These cross-appeals are against the order of the CIT(A) for assessment year 2001-02. In Revenue's appeal (ITA No. 661/Ahd./2005) the following grounds are taken :

"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in :

(1)		deleting the demurrage paid by the assessee-company amounting to Rs. 3,56,051 which was disallowed by the Assessing Officer as not an allowable revenue expenditure.
(2)		restricting the disallowance made by the Assessing Officer of Rs. 10,00,000 to Rs. 5,00,000 out of 'pocket expenses' 'travelling and conveyance expenses' 'welfare expenses' and 'miscellaneous expenses' which were treated by the Assessing Officer as not incurred wholly and exclusively for the business of the assessee-company and as the assessee could not produce all the vouchers for these expenses.
(3)		in directing the Assessing Officer to allow depreciation on wells @ 100 per cent treating the same as 'plant' as against the rate of depreciation at 10 per cent applicable to 'building' as the term 'building' is defined to include well as per Note 1 below Appendix to rule 5 of the Income-tax Rules.
(4)		allowing depreciation @ 25 per cent on the capitalized value of Rs. 1,92,77,510 of gas separator and flood light mast treating the same as 'plant and machinery' as against 10 per cent allowed by the Assessing Officer treating the same as 'building'.
(5)		allowing deduction under section 80-IB(9) of the Income-tax Act amounting to Rs. 3,24,95,075.
(6)		considering well Nos. 6 and 7 as separate undertaking and allowing deduction under section 80-IB(9) of the Income-tax Act.
(7)		in appreciating the fact that section 80-IB(9) of the Income-tax Act applies to an assessee who is engaged in commercial production or refining of mineral oil, whereas the assessee produces natural gas and the word 'mineral oil' does not include 'natural gas' for the purpose of section 80-IB(9) of the Income-tax Act."

2. In the appeal by the assessee (ITA No. 789/Ahd/2005) the grounds raised are :

"The learned CIT(A)-IV, Baroda [hereinafter referred to as 'the CIT(A)'] erred on facts and in law in upholding the assessment order dated 3rd March, 2004 issued by the learned Asstt. CIT, Circle 6, Baroda (hereinafter referred to as the Assessing Officer') under section 143(3) of the Income-tax Act, 1961 (' the') in relation to the assessment year 2001-02, relevant to the previous year ended 31st March, 2001, in the case of Niko Resources Ltd.—a company incorporated in Canada and whose business in India is to prospect for, explore and produce mineral oil (hereinafter referred to as the appellant) on certain grounds.

Your appellant's ground of appeal against the order of the CIT(A) is specifically stated below :

1. Partial confirmation of disallowance in respect of business promotion expenses upto Rs. 89,000

The CIT(A) erred in upholding he disallowance in respect of business promotion expenses incurred by way of 'donation paid' to the Canadian Embassy to the extent of Rs. 89,000, out of total expenditure of Rs. 1,28,110 incurred by the appellant and disallowed by the Assessing Officer.

The appellant prays that the Assessing Officer be directed to allow deduction for the business promotion expenses of Rs. 89,000 which has been disallowed by the CIT(A).

2. Partial confirmation of ad hoc disallowance of expenditure incurred for providing residential accommodation to expatriate employees, upto Rs. 70,000.

The CIT(A) erred in upholding the disallowance in respect of expenditure incurred on providing residential accommodation to expatriate employees to the extent of Rs. 70,000, out of total disallowance of Rs. 1,00,000 made by the Assessing Officer.

The appellant prays that the Assessing Officer be directed to allow deduction for the expenditure incurred on providing residential accommodation to expatriate employees amounting to Rs. 70,000 which is disallowed by the CIT(A).

3. Partial confirmation of disallowance of administrative expenses upto Rs. 5,00,000.

The CIT(A) erred in upholding the ad hoc disallowance of Rs. 10,00,000 made by the Assessing Officer in respect of various administrative expenses (namely, out of pocket expenses, travelling and conveyance expenses; welfare expenses and miscellaneous expenses), to the extent of Rs. 5,00,000.

The appellant prays that the Assessing Officer be directed to allow deduction for the expenditure incurred on various administrative expenses (namely, out of pocket expenses, travelling and conveyance expenses; welfare expenses and miscellaneous expenses) amounting to Rs. 5.00,000, which has been disallowed by the CIT(A).

4.1 Disallowance of expenditure claimed under section 42 of theand enhancement of income through additional disallowance made

The CIT(A) has. based on the facts of the case and in law, erred in treating the appellant as not eligible to claim any deduction under section 42 of theamounting to Rs. 27,40,33,303 on the basis that the production sharing contracts do not provide for the deductibility of such expenses.

The CIT(A) further, erred on the facts and in law, in enhancing the income of the appellant by Rs. 5,62,96,527 by holding to be disallowable, the deduction given by the AO under section 42 of thein computing the appellant's income, on the same basis.

The appellant prays that the Assessing Officer be directed to allow deduction under section 42 of thein respect of the expenditure incurred by the appellant amounting to Rs. 27,40,33,303 in connection with the drilling and exploration activities carried on by it.

Without prejudice grounds

4.2 Error in allowing depreciation on expenditure incurred in drilling of wells

Without prejudice to 4.1 above, the CIT(A) has, based on the facts of the case and in law, while allowing depreciation on the expenditure incurred on construction of wells, erred in not totalling well No. 12, which was put to use on 1st Oct., 2000, as put to use for at least 180 days during the relevant previous year.

The appellant prays that the Assessing Officer be directed to allow full years' depreciation @ 100 per cent on well No. 12 for the relevant previous year, as it was put to use for 182 days during the relevant previous year.

4.3 Depreciation on unproductive wells

Without prejudice to 4.1 above, the CIT(A) has, based on the facts of the case and in law, erred in disallowing depreciation on the actual costs of dry wells amounting to Rs. 5,68,93,238.

Further, the CIT(A) has, based on the facts of the case and in law, erred in disallowing depreciation on the actual cost of delineation well A#1 amounting to Rs. 5,41,95,406.

The appellant prays that the Assessing Officer be directed to allow the deduction in respect of the aforesaid expenditure by way of 100 per cent depreciation under section 32 of the.

