HINDUSTAN OIL EXPLORATION CO. LTD.,MUMBAI vs. ACIT - 12 (2)(2), MUMBAI

आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. The assessee is in second round of appeal before us since the matter was earlier remanded back by co-ordinate bench of Tribunal (ITA No.61/Mum/2011 order dated 07/02/2014) to the file of Ld. Assessing Officer (AO) with following observations: - 25. The AO has disallowed the entire expenditure of Rs.7,57,80,104/-. As such, expense was first claimed in assessment year 1998-99, which was allowed by the Id. CIT(A) and the appeal before the ITAT, as filed by the department, which is still pending where the issue pertained to 'drilling' for prospecting. 26. The AR submitted before us that as per the Production Sharing contract between Government of India and ONGC & GSPCL & HOECL prospecting M/s Hindustan Oil Exploration Company Ltd. Assessment Year: 2007-08 business, which includes Exploration Expenses and Drilling Expenses. The AR submitted that since the word drilling did not figure in section 42, the AO has restored to the disallowance and also that full contents of the Agreement dated 12.04.2000 may not have been referred to, therefore, the AO may look into the contents of the clauses of the Agreement signed by the assessee company with the Government of India and two other parties.

M/s Hindustan Oil Exploration Company Ltd. Assessment Year: 2007-08 Assessment Proceedings 2.1 Pursuant to these directions, an assessment order has been passed by Ld.AO u/s 143(3) r.w.s. 254 on 31/03/2016. It transpired that the assessee had claimed an expenditure of Rs.757.80 Lacs u/s 42 of the Act. During set-aside proceedings, the assessee referred to its letter dated 16/03/2015 wherein the party-wise details of exploration and development expenses were furnished. The assessee submitted that the expenses were as per Petroleum Sharing Contract (PSC) entered into by the assessee, ONGC and GSPCL with Government of India for block CB-ON7 dated 12/03/2000. The relevant extract from the agreement were also attached. As per the relevant Article 16, the assessee was to be allowed deduction u/s 42 for expIoration expenses. As per para 16.2.1, full deduction was to be allowed for all expenditure incurred on exploration operation and drilling operation. The same para envisages deduction of expenditure incurred for development other than expenditure incurred on drilling and exploration as general expenditure relating to business. 2.2 The assessee submitted that the exploration cost would include the cost incurred for drilling of exploratory wells for finding out the petroleum and the appraisal thereon. Since PSC provide for 100% deduction of exploration expenses, the expenses detailed in the exploration activities in addition to drilling need to be considered for deduction under the Income Tax Act which should be in addition to the expenditure allowable u/s 42. 2.3 The Ld. AO concurred that as per PSC, exploration cost includes direct or indirect expenses incurred in search of petroleum area which inter-alia include aerial, geophysical, geochemical, geological types of M/s Hindustan Oil Exploration Company Ltd. Assessment Year: 2007-08 survey and core hole drilling and water well drilling. Similarly, the development cost includes all direct and indirect expenditure incurred in respect to development of development area including expenditure incurred for drilling development wells. The development cost also includes completion of exploration well by way of installation of casting or equipment or otherwise or for the purpose of bringing a well into use as a producing well for the injection of water or gas to enhance recovery of petroleum and re-entry completion of working over the existing well. As per PSC, drilling expenses could be incurred for exploration as well as development activities. Though the assessee has filed details of expenses incurred as per PSC, however, it has failed to establish that expenditure was incurred for exploration or development as the commercial production of wells had already started and the above expenses incurred were after the starting of commercial production. Therefore, the expenditure would not qualify for deduction u/s. 42 since production from wells had already started and expenditure was for enhancement of productivity. Therefore, the amounts would not qualify as expenditure incurred for exploration activity rather it would be development expenditure. 2.4 In the opinion of Ld. AO, Sec. 42 is a special provision which provides for deduction of expenditure incurred on prospecting, extracting or production of mineral oil. As against this, the assessee had incurred expenditure on the existing well which has already started commercial production. Similar view was taken in AY 2006-07 which was confirmed by learned first appellate authority. Therefore, the deduction of the expenditure was finally denied to the assessee.

