Oil wells are plant and machinery and eligible for higher depreciation

Joshi Technologies International Inc. Vs Asst. Director of Income Tax  (ITAT Ahmedabad)

The ITAT, Ahmedabad in the case of M/s. Joshi Technologies International Inc. v. The Asst. Director of Income Tax [ITA Nos. 3456/Ahd/2010 & 3195/Ahd/2011, dated May 19, 2023] held that oil wells are plant and machinery, and accordingly, higher depreciation would be allowed to the assessee.

Facts:

M/s. Joshi Technologies International Inc. (“the Appellant”) is engaged in the exploration of crude oil, for which the Appellant installed oil wells.

For the Assessment Year 2007-08 the Assessing Officer (“the AO”) denied the depreciation on oil wells @ 60% as contended by the Appellant by considering oil wells as plant and machinery by refereeing to Entry 8 of Appendix-1 (“Appendix-1”) of the Income Tax Rules, 1962 (“the IT Rules”). However, the AO allowed depreciation @ 10% by treating oil wells as building.

Aggrieved by the decision of the AO, the Appellant filed an appeal before the Dispute Resolution Panel (“DR Panel”) which allowed the depreciation @ 15% to the Appellant on oil wells by placing reliance on the decision of the ITAT, Ahmedabad in the Niko Resources Ltd. in ITA No. 661/Ahd/2005-06 and further held that the AO has rightly observed that oil wells will fall within the ambit of building, since, the oil wells have to be used as plant and consequently it should be used for “distribution” which is not the case.

Aggrieved by the Order of the DR Panel the Appellant filed an appeal before the ITAT.

The Appellant contended that the Gujarat High Court in the case of Niko Resources Ltd. in Tax Appeal No. 1193 of 2009 dated July 20, 2016 held that mineral oil wells will form part of “plant and machinery” and not “building”. Further, the ITAT for previous Assessment Year has allowed higher depreciation to the Appellant.

Issue:

Whether the oil wells qualify as plant and machinery for computation of depreciation as per Income Tax Act, 1961?

Held:

The ITAT Ahmedabad in ITA Nos. 3456/Ahd/2010 & 3195/Ahd/2011 inter alia held as under:

• Observed that, DR Panel has erred in facts and in law in holding that to be eligible for claim for deduction the asset should be used for “distribution”, whereas the entry in Appendix-1 does not mandate any such requirement.
• Further observed that, The ITAT, Ahmedabad in the Appellant’s case for Assessment Years 2001-02, 2002-03 and 2005-06 has allowed the depreciation @ 60% to the Appellant for oil wells and similarly the depreciation @ 60% was allowed to the Appellant for Assessment Year 2006-07 as well.
• Held that, the oil wells are eligible for depreciation as “plant and machinery” and directed the AO to re-compute the depreciation on oils wells @ 60% on Opening Written Down Value.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

These two appeals filed by the assessee are against the order of the Dispute Resolution Panel, Ahmedabad, in proceeding u/s. 143C(5) vide order dated 03/09/2010 & 12-09-2011 passed for the assessment year 2007­08 and 2008-09 respectively.

ITA No. 3465/Ahd/2010 A.Y. 2007-08

2. The assessee has raised following grounds of appeal:-

“Your Appellant being dissatisfied with the order passed by the Learned Asst. Director of Income Tax (International Tax), Ahmedabad, u/s 143(3) r.w.s. 144C of the Income Tax Act ‘The Act”), presents this appeal against the same on the following amongst other grounds of appeal which are without prejudice to each other.

1 The order passed by the learned Asst. Director of Income Tax (“Assessing Officer”) u/s 143(3), in compliance of the order of Dispute Resolution Panel (“DRP”) u/s 144C, is erroneous and requires to be modified. It is submitted that it be so done now.

2 The learned Assessing Officer has erred in law and facts in disallowing claim of deduction under section 42 of the Act of Rs.21,83,64,955. It is submitted that in the facts and circumstances of the case, the appellant is entitled to deduction under section 42 of the Act. It is submitted that it be so held now.

2.1 Without prejudice to Ground No. 2, the learned Assessing Officer has erred, in event of disallowance of expenditure u/s. 42 of the Act, in considering an oil-well as ‘Building’ instead of ‘Plant & Machinery’ for the purpose of allowance of depreciation u/s. 32 of the Act. It be so held now.

2.2 Without prejudice to Ground No. 2, the learned Assessing Officer has erred, in event of disallowance of expenditure u/s. 42 of the Act, in not granting depreciation allowance at 60% on the plants used by the appellant in the field operations (including oil-well) as per Entry III(8)(xii) of Appendix I to the Income Tax Rules, 1962. It is submitted that it be so held now.

2.3 Without prejudice to Ground No. 2, the learned Assessing Officer has erred, in event of disallowance of expenditure u/s. 42 of the Act, in not granting additional depreciation u/s. 32(l)(iia) of the Act in respect of plant and machinery (including oil-well) installed during the year under consideration. It be so held now.

3 The learned Assessing Officer has erred in reducing Rs. 77,67,233 from the Block of Assets towards foreign exchange gain u/s. 43A of the Act despite the same being unrealized foreign exchange gain. It is submitted that Section 43A requires adjustment to Block of Assets only in relation to realized foreign exchange gain and therefore Rs.77,67,233 cannot be reduced from Block of Assets. It be so held now.

4 The learned Assessing Officer has erred in holding that the appellant is not entitled to deduction u/s. 80IB(9) of the Act in respect of wells in Wavel oilfield. It is submitted that in event of assessment of positive income of the appellant, the profits and gains earned from well nos. WA # 2 A & WA # 7 should be deducted u/s. 80IB(9) of the Act. It be so held now.

5 The learned Assessing Officer has erred in holding that the appellant is not entitled to deduction u/s. 80IB(9) of the Act in respect of wells in Dholka oilfield. It is submitted that in event of assessment of positive income of the appellant the profits and gains earned from well nos. DK # 20, DK # 21, DK # 22, DK # 23, DK # 24 & DK # 25 should be deducted u/s. 80IB(9) of the Act. It be so held now.

6 The learned Assessing Officer has erred in disallowing claim of deduction u/s. 37 of the Act towards technical service charges of Rs. 1,16,06,634 paid to Head Office. It be so held now.

7 The learned Assessing Officer has erred considering preliminary drilling expenditure of Rs. 12,14,580 as capital expenditure. In the facts and circumstances, the learned Assessing Officer ought to have allowed the same as revenue expenditure. It be so held now.

8 The learned Assessing Officer has erred in not granting depreciation allowance at 60%. on various plants used by the appellant in the field operations as per Entry III(8)(xii) of Appendix I to the Income Tax Rules, 1962 and thereby disallowing Rs. 5,70,657. It is submitted that it be so held now.

8.1 Without prejudice to above, the learned Assessing Officer has erred in making disallowance of Rs. 5,70,657 instead of Rs. 2,97,057. It is submitted that the appellant has claimed depreciation of Rs. 4,10,400 and the depreciation allowable as per the learned Assessing Officer is Rs. 1,13,343 and therefore only differential amount can be disallowed. It be so held now.

