SHELF DRILLING RON TAPPMEYER LTD,,MUMBAI vs. DY. C.I.T. (INTERNATIONAL TAXATION) - 4(2)(1), MUMBAI

आयकर अपीलीय अधिकरण “I” न्यायपीठ म ुंबई में। IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI श्री महावीर स िंह, न्याययक दस्य एविं श्री राजेश कुमार लेखा दस्य के मक्ष। BEFORE SRI MAHAVIR SINGH, JM AND SRI RAJESH KUMAR, AM आयकर अपील सुं./ ITA No. 7414/Mum/2017 (यिर्ाारण वर्ा / Assessment Year 2014-15) Shelf Drilling J.T. Angel Limited Dy. Commissioner of 4th Floor, Chemtex House, Main Income Tax, (International Street, Hiranandani Gardens, बनाम/ Taxation)-4(2)(1), Powai, Mumbai-400706, 17th Floor, Air India Vs. Maharashtra Building, Mumbai-400 021 (अपीलार्थी / Appellant) (प्रत्यर्थी/ Respondent) स्र्थायी लेखा सुं./PAN No. AASCS2719P आयकर अपील सुं./ ITA No. 7415/Mum/2017 (यिर्ाारण वर्ा / Assessment Year 2014-15) Shelf Drilling Ron Tappmeyer Dy. Commissioner of Limited Income Tax, (International 4th Floor, Chemtex House, Main Taxation)-4(2)(1), बनाम/ Street, Hiranandani Gardens, 17th Floor, Air India Vs. Powai, Mumbai-400706, Building, Mumbai-400 021 Maharashtra (अपीलार्थी / Appellant) (प्रत्यर्थी/ Respondent) स्र्थायी लेखा सुं./PAN No. AASCS2715B अपीलार्थी की ओर े / Appellant by : Shri J D Mistry, AR प्रत्यर्थी की ओर े / Respondent by : Shri A Mohan, DR

ुिवाई की तारीख / Date of hearing: 19.07.2019 घोर्णा की तारीख / Date of pronouncement : 04.10.2019

2 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. आदेश / O R D E R महावीर ससुंह, न्याययक सदस्य/ PER MAHAVIR SINGH, JM:

These two appeals of different assessees are arising out of the different orders of Dispute Resolution Panel-2, Mumbai [in short ‘DRP’], in objection Nos. 94 & 95, vide direction dated 28.09.2017. The Assessments were framed by the Dy. Commissioner of Income Tax, Circle-4(2)(1), Mumbai (in short ‘DCIT/AO’) for the assessment years 2014-15 vide order dated 26.12.2016, 30.10.2017 under section 143(3) read with section 144C(13) of the Income Tax Act, 1961(hereinafter ‘the Act). 2. The first issue in this appeal of assessee (in ITA no. 7414/ Mum/2017 in the case of Shelf Drilling J.T. Angel Ltd.) is against the order of AO confirming the directions of DRP under section 143(3) read with section 144(c)(13) of the Act and assessing the income after rejecting the books of account under section 44B of the Act at ₹ 4,34,79,980/- as against the loss returned by assessee at ₹ 120,18,44,672/-. For this assessee has raised the following grounds: - “General Ground 1.1 erred in assessing the income under section 446B of the Income-tax Act, 1961

3 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. (Act') at Rs 4,3479,980 as against allowing the returned loss of Rs 1,20,18,44,672; Rejection of books of accounts 2.1 erred in failing to complete the assessment as required under section 44BB(3) of the Act; 2.2 erred in holding that the Act permitted the department to ignore section 44BB(3) of the Act on the grounds of rejecting the Assessee's books of account, method of accounting or otherwise. 2.3 erred in rejecting the Assessee's books of account in the facts and circumstances of the case: 2.3.1 erred in concluding that the date of put to use of the rig after refurbishment, as submitted by the Assessee, is inaccurate, without appreciating that 'date of put to use is not relevant in the subject AY;

4 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. 2.3.2 erred in rejecting the books of accounts on the various reasons. inter alia, that in the earlier year and subsequent years, return of income was offered on the basis of deemed taxation and thereby books of accounts maintained only in this year are not reliable, without appreciating that under the law. Assessee is entitled to choose such option every year (i.e. either to offer income under deemed taxation or on basis of actual books of accounts);

