Interest from surplus fund investment is taxable under ‘Income from other sources’

DCIT Vs Cairn Energy Hydrocarbon Ltd (ITAT Delhi)

ITAT Delhi held that investment done from the surplus funds in FDs has nothing to do with the business connection. Accordingly, interest received from the same is to be treated under separate head i.e. Income from other sources and not as business income.

Facts- The issue is that the assessee deposited their surplus funds in the bank on which an interest amounting to Rs.36,19,348/- was earned and the same offered to tax under the head ‘income from business and profession’. AO erred in treated the interest earned from fixed deposits under the head income from other sources. CIT(A) confirmed treated income from FDs as income from other sources and interest income from temporary investments as business income

Conclusion- With regard to earning of interest of Rs. 3619348/-from FDs wherein the assessee has invested the surplus funds in the FDs has nothing to do with the business connection. In the instant FDs, we find that there was no compulsion on the part of the assessee to invest in bank FDs as a part of an agreement. No business contingency was brought out whether in this case the surplus funds have been kept as fixed term deposits in the bank which yielded interest. It is a passive income which is not directly relatable to the main functions of the business or the venture of oil exploration. This interest would be received even in the absence of lull/cessation of exploration activity. The interest was received is to be treated under a separate head for the purpose of tax as per the provisions of Section 14 of the Income Tax Act, 1961.

FULL TEXT OF THE ORDER OF ITAT DELHI

The present appeals have been filed by the assessee and the Revenue against the orders of ld. CIT(A)-XXIX, New Delhi dated 10.09.2013 and the order of ld. CIT(A)-42, New Delhi dated 25.07.2018.

2. The revenue has raised the following grounds in ITA No. 6357/Del/2013 for Assessment Year 2010-11:

“1. On the facts and in the circumstances of the case, the Ld CIT(A) has erred in allowing the exploration and development expenditure of Rs. 2,05,14,89,785/- which had been disallowed by the A.O on the ground that the assessee during the relevant previous year has contravened the provision of chapter XVII—B read with section 40a(i) and 40a(ia) of the Income Tax Act 1961 and these were also found unascertainable & unverifiable by the

2. CIT(A) has erred in allowing time cost and expenses of Rs. 11,88,89,517/- whereas the Assessing Officer had found these expenses without any actual evidences being made available for verification, their genuineness cannot be relied simply on the basis of certification/mechanism of charging such expenses to the UJV by the CA firm. Ld CIT(A) has also not gone in to the reasonableness and genuineness of the total claim made by the Appellant.

3. CIT(A) has erred in allowing expenses of Rs. 16,95,79,348/- without discussing the basis of issue raised by the A.O and has based on the finding given by the CIT(A) in earlier year where these expenses were allowed as deferred revenue expenses in 5 years starting from A.Y. 2010-11.

4. CIT(A) has erred in holding the interest of income Rs. 5,16,06,907/- and interest from FD Rs. 36,19,348/- as business income in place of income from other sources, whereas in both the cases the investments have been made out of the excess/surplus funds which was found idle by the appellant at the stage of investment with a sole purpose of earning interest. As such these interest incomes are “Income from other sources” on which no netting/set off is available as there is no such diminishing provision in section 57 of the Income Tax Act.

5. CIT(A) has erred in allowing in u/s 80IB even though the assessee was statutorily required to make such claim in the first year of commencement of production and this claim should have been made in the return of income irrespective of the fact whether there is positive income or not.”

3. The assessee has raised the following grounds in ITA No. 6346/Del/2013 for Assessment Year 2010-11:-

“1. THAT in the facts and circumstances of the case & in law, the Ld. CIT(A) erred in treating the interest income amounting to Rs. 36,19,348/- as income from other sources instead of income from business or profession.

2. THAT in the facts and circumstances of the case & in law, the Ld. CIT(A) erred in not allowing expenses incurred in the preceding years without appreciating that these expenses were disallowed by the Ld AO in the respective assessments on the ground that these expenses were to be allowed in the year of actual commencement of commercial production and the same ought to have been allowed in the captioned year wherein the commercial production has commenced.”

4. The revenue has raised the following grounds in ITA No. 5988/Del/2018 for Assessment Year 2013-14:-

“1. Whether, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the exploration and development expenditure of Rs. 1,46,39,18,152/-which had been disallowed by the AO on the ground that the assessee company during the relevant previous year has contravened the provision of chapter XVII-B read with section 40a(i) and 40a(ia) of the Income Tax Act, 1961 and these expenses were also found unascertainable & unverifiable by the assessing officer.

2. Whether, on the facts and in the circumstances of the case, the Ld. CIT(A] has erred in allowing the total time cost and expenses recharged by the operator to the Unincorporated Joint Venture (UJV) amounting to Rs. 83,37,49,190/- (being part of E & D expenditure of Rs. 1,46,39,18,152/-) which is the appellant share in the cost. The same has been disallowed by the AO as these were all estimated basis and no actual evidence was produced during the course of hearing.

3. Whether, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the payment of Rs. 12,06,69,199/- (being part of E & D expenditure of Rs. 1,46,39,18,152/-) made for parent company overhead which has been made from the books of Rajasthan block to parent company of operator, thus it was considered as head office expenditure covered u/s 44C for the block. The same has been disallowed by the AO as the same was on estimated basis without any evidence to support the same.”

5. The assessee has raised the following grounds in ITA No. 6277/Del/2018 for Assessment Year 2013-14:-

“1. That on the facts and circumstances of the case & in law, the Ld. C1T(A) erred in confirming action of Ld. AO in allowing claim of additional depreciation amounting to Rs. 10,43,83,712 (Rs. 18,26,71,497-7,82,87,784) under section 32(1 )(iia) of the Act and recomputed the deprecation of Rs 359,20,57,325 after giving effect to Assessment order of AY 12-13 despite the Appellant had not claimed the additional deprecation in Income Tax Return of the AY 2013-14.

1.1 That on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in confirming Ld. AO’s allegation that the claim of additional depreciation was to be mandatorily allowed in terms of Explanation 5 to section 32(1) of the Act, without appreciating that additional depreciation being optional in nature, is not covered within the purview of the said Explanation.