9 The learned Assessing Officer has erred considering renovation expenditure of Rs. 18,36,641 as capital expenditure. In the facts and circumstances, the learned Assessing Officer ought to have allowed the same as revenue expenditure. It be so held now.

9.1 Without prejudice to Ground No. 8, the learned Assessing Officer has erred in not granting depreciation u/s. 32 of the Act in event of considering renovation expenditure as capital expenditure. It be so held now.

10 The learned Assessing Officer has erred considering repairs and maintenance expenditure of Rs. 17,48,561 as capital expenditure. In the facts and circumstances, the learned Assessing Officer ought to have allowed the same as revenue expenditure. It be so held now

10.1 Without prejudice to Ground No. 9, the learned Assessing Officer has erred in not granting depreciation u/s. 32 of the Act in event of considering repairs and maintenance expenditure as capital expenditure. It be so held now.

11 The learned Assessing Officer has erred in making disallowance of Rs. 5,400 u/s. 40A(3) of the Act. It be so held now.

12 The learned Assessing Officer has erred in making disallowance of Rs. 65,610 u/s. 40(a)(ia) of the Act. It be so held now.

Your appellant prays for leave to add to alter and/or to amend any of the grounds before the final hearing of the appeal.”

Additional Grounds of Appeal:-

“1. The learned AO has erred in not granting additional depreciation u/s 32(l)(iia) of the Act on additions made to oil well and oil field equipment during the year. It is submitted that it be so held now.

This additional ground is purely a legal contention and do not require verification of any facts and may be admitted and be disposed of on merits.”

Additional Grounds of Appeal:-

“Your appellant prays before the Hon’ble Bench to move following additional Grounds of appeal along with the main appeal for their kind consideration:

13. The learned Assessing Officer has erred in not allowing depreciation on amount paid for acquiring participating interest in Joint Venture which is business or commercial right of similar nature as envisaged u/s 32 of the Act. It is submitted that it be so held now.

13.1. The learned Assessing Officer has erred in law in disregarding opening written down value of the Block of Asset under the head ‘Intangible Asset’ despite of there being no transaction in relation thereto during the year under consideration. It is submitted that it be so held now.

The above additional grounds are purely legal grounds and do not require investigation into facts and hence the same may please be admitted for the sake of substantial justice to the appellant.”

3. The brief facts of the case are that the assessee company is engaged in exploration of crude oil from Dholka and Wevel oil fields. The crude is exported to ONGC Central Storage for further refining process. For the impugned assessment year, the assessee filed return of income declaring “Nil” total income. The Assessing Officer made certain disallowances against which the assessee further filed objections before DRP. The ground wise appeal of the assessee against the order passed by DRP is discussed below in succeeding paragraphs.

4. Ground No 1 is general and does not require any adjudication.

Ground No. 2 (Disallowance of claim u/s. 42 of Rs. 21,83,64,955/-)

5. The brief facts in relation to this ground of appeal are that during the year under consideration, the assessee claimed deduction u/s. 42 of the Act. In the draft assessment year, the Assessing Officer rejected the assessee’s claim for deduction u/s. 42 of the Act on the ground that as per the section 42 of the Act, only those deductions are allowable which are specifically provided in the agreement entered into between the assessee and the Central Government and in the agreement entered into by the assessee with the Government, no such provision has been made to allow any deduction falling within the domain of section 42 of the Act.

5.1 Before us, the counsel of for the assessee submitted that the Hon’ble Supreme Court dismissed the petition filed by the assessee and held that Product Sharing Contracts (PSCs) entered into between the assessee and the Government of India did not include a clause pertaining to section 42 and therefore deduction under this section could not be allowed to the assessee. Based on the aforesaid decision passed by Hon’ble Supreme Court, the ITAT dismissed the appeal filed by the assessee for assessment years 2005­06, assessment year 2001-02 and assessment year 2002-03.

5.2 Accordingly, the counsel for the assessee submitted that this ground of appeal may accordingly be decided against the assessee.

5.3 In the result, ground no. 2 of assessee’s appeal is dismissed.

Ground No. 2.1 (Depreciation on oil wells be allowed as “plant and machinery” instead “building” u/s. 32 of the Act)

6. The brief facts in relation to this ground of appeal are that the assessee submitted before the Assessing Officer that in terms of entry III 8(xii) of Appendix 1, Depreciation table of Income Tax Rule 1962, oil wells are eligible for depreciation as plant and machinery @ 60%. However, the Assessing Officer granted depreciation on oil wells @ 10% by treating oil wells as building. The assessee filed appeal before DRP which held that the assessee is eligible for depreciation on oil wells @ 15%. The DRP further held that the Assessing Officer has rightly observed that to fall within the ambit of the said entry, the asset has to be used as plant and consequently it should be used for the purpose of “distribution”.

6.1 The assessee filed appeal before the DRP on this issue, which upheld the order of the Assessing Officer by placing reliance on the ITAT Ahmedabad decision in the Niko Resources Ltd. in ITA No. 661/Ahd/2005-06. The assessee is in appeal before us against the aforesaid addition confirmed by the DRP.

6.2 Before us, the counsel for the assessee submitted that DRP has erred in facts and in law in holding that to be eligible for claim for deduction the asset should be used for “distribution”, whereas the aforesaid entry in appendix-1 does not mandate any such requirement. Further, the counsel for the assessee submitted that relying on the decision of Gujarat High Court in the case of Niko Resources Ltd. in Tax Appeal No. 1193 of 2009 vide order dated 20-07-2016, the High Court held that minerals oil wells will form part of “plant and machinery” and not “building”. Accordingly, the ITAT Ahmedabad in assessee’s own case for assessment year 2005-06, assessment year 2001-02 and assessment year 2002-03 allowed depreciation at higher rate to the assessee. Further, the above order of ITAT has also been followed by ITAT in assessment year 2006-07 in assessee’s own case in ITA No. 2389/Ahd/2015 read with MA No. 149/Ahd/2021. The copies of the aforesaid orders have been placed before us for our perusal.

6.3 We observe that this issue has been decided in favour of the assessee for assessment year 2006-07 and the relevant extracts of the ITAT order are reproduced for reference:

“5. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, the ITAT was pleased to allow the depreciation to the assessee after making reference to the order of the ITAT in ITA No.3988/And/2018 for the Assessment Hear 2005-06 vide order dated 31/12/2019 in the own case of the assessee. But due to the mistake, the ITAT has directed the AO to delete the addition made by him, though there was not any addition made by the AO during the assessment proceedings. Thus the question of deleting the addition made by the AO does not arise.

Accordingly, we rectify the para 26.1 of the order of the ITAT as detailed under:

Accordingly we direct the AO to allow depreciation at the rate of 60% on the oil well and oil field equipment as plant & machinery as provided Entry U(8)(xii) as Appendix I to the Income Tax Rules, 1962.