4.4 Depreciation on causeway leading to land based drilling platform and escape bridge thereon

The CIT(A) has erred in law and in facts in holding that the approach road leading to the land based drilling platform and escape bridge thereon are not plant and thus classified them as building. Accordingly the CIT(A) erred in restricting the rate of depreciation on additions to these assets to 10 per cent of the actual cost amounting to Rs. 23,04,579 as against 25 per cent applicable to plant situated above ground.

The appellant prays that the Assessing Officer be directed to allow the depreciation on causeway and escape bridge which is part of land based drilling platform @ 25 per cent since it constitutes plant in the business of the appellant.

5. Deduction for head office expenses under section 44C of the

The CIT(A) erred on facts and in law in not directing the Assessing Officer to increase the deduction computed under section 44C of the Act, based on the adjusted total income to be computed by him.

The appellant prays that the Assessing Officer be directed to allow the deduction in respect of the head office expenses at the rate of five per cent of the adjusted total income of the appellant.

6. Interest levied under section 234B of the

The learned CIT(A) erred in not directing the Assessing Officer to apply the amended rate of interest while calculating interest payable under section 234B of the Income-tax Act.

7. Interest levied under section 234C of the

The learned CIT(A) erred in not directing the Assessing Officer for not levying interest under section 234C in absence of express direction giving in the assessment order."

3. As regards ground No. 1 in Revenue's appeal, the facts are that the assessee paid demurrage charges of Rs. 3,56,051 during the year for late taking of delivery of the drilling equipment imported and claimed the same as deductible revenue expenditure. The Assessing Officer disallowed the claim of the assessee by holding that the charges as paid were for infraction of law by not taking the delivery of certain goods within the stipulated time laid down as per rule. The CIT(A) allowed the claim by relying upon the decision of Allahabad High Court in the case of Nanhoomal Jyoti Prasad v. CIT [1980] 123 ITR 269 (All.) wherein it is held that the demurrage is a charge by way of compensation and includes amount chargeable for storage and safe custody of the goods by port authorities and it is an additional amount charged from the person for delayed clearance. It is not a fine paid to the port authorities for any criminal act but is a compensation for the use of port facilities beyond the free period allowed under the rules.

4. After hearing the parties we do not find reason to disagree with the CIT(A). For importing the drilling equipment goods at zero customs duty, essentiality certificate (EC) from Director General of Hydrocarbons (DGH) is required and there was. delay in obtaining essentiality certificate from DGH and that delayed the clearance from customs within the 'demurrage free period'. In the case of Nanhodmal Jyoti Prasad (supra) the assessee had imported certain goods under an import license. On inspection by the customs authorities, the imported goods were different from the goods for which the assessee had a license to import. The imported goods were confiscated. The assessee paid an amount of Rs. 22,000 as fine in lieu of confiscation, and cleared the goods, and got the goods released. A period of 48 months had elapsed since the date of the confiscation order and the release of the goods, as the assessee had been agitating the correctness of the order of the Collector of Customs before various authorities. The port authorities charged an amount of Rs. 19,119 as demurrage for the goods not being cleared within the free period allowed under the port rules. The High Court held that the demurrage is a charge by way of compensation and includes amount chargeable for storage and safe custody of the goods by the port authorities and an additional amount for delayed clearance. It was not a fine paid to the port authorities by the assessee for any criminal act, but compensation for use of the port facilities beyond the free period allowed under the rules. Though the delay was undoubtedly occasioned due to import of goods which were not in accordance with its import license, but that, the Court held, did not alter the character of the payment. On the import license being regularised and the assessee being allowed to clear the goods against the existing import license, commercial expediency dictated and required the assessee to take delivery of the goods from the port authorities after paying the requisite compensation. We, therefore, uphold the order of the CIT(A) in allowing the expenditure as laid out wholly and exclusively for the business of the assessee.

5. The next ground is regarding disallowance of Rs. 10,00,000 out of pocket expenses/travelling and conveyance expenses, welfare expenses and miscellaneous expenses. The details of the expenses are - (i) Out of pocket expenses Rs. 68,340; (ii) Travelling and conveyance expenses Rs. 1,23,99,212; (iii). Welfare expenses Rs. 11,26,150; and (iv) Miscellaneous expenses Rs. 30,51,823. The assessee during the course of assessment proceedings did not produce all the vouchers relating to these expenses on travelling, conveyance, welfare, miscellaneous and out of pocket expenses. The ground stated was that they were large in quantity and had been kept in so many files. Moreover, the voucher relating to these heads were found to be kept in a very disorderly manner and it was extremely difficult to find out a particular voucher for a particular expenditure and the purpose for which expenditure was incurred. Some of the journeys were not linked with the business purpose. The assessee could not satisfactorily explain as to what was the purpose of travelling. In absence of these details, the entire amount on out of pocket expenses/travelling and conveyance expenses, welfare and miscellaneous expenses were here held to be not for business purposes. The Assessing Officer accordingly disallowed a sum of Rs. 10,00.000.

6. The CIT(A) reduced the disallowance to Rs. 5,00,000. He accepted the assessee contention as regards out of pocket expenses paid to auditors because as per the terms of agreement, normally, an assessee is required to reimburse out of the pocket expenses incurred and claimed by the auditors. As regards travelling and conveyance expenses, welfare expenses and business expenses he observed that the assessee had not been able to produce complete vouchers and to state the specific purpose of particular expenditure, before the Assessing Officer and therefore the expenditure that too, wholly and exclusively for the purpose of business was not subjected to verification at the level of Assessing Officer irrespective of the fact that the financial statements have been audited by the auditor. It is a fact of common knowledge that on in-depth scrutiny in various audited accounts, the Assessing Officer finds out the various items of disallowances, which had been also sustained at higher judicial level. He however found some force in the reasons given by the assessee that it was not possible to produce specifically all the vouchers and to state for what purpose, these expenditures were incurred, as these were kept in different files and were quite bulky. At the same time keeping in mind the fact that the expenditure has been wholly and exclusively incurred could not be subjected to verification by Assessing Officer, due to failure on the part of the assessee to produce complete details and vouchers and considering the very nature of expenses, the total amount of welfare expenses, business expenditure and conveyance expenses, the CIT(A) held that whole of the expenditure cannot be considered to be incurred wholly and exclusively for the purpose of business reduced the disallowance to Rs. 5,00,000.