1.2 That on the facts and circumstances of the case & in law, the Ld CIT(A) erred in not appreciating that the additional depreciation, provided under Section 32(l)(iia) of the Act is in the nature of an incentive and cannot, therefore, be treated at par with ‘normal depreciation’.”

6. The assessee has raised the following grounds in ITA No. 6278/Del/2018 for Assessment Year 2014-15:-

1. That on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in confirming action of Ld. AO in allowing claim of additional depreciation under section 32(l)(iia) of the Act and recomputed the deprecation of Rs 350,49,97,998 after giving effect to Assessment order of AY 12-13 despite the Appellant had not claimed the additional deprecation in Income Tax Return of the AY 2014-15.

1.1 That on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in confirming Ld. AO’s allegation that the claim of additional depreciation was to be mandatorily allowed in terms of Explanation 5 to section 32(1) of the Act, without appreciating that additional depreciation being optional in nature, is not covered within the purview of the said Explanation.

1.2 That on the facts and circumstances of the case & in law, the Ld CIT(A) erred in not appreciating that the additional depreciation, provided under Section 32(l)(iia) of the Act is in the nature of an incentive and cannot, therefore, be treated at par with ‘normal depreciation’.

7. The revenue has raised the following grounds in ITA No. 5989/Del/2018 for Assessment Year 2014-15:-

“1. Whether, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the exploration and development expenditure of Rs. 8,79,43,82,537/-which had been disallowed by the AO on the ground that the assessee company during the relevant previous year has contravened the provision of chapter XVII-B read with section 40a(i) and 40a(ia) of the Income Tax Act, 1961 and these expenses were also found unascertainable & unverifiable by the assessing officer.

2. Whether, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the total time cost and expenses recharged by the operator to the Unincorporated Joint Venture (UJV) amounting to Rs. 3,06,62,31,823/- (being part of E & D expenditure of Rs. 8,79,43,82,537/-) which is the appellant share in the cost. The same has been disallowed by the AO as these were all estimated basis and no actual evidence was produced during the course of hearing.

3. Whether, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the payment of Rs. 23,73,64,140/- (being part of E & D expenditure of Rs. 8,79,43,82,537/-) made for parent company overhead which has been made from the books of Rajasthan block to parent company of operator, thus it was considered as head office expenditure covered u/s 44C for the block. The same has been disallowed by the AO as the same was on estimated basis without any evidence to support the same.”

8. Cairn Energy Hydrocarbons Limited (‘the Appellant’ or ‘CEHL’ or ‘the Assessee’) is a company incorporated in Scotland, U.K. and is a wholly owned subsidiary of Cairn India Holdings Limited, a company registered in Jersey Channel Island. The assessee is primarily engaged in the business of prospecting, drilling, exploring, producing and generally dealing in minerals, oils, gas and other related by-products.

9. The assessee acquired 50% Participating Interest (‘PI’) in the contract area RJ/ON-90/1 (located in Rajasthan) (‘Rajasthan Block’ or ‘Block’) with the approval of Government of India. The remaining PI was held by Cairn Energy India Pty Ltd. (‘CEIL’). It is to be noted that Oil and Natural Gas Corporation Ltd. (‘ONGC’) was also a partner in the Rajasthan Block. CEIL being the operator under the Production Sharing Contract (‘PSC’).

10. Subsequently, on 13^th January 2005, ONGC, as per clauses of PSC, exercised its option to acquire 30% interest in the Rajasthan Block. Accordingly, the revised PI in the block, with effect from the said date is mentioned hereunder:

Name of Parties	Exploration Stage	Development & Production Stage
CEHL	50	35%
Cairn Energy India Pty Ltd (CEIL) now Cairn India Ltd.	50	35%
ONGC	0	30%

11. The key events pertinent to the case are enumerated below:

Sr. No.	Events	Date
1.	Production Sharing Contract (PSC) entered into between Government of India, Oil and atural Gas Corporation Limited and Shell India Production Development (SIPD) in respect of Block RJ-On- 90/1 (Rajasthan) and tabled before Houses of Parliament.	May 15,1995
2.	First amendment to PSC wherein 50% of participating interest was transferred to Cairn Energy India Pty. Ltd. (CEIL) by SIPD	December 20,1999
3.	The balance 50% of participating interes transferred to Appellant by way of Asse Sale Agreement.	May 7, 2002
4.	Intimation by SIPD to Government of India to assign their interest to the Appellant.	July 19, 2002
5.	Contributions to the Cash Calls to Operator (Appellant’s share of expenditure on Contract Area)	May, 2002 to March, 2003
6.	Approval from Government of India through Directorate General of Hydrocarbon effective from June 20,2003	July 4, 2003
7.	First Return of income for AY 2003-04	November 23, 2003
8.	Commercial discovery on the said Block	October 15, 2004
9.	ONGC, as per clauses of PSC, exercised its option to acquire 30% interest in the Rajasthan Development Area.	January 13, 2005
10.	Commercial Production started in said block	August 29, 2009

12. The Assessee does not have any other operations in India except, to the extent of PI in the aforesaid block. All the activities viz. seismic acquisition & survey, geological and geophysical studies, drilling of wells etc. for the exploration and development for the area are undertaken by the Operator i.e. CEIL. The Assessee as well as ONGC contribute their shares by way of cash calls in proportion to their PI in these expenses.

ITA No. 6346/Del/2013: A.Y. 2010-11 (Assessee’s Appeal)

Ground No.1

ITA No. 6357/Del/2013: A.Y. 2010-11 (Revenue Appeal)

Ground No.4

Interest Income from Temporary Investments –Rs.

51606907/-

Interest income from FDs- Rs. 36,19,348/-

13. Facts relevant to the adjudication of this issue are that the assessee deposited their surplus funds in the bank on which an interest amounting to Rs.36,19,348/- was earned and the same offered to tax under the head ‘income from business and profession’. The AO erred in treated the interest earned from fixed deposits under the head income from other sources.

14. The ld. CIT(A) confirmed treated income from FDs as income from other sources and interest income from temporary investments as business income after examining the judgment of the Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT (227 ITR 172).

15. Before us, it was submitted that the entire interest earned arose from its business activity and not out of any independent activity. Therefore, by no stretch of imagination can it be categorized under the head income from other sources. To support the aforesaid contention, the Appellant places reliance on the decisions of the Hon’ble High Court of Bombay in the case of CIT vs. Paramount Premises (P.) Ltd.[(1991) 190 ITR 259] and CIT vs. Lok Holdings [(2009) 308 ITR 356] wherein it was categorically held that interest earned from deposit of funds linked to any business activity is income from business & profession and thus, cannot be categorized as income arising from other sources.

