INDIAN OIL CORPORATION LTD.,MUMBAI vs. ADDL. CIT - 10 (1), MUMBAI

The cross appeals and the cross objection were heard together and are disposed off by this common order for the sake of convenience and brevity.

The grievance of the assessee read as under: -

The CIT(A) ought to have directed the AO to reduce exchange loss aggregating to Rs.159.98 crores (Rs.35.77 crores plus Rs.124.21 crores) from the interest expenditure for computing deduction under section 80IB of the Act. Interest expenditure allocated to Refinery 5. The CIT(A) erred in confirming the apportionment of interest expenditure to PREP unit for computing profit eligible for deduction under section 80-IB.

Before us, the counsel reiterated that the liability is accrued and due but not paid and the same has to be allowed. Ld. DR relied upon the findings of the Assessing Officer.

In our understanding of law, if a business liability has definitely arisen in the accounting year the deduction should be allowed although

Similar view was taken in Calcutta Company Ltd v. CIT [37 ITR 1] wherein the Hon’ble Supreme Court has held that the liability on the assessee having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date.

Applying the ratio laid down of the Hon’ble Supreme Court (supra), we are of the considered view that provisions made by the assessee for meeting the liability accrued by it under LFA entitlement earned by employees is entitled to deduction and the liability is not a contingent liability. We accordingly direct the Assessing Officer to delete the addition of ₹.77,67,42,314/-. Ground No. 1 is allowed.

Ground Nos. 2 to 7 relate to the claim of deduction under section 80IB of Income-tax Act, 1961 (in short “Act”) disallowed by the Assessing Officer. It would be pertinent to consider the entire claim of deduction under section 80IB of the Act. This will cover the grounds Page No. 9 & 5979/MUM/2016 (A.Y: 2011-12) CO NO. 31/MUM/2018 M/s. Indian Oil Corporation Ltd., taken by the revenue in its appeal wherever the Ld. CIT(A) has given the relief.

The underlying facts in the issue are that the assessee claimed deduction under section 80IB of the Act of its new industrial unit PREP at Paniput. It is seen that the assessee is claiming deduction under section 80IB of the Act from A.Y. 2007-08. For its claim the assessee has submitted Tax Audit Report including Form 10CCB duly certified by the Auditors. PREP is an independent, identifiable and separate unit with separate man power. PREP produces petroleum products. The new process units installed under PREP are located in separate plot and are independent of the existing refinery. The utility blocks, effluent treatment plant, Flare network and fuel oil / Gas networks are also independent. The crude oil pipeline is also independent. The new process is operated independently. The PREP unit is a separate cost centre and maintains separate balance sheet and profit and loss account. In nut shell, PREP is a standalone refinery. The total profits of the prep and claim of 80IB is as under: -

While scrutinizing the claim the Assessing Officer noticed that the assessee allocated ₹.204.56 crores of Head Office expenses to various refineries. The assessee has allocated ₹.24.09 crores as other office administration out of the above. According to the Assessing Officer the assessee has allocated only ₹.204.56 crores out of total head office expenses of ₹.1137.18 crores. The Assessing Officer was of the opinion that out of the balance expenses after excluding the expenses not related to refinery balances amount still remains to be allocated and the Assessing Officer computed the disallowance as under: -

The Assessing Officer accordingly, reduced the 80IB deduction of PREP, Paniput by ₹.30.14 crores.

We have given a thoughtful consideration to the aforementioned working of the Assessing Officer, it appears that the Assessing Officer has made an adhoc addition without realizing that the assessee has already allocated all the direct and indirect expenses. Same can be understood from the following profit and loss account of Panipat refinery.

Considering the facts that the assessee has already allocated direct and indirect expenses to the PREP, Paniput and no error or defect has been pointed out by the Assessing Officer, we do not find any reason to any further disallowance, therefore, the addition of ₹.30.14 crores stand deleted.

Proceeding further, the Assessing Officer was of the opinion that the assessee has not worked out the profit / loss of marketing division correctly. According to the Assessing Officer the interest claimed in marketing division is only ₹.9.57 Crores whereas the assessee in its final profit and loss account has shown its interest cost about ₹.2669.83 crores. The Assessing Officer derived his own formulae and computed the allocation of the interest cost as under: -

We have carefully perused the order of the authorities below. On perusal of the balance sheet, we find that there are no borrowings for marketing division as on 31.03.2011. We further find that the working capital of the marketing division as on 31.03.2011 is ₹.13,799.25 crores and the accumulated reserves as on 31.03.2011 is ₹.44,307.06 crores. This shows that the assessee has sufficient own funds for the marketing division to meet the requirement of the working capital. Further, the division wise profit and loss account for the year ended 31.03.2014 show that the assessee has not incurred any interest expenditure against the borrowings. Therefore, we do not find any merit in further allocation of interest done by the Assessing Officer and confirmed by the Ld. CIT(A). We accordingly direct the Assessing Officer to delete the addition of ₹.536.54 crores.

