CIT vs. Enron Oil & Gas (Supreme Court)
Where the Assessee had entered into a production sharing contract with a consortium which was governed by section 42 of the Act and the assessee made contribution at a certain rate to the consortium whereas the expenditure incurred out of the said contribution stood converted on the basis of a different exchaneg rate which exercise resulted into a loss on conversion of foreign currency to the assessee and the AO held the loss to be a notional loss, Held,
(a) S. 42 represented an independent regime of taxation which had to be governed in accordance with the PSC. The PSC specified the deductions allowable and also a special manner of accounting which was at variance with the normal accounting standards. The said “PSC accounting” obliterated the difference between capital and revenue expenditure.
(b) The PSC contemplated currency translation because capital contributions by the co-venturers had to be converted under the PSC at one rate whereas the expenditure had to be converted at a different rate. This exercise resulted into loss/profit on conversion.
(c) Given the nature of a PSC, the profits cannot be ascertained without taking into account translation losses. Accordingly it cannot be said that “translation losses” under the PSC are illusory losses.
See Also: Woodward Governer 294 ITR 451 (Del)