2.3.3 erred in concluding that the expenses are not recorded correctly merely on the basis that stamp for acknowledging receipt of the invoices is Shelf Group evidencing that there is a centralized receiving system for the bills and processing payments, without appreciating the fact that the invoices mentioned the legal name of the entity on which it was raised; 2.3.4 erred in concluding that there was no basis for determining which payments

5 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. were made by the head office of SDJTA on behalf of project office, without appreciating that the fact that this aspect not relevant as the project office is a mere extension of head office and payment pertains to India operations:

2.3.5 erred in not appreciating the fact that the project office, being taxable in India under section 44BB(3) of the Act, is required to maintain books of accounts and not the head office

3.1 erred in not allowing deduction of expenses under the head “Repairs and maintenance” amounting to ₹34,91,86,461 and treating the same as capital in nature;

3.2 erred in not allowing deduction of expenses under the head Hire charges

6 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. amounting to Rs 21.79,79,053 and treating the same as capital in nature,

4.1 erred in considering the opening WDV of the assets as unreliable without considering the explanation submitted by Assessee;

4.2 erred in concluding that the Assessee has not submitted information relating to Capital Work in Progress,

4.3 erred in concluding that the assets acquired through the Dubai entity are not used for Indian operations,

4.4 erred in concluding that certain invoices submitted under the head Repairs and Maintenance' are not correct,

7 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. 4.5 erred in concluding that certain invoices submitted under the head Hire Charges" are not related to the business activities of the Assessee.

4.6 erred in concluding that the auditor has conducted only a system audit and therefore, it can be inferred that the Assessee has not got the books of accounts audited as per provisions of section 44AB of the Act:

Non-admission of additional evidence tiled before the DRP

5.1 erred in not accepting additional evidence filed by the Assessee even after obtaining a remand report on the same from the learned AO:

5.2 erred in holding that the details filed as additional evidence were not absolutely material and relevant for deciding whether the books of accounts ought to be rejected;”

8 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. 3. Briefly stated facts are that the assessee is a company incorporated in Cayman Islands. During the year under consideration, the assessee was awarded contracts in India for charter hire of its offshore drilling rig “J.T. Angel”. The assessee company in order to facilitate the operations of these contracts, has established a project office in Mumbai, India. The assessee maintained the books of accounts in this year, which were produced before the AO during the draft assessment proceedings, as well as before DRP during the course of various hearings and before the AO during the final assessment order. It was explained before the AO that the assessee is engaged in the business of providing services or facilities in connection with or supplying plant and machinery on hire used, or to be used, for the prospecting, or extractions or production of mineral oils i.e. charter hire of drilling rig and drilling services. The assessee claim before AO and explained that the facts are that for AY 2013-14 and for AY 2015-16 i.e. preceding year and succeeding year filed its return of income on gross basis under section 44BB of the Act as the assessee is eligible entity to be governed by special provisions of assessment under section 44BB of the Act. But during the assessment year 2014-15 relevant to FY 2013-14, the assessee incurred repair expenses on its drilling of rig “JT Angel” which exceeded its contractual revenue and hence, there was an overall business loss. As a result of the same, the assessee exercise the option available under section

9 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. 44BB(3) of the Act to claim profit lower than prescribed under the section at the rate of 10%, the assessee opted for net basis of taxation of books of accounts as per section 44AA of the Act and audited as per requirement of section 44AB of the Act. The AO on the basis of directions of DRP gave various findings and finally summarized the issue and rejected the books of accounts by taking the facts of the case and summarized the alleged defects as under: -

(i) The AO noted that no supporting documentation certifying the opening WDV has been provided inspite of repeated opportunities. Even the auditors of the assessee company have refused to comment on its correctness.

(ii) The opening WDV for AY 14-15 was shown as ₹70,89,65,814/- as per the audited books of the accounts of the assessee but in the Form 3CB filed with the Revenue, the opening WDV was shown as Rs. 68,66,22,438/-.

(iii) The assessee transferred an amount of ₹19,41,65,370/- from the Capital Works in progress the Addition to Fixed assets. However, when the audited financials were seen, the assessee had shown an addition of fixed assets of only ₹18,73,09,429/-.