16. The ld. AR placed reliance on the decision of the Hon’ble Supreme Court in case of CIT vs. Bokaro Steel Ltd. 236 ITR 315 (SC) wherein it was held that the interest income on the deposits cannot be treated as income where the income flows from deposits made by the assessee’s which were inextricably linked t the process of setting up of its plant & machinery. We were also appraised of the decision of the Hon’ble Delhi High Court in case of Indian Oil Panipat Power Consortium Ltd. v. ITO 315 ITR 255 (Del) wherein the ld. AR argued that where interest on money received as share capital is temporarily placed in fixed deposit awaiting acquisition of land, a claim that such interest is a capital receipt entitled to be set off against pre-operative expenses, is admissible, as the funds received by the assessee company by the joint venture partners are “inextricably linked” with the setting up of the plant and such interest earned cannot be treated as income from other sources. It was held as-

“5.2 It is dear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses.”

17. Heard the arguments of both the parties and perused the material available on record.

18. We have gone in details the judgment of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC). It says,

“Under the IT Act, 1961, the total income of the company is chargeable to tax under  Section 4. The total income has to be computed in accordance with the provisions of the Act. Sec. 14 lays down that for the purpose of computation, income of an assessee has to be classified under six heads:

(A) Interest on Securities.

(B) Income from house property.

(C) Profits and gains of business or profession.

(D) Capital gains.

(E) Income from other sources.

(F) Income from other sources.

By an amendment made in 1988 Interest on securities has been made chargeable to tax as business income when such interest forms part of business profits and in all other cases under  s. 56(2)(id) as income from other sources. The amendment made in 1988 has no relevance for the purpose of this case. We shall take this Act as it stood at the material time in the asst. yr. 1983-84.

The computation of income under each of the above six heads will have to be made independently and separately. There are specific rules of deduction and allowances under each head. No deduction or adjustment on account of any expenditure can be made except as provided by the Act.

4. The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income, each one of which will be chargeable to income tax. Profits and gains of business or profession is only one of the heads under which the companys income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. If the company, even before it commences business, invests the surplus fund in its hand for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head Capital gains. Similarly, if a company purchases a rented house and gets rent, such rent will be assessable to tax under  s. 22 as income from house property. Likewise, a company may have income from other sources. It may buy shares and get dividends. Such dividends will be taxable under  s. 56 of the Act. The company may also, as in this case, keep the surplus fund in short-term deposits in order to earn interest. Such interests will be chargeable under  s. 56 of the Act.

The company has chosen not to keep its surplus capital idle, but has decided to invest it fruitfully. The fruits of such investment will clearly be of revenue nature. This position in law was explained by Sir George Lowndes in the oft-quoted passage in the case of CIT vs.  Shaw Wallace & Co. (1932) 50 I.A. 206 (PC) :

“Income, their Lordships think, in this Act connotes a periodical monetary return coming in with some sort of regularity or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. This income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as capital.”

In other words, if the capital of a company is fruitfully utilised instead of keeping it idle the income thus generated will be of revenue nature and not accretion of capital. Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the purpose of earning income that income will have to be taxed in accordance with law. Income is something which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the company flows from its in vestments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital.

It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income. It was rightly pointed out in the case of Kedar Narain Singh vs.  CIT that “anything which can properly be described as income is taxable under the Act unless expressly exempted”. The interest earned by the assessee is clearly its income and unless it can be shown that any provision like  s. 10 has exempted it from tax, it will be taxable.

5. The fact that the source of income was borrowed money does not detract anything from the Revenue character of the receipt. The question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessees business had commenced. But that is not the case here. The assessee may be entitled to capitalise the interest payable by it. But what the assessee cannot claim is adjustment of this expenditure against interest assessable under s. 56. Sec. 57 of the Act sets out in its cls. (i) to (iii) the expenditures which are allowable as deduction from income assessable under s.  56. It is not the case of the assessee that the interest payable by it on term loans are allowable as deduction under  s. 57 of the Act.

………. Whether a particular receipt is of the nature of income and falls within the charge of s. 4 of the IT Act is a question of law which has to be decided by the Court on the basis of the provisions of the Act and the interpretation of the term income given in a large number of decisions of the High Courts, the Privy Council and also this Court. It is well-settled that income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability. It is also well-settled that interest income is always of a revenue nature unless it is received by way of damages or compensation.

In the premises, we are of the view that the Madras High Court came to a correct decision in the case of CIT vs. Seshasayee Paper & Boards Ltd. (supra). The contrary views expressed in the cases of CIT vs. Nagarjuna Steels Ltd.,; CIT vs. Electrochem Orissa Ltd. and CIT vs. Maharashtra Electrosmelt Ltd. are erroneous.”

19. We have also gone through the judgment of Hon’ble Apex Court in the case of CIT vs. Bokaro Steel Ltd. 236 ITR 315 (SC) and the specific facts involved in that case and the ratio laid down thereof. It reads,

“We will take the first three heads under which the assessee has received certain amounts. These are, the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee. Secondly, hire charges for plant and machinery which was given to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these three receipts are directly connected with or are incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertain to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee’s plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee had provided these facilities. The same is true of the hire charges for plant and machinery which was given by the assessee to the contractor for the assessee’s construction work. The receipts in this connection also go to compensate the assessee for the wear and tear on the machinery. The advances which the assessee made to the contractor to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitches as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts are arrangements which are intrinsically connected with the construction of its steel plant. The receipts have been adjusted against the charges payable to the contractors and have gone to reduce the cost of construction. They have, therefore, been rightly held as capital receipts and not income of the assessee from any independent source.

In the case of Addl. Commissioner of Income-tax, New Delhi V. Indian Drugs and Pharmaceuticals ltd. ([1983] 141 ITR 134), the Delhi High Court considered a case where the work of construction of the factory of the assessee was in progress and production had not commenced. receipts from sale of tender forms and supply of water and electricity to the contractors engaged in construction as also receipts on account of sale of stones, boulders, grass and trees were held to be receipts not from independent sources but were considered as inextricably linked with the process of setting up of business. These were directly related to the capital structure of business and were held to be capital in nature. We agree with this view taken by the Delhi High Court.

