ITA No. 93/Ahd/2007 (Asst. Year : 1998-99). Case: Niko Resources Ltd., 4th Floor, Land Mark, Race Course, Circle, Baroda Vs Asstt. CIT, Circle-6, Baroda. ITAT (Income Tax Appellate Tribunal)
| Case Number | ITA No. 93/Ahd/2007 (Asst. Year : 1998-99) |
| Judges | S/Shri D.K. Tyagi, JM and A. Mohan Alankamony, A.M. |
| Issue | Income Tax Act |
| Judgement Date | November 25, 2011 |
| Court | ITAT (Income Tax Appellate Tribunal) |
Order:
D.K. Tyagi, Judicial Member, (ITAT Ahmedabad 'C' Bench)
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This is an appeal filed by the assessee against the order of ld. CIT(A)-VI, Baroda dated 30.11.2006 raising following grounds:
(1) The ld. CIT(A)-VI, Baroda [hereinafter referred to as the CIT(A)] erred on the facts and circumstances of the case and in law, in upholding the assessment order dated February, 17, 2006 issued by the ld. Asstt. CIT, Circle-6, Baroda [hereinafter referred to as the AO].
(2) That the ld. CIT(A) has erred on the facts and circumstances of the case and in law, in confirming the action of the AO in reopening of assessment of the Appellant under section 147 of the Act.
The ld. CIT(A) has erred in observing that the appellant had failed to disclose fully and truly all material facts in relation to deduction claimed u/s 42.
The appellant prays that the re-assessment u/s 147 be treated as invalid.
(3) That the ld. CIT(A) has erred on the facts and circumstances of the case and in law, in confirming the disallowance of deduction of Rs.1,95,26,259/-claimed under section 42 of the Income-tax Act, 1961 (the Act) in respect of GSPC -Niko Joint Venture fields and in treating the appellant not eligible to claim any deduction u/s 42 of the Act, on the basis that the production sharing contracts (PSC) do not provide for the deductibility of such expenses.
The appellant prays that it be held eligible to claim deduction under section 42 of the Act in respect of the expenditure incurred by the appellant in connection with the drilling and exploration activities carried on by it in pursuance of the PSCs relating to GSPC-Niko Joint Venture fields.
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The first ground is general in nature hence no adjudication is required.
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The second ground relates to reopening of assessment u/s 147 of the Act. The facts of the case are that M/s Niko Resources Ltd., a non-resident company registered under Laws of Canada, derives income from sale of natural gas and crude oil. The assessee company entered into an agreement on 23.09.1994 with the Government of India on a joint venture withGujarat State Petroleum Corporation Ltd. (GSPCL), a company incorporated under the laws of India, for exploration and extraction of oil and natural gas in certain oil and gas fields in Gujarat namely Cambay, Hazira, Bhandut, Matar and Sabarmati. The details of these fields and share of assessee company are tabulated below:-
Sl.No.
Field
Joint Venture
Participating interest of Niko
Operator
1
Hazira
GSPC-NIKO
33.33%
NIKO
2
Bhandut
GSPC-NIKO
40.00%
NIKO
3
Cambay
GSPC-NIKO
33.33%
NIKO
4
Sabarmati
GSPC-NIKO
40.00%
NIKO
5
Matar
GSPC-NIKO
40.00%
NIKO
The assessee's over-all share in the oil and gas field comes to 37.33%. The remaining share is held by GSPCL. The assessee is the operator of these fields.
During the year under consideration, assessee-company also participated in an unincorporated joint venture under a production sharing contract for block KG-OS-09/1. The participating interest of the joint venture partners was as follows:-
Parties
Share
Niko Resources Ltd.
25%
Hindustan Oil Exploration Co. Ltd. (HOEC)
25%
Nagarjuna Fertilizers and Chemicals Ltd.
20%
Hardy Exploration and Production Ltd.
30%
For KG Block, the operator was Hardy Exploration and Production Ltd. The proportionate cost of KG Block of Rs.6,41,89,724/-is related to Niko and assessee has claimed it as deduction u/s 42 of the Act on account of infructuous & abortive exploration expenses. The well in question was plugged and abandoned as it was not successful and the contract was cancelled by Government of India on 19.2.1998.
The assessee filed its return of income on 30.11.1998 declaring a total loss of Rs.10,92,27,877/-. This return was processed u/s 143(1) on 15.3.2000. Subsequently the assessee submitted a revised return on 16.3.2000 declaring a loss of Rs.4,09,24,063/-. This case was selected for scrutiny and notice u/s 143(2) of the Act was issued on 27.9.1999 which was served on assessee on 4.10.1999. The assessment u/s 143(3) of the Act was finalized on 29.3.2001 with assessed loss of Rs.4,08,35,802/-. Thereafter, the case was reopened u/s 147 by issuing notice u.s 148 of the Income-tax Act, 1961 on 24.3.2005 which was served to the assessee on 28.3.2005. Assessment u/s 143(3) r.w.s. 147 was completed on 17.2.2006 determining the total revised loss at (-) Rs.2,27,96,315.