7. Both the assessee and the Revenue are in appeal. The learned CIT-Departmental Representative submitted that the vouchers were not produced before the Assessing Officer on the ground of their bulkiness and kept in different files and that it was not possible specifically to produce all the vouchers and to state as to what purposes these expenses were incurred; that out of pocket expenses are hotel bills of auditors in addition to fees; that the assessee could not explain the purpose of travelling, need for journey and expenditure on conveyance. Some of the journeys not linked to business purpose. Like is the case of welfare and miscellaneous expenses; that the CIT(A) has not given any reason for restricting the disallowances to Rs. 5,00,000 even though he agreed to the finding of the AO that the burden of proof to explain the expenditure is on assessee; that it is settled position of law that where an assessee claims a deduction, the onus on him to bring all material facts on record to substantiate the claim in view of decisions of Sohan Pathak & Sons v. CIT [1951] 19 ITR 199 (All.), Lakshmiratan Cotton Mills Co. Ltd. v. CIT [1969] 73 ITR 634 (SC), L.H. Sugar Factory & Oil Mills (P) Ltd. v. CIT [1980] 19 CTR (SC) 185 : [1980] 125 ITR 293 (SC), CIT v. Chandravilas Hotel [1986] 56 CTR (Guj.) 182 : [1987] 164 ITR 102 (Guj.), CIT v. Southern Sea Foods Ltd. [1995] 129 CTR (Mad.) 79 : [1995] 215 ITR 176 (Mad.) and Assam Pesticides & Agro Chemicals v. CIT [1998] 145 CTR (Gau.) 213 [1997] 227 ITR 846 (Gau). According to him the Assessing Officer was reasonable enough to disallow only Rs. 10,00,000 out of the expenses of about Rs. 234 lakhs which is about 4 per cent and deserve to be sustained.

8. The learned counsel on the other hand submitted that the Assessing Officer has presumed that all expenses claimed cannot be said to be laid out for business purpose on the allegation that the relevant vouchers could not be produced; that all the aforesaid expenses have been incurred wholly and exclusively for the purposes of business of the assessee; that a reputed firm of chartered accountants has audited the financial statements of the assessee without any qualified report and the assessee has also obtained the tax audit report and furnished the same with the return of income and no adverse findings regarding the propriety of expenses have come to light in the course of the audit proceedings of the assessee; that the Assessing Officer has not pointed out any specific instances where travel expenses have been found to be not connected to the business of the assessee. Therefore, it was submitted that the Assessing Officer had made the aforesaid disallowances on ad hoc basis and on wrong presumptions and hence, the same may be deleted treating it as incurred for business purpose.

9. We have heard both the parties and considered their rival submissions. We find force in the contention of the learned CIT-Departmental Representative that when the assessee has claimed deduction the onus heavily lies on him as held in the decisions referred to by him/it to substantiate its claim by producing necessary evidence in respect of such expenditure. The vouchers relating to these expenses were found observed to be kept in a very disorderly manner and it was found extremely difficult to hold that a particular expenditure and the purpose for which such expenditure was incurred was for business purposes. In such circumstances, the deduction in full cannot be allowed and the authorities below are justified in making partial disallowance out of such expenses. The disallowance as sustained by the CIT(A) being not unreasonable, we uphold the same and dismiss the ground of the assessee as well as that of the Revenue.

10. The next dispute in Revenue's appeal is against directing the Assessing Officer to allow depreciation on wells @100 per cent treating the same as plant as against 10 per cent applicable to building. Alternate claim of the parties is to allow correct rate of depreciation on the assets. The entire cost of well is claimed under section 42 before the Assessing Officer who disallowed the claim but allowed 10 per cent depreciation as building. The CIT(A) however allowed depreciation @ 100 per cent but restricted it to 50 per cent (being 1/2 of 100 per cent) for the use being less than 180 days. Both the Revenue and the assessee are in appeal, the assessee because of disallowance of its claim under section 42 and the Revenue because allowance of depreciation on wells as plant at 100 per cent; alternatively to restrict to 25 per cent. Both the above issues being common and inter-connected, are being discussed hereunder together.

11. We shall first take up the issue of deduction under section 42, raised in the appeal of the assessee that being the principle issue. The question of allowing depreciation and that too at what rate would arise only when assessee's claim under section 42 is found to be not maintainable.

12. The assessee claimed for deduction of a sum of Rs. 27,40,33,303 under section 42 of the Income-tax Act, 1961 comprising of the following amounts—(i) Rs. 25,58,865 being additions to fixed assets; (ii) Rs. 5,41,95,406 being drilling costs and exploratory delineation; and (iii) Rs. 21,72,79,032 being additions to producing properties.

13. As regards first item, the details of claim of expenditure being additions to fixed assets of Rs. 25,58,865 are :

Description	Hazira	Bhandut	Cambay	Baroda	Surat	Baroda	Total
Office equipment and furnishing	66,465	3,300	4,748	1,72,827	16.904	--	2,64,244
Guest house equipment	--	--	--	14,066	41,272	12,61,014	13,16,352
Computers	3.75,63			1,77,755	1,141		5,52,247
Vehicles	22,215	17.98		9.332			24,94,730
Other assets				1,78,493	1.944	_	1,76,550
Total	66,425	21.28	4.748	5,52,476	55.089	12,61,014	25,58.865