M/s Hindustan Oil Exploration Company Ltd. Assessment Year: 2007-08 Appellate Proceedings 3.1 During appellate proceedings, the assessee pleaded that deduction in respect of expenses incurred for exploration and drilling is allowable even after commencement of commercial production. The Ld. AR also submitted that pursuant to the directions of Tribunal for AY 2009-10, Ld. AO allowed similar claim u/s. 42(1)(b). The assessee also submitted that it incurred various expenses for exploration and development before the blocks were put on commercial production. The expenses incurred by the Company were as per the PSC. The details of the expenditure were as follows: - Particulars Block Amount Percentage of of the claim (Rs.) share in JV Drilling & Palej 6,70,62,762 50% (E), 35%(D) Exploration Drilling North Balol (69,629) 25% Drilling PY-3 87,86,971 21% Total 7,57,80,104 It was submitted that the expenses were related to drilling, exploration activities and certain services necessary to continue ongoing activities in accordance with the PSC. As per the terms of PSC, the assessee is allowed to claim deduction u/s 42 in respect of all the block expenses. The assessee submitted that the provisions of Sec. 42(1)(b) provide for deduction of expenditure incurred for exploration, development, production and related services in the block whether incurred before or after the commencement of commercial production. 3.2 The Ld. CIT(A) noted that the deduction was denied due to the fact that the expenditure was incurred after start of commercial M/s Hindustan Oil Exploration Company Ltd. Assessment Year: 2007-08 production and further due to the fact that the assessee failed to file the details of the same. The assessee made conflicting statements during original assessment proceedings as well as during set-aside proceedings and therefore, the claim was not allowable. Alternatively, the assessee failed to establish that the entire expenses were incurred for exploration and drilling operations and therefore, the reliance on the order for AY 2009-10 was misplaced. Finally, the action of Ld. AO was confirmed. Aggrieved, the assessee is in further appeal before us with following grounds of appeal: - 1.1. On the facts and circumstances of the case and in law, the Hon'ble Commissioner of Income tax Appeals

20. ('the Hon'ble CIT(A)') erred in upholding the disallowance of expenditure incurred by the Appellant in respect of exploration and drilling activities and related services of Rs.7,57,80,104 u/s 42(1)(b) of the Act, considering the same as expenditure incurred for the relevant blocks after the commencement of commercial production. 1.2. On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in not considering the facts that the expenditure u/s 42(1)(b) of the Act were accounted under the head "development" expenditure and without appreciating the facts that all expenditure were incurred in respect of drilling activities and related services, which were allowable as per the Act and the Production Sharing Contract (PSC). 1.3. On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in not considering the facts that the Appellant had filed all the relevant details during course of hearing before the leaned AO in respect of expenses claimed as exploration expenses u/s 42(1)(b) of the Act. 1.4. On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in not appreciating the language used in section 42(1)(b) of the Act that after the beginning of the Commercial Production, any expenditure incurred, whether before or after starting of the commercial production, in respect of drilling or exploration activities is to be allowed u/s 42(1)(b) of the Act. 1.5. Without prejudice to the above, on the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in disallowing the appellant's claim u/s 42(1)(b) of the Act without bringing any adverse evidence on records of such disallowance made in the hands of any Joint Venture Party, as the Appellant was one of the parties to the Joint Venture. 1.6. Without prejudice to the above, on the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in disallowing the Appellant's claim u/s 42(1)(b) of the Act without considering the facts that in preceding year AY 2006-07 and subsequent year AY 2009-10, the similar nature of expenses was allowed as deduction while passing OGE to ITAT Order as per the directions given by Hon'ble ITAT in these respective years.

M/s Hindustan Oil Exploration Company Ltd. Assessment Year: 2007-08 Our findings & Adjudication 4. Upon perusal of assessment order, we find that the main reason to deny the deduction of expenditure is the conclusion of Ld. AO that expenses incurred for exploration or development were after the start of commercial production and therefore, the expenditure would not qualify for deduction u/s 42. The expenditure was for enhancement of productivity. Similar view was stated to be taken in AY 2006-07.

M/s Hindustan Oil Exploration Company Ltd. Assessment Year: 2007-08 Similar was the position in AY 2006-07 wherein in the set-aside proceedings, Ld. AO allowed similar deduction vide order dated 17/11/2017.