, following its order passed in the case of the same assessee, the cross-appeals by the assessee-company and the Revenue, were disposed of by the Income Tax Appellate Tribunal, in “C” Bench, Chennai, by common order, dated 22.08.2012. Being aggrieved, the assessee-Company has filed T.C.A.Nos.96 and 97 of 2013 in respect of the respective assessment year 2002-2003 and 2004-2005. The Revenue has filed appeals in T.C.A.No.456 of 2013 for the assessment year 2002­2003 and T.C.A.No.457 of 2013 for the assessment year 2004-2005.

6. Considering the grounds of appeals, the appeals were admitted framing the following substantial questions of law:-

(i) T.C.A.Nos.96 and 97 of 2013 were admitted on 22.02.2013 on the following substantial questions of law:

(ii) Whether on the facts and circumstances of the case of the Appellant that the amount of Rs.6,82,24,247/-debited in the profit and loss account towards provision for site restoration cost was not an allowable deduction under the Act ?

(iii) Whether on the facts and circumstances and correct interpretation of provisions contained in Section 37(1) of the Act read with Section 42 of the Act, the sum of Rs.6,82,24,247/- representing provision for site restoration cost is an eligible business deduction, while computing the income of the appellant Company?

(iv) Whether on the facts and circumstances of the case of the appellant, the Tribunal has correctly disposed of the instant appeal, particularly when it has not given any reasons for disallowing the deduction for site restoration costs under normal computation?

(v) Whether on the facts and circumstances of the case, could it not be held that the deduction claimed as aforesaid represented an ascertained liability and allowable deduction on the basis of principles laid down by the Apex Court in the case of Calcutta Co. Ltd. Vs. CIT, reported in 37 ITR 1 and Bharath Earth Movers Ltd. Vs. CIT, reported in 245 ITR 428 ?

(ii) T.C.A.Nos.456 and 457 of 2013 were admitted by this Court on 30.10.2013 on the following substantial questions of law:

(i) Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the provision for site restoration expenses could not be added back by way of adjustment treating it as an un-ascertained liability in computation of book profits under Section 115-JB, even though the dis-allowance of the claim under normal computation has been upheld ?

(ii) Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the provision for site restoration expenses debited by the assessee to its profit and loss account is not an un-ascertained liability?

7. The common order of the Income Tax Appellate Tribunal, dated 22.08.2012, impugned in this batch of appeals, stems out of the following facts:

The assessee was engaged in exploration of petroleum, pursuant to the joint venture agreement, dated 28.10.1994, entered into between the consortium of private companies, with Government of India and ONGC, and while filing the Return of their income for the assessment year 2002-2003, the assessee-Company claimed deduction in respect of the provision for “site restoration” to the tune of Rs.6,84,14,348/- and for the assessment year 2004-2005 under the same head being the sum of Rs.6,82,24,247/-. The said amount was debited under the head “operating expenses” in the Profit and Loss Account. The provision made for site restoration is to be incurred in future, for restoration of the site, after completion of extracting the natural resources.

8. The claim of the assessee-Company is that its site restoration expenditure is ascertainable and they are entitled to claim deduction, in view of the judgment of the Honourable Supreme Court in the case of “Bharat Earth Movers Vs. Commissioner of Income Tax, Karnataka”, reported in 2000 (245) ITR 428 (SC).

9. Their claim was declined by the assessing officer by observing that the assessee has not incurred any expenditure towards site restoration during the period relevant under the assessment. It is only the provision made for future liability, which is not ascertainable.

10. On appeal by the assessee, the Tribunal, following its earlier consolidated order, dated 04.06.2010 in respect of the previous assessment years of the same assessee, dismissed the appeal of the assessee, holding that the pendency of the further appeal, i.e., in T.C.A.No.1299 to 1301 of 2010 filed by the assessees before the High Court, is not an impediment to dispose of the appeals against the assessee-Company.

11. It is pertinent to note that this Court, considering the assessee’s appeal preferred against the earlier order of the Tribunal, referred and relied in the order impugned in the present appeals allowed those appeal in favour of the assessee. (T.C.A.Nos.1299 to 1301 of 2010 order even dated 04.06.2010). Therefore, the present appeals filed by the assessee, which are the subject matter of T.C.A.Nos.96 and 97 of 2013, for the subsequent years 2002-2003 and 2004-2005, has to be allowed and accordingly, T.C.A.Nos.96 and 97 of 2013 are allowed.

12. Insofar as the appeal filed by the Revenue in T.C.A.Nos.456 and 457 of 2013, the issue as to whether the observation of the Tribunal that the provision made for the “site restoration expenses”, is concerned, the same is ascertainable, but cannot be claimed under Section 37(1) of the Income Tax Act, but only under Section 115-A and Section 115-J, are already covered by the judgment of this Court in respect of the same assessee for the previous assessment year in T.C.A.Nos.1483 to 1485 of 2010. In that appeal, we have answered the substantial questions of law summarised as under:

“While Section 33-ABA of the Act is incentive in nature and pre-deposit is required to claim the benefit of the incentive, it is optional to the assessee to claim the said incentive. Whereas, the “site restoration” is a mandatory requirement under the contract and for such expenditure, the assessee is eligible to claim deduction under Section 37(1) of the Act, it being the residuary clause, besides explicit deductions provided under the Act”.

13. Therefore, we are of the view that the impugned order of the Income Tax Appellate Tribunal, upholding the Assessment Order of dis-allowance claimed by the assessee in respect of the site restoration, has to be set aside.

Accordingly, the same is set aside.

14. In the result,

(i) T.C.A.Nos.96 and 97 of 2013 filed by the assessee-Company, are allowed.

(ii) T.C.A.Nos.456 and 457 of 2013 filed by the Revenue, stand dismissed. There shall be no order as to costs.