14. The Assessing Officer observed that the amount of Rs. 25,58,865 cannot be held to be relating to exploration and drilling activities or assets used in connection therewith. He observed that the amount of Rs. 2,64,244 has been incurred on office equipment and furnishings kept in Hazira, Bhandut, Baroda, Surat, the majority of the expenditure being in Baroda, which is near about 150 kms. away from the field. It has not been explained as to how the office equipment and furnishings kept in different places particularly in Baroda were used in connection with drilling and exploration activities; that Rs. 13,16,352 have been incurred on purchase of equipment kept in guest house located at Surat and Baroda and it is near about 180 kms. away from the Hazira gas field where the drilling operations were being carried on and was used by expatriate general manager. As the assessee had hired a drilling rig for drilling and exploration purposes the guest house equipment kept in Baroda and Surat would not have been used in connection with the drilling and exploratory activities; that the assessee has incurred the amount of Rs. 5,52,247 on purchase of computers kept at Hazira and Baroda. These computers were used for the office work and also in connection with distribution and sale of crude oil and natural gas. The computers were not connected in any way with drilling and exploration activities; that Rs. 2,49,473 on vehicles used for Hazira and Baroda office the Assessing Officer observed that the drilling operations activities were not being carried out by the assessee itself, therefore, it is not feasible to believe that the vehicles would have been used in connection with drilling and exploration activities; that Rs. 1,76,550 on purchase of generator kept at Baroda cannot be used in connection with drilling operations which are being carried out at a far distant place. Therefore, these sums were not deductible under section 42 of the Income-tax Act, 1961 by the Assessing Officer. He however allowed depreciation at the applicable rates on these items.

15. As regards drilling costs and exploratory delineation Rs. 5,41,95,406, the Assessing Officer allowed the claim and held that the drilling and exploration work was done by Essar Ltd. and John & Co. by their own drilling rig. The assessee has paid charges for drilling and exploration work to both the companies. Therefore, the assessee's claim for deduction under section 42 was restricted to drilling and exploration charges paid to both the companies.

16. As regards claim for deduction on additions on producing properties of Rs. 21,72,79,032 the Assessing Officer held :

"13.5 The amount of Rs. 21,72,79,032 claimed to be deductible under section 42 of the Income-tax Act, 1961 comprises the following amounts :

Description	Hazira	Bhaiidut	Cambay	Baroda	Surat	Baroda	Total
Wells cost	14,02.49.076	4.84,907					14.07.33,983
Pipeline cost	1.50.01.484						1.50.01.484
Land based drilling platform	23.04.579						23,04,579
Storage/trans/other/facility	5.98.336	1.90.236	3.48.390				11.36.961
Non producing properties dry hole			5.68.93238				5.68,93.238
Land	4.99.950	2.39.760					7,39,710
Building	9.48.890	1,88,583					11,37,472

13.6 A perusal of the details cited above shows that Rs. 14,07,33,983 has been spent on wells cost. The well cost is nothing but production cost which is incurred to protect, cover and put a structure around the space drilled from which mineral oil or gas is obtained. The wells constructed cannot be held to be related to drilling and exploration activities or assets used in connection with drilling and exploration activities. Had the wells been the part of drilling and exploration activities the same would have been shown by the assessee under the head drilling and exploratory activities and not under the head producing properties in the balance sheet and finance statements. It is nowhere stated, either in the agreement entered into with the Government of India or section 42, that expenditure incurred on well will be a part of drilling and exploration expenditure or assets used in connection therewith. The agreement with the Government of India is silent as to which expenditure should fall within the ambit of drilling and exploration activities. The amount incurred on well is held to be a capital expenditure not deductible under section 42 of the Income-tax Act, 1961. It however, qualifies for depreciation @ 10 per cent as the well falls within the definition of building. Accordingly disallowance of Rs. 14,07,98,333 is made and depreciation @ 10 per cent which works out to Rs. 1,40,79,803 is allowed.

The assessee has also claimed deduction of Rs. 1,50,01,084 under section 42 in respect of pipeline cost. The pipeline costs are not a part of a drilling and exploration expenditure. However, it qualifies for 100 per cent deduction as depreciation under section 32 of the Income-tax Act, 1961; the assessee being a mineral oil concern. Therefore no disallowance is made.

Land based drilling platform on which expenditure of Rs. 23,04,579 is incurred is held to be related to drilling and exploration activities and the amount incurred is deductible under section 42 of the Income-tax Act, 1961.

13.9 An amount of Rs. 11,36,961 has been incurred on storage/trans/other/facility and the same is claimed to be deductible under section 42 of the Income-tax Act, 1961 on the ground that the said expenditure relates to drilling and exploration expenditure. The assets were used for storing oil and natural gas obtained from the oil and gas field. They are not connected or related to the drilling and exploration activities. Therefore the amount of Rs. 11,36,961 incurred on storage/trans/other/facility is held to be not deductible under section 42 of the Income-tax Act, 1961. It is accordingly disallowed. However, the assets used being plant and machinery are entitled to depreciation @ 25 per cent. Accordingly depreciation of Rs. 2,84,240 is allowed.

13.10 The assessee has incurred expenditure of Rs. 7,39,710 on land. It has not been established that land has got any connection with drilling and exploration activities. Therefore, the amount of Rs. 7,39,710 expended on land is disallowed. The land does not qualify for depreciation under section 32 of the Income-tax Act, 1961. Therefore, no depreciation is allowed.

13.11 The assessee has incurred expenditure of Rs. 11,37,472 on building. It has not been established satisfactorily that the building has any connection with drilling or exploration activities. Therefore, the amount of Rs. 11,37,472 being expenditure incurred on building is held to be not allowable under section 42 of the Income-tax Act, 1961. The assessee will, however, be entitled to depreciation under section 32 @ 10 per cent, which works out to Rs. 1,13,747.

14. As per section 42(1)(a) expenditure incurred by way of infructuous or abortive exploration expenses in respect of any area surrendered prior to the beginning of the commercial production is allowable. The assessee had started commercial production some 7 to 8 years ago. Therefore, no deduction of Rs. 5,68,93,238 claimed on account of dry hole expenditure is held to be allowable under section 42(1)(a) of the Income-tax Act, 1961, as the same has been incurred after beginning of commercial production."