Proceeding further, while scrutinizing the claim of deduction under section 80IB of the Act, the Assessing Officer noticed that assessee has shown subsidy from Government of India amounting to ₹.1,613.13 crores as income in the marketing division. The Assessing Officer was of Page No. 14 & 5979/MUM/2016 (A.Y: 2011-12) CO NO. 31/MUM/2018 M/s. Indian Oil Corporation Ltd., the opinion that this amount cannot be said to have been derived from the business of refining but is only a consequence of loss sharing mechanism evolved by the Government, it has to be deducted from the marketing profit for the purpose of calculation of profit for section 80IB of the Act. A perusal of the notes on the accounts for the year ended 31.03.2011 show that subsidies on sales of SKO (PDS) and LPG (Domestic) in India amounting to ₹.157738.99 Lakhs and subsidies on sale of SKO and LPG to customers in Bhutan amounting to ₹.3573.80 Lakhs have been reckoned as per the schemes notified by the Government of India. Further, at clause (8) it has been mentioned that in line with the scheme formulated by petroleum Planning And Analysis Cell, the assessee has received during the year discounts of ₹.15,42,155.00 Lakhs on crude oil / products purchased from ONGS/GAIL/OIL and ₹.80,073.00 lakhs from CPCL through sale of HSD to IOC out of their purchase of crude oil from ONGC, towards under recovery suffered on sale of MS and the same has been adjusted against the purchase cost.

It would be pertinent to understand the subsidy scheme, the relevant clause read as under: -

Issue Price 6.1 For the depots/bottling plants from which sales of PDS kerosene and domestic LPG are being effected prior to the commencement of the scheme, the issue price of the product as on 31% March 2002, will be continued as such post 15 April 2002 till revised by the participating company in accordance with clause 8 herein under. 6.2 For a new depot/bottling plant commissioned after 1st April 2002, the issue price of the product for the first month for its operation and the subsidy per unit for that particular financial year will be determined by the Ministry of Petroleum & Natural

And in the discount scheme it has been provided that the contribution from ONGC and GAIL would come in terms of appropriate discounts on the prices of crude oil, LPG and kerosene supplied by them to oil manufacturing companies.

The Ld. CIT(A) allowed the claim of discount received from ONGC / Gail but sustained the action of the Assessing Officer in so far as the subsidy is concerned.

Let us understand the facts by a simple example. The assessee sells the petrol. The assessee is forced to sell the petrol at ₹.100 by the Government of India. The actual sale price is say ₹.150/-. To compensate the assessee deficit of ₹.50/- the Government allows subsidy to the assessee and also asks its undertakings like ONGC / GAIL and OIL to sell their products to the assessee at a discount. The Ld.CIT(A) has accepted the subsidy part but surprisingly not the discount part. We are of the considered view that both the subsidy and Page No. 17 & 5979/MUM/2016 (A.Y: 2011-12) CO NO. 31/MUM/2018 M/s. Indian Oil Corporation Ltd., the discount have a first degree nexus with the business of the assessee and therefore both form part of the marketing profit and cannot be excluded. Therefore, we direct the Assessing Officer to not to exclude the subsidy and the discount from the marketing profits. This will take care the grievance of both the sides.

The grounds relating to the claim of deduction under section 80IB of the Act contested by both the sides are decided accordingly, as mentioned hereinabove.