The appellant, however, relied upon the decision of this Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-tax (supra). That case dealt with the question whether investment of borrowed funds prior to commencement of business, resulting in earning of interest by the assessee would amount to the assessee earning any income. This Court held that if a person borrows money for business purposes, but utilizes that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilized by the assessee whichever way he likes. Merely because he utilized it to re-pay the interest on the loan taken, will not make the interest income as a capital receipt. The department relied upon the observations made in that judgment (at page 179) to the effect that it the company, even before it commences business, invests surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head “capital gains”. Similarly, if a company purchases rented house and gets rent, such rent will be assessable to tax under Section 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under Section 56 of the Income-tax Act. This Court also emphasised the fact that the company was not bound to utilize the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction. In the case of Challapalli Sugars Ltd. v. Commissioner of Income-tax, A.P. ([1975] 98 ITR 167), this Court examined the question whether interest paid before the commencement of production by a company on amounts borrowed for the acquisition and installation of plant and machinery would form a part of the actual cost of the asset to the assessee within the meaning of that expression in Section 10(5) of the Indian Income-tax Act, 1922 and whether the assessee will be entitled to depreciation allowances and development rebate with reference to such interest also. The Court held that the accepted accountancy rule for determining cost off fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production of such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income. The same reasoning would apply to royalty received by the assessee company for stone etc. excavated from the assessee company’s land. The land had been allowed to be utilized by the contractors for the purpose of excavating stones to be used in the construction work of assessee’s steel plant. The cost of the plant to the extent of such royalty received, is reduced for the assessee. It is therefore, rightly taken as a capital receipt.

In the assessment year 1971 -72, the assessee had shown in its books of accounts a sum of Rs.7,39,232/- as income from interest received from M/s. Hindustan Steel Ltd. for the eight locomotives supplied by the assessee-company to them. The entry in this regard was reversed in the next year since M/s. Hindustan Steel ltd. had replaced the eight locomotives lent by the assessee-company to it by new ones. The entire nature of the transaction was changed between the parties. There was a resolution of the assessee-company in this regard and the income from interest did not result at all as the original agreement ceased to be operative ab initio. The entry in the books which was made was about a hypothetical income which did not materialise and the entry was reversed in the next year. Both the Tribunal as well as the High Court have held that since this entry reflected only hypothetical income, it could not be brought to tax as income. Only real income can be brought to tax.

In support of this finding, the assessee has drawn our attention to a decision of this Court in Godhra Electricity Co. Ltd. v. Commissioner of Income-tax ([1997] 225 ITR 746) where the Court, inter alia, examined the case system and the mercantile system of accounting in the context of hypothetical income. The computation of income is made in accordance with the method of accounting regularly employed by the assessee. It may be either the case system where entries are made on the basis of actual receipts and actual outgoings or disbursements; or it may be the mercantile system where entries are made on accrual basis, that is to say, accrual of the right to receive payment and the accrual of the liability to disburse or pay. However, in both cases unless there is real income, there cannot be any income-tax. Considering the facts before it, the Court said that although the assessee-company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply of electricity made to its consumers, no real income had accrued to the assessee-company in respect of those enhanced charges in view of the fact that soon after the assessee-company decided to enhance the rate, representative suits were filed by the consumers which were decreed by the court and ultimately, after various proceedings which took place, the assessee-company was not able to realise the enhanced charges. The Court held that no real income had accrued to assessee-company and hence the entries in respect of enhanced charges did not reflect the real income of the assessee and could not be brought to tax by the Income-tax Officer.

In the present case also the entry which was initially made as interest was reversed the next year because in fact the nature of the transaction was changed and the assessee did not receive any real income. The High Court has, therefore, rightly held this entry as not reflecting the real income of the assessee and hence not exigible to income-tax.”

20. Hence, respectfully following the detailed judgment of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (supra), we hold that the interest earned out of temporary investments made out of borrowed funds not immediately required for utilization in business be treated as business income as the commercial production has started from 29.08.2009. Ergo, the assessee gets relief of an amount of Rs. 5,16,06,907/-.

21. With regard to earning of interest of Rs. 3619348/-from FDs wherein the assessee has invested the surplus funds in the FDs has nothing to do with the business connection. In the instant FDs, we find that there was no compulsion on the part of the assessee to invest in bank FDs as a part of an agreement. No business contingency was brought out whether in this case the surplus funds have been kept as fixed term deposits in the bank which yielded interest. It is a passive income which is not directly relatable to the main functions of the business or the venture of oil exploration. This interest would be received even in the absence of lull/cessation of exploration activity. The interest was received is to be treated under a separate head for the purpose of tax as per the provisions of Section 14 of the Income Tax Act, 1961 which reads as under:

“14. Heads of income Save as otherwise provided by this Act, all income shall, for the purposes of charge of income- tax and computation of total income, be classified under the following heads of income:- A.- Salaries. ¹ B.-] C. – Income from house property. D. – Profits and gains of business or profession. E. – Capital gains. F. – Income from other sources. A.- Salaries.”

22. Further, Section 56 of the Income Tax Act reads as under:

“Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.”

23. Ergo, appeal of the assessee on this ground is dismissed.

Ground No.2

Prior Period Expenses:

24. The Assessee in previous years (AY 2003-04 to 2008­09) had claimed expenses on account of Exploration, however, the AO in those years disallowed the expense on the basis that the same should be allowed in the year of commercial production i.e. the instant year under consideration being Assessment Year 2010-11. Since the Assessee has commenced commercial production in the captioned assessment year on 29 August 2009, accordingly, the ld. AR argued that as per the above stand of the AO read with clause 16.2.3 of PSC, such exploration expenses ought to be allowed in the current assessment year.

25. It was argued that in addition to the exploration expenditure, the operating expenses and depreciation were also disallowed during the previous assessment years from AY 2003-04 to AY 2009-10 on similar analogy holding that the same should be allowed in the year of commercial production.

26. It was brought to our notice that the instant year, the revenue [(AO and Ld. CIT(A)] erred in not allowing the aforesaid past years’ exploration expense, operating expense and depreciation, thereby resulting in self-contradicting stand vis-a-vis the finding given the past years on allowing such past expenses in the current year of commencement.