5.1 Hence, the ground raised in the MA filed by the assessee is allowed.”

6.4 It would also be useful to reproduce the relevant extracts of Ahmedabad ITAT order in assessee’s own case in ITA Nos. 3988/Ahd/2008, 904, 905/Ahd/2010 and 51/Ahd/2009 for assessment years 2001-12, 2002­03 and 2005-06, where the ITAT had allowed the assessee’s appeal. The relevant extracts of the ruling are reproduced for reference:

“23. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we find that the Hon’ble Gujarat High Court in case of Niko Resources Ltd. reported in 88 taxmann.com 691 has held that the oil wells are Plant & Machineries and not part of building. The relevant portion of the judgment is reproduced here under:

“5. We have heard [earned Counsel appearing far the respective parties. In light of the decision of the Hon’ble Supreme Court in the cane of Scientific Engg. House (P.) Ltd. (supra), we are of the view that the reasoning which was adopted by the Tribunal holding that she well would not form a part of the plant and machinery for drilling of oil is not possible. In that view of the matter, the view taken by CIT (Appeals) is restored and the findings of the Tribunal are reversed. Hence, the issue raised in this Appeal is answered in favour of the assessee and against the Department. The Appeal stands disposed of accordingly.

23.1 As the facts in the case on hand and the facts of the case as discussed in the case of Niko Resources Ltd (supra) are identical, therefore, respectfully following the order of the jurisdictional High Court as discussed above, we hold that the oil well is part of the plant and machinery. Hence, the ground of appeal raised by the assessee is allowed.”

6.5 Accordingly, respectfully following the aforesaid decisions, we hold that the oil wells are eligible for depreciation as “plant and machinery”.

6.6 Accordingly, the Assessing Officer is directed to re-compute the depreciation on “oil wells” on opening WDV. With respect to additions made during the year, the A.O. may call for necessary details from the assessee to ascertain the nature of additions made and allow depreciation as per the above directions.

7. In the result, ground no. 2.1 of the assessee’s appeal is allowed with the above directions to the Assessing Officer.

Ground No. 2.2 (Oil field equipment are eligible for depreciation @ 60% being plant and machinery)

8. In ground no. 2.2, the assessee’s contention is that oil field equipment used for field operation should also be considered to be a part of oil well and depreciation should be allowed on oil field equipment @ 60% as is applicable to mineral oil concern as per Entry 8 of Appendix-I.

8.1 We observe that ITAT in assessee’s own case has allowed depreciation on oil field equipment in assessment year 2006-07 in ITA No. 2389/Ahd/2015 r.w. M.A. No. 149/Ahd/2021

8.2 Accordingly, respectfully following the decision in assessee’s own case for assessment year 2006-07, we hold that the assessee is eligible to claim depreciation on oil field equipment @ 60% (the relevant extracts of the aforesaid decision have been reproduced in the earlier part of the ruling while discussing the ground no. 2.1 of assessee’s appeal)

8.3 Accordingly, the Assessing Officer is directed to re-compute the depreciation on “oil field equipment” on opening WDV. With respect to additions made during the year, the A.O. may call for necessary details from the assessee to ascertain the nature of additions made and allow depreciation as per the above directions.

9. In the result, ground no. 2.2 of assessee’s appeal is allowed with the above directions to the Assessing Officer.

Ground No. 2.3 (additional depreciation u/s. 32(1)(iia))

10. The brief facts in relation to this ground of appeal are that the assessee claimed additional depreciation u/s. 32(1)(iia) of the Act on the ground that the assessee is engaged in the business of extraction of mineral oil, which is akin to manufacture or production of article or thing and hence the assessee is entitled to claim depreciation u/s. 32(1)(iia) of the Act. Before us, the counsel for the assessee submitted that this issue is covered in favour of the assessee by the decision of Hon’ble Supreme Court in the case of Sesa Goa Ltd. 142 taxman 16 and also by the Mumbai ITAT decision in the case of Spectrum Coal and Power Ltd 88 com 89. Further, the counsel for the assessee submitted that this issue has also been decided in assessee’s favour by the ITAT in assessee’s own case for assessment year 2006-07 in ITA No.2398/Ahd/2015.

11. Before deciding the issue, on going through the contents of the ITAT Ahmedabad decision in assessee’s own case for assessment year 2006-07 as referred to above, we observe that the ITAT in the aforesaid decision has allowed the assessee’s claim for additional depreciation by making the below observations:-

“14. We have heard the rival contentions of both the parties and perused the materials available on record. There is no dispute to the fact that the assessee is eligible for depreciation on the machinery being oil well at the rate of 60% in view of the judgment of Hon’ble Gujarat High Court in the case of Niko Resources Ltd. reported in 88 taxmann.com 691. Once the oil well has been treated as plant and machinery then the assessee is also entitled for additional depreciation as provided under the provisions of section 32(l)(iia) of the Act as the assessee in engaged extraction of mineral oil which in our consideration view amount to production of articles or things. In holding so we draw support and guidance from the judgment of Hon’ble Supreme court in case of CIT vs. Sesa Goa Ltd reported in 271ITR 331 where the Hon’ble court held as under:

9. The reasoning given by the High Courts, in the decisions noted by us earlier, is, in our opinion, unimpeachable. This Court had, as early as in 1961, in Chrestien Mica Industries Ltd, v. State of Bihar[1961] 12 STC 150 defined the word “product/on”, albeit, in connection which the Bihar Sales Tax Act, 1947. The definition was adopted from the meaning ascribed to the word in the Oxford English Dictionary as meaning “amongst other things that which is produced; a thing that results from any action, process or of fort, a product; a product of human activity or effort”. From the wide definition of the word “production”, it has to follow that mining activity for the purpose of production of mineral ores would come within the ambit of the word “production” since ore is “a thing”, which is the result of human activity or effort. It has also been held by this Court in CIT v. N.C. Budharaja & Co. [1993]  204 ITR 412² (SC) that the word “production” is much wider than the word “manufacture”. It was said:

The word ‘product/on’ has a wider connotation than the word ‘manufacture’. While every manufacture can be characterised as production, every production need not amount to manufacture. The word ‘production’ or ‘produce’ when used in juxtaposition with the word ‘manufacture’ takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products intermediate products and residual products which emerge in the course of manufacture of goods.” (p. 415)

14.1 Thus in view of the above observation of Hon’ble Supreme Court we hold that the assessee was engaged in extraction of mineral oil requires action, process, human activity or effort which bring a things being mineral oil. Thus the assessee is eligible for additional depreciation on oil well plant which is installed after 31^st day of March 2005. Hence the ground of appeal of the assessee is hereby allowed.”

11.1 Respectfully following the aforesaid decision rendered in the assessee’s own case for assessment year 2006-07, which has held that extraction of mineral oil which would amount to “production of articles or things”, we hold that the assessee is eligible to claim additional depreciation u/s. 32(1)(iia) of the Act.

11.2 Accordingly, the matter is being restored to the file of the Assessing Officer to allow additional depreciation on oil well and oil field equipment, capitalized during the year. However the Assessing Officer may need to carry out the necessary verification that the conditions of section 32(1)(iia) have been satisfied i.e. the plant and machinery before its installation, was not used within or outside Indian by any other person and also satisfy himself that any other conditions as mentioned in section 32(1)(iia) of the Act, have been duly satisfied at the time of allowing the assessee’s claim for additional depreciation.