10 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. (iv) The assessee itself, did not maintain audited accounts in immediately preceding year and was offering its income under section 44BB(1) of the Act on presumptive basis but in current year it is claiming to maintain accounts based on accounts of preceding year as per the management certification only and then again in subsequent year it has switched back to the method where it does not maintain audited accounts and offers its income on presumptive basis under section 44BB(1) of the Act . Thus the assessee is changing its position from having no account case from preceding year to maintaining accounts in current year and then again switching to having no accounts in subsequent years i.e. AY 2015-16 and AY 2016-17.

(v) The valuation report in respect of the old rig purchased is from a foreign party but in absence of the agreement of purchase given by assessee, it is not known whether the seller and purchaser ever relied upon such valuation report to decide the purchase consideration of the old rig.

(vi) The purchase/sale transaction between two parties may be carried out at a lower/ higher rate from that of the valuation report depending on the health, longevity, utility and commercial expediency of the asset being transacted.

11 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. This is especially true in the present case, as the rig had to be sent for major refurbishment within one year of purchase of the rig and it is very much possible that the rig was purchased at a much lower value than what was stipulated in the valuation report.

(vii) The above valuation report is only a draft and unsigned.

(viii) The company has not inventorised stores and spares. The auditors have stated that this policy is not in accordance with the Accounting Standard 2 on Valuation of inventories. The impact of the above on the financial statements is not currently ascertainable and accordingly we are unable to comment on the effect thereof on the financial statements.

(ix) Wrong claim of depreciation in the current year in relation to the alleged addition to capital asset before 31.3.2014 and thereby creating artificial losses in the current year.

(x) Certain expenses of capital nature have been claimed as revenue expenditure.

(xi) Expenditure pertaining to subsequent years claimed in this year.

12 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. (xii) Expenditure unrelated to assessee’s business claimed.

(xiii) The refurbished rig has not been put to use during the year and the period of refurbishing (inactive period of the rig) is not proved.

(xiv) No regular maintenance of books of accounts. In the previous and the next year, the assessee has not maintained books of accounts and has opted to be assessed u/s 44B8 in AY 15-15 and AY 16-17.

(xv) The assessee also failed to produce all the invoices for the heads of expenditure which were picked up for investigation. The assessee submitted only sample invoices and serious irregularities (as discussed above) were found even among the sample invoices which were submitted.

(xvi) Majority of the high value invoices were not submitted.

(xvii) Artificial Losses of the current year are being used to set off income arising after the application of Section 44BB(1) in AY 2015-16 of ₹17,44,65,942/- and AY 16-17 of ₹2228,01,828/- and offering NIL Business income for taxation in both the years.

13 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. 4. In view of the above summary, the AO noted that the assessee is not following the same method of accounting and accounting standard as notified, regularly and consistently. There are serious defects in maintenance of accounts by the assessee. The assessee books are unreliable, incomplete and in accurate. The inaccuracies are reflected over a large part of the transactions and which form the majority part of its expenses. Assessee has changed its method of accounting over the period of the contract. Thus this is not a case where there are only minor mistakes in the books of accounts and difficulty in apportionment of profits of the assessee. The AO noted that there is suspicion without any positive evidence. Hence, he noted that there are positive and specific findings as to how and where, there are defects in the method of accounting in the books maintained by the assessee. Accordingly, the AO rejected the books of accounts after summing the above factors as under: -

“The sum and substance of the above cases, is that:

a) The job of the Assessing officer is to make a fair and reasonable assessment.

b) The case of the Assessing officer cannot be based merely on suspicion.

14 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. c) Assessing officer is not empowered to act arbitrarily when assessee as furnishing an explanation, which is supported by the relevant entries and other documents

d) When the assessee furnished an explanation, which is sought to be supported by evidence. the onus Would then shift back to the revenue.

e) Low profit in a particular year in itself cannot be a ground for invoking the powers of best assessment without support of any material on record. The system of accounting adopted by the assessee cannot be rejected on the ground that the gross profits were low and compared unfavorable with those of others.

f) In a case where books are maintained and the same were audited it is the rule that the AO shall accept the said books so long as he has not found out any defects or incompleteness of transactions or discrepancies or any inaccuracies,