27. We have gone through the decision of the ld. CIT(A) on this issue and the reasons given thereof. The AO disallowed the preoperative expenses in the Assessment Years 2003-04 to 2009-10, the assessee went into appeal and subsequently opted for VSV Scheme, thus resting all the litigation. Since, the matter attained finality the payment of tax wherever applicable, this ground cannot be re-entertained at this juncture.

ITA No. 6277/Del/2018: A.Y. 2013-14 (Assessee’s Appeal)  ITA No. 6278/Del/2018: A.Y. 2014-15 (Assessee’s Appeal)

Ground No.1

Additional Depreciation u/s 32(1)(iia):

28. The assessee aggrieved with mandatory allowance of additional depreciation in terms of Explanation -5 to Section 32(1) of the Income Tax Act, 1961 without appreciating that the additional depreciation has not been claimed by the assessee and deduction u/s 80IB was recomputed after allowing additional depreciation. The issue to be decided is whether the additional depreciation is a “Mandatory Claim” or an optional claim at the convenience of the assessee or not.

29. It is a fact on record that the assessee has not claimed additional depreciation admissible under clause (iia) of section 32(1). The assessing officer decided in the Assessment Order that the assessee has no choice not to the claim of additional depreciation under clause (iia) of section 32(1) in pursuance to the Explanation 5 which reads as under:

“[Explanation 5.—For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income;]”

30. The assessee contended that the said explanation is not applicable to the provisions of clause (iia) of section 32(1) because the explanation is placed before the said clause In the act. The assessee relied on the judgment in the case of Commissioner of Agricultural Income Tax Vs. The Plantation Corporation of Kerala Ltd AIR 2000 SC 3714, M/s. Patel Roadways Ltd. vs. M/s. Prasad Trading Co AIR 1992 SC 1514) and Mohanlal Hargovinddas vs. State of M.P.AIR 1967 SC 1022/ to stress on the relevance of positioning of explanation.

31. The ld. CIT(A) held that a general rule, the explanations incorporated in the Income tax act specifically provide that a particular explanation applies to a ‘section’ or sub-section’ or ‘clause’ or ‘sub-clause’. Therefore, there is no ambiguity in the applicability of a particular explanation in the act.

32. Explanation 5 specifically mentions that it is applicable for the ‘sub-section’. The ‘sub-section’ in this case is ‘sub-section’ 1 of section 32 of the Act. The scheme of the Act clearly lays out that a sub-clause falls under a clause and a clause falls under a sub-section and further, sub-section falls under section. Therefore, the explanation 5 which is applicable for the sub-section will be applicable for all clauses and sub clauses of the said sub-section. Since ‘clause (iia)’ falls under ‘sub-section 1’ of ‘section 32’, there is no doubt regarding applicability of explanation 5 to the said clause (iia) of section 32(1).

33. Further, the explanation 5 was introduced with effect from 1/04/2002 and clause (iia) was reintroduced from 01/04/2003. The later insertion of clause (iia) con not be the basis for non applicability of explanation 5 to the said clause because if the intention of the parliament was there to restrict the explanation to a particular clause only, it would have amended the phrase “sub-section” to “clause” or “sub-clause” as the case may be. It may be interesting to note that explanation 2 to the sub-section 1 of section 32 was modified from the phrase “[For the purposes of this [clause]” to “For the purposes of this [sub-section]” by the Finance Act, 2002, w.e.f. 1-4-2003.

34. The case laws cited by the assessee do not pertain to Income Tax Act but to Evidence Act and Agriculture Income Tax Act and there may be ambiguity in the scope of applicability of “explanation” in the respective Acts.

35. Accordingly, the AO has rightly allowed the additional depreciation in this case even without its claim by the assessee. The appeal of the assessee on this ground is dismissed.

ITA No. 6357/Del/2013: A.Y. 2010-11 (Revenue Appeal)

ITA No. 5988/Del/2018: A.Y. 2013-14 (Revenue Appeal)

ITA No. 5989/Del/2018: A.Y. 2014-15 (Revenue Appeal)

Ground No.1

Exploration & Development Expenditure u/s 40(i)(ia):

36. For the year under consideration, the company filed its return of income on 13.10.2010 declaring Nil income under the normal provisions of the Act and Rs.34,54,72,045/- under MAT as per provisions of Section 115JB of the Act. During the year under assessment, the Assessee claimed the exploration and development expenses of Rs.205,14,89,785/- under section 42 of the Act read with the terms of PSC.

37. The AO disallowed entire expenditure on following grounds:

• The claim of the assessee regarding exploration cost in the Profit and Loss Account as well as the total development and exploration cost as reflected in the Balance Sheet has been disallowed in earlier years.
• The entire edifice of the assessee’s claim is hovering around its incorrect interpretation of the various clauses of PSC. The assessee has intentionally and deliberately avoided clauses 16.2 and 16.2.2 of the PSC which clarifies the impugned issue satisfactorily and logically.
• The said expenditure being unapproved and unauthorized cannot be allowed.
• Due to the same being unascertainable and unverifiable, the entire development cost as claimed in the return of income is disallowable.
• Such disallowance of development expenditure is therefore, permanent in nature and only exploration cost shall be admitted for deduction after commencement of actual production in terms of the provisions of section 42 of the Act read with various articles of the PSC.
• It does not deduct any TDS on expenditure charged to its Profit and Loss account and still claims the same as deductible in contravention to the provisions of Chapter XVII-B read with section 40a(i) and 40a(ia) of the Act.

38. The ld. CIT(A) deleted the addition made on the grounds that in the earlier years the production was not commenced whereas in the current year the production has commenced. The ld. CIT(A) has also deleted the addition made on account of failure to adhere to provisions of section 40a(i) and 40a(ia) of the Act holding that the operator responsible has already deducted the TDS on the payments.