Ground No. 8 relates to the addition confirmed by the Ld. CIT(A) being capital receipts credited to Work-in-Progress as revenue receipts: - a. Sale of tender documents of ₹.74,200/- b. Recoveries from employees of ₹.6,21,407/-

While scrutinizing the return of income the Assessing Officer noticed that the assessee has reduced a sum of ₹.35.43 crores from the capital Work-in-Progress. The Assessing Officer was of the opinion that the amount reduced is in the nature of income earned which is not been offered to tax. The assessee was asked to explain why the same has not been offered to tax. The assessee explained that ₹.33,77,01,173/- is received as interest income on advances and deposits received from Page No. 18 & 5979/MUM/2016 (A.Y: 2011-12) CO NO. 31/MUM/2018 M/s. Indian Oil Corporation Ltd., suppliers / contractors; ₹.74,200/- is received on sale of tender documents and ₹.6,21,207/- was recoveries from employees and ₹.1,58,61,059/- are the recoveries from suppliers / contractors. It was explained that these receipts are directly and inextricable linked with the setting up of the plant at various refineries and marketing location. Therefore, same are in the nature of capital receipts. The submissions of the assessee did not find any favour with the Assessing Officer who referring to the decision of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., [227 ITR 172] and Hon’ble Bombay High Court in the case of Shree Krishna Polyster Ltd., [274 ITR 21] added back the amount of ₹.35.43 crores.

When the matter was agitated before the Ld. CIT(A), the Ld.CIT(A) following the order of his predecessor deleted the addition on account of interest income on advances of ₹.33,77,01,173/- and recoveries from suppliers / contractors ₹.1,58,61,059/- and confirmed the balance.

Before us, the counsel reiterated what has been stated before the lower authorities. Ld. DR strongly supported the findings of the Assessing Officer.

Before us, the counsel reiterated that the impugned expenditure relates to unsuccessful survey expenditure. The counsel referred to the provision to section 42 of the Act and referred to the Production Sharing Contract and pointed out that the deductions prescribed in the Production Sharing Contract are to be allowed. Referring to the relevant clause of the Production Sharing Contract, the counsel contended that the deduction for survey expenditure of ₹.333.44 crores should be allowed.

We have carefully considered the orders of the authorities below. Para No. 17.2.1 of the Production Sharing Contract reads as under: -

Section 42 of the Act which contains special provisions for deduction in the case of business for prospecting, extraction or production of mineral oils. It has been provided that there shall be made in lieu or in addition to the allowances admissible under the Act and such allowances are specified in the Production Sharing Contract. Reading the provisions of Section 42 of the Act with Para No. 17.2.1 (supra) we are of the considered view that the deduction @100% is allowable for both capital and revenue expenditure incurred in respect of Page No. 23 & 5979/MUM/2016 (A.Y: 2011-12) CO NO. 31/MUM/2018 M/s. Indian Oil Corporation Ltd., exploration and drilling expenses. Therefore, the claim of survey expenditure of ₹.333,43,69,242/- is to be allowed. We direct accordingly. Ground No. 9 is allowed.

Ground No. 10 becomes otiose.

Ground No. 11 relates to disallowance of prior period expenses of ₹.73.71 crores. During the course of the assessment proceedings the query raised that as per the Tax Audit Report prior period expenses are ₹.73,71,75,163/-, in the report it is further mentioned that ₹.9.37 crores pertaining to financial year 2009-10 and 2008-09 and hence prior period expenses. In its reply, assessee explained that the entire prior period expenses of ₹.73.71 crores has been offered for tax in the return and at the same time it was contended that these expenses are not prior period expenses. Explanation of the assessee do not find any favour with the Assessing Officer who made an addition of ₹.73,71,75,163/-.

The addition was challenged before Ld. CIT(A) who followed the decision of his predecessor and confirmed the addition.

Ground No. 12 becomes otiose.

Ground No. 13 relates to the additional depreciation, during the course of the assessment proceedings the assessee was asked that in the depreciation chart it has claimed additional depreciation on drainage, railway siding etc., assessee was asked to explain why the same is allowable. It was explained that during the year ₹.12.10 crores and ₹.13.07 crores have been transferred from construction Work-in- Progress for railway siding and drainage and sewage and water supply system respectively and further, ₹.3.05 crores has been added in Drainage, Sewage and Water Supply system directly. The Assessing Officer was not convinced that the railway siding and drainage are plant

Before us, counsel referring to the provisions of section 32(1)(iia) of the Act pointed that any new plant and machinery which has been acquired and installed after 31.03.2005 by an assessee engaged in the business of manufacturing for production of any article or things is eligible for additional depreciation. It is the say of the counsel that nowhere in the section it is mentioned that new plant and machinery should be acquired and installed in the same year. The counsel pointed out that in the appellants case new plant and machinery is acquired and installed after 31.03.2005, therefore the assessee is entitled to additional depreciation as per section 32(1)(iia) of the Act.