15 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. whatever may be the name given to them. However, the rejection of books in this case is not based on mere suspicion S The auditor of the assessee himself has shed his responsibility when It comes to stores, spares, opening WDV, creditors and debtors in the books of the assessee. The assessee is not following the same method of accounting and accounting standard as notified, regularly and consistently. Admitted that, it is the rule that the AO shall accept the said books so long as he has not found out any defects or incompleteness of transactions or discrepancies or any inaccuracies, however in this case, there are serious defects in maintenance of accounts by the assessee and the books suffer from unreliableness incompleteness and in inaccuracies. The inaccuracies are reflected over the transactions which form the majority part of its expenses. Further, nowhere in the preceding paras has a

16 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. case been made out of low profitability and the books are not being rejected due to the losses incurred by the assessee. Further, the assessee cannot take the plea that it has furnished all the explanations conclusively. As discussed at many places (supra) the assessee has been given ample opportunities to present all the relevant material to defend its case. And finally, the rejection of the books is proposed only after discussing each mischievous head of the financials in a minute, detailed and threadbare manner while placing reliance on the very evidence the assessee has himself submitted.”

Aggrieved, assessee went before DRP against the adjustment made in the draft assessment order and filed objections in form no. 35A on 27.01.2017.

17 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. “7.8.18 It is, therefore, evident that not only the transactions of head office and project offices are inter-linked but the transactions of the multiple entities of the group are also interlinked. Some of the group concerns are claiming to have maintained books of account whereas some of those are not maintaining any books of account. In the given circumstances of the case, it is very easy and convenient to shift expenditure of those concerns who are filing return as per provisions of section 441313 and hence, not maintaining any books of account to those concerns which arc claiming 'lower profit' as per provisions of section 44BB(3) of the Act. In the given facts of the case, when the assessee has claimed that two of the project offices of the group concerns, including the assessee is maintain books of accounts whereas the project offices of other group concerns are not maintaining any books of accounts and head office of none of the said group concerns are maintaining

18 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. books of accounts, it is impossible to verify the reliability and genuineness of individual payments and individual books of accounts of the project offices of these two concerns as it is evident that only the transactions but all the modalities of transactions of the group concerns are common and closely interlinked and there is no reason or justification to accept the claim as to completeness and accuracy of the individual Books of accounts when project offices of these companies have claimed to have maintaining books of accounts but the respective head offices are not maintaining any books of accounts.

7.8.19 It is also pertinent to mention that maintaining books of accounts is a continuous process and opening balance, closing balance, WDV of the assets for claiming depreciation, outstanding balance of payables and receivables are brought forward from earlier years and carried forward to subsequent years as

19 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. per the books of accounts. [knee, it is not possible to compute these figures accurately if the. books of accounts are not maintained continuously for all the years of operations. This fact is evident from the observation of the auditor itself. His observation in Para 5 of the form 3CEB of the Project Office is as below:

These are the flint set of audited financial statements of the company prepared for compliance of section 3 of the Income Tax Act, 1961 for the year from April 1, 2013 to March 31, 2014 Hence, the opening balances as at April 7, 2013 of assets, liabilities and head office account are derived from unaudited management accounts. As a result, we have been unable to conclude or; the completeness or accuracy of the opening balances of assets, liabilities and head office account, and adjustments that may be required to these opening balances due to errors and omissions.

20 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. 7.8.20 In the cases such as this, the allowance on account of depreciation is bound to be huge as not only the Rigs but its equipments are also very expensive and it is impossible to compute the WDV of these equipments in any particular FY, if the books are not maintained continuously and WDV is not computed as per provisions of Income Tax act, 1961. This is one of the reasons that such companies are allowed to declare their income u/s 44BB without maintaining any books of account. However, if they offer income less than what is prescribed under section 44BB, they are supposed to maintain books of account which could enable the AO to deduce their profit correctly and reasonably. It is, however, evident from the observation of the auditor itself that the completeness and accuracy of the opening balances of assets and liabilities and the transactions made from head office has not even found by him to be sufficient for certification and there is a reason to form an opinion that

21 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. these figures could not be derived from the books of accounts with desired certainty and accuracy so as to accept that the assessee was maintaining books of account properly. Further, as per the observation of the Auditor, there is inventory of stores and spares. The findings of the Auditors in this regard is as below:

"The company does not inventories stores and spares. This policy is not in accordance with the Accounting Standard 2 on Valuation of Inventories. The impact of the above on the financial statements is not currently ascertainable and accordingly, we are unable to comment on the effect thereof on the financial statements.

