Director of Income Tax (International Taxation) Vs Vedanta Limited (Madras High Court)
The Madras High Court dismissed three appeals filed by the Revenue against a common order of the Income Tax Appellate Tribunal (ITAT) concerning deduction of site restoration expenditure incurred by a non-resident company engaged in petroleum exploration and production in India under a Production Sharing Contract (PSC). The Revenue challenged the Tribunal’s findings relating to deduction of site restoration expenditure, computation of book profits under Section 115JA/115JB, reopening of assessment under Section 147, and levy of interest under Sections 234B and 234C.
The Assessing Officer had held that the PSC did not expressly permit deduction of provisions for site restoration costs under Section 42 of the Income-tax Act and that only actual expenditure incurred on drilling or exploration activities was deductible. According to the Assessing Officer, no expenditure towards site restoration had been incurred during the relevant assessment years and the liability could be ascertained only after commercial production ended. Consequently, the claim for deduction under Section 37(1) was disallowed, though the expenditure was considered while computing book profits under Section 115JA.
The Commissioner of Income Tax (Appeals), following earlier appellate orders, allowed the deduction under Section 37 and also permitted consideration of the expenditure while computing book profits under Section 115. The Revenue appealed before the ITAT. The Tribunal held that Section 115JA constituted a separate code overriding other provisions of the Act and that an expenditure, though not allowable under Section 37(1), could still represent an ascertained liability not requiring adjustment while computing book profits under Section 115JA. It observed that the PSC expressly included site restoration as part of petroleum operations and that the provision for site restoration had been debited in the audited profit and loss account prepared in accordance with the Companies Act. Relying on judicial precedents, including Apollo Tyres Ltd. and Kovai Maruthi Paper and Board (P) Ltd., the Tribunal concluded that the Assessing Officer could not alter the audited profit except to the extent permitted by the statutory explanation to Section 115JA. It also held that the provision for site restoration represented an ascertained liability arising from the contractual obligation under the PSC.