We have carefully perused the orders of the authorities below. It is true that under section 32(1)(iia) of the Act, it has been mentioned that the new machinery or plant eligible for depreciation has to be acquired and installed after 31.03.2005. In our considered opinion once the assessee submits that plant and machinery are acquired and installed after 31.03.2005 the assessee is eligible for additional depreciation, there is no question of add or subtract a word from the provisions of section. The provisions of section 32(1)(iia) was introduced into Act by the Finance Act, 2002 w.e.f. 01.04.2003 and it was introduced as an incentive for fresh investments in the industrial sector with a specific purpose / object of providing relief to tax payers to make investments in the new plant and machinery. In our humble opinion such provision has to be interpreted keeping in view the intent and purpose for which it was introduced. Considering facts of the case in totality in the light of the relevant provision of the Act we do not see merit in the disallowance of the claim of depreciation and the claim of additional depreciation and the Assessing Officer is directed to delete the same. For the sake of completeness, we are of the view that railway

Ground No. 14 relates to the disallowance of business loss on sale of oil bonds. While scrutinizing the return the Assessing Officer noticed that the assessee has claimed expenses on Government of India Oil bonds amounting to ₹.356,47,28,469/-. Assessee was asked to explain why it should not be treated as capital loss as these are classified as current asset. The assessee explained how it purchased the Government of India Special OIL Bonds. Assessee also explained the intent of the said purchase and sale thereon and explained in detail how the loss was incurred and is incidental to business carried on by the assessee and hence revenue loss. The reply of the assessee did not find any favour with the Assessing Officer who treated the said loss as capital loss. The action of the Assessing Officer was confirmed by the Ld. CIT(A).

Ld. DR read the operative part of the Assessing Officer and the Ld.CIT(A) order and reiterated that loss is a capital loss.

We have given a thoughtful consideration to the underlying facts in the issue, there is no dispute that as per the Government of India directives the assessee procured the oil bonds. Such bonds were shown under the head current investments and valued at cost or market value whichever is less which is similar in the light of valuation of stock in Page No. 30 & 5979/MUM/2016 (A.Y: 2011-12) CO NO. 31/MUM/2018 M/s. Indian Oil Corporation Ltd., Trade. It is an undisputed fact that the purchase price of the bonds is akin to the sale price credited to the profit and loss account. A simple example will explain the facts in true perspectives. The assessee is forced to sell petrol, diesel or kerosene or LPG used for domestic consumption for say ₹.100/- and the cost comes to ₹.150/-. This mandate of the Government of India has resulted in operating loss to the assessee amounting to ₹.50/-. Government of India came up with the scheme of giving oil bonds of ₹.50/- to the assessee to compensate the operating loss suffered by the assessee. Now such oil bonds does not have any statutory liquidity ratio status and therefor banks are unwilling to buy such bonds making the demand of such bonds very limited. It has to be understood clearly that the assessee has neither subscribed to these bond nor had intention to earn any investment income from them. These bonds were received at the behest of the Government of India as cash subsidy and the assessee has no alternative but to agree to Government’s directives. Any low realisation from such bonds is nothing but non-receipt of subsidy. Therefore, in our considered view such loss is nothing but a revenue loss incurred by the assessee in the ordinary course of its business and deserves to be Page No. 31 & 5979/MUM/2016 (A.Y: 2011-12) CO NO. 31/MUM/2018 M/s. Indian Oil Corporation Ltd., allowed. We therefore direct the Assessing Officer to delete the disallowance of ₹.356.47 crores. Ground No. 14 is allowed.

Ground No. 15 relates to the expenditure for increase in authorised share capital. During the course of the assessment proceedings the assessee was asked to justify the expenses incurred in increase in capital from ₹.2,500 crores to ₹.6,000 crores. It was explained that following expenses were incurred in relation to obtaining shareholders’ approval through postal ballot for increase in authorised capital through public offer (i) R & T Bills for processing ballot data & over printing of forms; (ii) R & T bills for postage expenses for dispatch of ballot forms, and (iii) scrutinizer bill for postal ballot activity. It was explained that there is no increase in the capital base of the company, therefore postal ballot expenditure is incurred for increase in the authorised capital is revenue in nature and therefore should be allowed. The Assessing Officer was of the opinion that these expenses incurred by the assessee are for increase in share capital and since there is a close nexus between the expenses incurred and increase in share capital the Assessing Officer treated the same as capital expenses as confirmed by the Ld. CIT(A).

