DCIT, NEW DELHI vs. M/S. JUBILANT OFFSHORE DRILLING PVT. LTD., NOIDA

Following grounds have been raised in this appeal: “1. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in deleting the addition of Rs. 22,35,42,346/- on account of pre- operative expenses?

3. That the appellant craves leave to add, alter, amend or forego any grounds of appeal raised above at the time of hearing.”

Facts of the case in brief are that the assessee company is engaged in the business of oil & gas exploration and production. The assessee filed the return of income on 08.10.2010 declaring Nil income which was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act). Later on, the case was selected for scrutiny. In response to the notices, the ld. AR of the assessee attended the proceedings from time to time and furnished written replies to the questionnaire and produced requisitioned documents including books of accounts, bills and vouchers, bank statements which were put to test checks. The AO asked to show-cause as to why the expenses claimed by the assessee should not be disallowed as it had not commenced its business operations. The AO considered the submissions of the assessee and the case laws relied upon by the assessee. After applying the ratio decidendi laid down by various courts to the facts of the instant case, it was evident that in case of an oil company, only when the production facility was ready for commercial production then only it would amount to commencement of business. It was stated that the company is at a very nascent stage of its business and by no stretch of imagination, it could be said that the business had commenced. The AO observed that in the relevant previous year 2007-08, the assessee had only carried out exploration work, therefore, the business of the assessee was not set up and the expenditure incurred prior to setting up of a business was not allowable. In view of the above discussion, expenses including 3 Jubilat Offshore Drilling Pvt. Ltd. depreciation amounting to Rs. 22,35,42,346/- was treated as pre- operative expenses and hence disallowed and added back to the total income.

Being aggrieved the assessee carried the matter to the ld. CIT(A) who deleted the addition by holding as under: “I have considered the submissions made by the appellant, paperbook and other details filed and also perused the assessment order passed by the assessing officer. It is noted that the issue in the present case revolves around as to when the business of the appellant could be said to have been set up. As per the assessing officer, the appellant's business could be said to have been set up only on commencement of production of oil from oil wells, whereas, the appellant had submitted that production from oil wells are not relevant and the business of the appellant was set up when the appellant started bidding. I find considerable force in the argument of the appellant that in such a business carried on by the appellant, exploration is an essential activity which precedes the stage of drilling and production. The exploration activities are undertaken first in point of time which may result in actual production. There may be no actual production if the well being explore turned out to be dry. In such circumstances, it cannot be said that the appellant has not commenced business until the date of commercial production. It is also noticed that the appellant is accumulating the cost relating to exploration business under Capital Work in progress in the Balance Sheet, which as submitted by the appellant would be claimed in the year of production of oil as per section 42 of the Act. The figure of accumulation of 4 Jubilat Offshore Drilling Pvt. Ltd. expenditure as on 31.03.2010 is Rs.6,58,90,22,194 which is to be allowed in the year of Revenue Generation on operation of Oil wells. The appellant is only claiming deduction of the routine expenditure necessary for carrying out the business activities. In my view, the assessing officer cannot today turnaround and say that business of the appellant has not been set up more so when the issue relating to setting up of the business as specifically gone into by the assessing officer while passing the assessment order for the assessment year 2006- 07 under section 143(3) of the Act Moreso, my predecessor has decided this issue relating to setting up of business in favour of the appellant in the assessment year 2008-09, whose order has been upheld by the Delhi Bench of Tribunal in observing as under: "9. It was also rightly taken note by the ld CIT(A) that the business activity of the assessee consists of three stages:- the first stage relates to the exploration; the second stage activity relates to the development; and the third stage relates to the commercial production. The first in point of time lays the foundation for the second activity and the second activity when completed lays the foundation for the third activity. It is to be noted that the appellant is in the business of exploration, production and dealing in minerals, oils, gas and other related by-products of oil and gas in India or elsewhere. It is also to be noted that the three activities combined together constituted the business of the assessee. Each one of the activities was as much essential for the purpose of carrying out business of the assessee. Each one of the activity constitutes an integral part of the business of the assessee. The business consisted of a continuous process of these three activities and when the first activity was started with a view to embarking upon the second and then the third 5 Jubilat Offshore Drilling Pvt. Ltd. activities, it clearly amounted to commencement of the business. Business is nothing more than a continuous course of activities and all the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which is first in point of time and which must necessarily precedes the other activities is started as held by Hon'ble Justice P. N. Bhagwati in the case of CIT Vs. Saurashtra Cement and Chemical Industries Ltd. 91 ITR 170 (Gujarat High Court). The said decision of the Hon'ble Gujarat High Court was also affirmed by the Apex Court in the case of CIT Vs. Sarabhai Management Corporation Ltd. (1992) 102 CTR (SC) 164 and the said decision has recently been followed by the Jurisdictional High court in the case of the CIT Vs. Aspentech India (P) Ltd. 187 Taxmann 25 (Delhi).

In the instant case we find that one of the essential activity namely license/right to explore the blocks has been granted and exploration of blocks has already been started without which no production can take place. Hence business had commenced at the stage when licence to explore the respective blocks was granted by the Govt. of India to Assessee Company.

It is to be noted that the exploration activities commenced after prospecting, bidding and assignment of rights to explore were granted to the assessee by the Govt. of India for different blocks. Hence, the expenditure incurred after commencement of business should be allowed as business expenditure irrespective of the fact that the actual commercial production has not been commenced. Considering the nature, duration and cost of the business of the appellant, the ld CIT(A) has rightly made a finding that the assessee have commenced its business, when the appellant has carried the first activity being assignment of 6 Jubilat Offshore Drilling Pvt. Ltd. the right to explore the block awarded in the New Exploration and Licensing Policy (NELP) and commencement of exploration activities thereafter incurred an expense of more than Rs. 258 crores. Thus the ld CIT(A) reasons that the expenditure incurred for carrying on any of these including the first activity is also deductible in computing the profits and gains of the assessee for the relevant Assessment Year when the activity is undertaken.

A perusal of the table depicting the expenses claimed by the assessee which is reflected in Page 12 of the ld CIT(A) order shows that none of the expenses mentioned therein are of personal in nature; and the said expenses are of revenue in nature. Even otherwise, the assessee has capitalized all the exploration cost and the same have been reflected as "capital work for progress" in the balance-sheet. The assessee has only claimed deduction of the expenses which have been incurred for day to day operation of the business which are eligible for deduction U/S 37(1) of the Act. Since the assessee has claimed deduction only in relation to the expenditure of revenue in nature in the Profit and Loss Account, we find no infirmity in the reasoned order of the ld CIT(A), therefore, we confirm the finding of the ld CIT(A) on this ground and dismiss the said ground of appeal

I have heard rival submissions of the parties and have gone through the entire material placed on record. I find that the issue in question is squarely covered in favour of the assessee by the earlier decision of the ITAT dated 14.01.2014 in assessee’s own case for assessment year 2008-09 in ITA No. 3224/Del/2011. The said order of the ITAT was subject matter of appeal before the Hon’ble Delhi High Court and the Hon’ble High Court has affirmed the decision of the ITAT vide its decision dated 24.11.2014 rendered in and a cost of Rs. 10,000/- was levied on the CIT, Delhi-II for filing the appeal which was considered by the Hon’ble High Court misconceived and should have not been filed. The order of the CIT(A) on the issue in question being in conformity with the order of the ITAT, I therefore, do not see any reason to interfere with the same. Accordingly, order of the ld. CIT(A) is upheld.

In the result, the appeal of the department is dismissed. (Order Pronounced in the Court on 30/09/2015)