11.3 In the result, Ground No. 2.3 of the assessee’s appeal is allowed for statistical purposes.

Ground No. 3 (unrealized foreign exchange gain of Rs. 77,67,233/-reduced from block of assets u/s. 43A of the Act)

12. The brief facts in relation to this ground of appeal are that during the course of assessment, the Assessing Officer held that the foreign exchange gain on account of restatement of payables for capital asset at the end of year needs to be considered as “realized gain” only since the assessee failed to give appropriate details of its claim of foreign exchange gain into “realized” and “unrealized” gains and therefore the same is required to be reduced from the written down value “WDV” of the relevant block of asset before allowing depreciation as per the provisions of section 43A of the Act. The assessee filed objection before DRP who upheld the order of Assessing Officer and directed the Assessing Officer to exclude the foreign exchange gain of Rs. 77,67,233/- from the total income of the assessee and also reduced the same from the WDV of the relevant block of asset and directed to allow the depreciation claim on the said WDV of the relevant block of assets.

13. Before us, the counsel for the assessee submitted that foreign exchange gains is “unrealized” in nature on account of restatement of payables for capital asset at the end of the year and therefore, cannot be reduced from the block of asset u/s. 43A of the Act. However, in the instant facts, we observe that the Assessing Officer and DRP have given a categorical finding that the assessee has not been able to demonstrate whether the aforesaid foreign exchange gains on account of restatement of payables for capital asset at the end of the year is “realized” or “unrealized” capital gains. Accordingly, this issue is restored to the file of Assessing Officer to verify whether the foreign exchange gains are “realized” or “unrealized” in the instant set of facts and then allow the claim of the assessee in accordance with law.

14. In the result, the ground no. 3 of the assessee’s appeal is allowed for statistical purposes.

Ground Nos. 4 and 5 (Disallowance of deduction u/s. 80IB(9) for Wavel Oil Field and Dholka Oil Field)

15. The issue for consideration in relation to this ground of appeal is whether each well operated by the assessee is a separate “undertaking” eligible for deduction u/s. 80IB(9) of the Act. Before us, the counsel for the assessee submitted that the ITAT in assessee’s own case for A.Y. 2005-06, A.Y. 2001-02 and A.Y. 2002-03 has decided this issue in favour of the assessee by relying on the Gujarat High Court decision in the case of Niko Resources supra. Further, the counsel for the assessee submitted that the above order has also been followed by the ITAT in assessee’s own case for A.Y. 2006-07.

15.1 We observe that the benefit of deduction u/s. 80IB(9) given to undertakings engaged in commercial production of natural gas was sought to be removed retrospectively by explanation 11 to the said provision. However, the retrospective insertion of explanation was held to be unconstitutional by the Gujarat High Court in the case of Niko Resources Ltd. vs. Union of India 274 ITR 369 since this affected the vested right of the assessee and therefore the Gujarat High Court struck down the aforesaid Explanation as being arbitrary and violative of Article 14 of the Constitution. However, the above findings made by the Gujarat High Court in the case of Niko Resources supra have been stayed by the Hon’ble Supreme Court while admitting the SLP in CC No. 18370 of 2015. In the aforesaid order, the Supreme Court held as below:-

“as we are entertaining the matter, the High Courts where the appeals are pending shall not finalize the same till the matter is dealt with by this Court.”

15.2 Therefore, the present matter whether each well would constitute a separate undertaking is pending adjudication before the Supreme Court. Further, the Supreme Court in the case of similar provision u/s. 35D in the case of Pransati Medical Services and Resources Foundation vs. Union of India 416 ITR 485 (SC) refused to read-down the amendment in such a manner. In the aforesaid case, the Hon’ble Supreme Court held that constitutional validity of any provision and specially taxing provision cannot be struck down on a plea based on equity or/and hardship in a taxing statute and same is not legally sustainable.

15.3 Accordingly, the matter has been stayed by the Hon’ble Supreme Court and the ITAT in assessee’s own case for assessment year 2001-02, 2002-03 and 2005-06 has refrained from adjudicating on the issue whether or not the Explanation inserted by way of amendment u/s. 80IB(9) of the Act is retrospectively applicable. The ITAT in assessee’s own case set aside the issue to the file of the Assessing Officer for fresh adjudication in accordance with the judgment of the Hon’ble Supreme Court which is pending adjudication. In the aforesaid decision, the ITAT directed the Assessing Officer to wait for the verdict of the Hon’ble Supreme Court and thereafter decide the issue accordingly in the light of the judgment of the Hon’ble Supreme Court. Therefore, since the issue whether each “well” would constitute a separate undertaking and hence eligible for deduction u/s. 80IB(9) is dependent on whether the Explanation inserted to section 80IB(9) would operate from retrospective effect or not.

15.4 Accordingly, since the issue whether the Explanation to section 80IB(9) would operate retrospectively or not is pending adjudication before the Hon’ble Supreme Court, following the decision of the assessee’s own case for assessment year 2001-02, 2002-3 and 2005-06 at this juncture, we are refraining from adjudicating ground nos. 3 & 4 and restore the matter back to the file of Assessing Officer to decide the issue in accordance with the directions of the Hon’ble Supreme Court decision in CC N0.18370 of 2015 as referred to above.

16. In the result, issues raised vide ground nos. 4 & 5 of assessee’s appeal are set aside to the file of Assessing Officer for fresh adjudication in the light of order of Hon’ble Supreme Court of India.

Ground No. 6 (disallowance of deduction of technical service charges of Rs. 1,16,06,634/- paid to head office)

17. The brief facts in relation to this ground of appeal are that the assessee, which is a permanent establishment (branch office) of a company incorporated in USA, has availed various services in the nature of services rendered for various reports, analysis of various activities related to production and commercial activities from the Head Office. Further, the assessee has reimbursed from head office towards subscription charges paid on its behalf. During the course of assessment proceedings, the Assessing Officer observed that the assessee has not deducted taxes at source on such payment and therefore the Assessing Officer disallowed the deduction on such payments to the assessee. In appeal, The DRP upheld the disallowance made by the Assessing Officer and held that the payments made to the head office are not by way of reimbursement of expenses for services provided by third party but the services have been provided by the head office to the assessee branch office. Further, the DRP also rejected the assessee’s contention that none of the services are technical services within the meaning “fee for included services” as defined in Article 12 of the India – US Treaty. Accordingly, the DRP held that the branch office cannot claim the amount paid to the head office on account of fees or other specific charges as deduction since the same has been specifically prohibited by the DTAA unless the same is in the nature of reimbursement.

18. Before us, the counsel for the assessee submitted that in the immediately succeeding year i.e. assessment year 2008-09, the DRP has allowed this issue in favour of the assessee. Therefore, it was submitted that since the Department itself in the immediately succeeding year has allowed this issue in favour of the assessee, this ground of appeal should allowed in favour of the assessee. Further, the counsel for the assessee relied on various judicial precedents on this subject to the effect that if “make available” clause is not satisfied then the payments do not qualify as “fee for included services/fee for technical services” under the India-US Treaty and hence there is no requirement to withhold taxes on such payments. Further, the counsel for the assessee relied on certain judicial precedents on the subject that only by furnishing of reports, “make available” clause does not get satisfied. Further, the counsel for the assessee placed reliance on several cases which have held payment towards technical services are not covered within the purview of section 44C of the Act. In response, the ld. Departmental Representative placed reliance on the observations made by the DRP in its order.