We have carefully perused the orders of the authorities below. The undisputed fact is that no stamp duty was paid to Superintended of Stamps, Mumbai and to the ROC and a perusal of the balance sheet show that there is increase in authorised share capital only. The issued share capital has remained the same. In our considered opinion, even if the expenditure is incurred for increase in the authorised capital this expenditure is revenue in nature and is therefore allowable under section 37(1) of the Act. The decision relied upon by the Assessing Officer in the case of Punjab State Industrial Corporation [225 ITR 792] is misplaced in as much as in that case the issue was whether filing fees paid to Registrar of Companies for increasing the capital base of the company is allowable as deduction. Whereas in the case in hand no filing fees are paid to Registrar of Companies and there is no increase in issued share capital. Therefore, considering the facts in totality the impugned expenditure is directed to be allowed as revenue expenditure.

In the result, appeal filed by the assessee is partly allowed on the grounds argued before us. (A.Y. 2011-12) – REVENUE APPEAL

Grievance of the revenue, read as under: - “1 "On the facts and in the circumstances of the case as well as in law, the Learned CTT(A) has erred in deleting the addition made on account of disallowance u/s 40A(9) of expenditure being payment to educational institutions"

Ground No. 1 relates to disallowance made under section 40A(9) of the Act being payment made to Educational Institutions. On a perusal of the audit report, the Assessing Officer found that the assessee paid to Educational Institutions ₹.24,23,67,130/- for welfare of Page No. 37 & 5979/MUM/2016 (A.Y: 2011-12) CO NO. 31/MUM/2018 M/s. Indian Oil Corporation Ltd., IOCL employees. The assessee was asked to explain why the same should not be disallowed under section 40A(9) of the Act. In its reply the assessee contended that the said expenditure is incurred for the purpose of its business and is in the nature of employee welfare expenses and hence not covered by the provisions of section 40A(9) of the Act. The Assessing Officer was of the opinion that since the auditors have referred the said expenditure falling within the scope of provisions of section 40A(9) of the Act the Assessing Officer disallowed the same. The Ld. CIT(A) simply followed the order of his predecessor and deleted the disallowance.

Before us, counsel vehemently stated that the assessee is a public sector undertaking which carried on business through five divisions. The assessee has nine refineries at remote areas. Technocrats and men of managerial skills are required to run these refineries. In order to locate employees at such remote places, it is necessary to provide them a conducive environment and opportunities and for this purpose assessee provided education facilities to the children of employees at the places of their work. It is the say of the counsel that the entire cost of running of the Kendriya Vidyalayas near refineries which includes expenditure on pay and allowances, recurring and non-recurring expenditure are borne

We have given a thoughtful consideration to the order of the authorities below. In our considered opinion without such facilities being provided, it would have not been possible for the assessee to obtain the services of the employees concerned and to efficiently continue its business. Therefore, in our considered view the amount paid towards education of employee’s children which is for the welfare of the employees ought to be allowed as deduction under section 37(1) of the Act. In our considered opinion such expenditure is incurred wholly and exclusively for the purpose of business. It would be pertinent to refer to the decision of the Hon’ble Supreme Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co., [223 ITR 101] wherein the Hon’ble Supreme Court held that as long as the expenditure is made for the purpose of the business and the payment made is not by way of penalty for infraction of any law, the same would be allowable as a deduction. In the same judgement the Hon’ble Supreme Court further held that any contribution made by the assessee to public welfare fund which is directly connected or related with the Page No. 39 & 5979/MUM/2016 (A.Y: 2011-12) CO NO. 31/MUM/2018 M/s. Indian Oil Corporation Ltd., carrying on of the assessee’s business or which results in the benefit to the assessee’s business has to be regarded as an allowable deduction. In our considered view section 40A(9) of the Act was introduced to avoid tax evasion in the guise of donation to trusts and the flow back of the same amount to the employer again in the form of deposit and as a measure for combating tax avoidance. Therefore, in our considered opinion the case of the assessee does not fall within the ambit of section 40A(9) of the Act and therefore the expenditure incurred has to be allowed under section 37(1) of the Act. Therefore, no interference is called for in the findings of the Ld. CIT(A). Ground No. 1 is dismissed.

Ground No. 2 relates to the deletion of the club expenditure. The Assessing Officer noticed that the assessee has debited club expenses being entrance fees and subscriptions ₹.60,78,076/- and Cost of club services and facilities used at ₹.1,27,18,374/- totaling to ₹.1,87,96,450/-. The assessee was asked to explain why the said expenditure should be allowed. Assessee filed a detailed reply which was dismissed by the Assessing Officer who went on to make the addition of ₹.1,87,96,450/-. Ld. CIT(A) following the order of his predecessor deleted the addition. The Ld. CIT(A) also referred to the decision of the Hon’ble Bombay High Court in the case of Otis Elevator Co. India Ltd., [195 ITR 682].