7.8.21 In the case of a Rig where stores and spares are also very expensive and those usually comprises substantive pan of the expenditure of the company and when as per Auditor itself the impact of

22 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. the above on the financial statements is not currently ascertainable the financial statements of the company cannot be taken as reliable.

7.8.22 On perusal of the audited financials of the project office it is found that the depreciation is claimed to have been provided using the straight line method as per the useful lives of the tangibles assets estimated by the management, or at the rates prescribed under schedule XIV of the companies Act, 1956 whichever is higher. The company claimed to have used the following rates to provide depreciation on its fixed assets;

Category Depreciation Rate/ Useful Life Rig related equipment 5.30 to 20.00% Drill Pipe and Drill Collar 10% to 20% Top Drive 5% to 7.5% Computers 33.33% Leasehold Improvement 5 Years Furniture and fixtures 10% In this regard it is most important to note that the depreciation as per the provision of the Income- tax Act has to be calculated as per Written Down Value

23 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. (WDV) and there was no way the AO could have verified or ascertained WDV of multiple equipments of the Rig when the assessee has not maintained any books of accounts for earlier assessment years and even the auditors of the assessee has observed that they were unable to conclude on the completeness or accuracy of Me opening balances of assets, liabilities and head office account, and adjustments that may be required to these opening balances due to errors and omissions.”

Aggrieved, assessee came in appeal before Tribunal.

24 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. return of income for AY 2014-15, computation of income, form No. 3CD, copy of financial statements, party-wise breakup and majority of vouchers for various expenses such as contract labour expenses, custom duty, food and octoroi cost, support services, travelling expenses, repair and maintenance expenses, rig related expenses, receipts from various contracts and other documents. It was contended that the assessee has explained everything before the lower authorities including the AO during the draft assessment proceedings before DRP and before AO again during final assessment order. The assessee submitted before DRP various additional evidences to substantiate its claim vide submissions dated 27.01.2017 and 17.08.2017. The DRP forwarded these additional evidences to the AO for verification and comments on the merits of the submissions as well as admissibility of the additional evidences vide letter dated 20.07.2017. The AO submitted his remand report dated 11.08.2017 providing his comment thereon and analyzing the additional evidences submitted by the assessee and called for additional documents/ information from the assessee. It was contended that during the remand proceedings also, the AO has verified the books of accounts of the assessee in detail but rejected the books of accounts without any basis. He explained that the entire documents are available with the assessee and for this, he referred to the assessee’s factual paper book

25 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. consisting pages 1-479, wherein the following documents are filed: -

Sr. Particulars For AY No. 1. Annexure2-Return of income along with 2014-15 acknowledgement 2. Annexure3-Tax Audit Report 2014-15 3. Annexure4- Financial Statement 2014-15 4. Annexure5- Computation of income 2014-15 5. Copy of acknowledgement of return of income 2013-14 6. Computation of income 2013-14 7. Copy of invoices with respect to revenues earned 2013-14 8. Copy of acknowledgement of return of income 2015-16 9. Computation of income 2015-16 10. Copy of invoices with respect to revenues earned 2015-16 11. Summary of contracts executed by Shelf Drilling JT Angel Limited 12. Annexure 3- copy of agreement between Shelf Drilling JT Angel Limited and Shelf Drilling Offshore Services India Private Limited 13. Annexure 4- Copy of Form 26AS for AY 2014-15 14. Annexure 1- copy of Form 3CEB 15. Copy of submission dated 11 November 2016 16. Copy of submission dated 25 November 2016 17. Copy of submission dated 6 December 2016 18. Annexure 8- Nature of Capital work in progress 19. Copy of submission dated 22 December 2016 20. Annexure 1- copy of signed valuation report 21. Annexure 2- Copy of sample purchase orders to substantiate ultimate delivery in India. 22. Annexure 3-copy of the signed agreement between Shelf Drilling JT Angel Limited and Pipavav Defence & Offshore Engg. Co. Ltd. 23. Annexure 4- Copy of acceptance letter from ONGC 24. Annexure 5- Copy of customs clearance certificate 25. Annexure 6- Copy of master service agreement with Shelf Drilling group and G1 Offshore & Marine Pvt. Ltd. 26. Annexure 7-copy of purchase order of invoice dated 29 April 2014 specifically mentioned in the