19. In the instant facts, we observe that the DRP in the immediately succeeding year assessment year 2008-09 has allowed the assessee’s appeal on identical set of facts in favour of the assessee. However, the distinguishing factor between assessment year 2007-08 and 2008-09 is that in the succeeding year, the assessee has deducted taxes on the aforesaid payments and the DRP allowed assessee’s claim on two grounds, firstly, the head office and the permanent establishment are distinct entities and hence the assessee is eligible for claiming deduction in respect of head office expenses and secondly, the assessee has deducted TDS on the aforesaid payments and therefore the deduction should be allowed to the assessee. Nevertheless, we are in agreement with the proposition that merely by providing services in the form of reports etc does not lead to the inference that technology has been “made available” to the assessee and therefore in our considered view, since the Department has not been able to bring anything conclusive to prove that services have made available, knowledge and technology in a manner that the assessee shall not require such services from the head office for the purpose of conducting its business in India in the future. We are of the view that in the instant facts, “make available” clause has not been satisfied and therefore the services do not qualify as fee for “included services” under Article 12 of the India-US Tax Treaty. Further, it is also a settled preposition that technical services do not fall within the embargo provided u/s. 44C of the Act. In the case of DIT vs. Skanska Cementation 82 taxman.com 222, Gujarat High Court held that expenditure incurred by the head office for supervisory, personnel deputed to oversee project executed by the branch office in India and expenditure in respect of guarantees, sundry expenses, insurance, travelling and legal expenses etc. would not fall under the definition of head office expenditure for the purpose of section 44C of the Act, and therefore, the limit prescribed under such provision would not be attracted in the case of the assessee. Again, the Mumbai ITAT in the case of Lloyd’s Registrar Asia (India Branch Office) vs. ACIT 58 taxman.com 58 held that license fees and management services paid by the assessee and Indian Branch towards UK head office does not fall in the nature of head office expenses and hence could not be disallowed u/s. 44C of the Act. In the case of John Wyeth & Brothers Ltd. 26 taxman 106, the ITAT held that where the assessee, a branch office of foreign company, claimed deduction of laboratory expenses, in view of the fact that said expenses did not include expenses incurred on executive or general administration as indicated in different clauses of section 44C of the Act, the assessee’s claim was to be allowed. In view of the above observations, we are of the considered view that the assessee is eligible to claim deduction of technical service charges of Rs. 1,16,06,364/-paid to the head office.

20. In the result, ground no. 6 of assessee’s appeal is allowed.

Ground No. 7 (Disallowance of preliminary drilling expenditure of Rs. 12,14,580/- as capital expenditure)

21. The brief facts in relation to this ground of appeal are that the Assessing Officer disallowed a sum of Rs. 12,14,580/- debited to the profit and loss account on account of preliminary drilling expenses by treating the same as capital expenditure. In appeal, the DRP upheld the order of Assessing Officer by observing that the preliminary drilling expense have been incurred by the assessee on account of fees, studies and other consultancy charges with regard to creation of new assets and therefore the aforesaid expenditure is capital in nature.

22. Before us, the counsel for the assessee submitted that the aforesaid expenditure has been incurred on revenue account to analyse the feasibility of drilling of production wells. The expenses include consultancy charges, food and lodging relating to consultancy and drilling expenses. The counsel for the assessee submitted that these expenses have been incurred as revenue expenditure as part of assessee’s business operation and no new asset has come into existence which could give enduring benefit. The counsel for the assessee submitted that these expenses are normal day to day expenses with respect to nature of industry. The counsel for the assessee placed reliance on several judicial precedents in support of its contention. In response, the ld. Departmental Representative placed reliance on the observations made in the DRP order.

22.1 We observe that in the case of DCIT vs. Gujarat Narmada Valley Fertilizer 57 taxman.com 250 (Gujarat), the Gujarat High Court held that where the new project did not materialize, the expenses incurred towards such project was revenue expenditure. Accordingly, looking into the nature of expenses incurred by the assessee coupled with the fact that the Department has not brought anything on record to show that any capital asset of enduring nature was brought into existence, the claim of the assessee on expenses incurred on preliminary drilling expenditure is hereby allowed.

23. In the result, ground no. 7 of the assessee’s appeal is allowed.

Ground No. 8 (Depreciation on plant and machinery to be allowed @ 60%)

24. We observe that this ground is identical to ground no. 2.2, which have discussed in the preceding part of the order. Since, we have already allowed this issue in favour of the assessee in ground no. 2.2 above by following the decision of ITAT Ahmedabad in assessee’s own case for assessment year 2006-07, we are hereby allowing ground no. 8 of assessee’s appeal.

25. In the result, ground no. 8 of the assessee’s appeal is allowed.

Ground Nos. 9 (Assessing Officer erred in considering renovation expenditure of Rs. 18,36,641/- as capital expenditure)

Ground No. 9.1 (Assessing Officer erred in not granting depreciation u/s. 32 of the Act in the event of considering renovation expenditure as capital expenditure)

26. Before us, the counsel for the assessee submitted that during the impugned assessment year, the assessee incurred certain expenditure relating to office renovation expenses like dismantling wells, sand filling, excavation, cementing, plastering etc. and on purchase of furniture and fixture. The assessee submitted that these office renovation expenses are on leased premises and hence are allowable as revenue expenditure. Further, the assessee submitted that looking into the nature of expenses, these are small structural changes which have been made by the assessee and cannot be construed as creation of a capital asset since no new asset has come into existence with enduring benefit.

27. We observe that on perusal of break-up of the expenses a sum of Rs. 5,68,990/- was paid to one Mr. Jitendra S. Bhimani on account of office renovation expenses towards dismantling old wells excavation, sand filling, brick work for partition etc. In our view, the aforesaid expenditure qualifies as revenue expenditure and hence may be allowed as revenue expenditure.

Further, the assessee has incurred a sum of Rs. 1,16,918/- towards other sundry expenses, may also be allowed as revenue expenditure since no capital asset of enduring nature was brought into existence by way of aforesaid expenditure and hence the same may be allowed to the assessee as revenue expenditure. However, expenses towards purchase of furniture and fixture Rs. 2,09,679/-, and another payment to Dishnet Wireless Ltd. for purchase of asset Rs. 8,55,500/- and payment of Rs. 85,554/- towards purchase of furniture and fixture for new office have been incurred for purchase of furniture and fixture and other capital assets and hence are in the nature of capital expenses. Accordingly, the same cannot, in our view, be allowed as revenue expenditure in the hands of the assessee. However, the Assessing Officer is directed to allow depreciation on such fixed asset in accordance with law after carrying out the necessary verification.

28. In the result, ground no. 9 of assessee’s appeal is dismissed and ground no. 9.1 of assessee’s appeal is allowed for statistical purposes.

Ground No. 10 (Assessing Officer erroneously considered repairs and maintenance expenditure of Rs. 17,84,561/- as capital expenditure)

Ground No. 10.1 (Assessing Officer erred in not granting depreciation u/s. 32 if expenditure is held as capital expenditure)

29. The brief facts in relation to this ground of appeal are that the Assessing Officer treated various expenses of Rs. 17,48,561/- by treating the same as capital in nature.