Counsel submitted that entrance fees and subscriptions have been paid to obtain corporate membership of the clubs. It is the say of the counsel that since the assessee is a public sector undertaking it has to follow prescribed guidelines for incurring any expenditure. The membership of various clubs was obtained for the purpose of conducting business conferences.

We have given thoughtful consideration to the rival submissions. The impugned dispute has now been settled by the Hon’ble Supreme Court in the case of United Glass Mfg., Co., Ltd., [28 Taxman.com 429] wherein the Hon’ble Supreme Court inter alia was seized with the following question for determination:

And the Hon’ble Supreme Court inter alia held that “as far as Question No. 2 is concerned, we find that a series of judgments have Page No. 41 & 5979/MUM/2016 (A.Y: 2011-12) CO NO. 31/MUM/2018 M/s. Indian Oil Corporation Ltd., been passed by High Courts holding that club membership fees for employees incurred by the assessee is business expense under section 37 of the Income Tax Act, 1961. We also find that none of the decisions have been challenged in this court. Even otherwise, we are of the view that it is a pure business expense.” Respectfully following the decision of the Hon’ble Supreme Court, we decline to interfere with the findings of the Ld. CIT(A). Ground No. 2 is dismissed.

Ground No. 3 relates to deletion of disallowance under section 14A r.w. Rule 8D of I.T. Rules. While scrutinizing the return of income the Assessing Officer found that the assessee in the computation of taxable income claimed exemption in respect of dividend from subsidiaries companies ₹.92.72 crores and from other companies ₹.966.54 crores totaling to ₹.1059.26 crores. Assessee was asked to explain as to why no expenditure has been apportioned in respect of the income claimed as exempt and why the expenditure should not be disallowed as per section 14A of the Act. In its reply the assessee explained that there was nexus between expenditure incurred and dividend earned and hence no expenditure should be netted off against the dividend income. The explanation has not find any favour with the Assessing Officer who

When the matter was agitated before Ld. CIT(A) the Ld. CIT(A) simply followed the order of his predecessor and deleted entire disallowance.

Ld. DR strongly contended that some expenditure must have been incurred by the assessee to earn exempt income and reasonable disallowance ought to have been made in this regard.

Before us, counsel reiterated what has been stated before the Assessing Officer. It is the say of the counsel that the investments have been made out of own funds and the assessee has not made any borrowings for the purpose of making investments in shares of companies which earned tax free income.

We have carefully perused the rival submissions. The undisputed fact is that investments has been made out of own funds. The own funds are far more in excess of the investments. Therefore, the ratio laid down by the Hon’ble Jurisdictional High Court of Bombay in the case

Ground No. 4 and 5 relates to claim of 80IB deduction. The claim of 80IB deduction has been considered by us in detail in appeal of the assessee (supra) for our detailed discussion therein, these grounds are dismissed.

Ground No. 6 relates to the deletion of addition of ₹.41,68,19,076/- being incurred on enabling facility treated as revenue expenditure. While scrutinizing the return, the Assessing Officer noticed that the assessee has claimed ₹.41.68 crores under the head “Expenses on enabling facilities”. The details submitted by the assessee are as under: -

By merely giving a cursory look, the Assessing Officer formed a belief that the said expenses have been incurred for assets of enduring nature and are in the nature of capital expenditure and disallowed the sum of ₹.41,68,19,076/-. The Ld. CIT(A) simply following the order of his predecessor deleted the entire disallowance.

Before us, Ld. DR reiterated that is a capital expenditure. It is the say of the counsel that whether expenditure is revenue or capital has to be decided based on the facts of each case and the character of the expenditure depends upon the commercial consideration in each case.