39. Heard the arguments of both the parties and perused the material available on record.

40. With regard to non-deduction of TDS on the expenditure charged to P&L account, we hold that,

• The assessee has a Participating Interest (PI) in the unincorporated joint-venture.
• The business of prospecting and exploration of mineral oil in India could be done only by the way of Production Sharing Contracts (PSC) with Government of India.
• ONGC is one part of the PSC on behalf of the Government of India.
• The assessee (CEHL) acquired 50% participating interest in exploration, development and production of oil and natural gas in the contract area RJ (the block) with the approval of the Government of India.
• ONGC and Cairn Energy India Pvt. Ltd. (CEIL) are the other partners in the block.
• CEIL is the operator of this contract area.
• CEIL holds 35%, CEHL holds 35% and ONGC holds 30% interest during the development and production stage.
• As per the Article 1.4.4 Appendix C of PSC and in terms of the aforesaid Articles, the operator namely CEIL is required to maintain, on behalf of all contractor parties, all the accounts of the Petroleum Operations in accordance with the provisions of the PSC and also timely filing of reports and payment of fees, levies, taxes etc. Such expenditure/sums paid by the operator on behalf of all contracting parties and thus allocated to the parties, based upon which profit/loss accounts are drawn. Thus disallowance under section 40(a)(i) and 40(a)(ai) is totally unwarranted and uncalled for.
• Though, even after mentioning that the commercial production has been started which was one of the main reasons for disallowance in earlier years, however, the AO erroneously disallowed the total development and exploration cost amounting to Rs.205,14,89,785/- alternatively by invoking the provisions of Section 40(a)(i).
• Article 6.4 of PSC reveals that the operating functions will be performed by the operator i.e. CEIL.
• The said Article reads as under:

“The operating functions required of the Contractor under this contract shall be performed by the Operator on behalf of the all constituents of contractor, subject to, and in accordance with the terms and provisions of this Contract and generally accepted international petroleum industry practice.”

• The operator is also responsible for the maintenance of books of accounts and others records including audit thereof in accordance with the terms of the PSC. Article 1.4.4 of Appendix C of the PSC provides that Operator shall be responsible for maintaining at business office in India, on behalf of the contractor, all the accounts of the Petroleum Operations in accordance with the provisions of the Accounting Procedure and the contract. Also, as per the Joint Operating Agreement entered by the parties to the PSC, operator is required to carry out Petroleum Operations in compliance with the obligations imposed upon the Contractor by the laws of India and the Contract including the timely filing of reports and payment of all fees, levies, taxes etc.
• Clause 27 of the Tax Audit Report for the UJV certifies that the operator has complied with the requirement of Chapter XVII-B regarding deduction of tax at source & deposit thereof to the credit of Central Govt.
• The appellant further submitted that the Hon’ble CIT(A) in its order for AY 2006-07 has held that operator has complied with provisions of TDS contained in Chapter XVII of the Act.
• During AY under consideration, commercial production has commenced, therefore, even under provisions of IT Act, exploration and development expenses becomes allowable during AY under consideration.
• The ld. CIT(A) has categorically held that the assessee (CEHL) has furnished tax audit report of the operator CEIL perusal of which shows that TDS requirement have been duly complied with the operator.

hence, the disallowance made by the AO on account of exploration & development expenditure per se and on account of infraction of provisions of Section 40(a)(ia) of the Income Tax Act, 1961 are liable to be deleted. The order of the ld. CIT(A) on this ground is affirmed.

Ground No.2

Disallowance of Time Cost Expenses:

41. The time cost expenses recharged by the operator to the UJV amounted to Rs.349,54,83,532/- and assessee’s share works out to Rs.1,11,88,89,517/- (being 50% of the cost incurred outside development area and 35% of the cost incurred inside development area) (erroneously mentioned as Rs. 55,94,44,758/-).

The AO held that the same is not allowable u/s 40A of the Act being excessive in nature on the following grounds:

• The charges computed by the operator are notional and on estimated basis.
• Development cost was charged on notional basis without actual evidence being made available for verification.
• These charges, being part of the total exploration and development cost claimed by the Assessee and hence, are not allowable under section 42 of the Act. Also, these expenses being treated as excessive, unreasonable and unverifiable cannot be allowed as per the provisions of section 40A of the Act read in conjunction with Article 16.2.1(b) of the PSC.

43. The ld. CIT(A) in its order for AY 2003-04 to 2006-07 has allowed these expenses as deferred revenue expenses for 5 years starting from the AY 2010-11 i.e. the relevant assessment year in the present case. For the same, the CIT(A) has relied upon the judgment of the ITO vs. Aravali Swachalit Vahan P. Ltd. [(1987) 27 TTJ 161]. The ld. CIT(A) after going through the earlier orders held that since the production has commenced now and the AO has not given any reasons for invoking the provisions of Section 40A are not attracted. The ld. CIT(A) held that these expenses are otherwise allowable as deduction now and earlier the same were disallowed owing to unreasonable delay in starting commercial production.

44. Heard the arguments of both the parties and perused the material available on record. The entire issue is as under:

45. During the year under consideration, the UJV in which the assessee has a participating interest made payments to the operator i.e. Cairn Energy India Pvt. Ltd. for the time cost and expenses incurred by operator at aforesaid contract area at cost. The same has been certified by the Auditor that the payments were at cost reimbursement.

46. During the course of assessment proceedings, the AO asked the Assessee to furnish the details of the expenditure covered under section 40A of the Act. The Assessee submitted that in terms of clause 16.2.1(b) of the PSC, the assessee’s share in expenses is INR 1,11,88,89,517/-. The AO without going through the facts disallowed the entire expenditure of INR 1,11,88,89,517/-(erroneously mentioned as INR 55,94,44,758) under section 40A read with Clause 16.2.1(b) of the PSC.

47. It was submitted during the assessment proceedings that the recharge is on cost to cost basis and the very question of applying the provisions of section 40A of the Act does not arise. Article 16.2.1 of the PSC  is reproduced below:

“16.2.1 Subject to the provisions herein below, deductions at the rate of one hundred percent (100%) per annum shall be allowed for all expenditures incurred in respect of Exploration Operations and drilling operations. The expenditure incurred in respect of Development Operations, and Production Operations other than drilling operations will be allowable as per the provisions of the Income Tax Act, 1961. The expenses so incurred are subject to the following:

a) where any expenditure is not solely incurred on Petroleum Operations or is incurred as part of or in conjunction with any other business only that proportion of the total expenditure which can be proved to the assessing officer to represent a fair proportionate part thereof, having regard to the facts and circumstances, shall be allowed.

b) section 40A and 44C of the Income Tax Act, 1961, shall apply.”