30. On going through the nature of expenses incurred by the assessee, we observe that DRP has correctly observed that looking into the nature of expenses they have been incurred primarily to bring into existence a new capital asset and hence the same cannot qualify as being revenue in nature. The DRP in its order has given a break-up of the expenses incurred by the assessee and after discussing the nature of each of the expenditure individually has held that the expenditure has been incurred towards creation of a capital asset viz. bifurcation of oil tank (Rs. 7,75,200/-), construction of office shed (Rs. 1,01,710/-), construction of slab and pipe culbret, construction of plate-form for tankers and foundation (Rs. 7,02,792/-) and Rs. 1,63,359/- towards demurrage charges for water injection plant (the assessee has capitalized the expenditure of purchase of water injections). Accordingly, looking into the nature of expenses since the same have been incurred for creation of a capital asset, the same are of capital account and hence are not allowable as revenue expenditure.

30.1 However we are in agreement with the contention of the assessee that in case the expenses are held to be of capital nature and have been incurred for creation of new capital asset, then, the assessee is entitled to claim depreciation on such expenses. Accordingly, we direct the Assessing Officer to allow depreciation on the aforesaid expenditure in accordance with law after carrying out the necessary verifications.

31. In the result, ground no. 10 of the assessee’s appeal is dismissed and ground no. 10.1 of assessee’s appeal is allowed for statistical purposes.

Ground No. 11 (Disallowance of Rs. 5400 u/s. 40A(3)

32. The brief facts of this issue are that the assessee incurred payment of Rs. 27,000/- on sweets during the festive season. The aforesaid payment of Rs. 27,000/- was made in cash and accordingly, the Assessing Officer disallowed 20% of the aforesaid payment amounting to Rs. 5400/- under section 40A(3) r.w.r. 6D. The assessee submitted that the said payment was made in cash as the shop refused to accept the payment through account payee cheque and only accepted cash. However, despite being provided an opportunity, the assessee could not furnish any supporting evidence of having made the aforesaid payment for the purchase of sweets. Accordingly, in absence of any evidence whatsoever, the Assessing Officer and DRP disallowed 20% of the aforesaid payment in cash amounting to Rs.5400/-

33. Since the assessee has not been able to adduce any evidence whatsoever with respect to incurring of the aforesaid expenditure in cash towards purchase of sweets, we find no infirmity in the order of DRP so as to call for any interference.

34. In the result, the ground no. 11 of the assessee’s appeal is dismissed.

Ground No. 12 (Disallowance of Rs. 65,610/- u/s. 40(a)(ia) of the Act

35. The brief facts in relation to this ground of appeal are that the assessee incurred expenditure of Rs. 31,25,200/- on account of professional/technical fees. However, the Assessing Officer observed that that as per the Tax Audit Report there has been a shortfall of 3737/- in deduction of tax at source. Accordingly, the Assessing Officer made a disallowance of Rs. 65,610/- on account of short deduction of Rs. 3637/- and added back the same to the total income of the assessee. Before us, the counsel for the assessee submitted that the aforesaid short deduction of taxes amounting to Rs. 3637/- on the total payment of Rs. 31,25,200/- was on account of inadvertent exclusion of surcharge while deducting taxes at source on the aforesaid payment. Further, the counsel for the assessee submitted that the issue is covered directly in favour of the assessee in the case of PCIT vs. Future First Info Services Pvt. Ltd. 145 taxman.com 35. Accordingly, there can be no disallowance on account of the above inadvertent deduction of tax owing to exclusion of surcharge.

35.1 We observe that this issue has been decided in favour of the assessee by the Delhi High Court in the case of Future First Info Services Pvt. Ltd. supra, wherein the High Court has held that where the Assessing Officer made disallowance u/s. 40(a)(ia) on the ground that assessee company had made short deduction of tax and thus was in violation of section 97(1), since for cases of short deduction of TDS the correct course of action is proceeding under section 201 of the Act, thus, impugned disallowance u/s. 40(a)(ia) was to be deleted. Respectfully following the aforesaid decision, we are of the considered view that this issue stands decided in favour of the assessee and accordingly, no disallowance is called for on account of aforesaid short deduction of tax.

36. In the result, ground no. 12 of assessee’s appeal is allowed.

Ground No. 13 and 13.1 (disallowance of depreciation of Rs. 14,33,745/-u/s. 32 of the Act)

37. The brief facts in relation to this ground of appeal are that the assessee company in its return of income has claimed an amount of Rs. 14,33,745/- as depreciation on goodwill. During the course of assessment, the assessee vide letter dated 18-12-2019 submitted that the amount shown under the head “goodwill” is the amount paid by the company in respect of value of assets acquired by it along with interest in joint venture from L & T. However, the Assessing Officer disallowed the claim of the assessee by placing reliance on the Bombay High Court decision in the case of CIT vs. Techno Shares and Stock Ltd. in ITA No. 971 of 2006 dated 11-09-2009 in which the Bombay High Court held that u/s. 32(1)(ii) of the Act depreciation is not allowed on all capital assets but is allowable on capital assets which fall in any one of the categories enumerated in the section. Accordingly, the Assessing Officer by relying on the aforesaid decision held that depreciation of goodwill is not admissible to the assessee as goodwill does not fall in any categories of intangible assets as prescribed in section 32(1)(ii) of the Act.

37.1 Before the DRP, the assessee submitted that firstly the facts of assessee’s case and the facts of the case of CIT vs. Techno Shares supra are distinguishable. Further, the assessee submitted that since no payment was made during the year and there was no addition to the block of intangible asset during the year, the block which was decided in 2003-04 cannot be changed in the subsequent assessment year. However, the DRP rejected the assessee’s claim on the ground that firstly that the amount on which depreciation of Rs. 14,33,744/- has been claimed by the assessee was paid for acquiring the participating interest in the joint venture from L & T and the said amount was shown by the assessee itself as “goodwill” in its books of account. Accordingly, the claim of the assessee that this amount does not represent goodwill cannot be accepted. Secondly, even if the claim of the assessee is accepted that the aforesaid payment was made for acquiring participating interest in the joint venture, and is not in the nature of goodwill, even then, rights acquired by the assessee do not fall in any of the categories of “intangible assets” as prescribed by section 32(1)(ii) of the Act and hence depreciation is not admissible. Thirdly, the DRP held that the contention of the assessee that since the block of assets was decided in assessment year 2003-04, the same cannot be changed in the subsequent year is not acceptable. The DRP held that if an error has been committed in the earlier assessment year, it would not prevent the Income Tax Authorities from taking the correct legal view in the subsequent year. Accordingly, the DRP upheld that disallowance of depreciation of Rs. 14,33,744/- on the said amount.