We have carefully considered the orders of the authorities below and have given a thoughtful consideration to the expenditure claimed as mentioned elsewhere. In our humble opinion the expenditure has been incurred in order to procure appropriate facilities to enable the assessee to carry out its operations effectively and profitably. For example, the expenditure incurred on railway quarters at Ratlam is to facilitate smooth running of the business of the assessee at the junction of Railway Station Ratlam. The same is the nature of expenditure incurred for setting up KVA line at Viramgam, construction of costal road at Paradeep Port Trust and supply of transmission line at Paradeep colony. The Hon’ble Supreme Court in the case of CIT v. Madras Auto services Pvt ltd., [233 ITR 468] has considered the case where the assessee had taken a premise on lease for 39 years and demolished the said premises and constructed new building at its own expenses. The Hon’ble Supreme Court held that “Right from inception, the building was of the Page No. 46 & 5979/MUM/2016 (A.Y: 2011-12) CO NO. 31/MUM/2018 M/s. Indian Oil Corporation Ltd., ownership of the lessor. Therefore, by spending this money, the assessee did not acquire any capital asset. The only advantage which the assessee derived by spending the money was that it got the lease of a new building at a low rent. From the business point of view, therefore, the assessee got the benefit of reduced rent. The expenditure is, therefore, to be treated as revenue expenditure.” Considering the nature of expenditure in the light of the decision of the Hon’ble Supreme Court we do not find reason to interfere with the findings of the Ld. CIT(A). Ground No. 6 is dismissed.

Ground No. 7 relates to the deletion of the addition of ₹.6.57 crores in respect of the bad debts, bad advances and bad claims written off. The Assessing Officer noticed that the assessee has debited ₹.6.57 crores as amount written off. The assessee was asked to justify its claim. In its reply the assessee stated that the write off are incidental to the trade and is allowable as expenditure under section 28 of the Act on ordinary principles of commercial trading. The submissions of the assessee was dismissed by the Assessing Officer who was of the firm belief that the assessee failed to fulfill the conditions stipulated under section 36(2) r.w.s. 36(1)(vii) of the Act. When the addition was Page No. 47 & 5979/MUM/2016 (A.Y: 2011-12) CO NO. 31/MUM/2018 M/s. Indian Oil Corporation Ltd., agitated before Ld. CIT(A) the Ld. CIT(A) simply followed the order of his predecessor and deleted the addition.

Before us, the counsel stated that the assessee is not required to prove that debts / advances / claims have become bad during the year under consideration. It is the say of the counsel that once the debts / advances / claims are written off as bad debts then deduction under section 36(1)(vii) r.w.s. 36(2) of the Act ought to be allowed. The counsel stated that bad debts has arisen on account of sale of petroleum products to various parties from which recovery could not be made due to various reasons such as subsequent rate revision, rate or quality dispute, short receipt of quantity by the customers etc.,

We have carefully perused the orders of the authorities below. The details of bad debts, advance, claim written off are as under: -

Ground No. 8 relates to the treatment of receipts for capital Work- in-Progress, this issue has been considered by us in the appeal of the assessee (supra), for our detailed discussion therein, this ground is dismissed.

Ground No. 9 relates to the allowance of deduction of expenditure incurred on leave encashment claim made for the assessment year under consideration disallowed by the Assessing Officer under section 43B(f) of the Act.

Now the Hon’ble Supreme Court has decided the issue in favour of revenue accepting constitutional validity of section 43B(f) of the Act, we are of the considered view that this issue needs fresh verification at the assessment stage as the facts have not been examined in the first round of litigation. We therefore restore this issue to the file of the Assessing Officer. The Assessing Officer is directed to examine the underlying facts afresh after affording a reasonable and adequate opportunity of being heard to the assessee and the assessee is directed to explain the facts of payment / valuation with supportive documentary evidences to Page No. 50 & 5979/MUM/2016 (A.Y: 2011-12) CO NO. 31/MUM/2018 M/s. Indian Oil Corporation Ltd., the satisfaction of the Assessing Officer. This ground is allowed for statistical purposes.

The next grievance relates to the additional depreciation on machineries transferred from construction Work-in-Progress and also allowance of the claim of additional depreciation on railway sidings and drainage. Both these issues also find place in the appeal filed by the assessee considered hereinabove. The underlying facts show that he assessee in its return claimed additional depreciation of ₹.3004,99,33,399/- for additional depreciation of ₹.17,07,16,57,0125/- made to plant and machinery. The Assessing Officer proceeded to disallow additional depreciation on new machinery installed during the year on the ground that both acquiring and installation should be in the same year when the claim of additional depreciation is made. In the opinion of the Assessing Officer machinery which are transferred from construction Work-in-Progress are not eligible for additional depreciation. As discussed in the appeal filed by the assessee that as per section 32(1)(iia) of the Act any new plant and machinery which has been acquired and installed after 31.03.2005 by an assessee engaged in the business of any manufacturing or production of article or things is eligible for additional depreciation. In our understanding nowhere in the Page No. 51 & 5979/MUM/2016 (A.Y: 2011-12) CO NO. 31/MUM/2018 M/s. Indian Oil Corporation Ltd., section it is mentioned that new plant and machinery should be acquired and installed in the same year. We are of the considered view that there is no dispute that the plant and machinery was capitalised in the year under consideration. It is also not in dispute that assets capitalised from the capital Work-in-Progress were acquired after 31.03.2005. It appears that the Assessing Officer has overlooked the fact that such expenditure was part of the installation of plant which has been capitalized in the year under consideration. Therefore, in our considered view merely because the plant and machinery were transferred from construction Work-in-Progress will not disentitle the assessee to claim the additional depreciation as it has claimed. Therefore, in our humble opinion the assessee is very much entitled for the claim of additional depreciation and the findings of the Ld. CIT(A) cannot be faulted with. Ground No. 10 is dismissed.