17. The CIT(A) held that assessee is not entitled to deduction under section 42 and withdrew the deduction allowed by the Assessing Officer by issuing enhancement notice, though he allowed depreciation on a part and disallowed on the balance. He noted it undisputed that the special expenditure or allowances are envisaged to be allowed under section 42(1), though in normal course, these expenditures are capital in nature; that the deduction of this expenditure is allowed to the profits and gains of the business consisting of prospecting for or extracting or production of mineral oil, in relation to which, the Central Government has entered into an agreement; that in addition to the normal allowances admissible under the, only such allowances are allowed under section 42(1), which are specified in the agreement and these specified allowances should also fall in any of the sub-clause (a), (b) or (q ) of section 42(1); that sub-clause (a) applies to situation prior to beginning of commercial production; that sub-clause (b) applies to the situation, after the beginning of commercial production and that sub-clause (c) applies to allowance in relation to depreciation on mineral oil in the year where production has begun and in succeeding year. As the assessee has already started commercial production, he held that only sub-clause (b) would apply. He then referred to section 42(1) with sub-clause (b) and saw that for the purpose of allowing deduction/allowances in addition to the allowances admissible in other sections of this Act, the conditions to be satisfied are : (1) There should be an agreement of the person with Central Government (and agreement should be laid on the table of each house of the Parliament); (2) Only such allowances are allowed which are specified in the agreement, (3) Such specified allowances should be in relation to the expenditure incurred in respect of drilling or exploration activities or services or in respect of physical assets used in that connection and (4) Such allowances shall be computed and made in the manner specified in the agreement. Therefore, he concluded that firstly, there should be an agreement of the assessee with the Central Government and the assessee has entered into agreement with the Central Government in respect of various fields, named as production sharing contracts (PSC); the second basic condition is that only those allowances are allowed which are specified in the agreement and that these allowances should be in relation to various specific natures as mentioned in sub-clause (a), (b) and (c ). It means that these allowances should be specified in the agreement and there may be chances that various/different types of allowances have been specified in the agreement, which are in respect of drilling or exploration activities or services.

18. He observed that undisputedly no allowances have been specified in the PSC. As already mentioned, all the five contracts, which the assessee and M/s GSPCL jointly entered with the Government of India are having the same content and language and art. 15 in all deals with computation of profits and gains for the purpose of income-tax and it is named as "taxes, royalties, rentals, customs duties etc." Clause (3), which deals with computation of profits and gains for levy of income-tax is extracted by him as under :

"15.3. The profits and gains of the a company consisting of petroleum operations shall, for the purpose of levy of income-tax under the Income-tax Act, 1961 be computed on the basis of the value, determined in accordance with art. 18, of its participating interest share of crude oil produced and saved and sold, or otherwise disposed of, from the contract area and from any revenue realised on the same or disposal of associated or non-associated natural gas referred to in article 20 as well as any other gains or receipts from petroleum operations as reduced by the allowable deductions"

19. He observed that the Authorised Representatives of the assessee have admitted that at no other place, any deduction has been specified in relation to income-tax. However, they have submitted that the phrase used above in article 15.3. "allowable deductions" should be read as "allowable deductions under section 42 of the". The contention of the assessee that it should be read as "that the profits and gains of the petroleum operations shall be computed in the prescribed manner as reduced by the deductions allowable under the, including, section 42 of the" was rejected by the CIT(A) by observing that firstly, because in PSC article 15.3 phrase used is "as reduced by "allowable deduction" and that this having been laid on the table of both the houses of Parliament and being a legal document no word or phrase can be added. While reading it, one has to read what has been mentioned in the contract/agreement; that presuming but not admitting that one can read the contract be adding words "including section 42 of the Income-tax Act", thus, making the phrase "as reduced by deduction allowable under the including section 42 of the" even then one will have to revert back to section 42 itself and thus, no additional allowance can be allowed to be deducted by virtue of section 42, over and above, the normal allowance allowable under other section of the. He further observed that the aforesaid gets further fortified from the fact that not only these allowances should be specified in the agreement, but even the computation of such allowances has to be made in the manner specified in the agreement. The same is quite clear from the phrase used below sub-clause (c) of section 42(1), namely : "…and such allowances shall be computed and made in the manner specified in the agreement". He accordingly held that no such allowance which is allowed as deduction under section 42 can be computed, in absence of manner of computation being specified in the agreement.

20. The contention of the assessee that section 42 is an incentive provision for the concerns engaged in extraction and production of mineral oil and accordingly, it should be interpreted liberally and that the Supreme Court has held that where the plain literal interpretation of statutory Provision produces a manifestly unjust result, the Court, might modify the language so as to achieve the intention of legislature was also rejected by the CIT(A) by citing the decision of the Supreme Court in the case of Navopan India Ltd. v. CCE & Customs 1994 (73) ELT 679 (SC) holding "exemption being in the nature of exception, it is to be construed strictly at the stage of determination whether the assessee falls within its terms or not and in case of doubt the benefit must go to the State. Once it is found applicable, full effect may be given." As regards rules of liberal interpretation he referred to the decision of the Supreme Court in the case of Pandian Chemicals Ltd. v. CIT [2003] 183 CTR (SC) 99 : [2003] 262 ITR 278 (SC) holding that "rules of interpretation would come into play only if there is any doubt with regard to the express language used in the provision. Where the words are unequivocal, there is no scope for importing the rule of liberal interpretation of an incentive provision". According to him it is clear that where there is no doubt with regard to the express language and the words are unequivocal there is no scope for importing the rule of liberal interpretation. The Supreme Court in another case namely, Gujarat Industrial Development Corporation, v. CIT [1997] 142 CTR (SC) 181 : [1997] 227 ITR 414 (SC) has held that "even if a provision is capable of 'more than one interpretation, the interpretation which serves the object of the enactment has to be accepted". Again in another case namely, Petron Engineering Construction (P.) Ltd. v. CBDT [1989] 75 CTR (SC) 20 : [1989] 175 ITR 523 (SC) has held that liberal conception cannot be made by doing violence to the plain reading of the provision of the. Liberal construction can be resorted to only when it is possible without impairing the legislative requirement and the spirit of the provision. The Supreme Court : again in CIT v. N.C. Budharaja & Co. [1993] 114 CTR (SC) 420 : [1993] 204 ITR 412 (SC) held that the words used in a provision take colour from the context as also from the history of the provision. Liberal interpretation should not do violence to plain language. The object of an enactment should be gathered from a reasonable interpretation of the language used therein. It is thus clear that the language in the statute has to be read plainly and normally, to be read from the context in which they have been used. The rule of interpretation has only to be used when there is any doubt with regard to the express language used in the provision. In the instant case of the assessee, there is no any doubt in the language used in section 42(1) of the Income-tax Act as well as in PSC. The language used is quite unequivocal and there is no scope of any double interpretation. The principle of liberal interpretation has to be applied, even if it were to apply, it should not be to do violence to the plain language of the.