26 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. draft assessment order. 27. Annexure 8-Copy of the bunker delivery note proving that the fuel was delivered at Bombay High 28. Annexure 1- Copy of delivery challan to substantiate ultimate delivery in India 29. Annexure 2-copy of letter of intimation from ONGC 30. Annexure 3-Essentiality certificate of the refurbished rig 31. Copy of fixed asset register. 7. The assessee contended that the auditors have verified the books of accounts of the assessee in great detail and have express the opinion that the financial statements are given true and fair view of the state of affairs of the operations of the company and the balance sheet and the profit and loss account of the year end consideration are in agreement with the books of accounts of the assessee. He referred to WDV for assessment year 2014-15 and stated that the difference pointed out by the AO, he has compared the cost as on 01.04.2013 for rig and related equipment as per financial statements, where the figure is given at ₹70,89,65,840/-, with the opening WDV as per tax audit report is at ₹68,66,22,438/-. It was explained that the said figure will not match as different rates of depreciation has been provided under the Companies Act and that of the Income-tax Act, that can be verified by the Assessing Officer. He further pointed out that AO has compared the opening gross block for AY 2014-15 along with closing net block for AY 2013- 14 and the said amount will not match as the gross block refers to actual cost and the net block refers to cost less depreciation.

27 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. He referred to the financial statements at page 59 of the assessee’s paper book and page 42 of the assessee’s paper book, where form No. 3CB i.e. tax audit report is enclosed. The assessee argued that for AY 2014-15, which is the first year in which assessee has maintained the books of accounts under the Act and offered the income under section 44BB(3) of the Act, opening balance are derived from unaudited books of accounts of the assessee and accordingly, auditors is bound to clarify more with respect to opening balances in the tax audited report which cannot be considered as reason for rejection of books of accounts. But he argued that the AO has examined in very detail the books of account and in case, in case he finds defect in the books of account he can reject the books of account, not otherwise.

28 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. drilling and Transocean, the said purchase price of the rig at USD 1.63 crores was filed as additional evidence before the DRP and the same was examined by the AO in its remand report. The assessee claimed that the claim of depreciation is duly supported by fixed asset register and documents such as purchase agreement and valuation report to support the amount recorded as cost in the books of account. Further, the assessee claimed that the claim of depreciation shall not create any artificial loss as unabsorbed depreciation under section 32 of the Act will not be allowed to be set off against business income in the subsequent years and no benefit has been availed from the claim of depreciation by the assessee.

29 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. equipment” amounting to ₹18,73,09,429/- and “furniture and fittings” amounting to ₹68,55,941/-. He stated that the AO has compared the Capital work in progress transfer with additions to head “Rig and related equipment” only and has not considered transfer other heads.

30 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. before the DRP and the same has been examined by the AO in its remand report.

31 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. mentioned above, these were duly classified into capital and revenue based on the nature of expenses itself and Depreciation was earned on the capitalized expenses. As stated above, the rig is already in use since AY 2013-14 and the assessee’s business is ongoing. Accordingly, the treatment of expenses shall be determined only on the basis of nature of expenses irrespective of the value of expenditure. As per the invoice dated 25.12.2013 which is printed on the face of assessment order, however, AO stated that the invoice is dated 25.12.2014 and thereby alleging that the assessee has claimed expenses pertaining to subsequent years in the current assessment year. The description of expenses on the invoice is purchase of clamps, plates and packing charges. These expenses do not result in creation of any capital asset and hence, cannot be treated as capital in nature. The invoice raised in November dated 29.04.2014 submitted by the assessee is reproduced by the AO in assessment order. It is pertinent to note that while the said invoice was raised by November in the subsequent year, the purchase order pertaining to the said invoice is dated 01.02.2014. This evidence proves that this expense was incurred in AY 2014-15 itself. Accordingly, the contention of the AO that these expenses are inflated with subsequent years is erroneous in nature.