Ground No. 11 relates to the claim of depreciation on railway siding and drainage. The underling facts show that the assessee has classified drainage and railway siding as plant and machinery and accordingly claimed depreciation @15% on the opening written down value and additions.

When the matter was agitated before Ld. CIT(A), it was strongly contended that railway siding and drainage are not buildings but plant as the same are used for running the business. Strong reliance was place on the decision in the case of CIT v. Birla Jute & Industries Ltd., [260 ITR 55]. After considering the facts and submissions, Ld. CIT(A) was convinced with the claim of depreciation @15% and allowed the same.

Before us, Ld. DR reiterated what has been stated by the Assessing Officer while allowing the depreciation @10%. The counsel once again relied on the decision in the case of CIT v. Birla Jute & Industries Ltd., (supra).

The Hon’ble Gujarat High Court in the case of Gujarat State Fertilizer Co. Ltd. [219 ITR 550] held as under: -

In the light of the aforementioned decisions, in our considered opining railway sidings would constitute plant since loading or unloading of raw materials or transporting of the finished products are also part of the operation of the business for obtaining the end product. Therefore, any devise used for such purpose should be considered as plant. And for drainage, the affluent discharge system for discharge of affluent

Ground No. 12 and 13 relates to the deletion of amortization of premium on forward contracts and commodity hedging loss. The underlying facts in the issues are that to safeguard against risk of exchange fluctuations in foreign currency at the time of payment of liability. The assessee entered into forward contract with the banks. Under the contract, banks agree to provide foreign exchange to the assessee at predetermined rate of the foreign currency on the date when payment to suppliers becomes due. This is very common practice by which the assessee restricts risk of foreign exchange loss at the time of settlement of foreign exchange liability. As per assessee risk management policy it undertakes refining margin hedging, inventory

On understanding the facts, we find that the assessee imports crude oil from foreign countries for which it incurs liability in foreign currency. To safeguard against risk of exchange fluctuations in foreign currency at the time of payment of liability, the assessee enters into forward contract with the banks. This way the assessee restricts risk of foreign exchange loss at the time of settlement of foreign exchange liability. The assessee amortizes the premium / discount arising at the inception of the forward exchange contracts over the life of the contract. On understanding the underlying facts, we are of the considered view that the forward exchange premium can neither be a contingent liability nor notional in nature since in case of a forward contract, there is a legally binding and enforceable contract for purchase of foreign currency on a future date at the pre-determined rates. Therefore, it cannot be said that it is a contingent liability as the date and the rate of purchase of the foreign currency are decided at the time of entering into contract.

Coming to the hedge loss of ₹.48.40 crores, the Assessing Officer has disallowed the same holding it as a notional loss or contingent liability, as according to the Assessing Officer hedging loss is speculative in nature. For the reasons discussed herein above, we reiterate that there is a legally binding enforceable contract for purchase of foreign currency on a future date at the pre-determined rates. Therefore, commodity loss is also cannot be treated as speculative in nature and the same has to be allowed and rightly done so by the Ld. CIT(A) and no interference is called for. Ground Nos. 12 and 13 are also dismissed.

In the result, appeal filed by the revenue is partly allowed on the grounds argued before us.

The grounds of cross objection read as under: - Grounds not decided 1. The learned Commissioner of Income tax (Appeals) erred in not deciding the following grounds of appeal: "Disallowance under section 14A Ground No.

For our detailed discussion and decision in the appeal of the assessee in , the cross objection becomes otiose.

In the result, cross objection filed by the assessee is dismissed.

To sum-up, appeal filed by the assessee and revenue are partly allowed. Cross objection filed by the assessee is dismissed.