37.2 Before us, the contention of the counsel for the assessee was two fold. Firstly, that DRP had disallowed the claim of depreciation by placing reliance in the case of Techno Shares and Stocks case passed by the Bombay High Court, however, the aforesaid decision has been reversed and decided in favour of the assessee by the Hon’ble Supreme Court in the case of Techno Shares and Stocks Ltd. vs. CIT 193 taxman 248. Accordingly, since the aforesaid case has since been decided by the Supreme Court in favour of the assessee and since the issue was decided by the DRP against the assessee on the basis of aforesaid case, which has since been reversed by the Supreme Court, the depreciation should be allowed to the assessee. The second contention raised by the counsel for the assessee is that since depreciation on the aforesaid asset has already been allowed to the assessee in the earlier years and the aforesaid asset was forming part of block of assets on which the depreciation has been allowed for various years, then, in view of various judicial precedents on the subject which have held that once depreciation has been allowed to the assessee on an asset forming part of block of asset, then, even if such asset has not been put to use in the subsequent years, the assessee would still be eligible to claim depreciation on such block of assets. Therefore, depreciation cannot be disturbed in the impugned assessment, since depreciation has been allowed on the “block of assets”, of which this asset has been a part of, for past many years. In response, ld. Departmental Representative placed reliance on the observations made by the DRP in its order.

38. We have heard the rival contention and perused the material on record. We are however, unable to agree with the contentions put forward by the ld. counsel for the assessee. Firstly, the we are of the considered view that simply because the depreciation has been allowed to the assessee on a block of assets of which this particular asset is a part thereof, would not suo moto entitle the assessee to claim depreciation, even if, it is late, found that the assessee’s claim for depreciation is per-se incorrect. While we agree with the contention that if the assessee is correct in claiming depreciation on an asset forming part of block of asset in a particular year, then, depreciation would still be allowable even if the aforesaid block of assets could not be put to use in the subsequent assessment years owing lull in the business of the assessee or for any other reason whatsoever. However, the above principle would not apply if the depreciation which was allowed to the assessee is per-se incorrect. For instance, if, an asset eligible for depreciation @ 15% has been formed part of the block assets eligible for deprecation @ 60% and the depreciation was allowed to the assessee on such block of assets “including the assets” which is eligible for deprecation @ 15%, for the reason that the Assessing Officer failed to examine the claim of depreciation during the course of assessment, then in such a case, in our considered view such incorrect claim can be re-examined by the Department in the subsequent years. In such circumstances, the assessee does not get a vested right to a higher claim of depreciation simply on the ground that an asset has been placed in another block of assets on which depreciation has been inadvertently allowed to the assessee in the earlier assessment years. Therefore, the above contention of the assessee cannot be accepted that simply because the assessee has been allowed depreciation on a block of assets, albeit incorrectly, this would give a vested right to the assessee to claim depreciation on such asset which has been mistakenly/inadvertently granted by the Department in the earlier years. Secondly, we are also not in agreement with the argument for the assessee that the claim of depreciation can be examined by the Department only in the first year when the asset was acquired and the Department is precluded from examining claim of depreciation in the subsequent assessment years. In our considered view, if the Department omitted to examine the claim of the assessee in earlier assessment years or if Department is of the view that such claim of depreciation has been incorrectly allowed to the assessee in the previous assessment years, then, nothing precludes the Department from examining the claim of the assessee simply on the reasoning that the claim of depreciation can be examined only in the year when the asset was first acquired by the assessee. The third contention of the counsel for the assessee was that since the decision of Techno Shares and Stocks supra (on which reliance was placed by DRP) has since been reversed by the Supreme Court in favour of the assessee, then the claim of depreciation may accordingly be allowed in favour of the assessee. However, we observe that the decision of DRP was not based exclusively on the decision of Techno Shares and Stocks supra alone which was on the issue whether right of membership conferred upon a member of BSE was a business or commercial right and hence eligible for depreciation u/s. 32(1)(ii) of the Act. The DRP has dealt with several aspects while disallowing the assessee’s claim of depreciation and the decision of DRP is not based on the case of Techno Shares and Stocks alone. We further observe that while the assessee in the return of income has claimed that the depreciation is allowable on such asset as “goodwill”, however, during the course of proceedings before the Department, the assessee submitted that the aforesaid amount paid towards excess of consideration paid for assets and liabilities as goodwill, essentially represents amounts paid for acquiring the right of L & T under the PSC signed with Government of India, and, therefore, strictly speaking, aforesaid amount does not qualify as goodwill since the contract is fully governed by the product sharing contract and as per the terms of PSC, entire sale is to be made to IOC and therefore there is no question of acquisition of any “goodwill”. Further, the assessee submitted that even though the amount paid for acquiring the participating interest is debited as “goodwill”, it is a settled law that nomenclature in books would not determine the nature of asset. Therefore, the amount paid to L & T towards purchasing or acquiring statutory right which entitles the company to carry out its business activity, falls within the purview of “intangible assets” and is eligible for depreciation u/s. 32 of the Act. Therefore, as per the above submissions of the assessee, while assessee has debited the aforesaid asset as “goodwill” in its books of accounts, however, during the course of proceedings before the Department, the assessee itself submitted that the nomenclature in the books of accounts is not representative of the true character of asset and the assessee is eligible for claiming depreciation on the aforesaid asset as “intangible assets” u/s. 32 of the Act. However, we observe that the eligibility of assessee’s claim of depreciation has not been examined in detail by the Assessing Officer during the course of assessment proceedings, i.e. whether the assessee is eligible to claim depreciation as “goodwill” as per assessee’s books as “intangible assets” u/s 32 of the Act, as per assessee’s submissions before the Department. Accordingly, in the interest of justice, this issue is being restored to the file of Assessing Officer to examine firstly, whether or not depreciation is allowable on the aforesaid asset and under which category the assessee is claiming depreciation on the same i.e. as depreciation on goodwill or as depreciation of “any other commercial right” or “intangible asset” u/s. 32 of the Act. Secondly, the Assessing Officer may also examine that the necessary supporting documents in justification for assessee’s claim of depreciation. Accordingly, this issue is aside to the file of ld. Assessing Officer with the aforesaid directions.

39. In the result, ground no. 13 & 13.1 of assessee’s appeal are allowed for statistical purposes.

ITA No. 3195/Ahd/2011 A.Y. 2008-09

40. The assessee has taken the following grounds of appeal:-

“Your Appellant being dissatisfied with the order passed by the Learned Asst. Director of Income Tax (International Tax), Ahmedabad, u/s 143(3) r.w.s. 144C of the Income Tax Act (“the Act”), presents this appeal against the same on the following amongst other grounds of appeal which are without prejudice to each other.

1 The order passed by the learned Asst. Director of Income Tax (“Assessing Officer”) u/s 143(3), in persuance of the order of Dispute Resolution Panel (“DRP”) u/s 144C, is erroneous and requires to be modified. It is submitted that it be so held now.

2 The learned Assessing Officer has erred in law and facts in disallowing claim of deduction under section 42 of the Act of Rs. 46,13,54,315. It is submitted that in the facts and circumstances of the case, the appellant is entitled to deduction under section 42 of the Act. It is submitted that it be so held now.

2.1 Without prejudice to Ground No. 2, the learned Assessing Officer has erred, in event of disallowance of expenditure u/s. 42 of the Act, in considering an oil-well as ‘Building’ instead of ‘Plant & Machinery’ for the purpose of allowance of depreciation u/s. 32 of the Act. It be so held now.