32 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. 14. We noted that Shelf Drilling JT Angel Limited has a master service agreement with G1 Offshore wherein G1 Offshore supplies manpower to Shelf Drilling JT Angel Limited. A copy of the agreement between G1 Offshore and Shelf Drilling JT Angel Limited was submitted as Additional evidence which has been examined by the AO in its remand report. The AO failed to appreciate the fact that certain manpower is required on the rig on a continuous basis (Irrespective of whether the rig is rider repair or operation) for overall maintenance and upkeep of the rig. This manpower is sourced by Shelf Drilling JT Angel Limited from G1 Offshore. The AO in final assessment order has failed to appreciate that G1 Offshore supplies manpower to Shelf Drilling JT Angel Limited throughout the year and the same is not limited to the period where the rig underwent repairs at Pipavav. The AO has erred in considering repairs expenses to be capital merely because the rig was the active service during that period. The AO, instead of analyzing the nature of repairs has assumed that such repair expenses are to be capitalized. The AO has erred in not considering the fact that the treatment of expenses shall be determined only on the basis of nature of expenses respective of the value of expenditure.

33 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. expenses and grant depreciation thereon instead of rejecting the books of accounts of the assessee. Shelf Drilling JT Angel Limited tug boats, vessels, helicopters to transport the rig fuel, people etc from Bombay High to Pipavav Shipyard. Such expenses do not result creation of any capital asset. Copies of invoice substantiating the above have been submitted during assessment proceedings.

34 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. 2006 and the relevant provisions of the Companies Act, 1956. Even the accounts are audited and the same is evidenced from the tax auditors report furnished along with the return of income as well as before the AO. The opening balances of assets, liabilities and head office accounts are prepared based on the income offered under section 44BB of the Act in the preceding assessment year 2013-14 and the relevant bills and vouchers of earlier years. The assessee is primarily service company and not a manufacturing / trading company and there is a limited requirement with respect to stores and spare parts of rig at any given point of time, which are relatively insignificant in value. In such circumstances, the AO has to prove that the books of accounts are incomplete or incorrect and the basis for the same. In view of the above facts, we find that both the authorities below i.e. AO and DRP have erred in rejecting the books of accounts without considering the books of accounts and other documentary evidences as noted above by us in this order. The complete details were available before the AO and AO should have examined the same on the basis of books of accounts and supporting bills and vouchers and on that basis assessment should have been framed. Since, many of the evidences were filed by the assessee as additional evidences before DRP (no doubt these were referred to AO for verification and remand report which eventually was given by the AO), which have not been gone into as demonstrated by the

35 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. assessee before us now. Hence, we set aside the very first issue of rejection of books of accounts to the file of the AO, who will go into the books of accounts afresh and will compute the income on the basis of books of accounts as per law. No doubt, the books of accounts do not confirm to the provisions of section 145 of the Act, the AO can reject the books of accounts. But the AO has to give finding and to consider whether or not the books disclose the true state of accounts and the correct income can be reduced there from. For this, the AO has to give a categorical finding in this regard. Hence, this issue of the assessee’s appeal is remanded back to the file of the AO for fresh adjudication. The orders of the lower authorities are set aside and the appeal of the assessee is allowed for statistical purposes.

36 | P a g e ITA Nos. 7414 & 7415/Mum/2017 Shelf Drilling J.T. Angel Ltd.& Shelf Drilling Ron Tappmeyer Ltd. Bench while deciding this appeal. Since, we have set aside the appeal in the case of Shelf Drilling JT Angel Ltd., a sister concern, we set aside exactly on identical direction this appeal also. 20. In the result, the appeals of the assessee are allowed for statistical purposes. Order pronounced in the open court on 04.10.2019. Sd/- Sd/- (राजेश कुमार / RAJESH KUMAR) (महावीर स िंह /MAHAVIR SINGH) (लेखा दस्य / ACCOUNTANT MEMBER) (न्याययक दस्य/ JUDICIAL MEMBER) मुिंबई, ददिािंक/ Mumbai, Dated: 04.10.2019. स दीप सरकार, व.यनजी सधिव / Sudip Sarkar, Sr.PS आदेश की प्रयिसलपप अग्रेपिि/Copy of the Order forwarded to : अपीलार्थी / The Appellant 1. 2. प्रत्यर्थी / The Respondent. आयकर आयुक्त(अपील) / The CIT(A) 3. आयकर आयुक्त / CIT 4. ववभागीय प्रयतयिधर्, आयकर अपीलीय अधर्करण, मुिंबई / DR, 5. ITAT, Mumbai गार्ा फाईल / Guard file. 6. आदेशान सार/ BY ORDER, त्यावपत प्रयत //True Copy// उप/सहायक पुंजीकार (Asstt. Registrar) आयकर अपीलीय अधिकरण, मुिंबई / ITAT, Mumbai