48. The disallowance is called for only where any expenditure is not incurred solely for Petroleum operations or is incurred as part of or in conjunction with other business, then the Assessing Officer having regard to facts and circumstances, shall allow only a fair proportion thereof. In the present case, it is an admitted position that the assessee does not have any other business in India except PI in the block and has not incurred any expenditure itself, rather it has made contribution to the cash calls made by the operator which has incurred the expenditure.

49. It is a settled position of law that for making a disallowance under section 40A of the Act, the onus is on the AO to establish that the payments made by the assessee were excessive and unreasonable. In the present case, the AO made disallowances without discussing even the nature of expenses and its reasonableness. Hence, the disallowance proposed to be made is bad in law and deserves to be deleted. Ergo, the decision of the Ld. CIT(A) is hereby affirmed.

Ground No.3

Disallowance of Overhead Expenses:

50. The Parent Company overheads are primarily overhead payments by the operator to its parent company under the PSC to support and manage petroleum operation under the contract. During the year under assessment, the company has accounted for its share of cost of Parent Company Overheads which was Rs.16,95,79,248/-.

51. The AO disallowed these charges for the following stated reasons:

In the assessment orders of the earlier assessment years, it has been categorically held that such expenditure is permanently disallowable. The allowability will not change after commercial production;

It is evident from the reply of the assessee that the impugned amount was paid to the parent company of operator from the UJV;

It is merely an attribution of an estimated expenditure incurred at the head office without any evidence to support the same;

The fact that there exists no separate assessment of the joint venture for the Rajasthan block, application of the provisions of section 44C is squarely required in terms of the Article 16.2.1(b) of the PSC;

In fact, the payment of INR 16,95,79,248/-(erroneously mentioned as INR 16,38,17,569/-) for parent company overhead has been made from the books of the Rajasthan Block to the parent company of operator, thus it is a head office expenditure covered u/s 44C for the block;

If the benefit of section 293A of the Act would not have been available to the block, the UJV would have been treated as an assessable entity. In that case, this expenditure would have fallen u/s 44C and would have stood disallowed;

The assessee has categorically admitted the fact of having incurred such expenditure which falls within the ambit of section 44C but has claimed the same as allowable merely in terms of Appendix C of the PSC. However, Article 16.2.1(b) of the PSC specifically permits operation of the provision of section 44C of the Act and therefore, the said expenditure cannot be held as allowable.

52. The ld. CIT(A) deleted the addition holding that the addition made in the earlier years was due to the fact that the commercial production was not started and the AO has not given any reasons as to how the provisions of 44C are applicable.

53. Heard the arguments of both the parties and perused the material available on record.

54. The provisions of Section 44C are as under:

“Deduction of head office expenditure in the case of non­residents.

44C. Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee, being a non-resident, no allowance shall be made, in computing the income chargeable under the head “Profits and gains of business or profession”, in respect of so much of the expenditure in the nature of head office expenditure as is in excess of the amount computed as hereunder, namely:—

(a) an amount equal to five per cent of the adjusted total income; or

(b) [***]

(c) the amount of so much of the expenditure in the nature of head office expenditure incurred by the assessee as is attributable to the business or profession of the assessee in India, whichever is the least :

Provided that in a case where the adjusted total income of the assessee is a loss, the amount under clause (a) shall be computed at the rate of five per cent of the average adjusted total income of the assessee.

Explanation.—For the purposes of this section,—

(i) “adjusted total income” means the total income computed in accordance with the provisions of this Act, without giving effect to the allowance referred to in this section or in sub-section (2) of section 32 or the deduction referred to in section 32A or section 33 or section 33A or the first proviso to clause (ix) of sub-section (1) of section 36 or any loss carried forward under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A or the deductions under Chapter VI-A;

(ii) “average adjusted total income” means,—

(a) in a case where the total income of the assessee is assessable for each of the three assessment years immediately preceding the relevant assessment year, one-third of the aggregate amount of the adjusted total income in respect of the previous years relevant to the aforesaid three assessment years;

(b) in a case where the total income of the assessee is assessable only for two of the aforesaid three assessment years, one-half of the aggregate amount of the adjusted total income in respect of the previous years relevant to the aforesaid two assessment years;

(c) in a case where the total income of the assessee is assessable only for one of the aforesaid three assessment years, the amount of the adjusted total income in respect of the previous year relevant to that assessment year;

(iii) [***]

(iv) “head office expenditure” means executive and general administration expenditure incurred by the assessee outside India, including expenditure incurred in respect of—

(a) rent, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the business or profession;

(b) salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in addition to salary, whether paid or allowed to any employee or other person employed in, or managing the affairs of, any office outside India;

(c) travelling by any employee or other person employed in, or managing the affairs of, any office outside India; and

(d) such other matters connected with executive and general administration as may be prescribed.”

55. The cost paid to the parent company by the operator is to support and manage the petroleum operations under the PSC and not the head office expenditure and general administrative expenditure on which provisions of section 44C of the Act is attracted.

56. During the course of assessment proceedings, the Assessee submitted vide letter dated March 15, 2013 that the Assessee has accounted for its share of the Parent Company Overheads to the extent of INR 16,95,79,248/-. These expenditures are basically paid to the Parent company of the operator as per the PSC to support and manage the petroleum operations under the contract.

57. Section 44C of the Act provides for a ceiling on allowance in respect of the Head Office expenditure which is in the nature of executive and general administrative expenses incurred by the foreign head offices in so far as such expenses can be related to their business or profession in India.

58. The AO disallowed the Parent Company Overheads as Head office expenditure by treating the same as expenditure under section 44C of the Act. The AO further stated that the said expenses were not to be allowed as revenue expenditure even in the year of commencement of production i.e. the relevant assessment year.

59. Reliance is placed on the decision of CIT Vs. Emirates Commercial Bank [(2003) 262 ITR 55 (Bom)] wherein Bombay High Court held that section 44C of the Act contemplates allocation of expenses amongst various entities. The expenditure which is covered by section 44C of the Act is of common nature, which is incurred for the various branches or which is incurred for the head office and the branch. Expenditure incurred by the head office exclusively for the Indian branch will not be subject to ceiling under section 44C of the Act. This judgment was followed by the Hon’ble Bombay High Court in the case of John Wyeth And Brother Ltd. vs. CIT [(2008) 174 Taxman 451 (Bom.)] and also by the Mumbai Tribunal in the case of ADIT vs. Bank of Bahrain and Kuwait [(2011) 44 SOT 693 (Mum)].