21. The argument of the assessee that when the plain interpretation produces a manifestly unjust result, the Court might modify the language was also rejected because in the instant case, the language of the statutory provision is not creating any unjust result. In fact the language of the provision namely, section 42 is quite clear and unequivocal, inasmuch as that only those allowances are to be allowed which are specified in the agreement entered into by the assessee with Central Government. In fact PSCs do not specify any allowance and accordingly, no deduction can be allowed under section 42. In contrast he noted that in the later period, the assessee itself has entered into PSC providing the allowances allowed to be deducted under section 42. It, according to him only proves that while entering into these contracts with the assessee and GSPCL, the Central Government at that time may not have thought it fit to provide special deduction under section 42 of Income-tax Act and in view of the same, the expenditure/allowances have not been specified in the PSCs signed in the years 1994 and 1995, which are relevant to the assessment year under consideration. The another difference noticed in the later contract (in which the expenditure has been specified) and the contracts under consideration is that these later contracts are entered into between Central Government and the assessee only, whereas, the contracts under consideration are tripartite contract between Central Government, the assessee and M/s. GSPCL. Accordingly, he held that in respect of present PSCs the assessee is not entitled to deduction under section 42.

22. As regards assessee's contention based on discrimination on the basis of Canada tax treaty that the assessee cannot be subjected to a more burdensome basis of taxation, since it would amount to discrimination, which is not permissible under the provisions of article 24 of the Indian-Canada tax treaty the CIT(A) held : "As regards Indian-Canada tax treaty is concerned, it has provided that the Canadian company cannot be subjected to more burdensome basis of taxation, meaning thereby that in the Indian tax laws i.e., in the Income-tax Act, more burdensome provisions of taxation to any Canadian company cannot be incorporated vis-a-vis the Indian company, that too, within the four corners of the restriction provided in the article 24. In the instant case, it is clear that same provisions of Income-tax Act, 1961 are being applied to the assessee (a Canadian company) which are being applied to M/s. GSPCL (Indian company). There is no difference in the provisions of Income-tax Act, more particularly, section 42 for Indian company and Canadian company. Accordingly, this argument of the assessee has no basis and is in fact misplaced and therefore, rejected. It is only that the Assessing Officer of M/s. GSPCL has not examined the basic issue 'regarding allowability of deduction under section 42'. Accordingly, the learned CIT(A) in the case of M/s GSPCL has no occasion to examine whether deduction under section 42 ofis at all available to M/s. GSPCL or not. Without prejudice to above, it may be mentioned that no detailed discussion has been done by the learned CIT(A) in the case of M/s. GSPCL in relation to the basic issue of allowability of deduction under section 42. In fact CIT(A) has discussed the allowability of specific expenditure with reference to the fact whether same can be considered as drilling and exploration expenses or not and is thus covered under clause 'b' of section 42(1) and not the basic issue whether all these expenses have been specified in the argument, which is a Prerequisite before proceeding further to examine whether these expenses are part of drilling or exploration expenses."

23. Claim under section 42(1) : The learned counsel of the assessee submitted that agreements provide for the manner of deduction of expenditure; that section 42 applies as the assessee is engaged in extracting mineral oil and the Government is a party to the agreement; Hazira agreement was tabled on the floor of the house, though for other agreements no information is available; and that the manner of expenditure is provided in the agreements and he referred to in this connection articles 15, 24, Annex, 'c'. The CIT(A) relied upon 2003-04 agreements providing specifically which is nothing but making explicit what is implicit. He then referred to letter dated 11th April, 2007 and also to earlier letter dated 17th June, 2005 and submitted that it was nothing, but a technical objection not valid in law.

24. The assessee also submits that the aforesaid assets were used in the assessee's project office; site offices at Hazira; Bhandut, Sabarmati, Matar and Cambay and the guest house at Surat; that the core activities of the assessee are drilling and exploration and the project office provides overall support to these core activities; that the personnel working at the project office are operation managers, technical personnel, drilling supervisors, geologists, finance and accounts staff, commercial and administration staff who are carrying out the activities of—drilling plans, ascertaining requirement of equipment, requirement of material and services relating to drilling, and locating suppliers and having negotiations with them; that the guest house was used by the expatriate general manager and the project engineers who are also intimately engaged in the drilling and exploration activities carried on by the assessee; that the other personnel at the project office such as the finance and accounts personnel and administrative personnel provide services to the entire operations of the company, the core being the drilling and exploration activities; and that the assets used were directly or indirectly in connection with drilling and exploration activities. It is therefore, submitted that the expenditure incurred by it in respect of aforesaid assets is "in connection with" drilling and exploration activities is fully allowable under section 42(1)(b). The expression "in connection with" has to be given a wider meaning than the expression "for" in the light of the decision of Bombay High Court in the case of CIT v. Smt. Shakuntala Kantilal [1991] 190 ITR 56 (Bom.).