2.2 Without prejudice to Ground No. 2, the learned Assessing Officer has erred, in event of disallowance of expenditure u/s. 42 of the Act, in not granting depreciation allowance at 60% on the plants used by the appellant in the field operations (including oil-well) as per Entry III(8)(xii) of Appendix 1 to the Income Tax Rules, 1962. It is submitted that it be so held now.

3 The learned Assessing Officer has erred in holding that the appellant is not entitled to deduction u/s. 80IB(9) of the Act in respect of wells in Wavel oilfield. It is submitted that in event of assessment of positive income of the appellant the profits and gains earned from all the wells [i.e. well nos. WA # 2A & WA #7] in Wavel oilfield should be reduced u/s. 80IB(9) of the Act while working out taxable profits. It be so held now.

4 The learned Assessing Officer has erred in holding that the appellant is not entitled to deduction u/s. 80IB(9) of the Act in respect of wells in Dholka oil field. It is submitted that in event of assessment of positive income of the appellant the profits and gains earned from wells in Dholka oilfield commencing commercial operations on or after April 1, 2001 [i.e. well nos. DK # 21, DK # 22, DK # 23, DK # 24, DK # 25. DK # 26 & DK # 27] should be reduced u/s. 80IB(9) of the Act while working out taxable profits. It be so held now.

5 The learned Assessing Officer has erred considering preliminary drilling expenditure of Rs. 9,98,592 as capital expenditure. In the facts and circumstances, the learned Assessing Officer ought to have allowed the same as revenue expenditure. It be so held now.

6 The learned Assessing Officer has erred in granting depreciation allowance at 15% instead of 60% on various plants used by the appellant in the field operations as per Entry III(8)(xii) of Appendix I to the Income Tax Rules, 1962. It is submitted that due to the same, the learned Assessing Officer has allowed depreciation of Rs. 52,495 instead of depreciation of Rs. 2,39,794. It is submitted that it be so held now.

7 The learned Assessing Officer has erred considering repairs and maintenance expenditure of Rs. 91,904 as capital expenditure. In the facts and circumstances, the learned Assessing Officer ought to have allowed the same as revenue expenditure. It be so held now.

8 The learned Assessing Officer has erred in not allowing depreciation of Rs. 10,75,308 on amount paid for acquiring participating interest in Joint Venture which is business or commercial right of similar nature as envisaged u/s 32 of the Act. It is submitted that it be so held now.

9 The learned assessing officer has erred in not granting deduction u/s 80G of Rs. 2,00,000, which was previously not claimed by the appellant as the total returned income was Nil.

10 The learned assessing officer has erred in not allowing depreciation on the opening written down value of such expenditure which was capitalized during AY 2007-08 in the Assessment Proceedings.

Your appellant prays for leave to add to alter and/or to amend any of the grounds before the final hearing of the appeal.”

Ground No. 2

41. We observe that ground no. 2 of assessee’s appeal for assessment year 2008-09 is identical to Ground No. 2 of assessee’s appeal for assessment year 2007-08. Accordingly, ground no. 2 of assessee’s appeal is dismissed in view of the observations made in assessment year 2007-08.

Ground No. 2.1

42. We observe that ground no. 2.1 is identical to ground no. 2.1 for assessment year 2008-09 and hence ground no. 2.1 of assessee’s appeal is allowed in the light of observations made in ground no. 2.1 for assessment year 2007-08.

Ground No. 2.2

43. Ground No. 2.2 of assessee’s appeal is identical to ground no. 2.2 for assessment year 2008-09 and accordingly the assessee’s appeal is allowed in the light of the observations made for assessment year 2007-08.

Ground No. 3 & 4

44. Ground Nos. 3 & 4 of assessee’s appeal for assessment year 2008-09 are identical to ground nos. 4 & 5 of assessee’s appeal for assessment year 2007-08 and accordingly the same are allowed for statistical purposes in view of the decision with respect of these grounds of appeal for assessment year 2007-08.

Ground No. 5

45. Ground No. 5 of assessee’s appeal for assessment year 2008-09 is identical to ground no. 7 of assessee’s appeal for assessment year 2007-08. Accordingly, the same is allowed in favour of the assessee in view of the decision with respect to this ground of appeal for assessment year 2007-08.

Ground No. 6

46. Ground No. 6 of assessee’s appeal for assessment year 2008-09 is identical to ground no. 8 of assessee’s appeal for assessment year 2007-08 and accordingly, the same is allowed in view of the observations made with respect to ground no. 8 for assessment year 2007-08.

Ground No. 8

47. Ground No. 8 of assessee’s appeal for assessment year 2008-09 is identical to ground no. 13 of assessee’s appeal for assessment year 2007-08. Accordingly, this issue is restored to the file of ld. Assessing Officer as per directions given in ground no. 13 of assessee’s appeal for assessment year 2007-08

Ground No. 7 (Assessing Officer erred in considering repairs and maintenance expenditure of Rs. 91,904/- as capital expenditure

48. In respect of the above ground, the counsel for the assessee submitted that the expenditure relates to dismantling and construction of toilet block at Dholka. Accordingly, no new asset came into existence with enduring benefit.

48.1 Accordingly, looking into the facts of the instant case and submission of the assessee to the effect that out of the aforesaid expenditure, the assessee already identified and capitalized the relevant expenditure and assessee only claimed the balance expenditure as Revenue expenditure, we are of the considered view that the assessee is eligible to claim aforesaid expenditure as revenue expenditure. Further, the assessee’s facts are supported by the case of CIT vs. Madras Auto Services 232 ITR 468 (SC) and also by the case of Modi Spinnig and Weaving Mills Vs. ITO 200 ITR 544 (Delhi) in which it was held that expenditure of alteration is capital, if incurred by owner but revenue if incurred by the tenant.

49. Accordingly, ground no. 7 of assessee’s appeal is allowed.

Ground No. 9 (Non grant of deduction u/s. 80G of the Act)

50. With respect to this ground of appeal, the counsel for the assessee submitted that the assessee claimed deduction u/s. 80G of the Act in the return of income, but the same has not been allowed to the assessee. Accordingly, a proper direction may be given, to consider the above omission on the part of the ld. Assessing Officer.

50.1 Looking into the facts of the instant case, this issue is set aside to the file of ld. Assessing Officer to allow the assessee’s claim of deduction u/s. 80G of the Act as per law, after carrying out the necessary verifications.

51. In the result, ground no. 9 of the assessee’s appeal is allowed for statistical purposes.

Ground No. 10 (Assessing Officer erred in not allowing depreciation of expenditure capitalized during assessment year 2007-08)

52. In relation to this ground of appeal, the counsel for the assessee submitted that depreciation on opening WDV with respect to expenses capitalized in assessment year 2007-08 during assessment proceedings may be allowed. We observe that this ground is consequential to appeal for assessment year 2007-08. Accordingly, this ground does not require any specific adjudication.

53. In the combined result, the assessee’s appeals are partly allowed for assessment year 2007-08 and assessment year 2008-09. Order pronounced in the open court on 19-05-2023.

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(Author can be reached at info@a2ztaxcorp.com)