60. It was argued that the assessee would qualify for head office expenditure, on the grounds that,

• that section 44C of the Act begins with a non obstante clause;
• it restricts deduction to least of two parameters mentioned in clauses (a) and (c) of section 44C of the Act and in the absence of any one out of the two prescribed parameters, the entire section becomes non-workable. Consequently, the Assessee would become entitled to full deduction under section 37(1) of the Act in respect of its head office expenses. – CIT v. Deutsche Bank A.G. [(20oy) Taxman 37 (Bom.)]

61. We find that the Ld. CIT(A) in his order for AY 2010­11 has allowed these expenses by holding as under:

“(a) It is seen that then CIT(A) in his appellate order for AY 2004-05 and subsequent AY has held that the appellant may claim such expenses over a period of 5 years starting from AY 2010-11. The ld. CIT(A) has given a finding that the provisions of section 44C do not apply to these expenses and these are otherwise allowable as deduction. However, he did not allow such deduction for those earlier AYs on the reasoning that there is unreasonable delay in starting commercial production.

(b) That the AO has not given the reasoning as to how these expenses are hit by the provisions of section 44C and has simply disallowed these expenses on the basis of the stand taken by the Assessing Officer in earlier assessment years.

(c) The expenses are allowable since it is undisputed that the commercial production started in AY 2010-11.”

62. In view of the above, we find no infirmity in the order of the Ld. CIT(A) in allowing the parent company overheads.

ITA No. 6357/Del/2013: A.Y. 2010-11 (Revenue Appeal)

Ground No.5

Disallowance of Deduction u/s 80IB(9):

63. During the year under consideration, the Assessee commenced the commercial production of mineral oil and hence, subject year being the initial assessment year, the assessee was eligible for tax holiday benefit under section 80IB(9) of the Act for a period of 7 consecutive years i.e. from FY 2009-10 (AY 2010-11) to FY 2015-06 (AY 2016­17).

64. While filing the income tax return as per section 139(1) of the Act read with Rule 12 of the Income Tax Rules, 1962, since the same had to be filed in the electronic form without annexing any statement, the Assessee could not file Form 10CCB providing the computation u/s 80IB(9) of the Act at the time of uploading the tax return and the same was furnished during the course of the assessment proceedings.

65. The aforesaid eligibility for deduction under section 80IB(9) of the Act is only evident from the report issued by the Chartered Accountant on deduction under section 80IB(9) of the Act in compliance with Form no. 10CCB under Rule 18BBB of the Income Tax Rules, 1962. The report says,

“the company is eligible for deduction u/s 80-IB(g) of the Income Tax Act, 1961 in respect of commercial production of mineral oil. However, no deduction is being claimed for the year under assessment as he assessee is expecting a negative Gross Total Income. However, the gross total income is subject to final determination.”

66. The Assessee submitted that despite the fact that deduction under section 80IB(9) of the Act was available, since the returned income was Nil there was no occasion to claim deduction under section 80IB(9) of the Act. Further, the Assessee also submitted that during the assessment proceedings, vide letter dated 8 March 2013, that disallowances of expenses under normal provision will not affect the taxability under normal provision since to the extent of increase in taxable income on account of disallowance, amount of tax holiday will also increase.

67. During the assessment proceedings, the assessee submitted the revised calculation of deduction u/s 80IB(9) of the Act vide letter dated 22 March 2013. It was submitted before the AO that the Assessee being eligible for deduction u/s 80IB(9) of the Act, in case if there is a positive income due to addition made, a deduction u/s 80IB(9) should also be allowed accordingly.

68. The claim of the Appellant with respect to deduction u/s 80IB(9) of the Act was not allowed by the AO on the sole reason that such claim was not claimed in the return of income and no adverse observations was made by the AO on the veracity of the claim of the Appellant u/s 80IB(9).

69. Heard the arguments of both the parties and perused the material available on record.

70. Circular NO.14(XL-35) dated 11 April, 1955 issued by the Central Board of Direct Taxes (‘CBDT’) states as under:

“Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department, for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with the assessee’s on whom it is imposed by law, officers should—

(a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;

(b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.”

71. The assessee would further like to submit that eligibility to get the benefit of deduction under section 80IB(9) of the Act being an undisputed fact, the AO was bound by law to allow the claim made by the Assessee so that a fair amount of income and tax thereon could be assessed.

72. The Ld. CIT(A) has allowed the deduction claimed under section 80IB by holding as under:

(a) The appellant has submitted that since its returned income was nil, there was no occasion to claim deduction u/s 80IB in its return of income. However, in the tax audit report, it has been expressly mentioned that the appellant is eligible for deduction u/s 80IB and it is not being claimed in view of nil returned income.

(b) Further, the appellant has also furnished its report in Form 10CCB during the assessment stage as at the time of filing of return, the same could not be uploaded as it was filed electronically where no annexures are required to be uploaded. The appellant has relied upon various case laws in support of its claim.

(c) It is noted that the AO has not commented upon the eligibility of the appellant for claiming deduction u/s 80IB. The AO has simply commented that since deduction has not been claimed in the return of income, it cannot be allowed. This argument is fallacious as when there is no taxable income in the return, then how can the appellant claim such a deduction.

(d) Therefore, there is no valid reason to deny such deduction to the appellant if during assessment proceeding, there comes some positive income. The AO is therefore directed to allow the claim of deduction u/s 80IB of the Act, if there is a positive income after giving effect to this order. The ground of appeal is accordingly allowed.

73. We are in agreement with the finding of the ld. CIT(A), the AO has simply commented that since deduction has not been claimed in the return of income, it cannot be allowed. This argument is fallacious as when there is no taxable income in the return, then how can the appellant suppose to claim such a deduction. Once the income of the assessee is turns positive (instead of loss) then the deduction eligible should also be allowed in principle. Hence, the appeal of the revenue on this ground is dismissed.

74. In the result, the appeals of the assessee are partly allowed and the appeals of the revenue are dismissed. Order Pronounced in the Open Court on 31/01/2023.