25. The assessee submits that it has claimed a sum of Rs. 27,40,33,303 under section 42 of the Act, towards expenditure incurred by it in connection with natural gas and oil drilling and exploration activities and assets used in connection therewith. This includes Rs. 14,07,33,983 towards expenditure incurred for drilling natural gas and oil wells which comprised of expenditure on drilling tangibles and drilling services' Rs. 12,14,56,473, gas separator Rs. 1,87,92,603, and flood light mast Rs. 4,84,907. The expenditure of Rs. 12,14,56,473 is 1/3rd share of the assessee of Rs. 36,34,52,591 and was incurred in the course of drilling natural gas/oil wells below the ground at depths varying between 1,000 to 2,000 meters, and therefore wrongly disallowed by Assessing Officer. Section 42 of theallows deduction for, inter alia, "drilling or exploration activities or services or in respect of physical assets used in that connection" in lieu of depreciation which would have otherwise been allowable on such expenditure. The terms "drilling" and "exploration" are not defined in the and there be understood on the industry practices, governing business laws, and relevant guidance notes for accounting, etc. Drilling is the core activity in the oil and gas producing industry. Oil and gas are contained in the pore spaces of a reservoir rock. Reservoir rocks are located in millions of layers in the earth and the seabed Drilling is required to explore (or discover) as well as extract such oil and gas. The drilling can be of two types : (i) Exploratory drilling for the purpose of searching for undiscovered oil and gas accumulations on any geological prospect; and (ii) Development drilling referring to drilling or deepening, completion or recompletion of a well within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive. In simplified terms the drilling process involves turning a string of pipe with a drill bit connected to the end, using a motor, either at the surface or downhole. The drill bit has special "teeth" to help it crush or break up the rock it encounters to make a hole in the ground. The 9 steps involved in drilling were then explained. It is submitted that each of the aforesaid steps is an integral part of the drilling process. Simplistically, drilling means boring or making a hole. It is a process of turning a string of pipe with a "drill bit" connected to the end, into the ground or the seabed. During the drilling process, "drilling fluid" or "drilling mud" is constantly circulated down the well bore. Drilling mud serves several purposes. It raises the small bits of rock (cuttings) from the drilling process to the surface so they can be removed. It also lubricates the drilling bit and keeps formation fluids from entering the well bore, Approximately every 30 feet as the hole is deepened, joint of drill pipe is added, a process called making a mouse hole connection. Periodically, when the drill bit becomes worn or damaged; the entire drill pipe has to be removed form the hole in a process called "tripping out". After a new drill bit is attached, the pipe is lowered back into the, hole, called tripping in. Normally the drill pipe is removed and lowered three joints i.e. stand, at a time depending upon the height of the "derrick" tripping when "casing" must be set. Casing is a steel pipe that is set i.e. cemented to the well bore. Functions of casing include preventing the caving in of the hole, preventing fresh water sands excluding water from the producing formations, confining production to the well bore and controlling formation pressure. These steps are summarised :

—Placing the drill bit, "collar" and "drill pipe" in the hole;

—Attaching the "Kelly" and "turntable" and begin drilling;

—As drilling progresses, circulated mud through the pipe and out of the bit to float the rock cuttings out of the hole;

—Adding new sections (joints) of drill pipes as the hole gets deeper; and

—Removing (trip out) the drill pipe, collar and bit when the pre-set depth (any where from a few hundred to a couple-thousand feet) is reached.

26. Para 8 of the Guidance Note on Accounting for Oil and Gas Producing Activities issued by the ICAI ("the Guidance Note") is referred to defining the exploration activities as : "Exploration activities cover the prospecting activities conducted in the, search for oil and gas. In the course of an appraisal programme these activities include but are not limited to aerial, geological, geophysical geochemical, palaeontological, palynological, topographical and seismic surveys, analysis, studies and their interpretation. Investigations relating to the subsurface geology including structural test drilling, exploratory type stratigraphic test drilling, dulling of exploration and appraisal wells and other related activities such as surveying, drill site preparation and all work necessarily connected therewith for the purpose of oil and gas exploration." Para 9 of the Guidance Note deals with exploration costs as : "principal types of exploration costs cover all direct and allocated indirect expenditure which include depreciation and applicable operating costs of related support equipment and facilities and other costs of exploration activities." In view of nature of drilling and exploration activities, it is claimed that the expenditure on drilling tangibles and drilling services are clearly incurred towards drilling and exploration activities and is allowable as under section 42 of the; that the deducibility of expenses for tax purposes should be determined only with reference to tax principles and not accounting principles in view of decisions of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) and Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 141 CTR (SC) 387 : [1997] 227 ITR 172 (SC).

27. As regards the expenditure incurred on gas separator and flood light mast, it is submitted that the laying of flow lines and constructing production facilities like separators, heater, teeters, tanks etc. is a logical conclusion to the drilling process. Further, the expenditure incurred on installing the flood light mast is part of the site preparation activity. The flood light mast carries a floodlight that enables illumination and aids activities, if any, carried out at the drilling site after dark. The expenditure on storage/transportation/other facilities amounting to Rs. 11,36,961 are allowable under section 42.

28. We have heard the parties and considered the rival submissions. To claim a deduction under section 42 the expenditure claimed should be in connection with drilling and exploration activity as envisaged under section 42(1)(b). There is no doubt that the expenses claimed by the assessee are capital in nature not allowable in normal course. The claim of the assessee is for special expenditure/allowances under section 42(1) and we have to examine it under this section. Section 42(1) reads as under :

"42(1) For the purpose of computing the profits and gains of any business consisting of the prospecting for or extraction or production of mineral oils in relation to which the Central Government has entered into an agreement with any person for the association or participation of the Central Government or any person authorised by it in such business (which agreement has been laid on the table of each house of Parliament), there shall be made in lieu of, or in addition to, the allowances admissible under this Act, such allowances as are specified in the agreement in relation;

(a)		…………
(b)		after the beginning of commercial production, to expenditure incurred by the assessee, whether before or after commercial production, in respect of drilling and exploration activities or services or in respect of physical assets used in that connection,
(c)		………….

and such allowances shall be computed and made in the manner specified in the agreement, the other provisions of this Act being deemed for this purpose to have been modified to the extent necessary to give effect to the terms of the agreement."

29. On a close reading of this section, we find that the deduction under this section is allowed for computing the profits and gains of the business of prospecting for or extracting or production of mineral oil, in relation to which, the Central Government has entered into an agreement. Only such deductions are allowed under section 42(1) as are specified in the agreement and that also when they fall in any of the sub-clause (a), (b) or (c) of section 42(1). Sub-clause (a) applies to an activity prior to beginning of commercial production and sub-clause (b) applies to the situation, after the beginning of commercial production. Sub-clause (c) applies to allowance in relation to depreciation on mineral oil in the year where production has begun and in succeeding year. The assessee has already started commercial production, its case therefore falls in sub-clause (b) of section 42(1). To summarise, the following conditions should be satisfied for claiming deduction under section 42(1) of the—(i) there should be an agreement of the assessee with Central Government; (ii) that the agreement should be laid on the table of each house of the Parliament; (iii) that the allowances sought to be allowed are those specified in the agreement; (iv) that such specified allowances should be the expenditure incurred in respect of drilling or exploration activities or services or in respect of physical assets used in that connection; and (v) that such allowances is to be computed and allowed in the manner specified in the agreement.