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The notice was issued after obtaining necessary saction from the CIT-IV, Baroda. The assessee was also provided the reasons for reopening the case. The reasons for reopening were as under:
In this case, the assessment was made u/s 143(3) of the IT Act on 29.3.2001 determining total loss of Rs.4,08,35,802/-. In the revised return filed by the assessee on 16/3/2000, it has claimed deduction u/s 42 of the IT Act of Rs.8,37,15,984/-. The deduction claimed u/s 42 included claim of deduction in respect of expenditure of Rs.1,95,26,260/-in respect of Bhandut, Hazira, Cambay and Baroda and Surat.
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During the course of assessment proceedings for the subsequent assessment years it is held that the assessee is not entitled to deduction u/s 42(1) of the IT Act, as it was not specified in the agreement entered into by the assessee with the Central Government. In view of the provisions of Section 42(1) of the IT Act, the expenditure incurred by the assessee in respect of drilling and exploration activities or for services or in respect of physical asset used in that connection is allowable only if such allowance is specified in the agreement entered into by the assessee with the Central Government. The assessee has not submitted copy of the agreement with the Central Government either in the return of income filed or during the course of assessment proceedings. This makes it clear that the assessee has sought to avail of the deduction wrongfully by not disclosing full facts necessary for the entitlement for the deduction.
Though the assessee has made passing reference of the agreement in the note attached to the financial statement along with return what was specified in the agreement is not mentioned. The assessee has claimed deduction u/s 42 without disclosing some of the expenditure specified in the agreement. The income has therefore escaped assessment for failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of its assessment.
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From the plain reading of section 42, it can be seen that there are two basic conditions which should be fulfilled, firstly there should be an agreement of the assessee with the Central Government. The second condition is that only those allowances are allowable which are specified in the agreement and these allowances should be in relation to various specific nature as mentioned in sub-clause (a), (b) & (c) of section 42(1). Out of these allowances, allowances which are specified in the agreement only those allowances are to be allowed under sub-clause (b) which are in respect of drilling or exploration activities or services.
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As no such allowance has been specified in the agreement and in absence of any allowance being specified in the agreement, no additional allowance can be allowed to be deducted by virtue of Section 42 over and above the normal allowance allowable under the other section of the Act. This point further gets fortified from the fact that not only these allowances should be specified in the agreement but even the computation of such allowance has to be made in the manner specified in the agreement. It is undisputed fact that nowhere in the agreement, computation of such allowance has been specified, no such allowance u/s 42 can be computed in absence of manner of computation being specified in the agreement.
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Therefore, the assessee's claim for deduction u/s 42 of the IT Act in respect of expenditure incurred at Bhandut, Hazira, Cambay, Baroda and Surat of Rs.1,95,26,260/-is not allowable. As the deduction u/s 42 of the IT Act claimed by the assessee amounting to Rs.1,95,26,260/-is not allowable in view of the reason that the same is not specified in the agreement entered into by the assessee with the Government of India, the deduction u/s 42 of the IT Act has been wrongly allowed which has resulted in the under assessment of income within the meaning of section 147 of the IT Act. The assessee has not produced the copy of the agreement with the Government of India for the exploration of oil at Cambay, Bhandut and Hazira field. Though, the assessee has mentioned in the note appended with the financial statement about the agreement, no copy of the same was furnished along with the return of income. Further as mentioned above, deduction under section 42(1) can be allowed only if the same is mentioned in the agreement entered into by the assessee with the Central Government. The assessee has not disclosed whether such allowance under section 42(1) was mentioned in the agreement entered into by the assessee with the Central Government. The income has escaped assessment for failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of its assessment.
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I have therefore reason to believe that the deduction claimed u/s 42(1) of the IT Act in respect of expenses for various gas field like Bhandut, Hazira, Cambay and for Baroda and Surat has been wrongly claimed u/s 42(1) of the IT Act which has resulted in the under assessment of income within the meaning of section 147 of the IT Act. The deduction claimed and allowed u/s 42 of the IT Act of Rs.1,95,26,260/-requires to be withdrawn.
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The assessee vide its letter dated 7.6.2005 raised preliminary objections against the reopening of the case.
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The company received the notice dated 24 March 2005 issued under section 148 of the Act The said notice proposing to initiate the. re-assessment proceedings was issued after the expiry of four...
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