30. The assessee has no doubt entered into agreement (PSC) with the Central Government in respect of various fields, but except one the other agreements are not shown to have been laid on the table of the both the houses of the Parliament. The agreement does not provide the manner of computation of such deduction. Further the allowances are not of the nature specified in the agreement, nor of various specific nature as mentioned in sub-clause (a), or (b) or (c) of section 42(1). As we are concerned in this case with sub-clause (b), these specified allowances should be in relation to expenditure in respect of drilling or exploration activities or services.

31. There are five contracts which the assessee and M/s. GSPCL jointly entered with the Government of India. They are production sharing contracts (PSC) and these are similarly worded with the same contents and language. In all these agreements article 15 deals with computation of profits and gains for the purpose of income-tax. It is titled as "taxes, royalties, rentals, customs duties etc". Clause (3) is relevant and on which reliance is placed reads :

"15.3 The profits and gains of a company consisting of petroleum operations shall, for the purpose of levy of income-tax under the IT Act, 1961 be computed on the basis of the value, determined in accordance with article 18 of its participating interest share of crude oil produced and saved and sold, or otherwise disposed of, from the contract area and from any revenue realised on the same or disposal of associated or non-associated natural gas referred to in art. 20 as well as any other gains or receipts from petroleum operations as reduced by the allowable deductions."

32. This article provides as to how the profits and gains of a company consisting of petroleum operations shall, for the purpose of levy of income-tax under the Income-tax Act, 1961 be computed. It is on the basis of the value determined in accordance with article 18, of its participating interest share of crude oil produced and saved and sold, or otherwise disposed of, from the contract area and from any revenue realised on the same or disposal of associated or non-associated natural gas referred to in article 20 as well as any other gains or receipts from petroleum operations as reduced by the allowable deductions. The assessee submits that the phrase used in above article is "allowable deductions". It is to be read as "allowable deductions under the including section 42 of the". We are afraid, it cannot be read like that because the PSC is an agreement between the Government of India and assessee and GSPCL and was laid/to be laid on the table of both the houses of Parliament. It being a legal document, no word or phrase can be added. It has to read as it is. Accordingly, the CIT(A) is right in not accepting submission of the assessee that "as reduced by allowable deduction" should be read as "as reduced by allowable deduction under the including section 42 of the". Even otherwise section 42 contains a specific mention of the phrase "such allowances as specified in the agreement" and that in absence of any allowances being specified in the agreement, no additional allowance can be deducted by virtue of section 42, over and above the normal allowance allowable under other section of the. It is not only that these allowances should be specified in the agreement, but even the computation of such allowances has to be made in the manner specified in the agreement. The same is quite clear from the phrase used below sub-clause (c) of section 42(1) i.e., "and such allowances shall be computed and made in the manner specified in the agreement". Nowhere in the PSC agreements, the computation and manner of such allowances, is stated or specified. Accordingly, no such deduction can be allowed under section 42 in absence of manner of computation and the manner specified in the agreement.

33. Article 18 providing for valuation of petroleum in accordance with the appropriate basis for that type of sale or disposal specified therein. It does not deal with any deductions of expenses and, therefore, it may not have relevance to determine the issue of deduction allowable or otherwise. As per clause 18.11 of PSC the price of natural gas shall be in terms of article 20. Again the article 20 deals with marketing rights and sale price of natural gas and it has also nothing to do with expenses as in article 18. Article 24 provides for record of all its activities, expenditures and receipts, reports, accounts in accordance with the accounting procedure and audit by a qualified, independent firm of recognised chartered accountants, registered in India. These may not be extracted in extenso.

34. Annexure C—Section 1 provides general provisions which contain "purpose", "definitions", "inconsistency", "documentation and statements to be submitted by the contractor", "language and units or account", "currency exchange rates", "payments", "arms length transactions", "audit and inspection rights of the Government" and "revision of the accounting procedures."

35. None of these clauses do not (sic)specify for the computation of income and the manner in which they are to be allowed. What section says is that "there shall be made in lieu of, or in addition to, the allowances admissible under this Act, such allowances as are specified in the agreement in relation". Nothing is specified in the agreements and, therefore, deduction under section 42 would not be granted for any expenditure except that is allowable under the otherwise.

36. An expenditure on storage, transportation and other facilities is more relatable to the production and/or sale rather than exploration and drilling. Exploration is an activity carried out to find out the possibility of oil/gas by collecting geological data and seismic survey etc. and thereafter the drilling is done at a place where probability of finding the oil/gas is comparatively high. At the time of exploratory drilling, these facilities have hardly any role to play. Similarly, the land in question was taken by the assessee basically as a passage to the oil field land and also to have its supporting structure including building. This is quite separate from the land allotted by the Government for the purpose of drilling the oil/gas well. Accordingly, this land and building has no exploratory drilling activity.

37. The contention that section 42 is an incentive provision and, therefore, should be interpreted liberally is to be viewed in the light of the decision of the Supreme Court in the case of Pandian Chemicals Ltd. (supra) wherein it is held that the rule of liberal interpretation comes into play only if there were any doubts with regard to the express language used in the provision and where the words are unequivocal, there is no scope for importing the rule of liberal or other interpretation of an incentive provision. The Supreme Court in Petron Engineering Construction (P) Ltd. (supra) again held that liberal conception cannot be made by doing violence to the plain reading of the provision of the. It reaffirmed that liberal construction can be resorted to only when it is possible without impairing the legislative requirement and the spirit of the provision. The language in the statute has to be read plainly and normally. The words used in the provision may be read from the context in which they have been used. The rule of interpretation has only to be used when there is any doubt with regard to the express language used in the provision or where the plain literal interpretation of statutory provision produces a manifestly unjust result, one might modify the language so as to achieve the intention of legislature. One should not loose sight of the decision of the Supreme Court in Navopan India Ltd. (supra) holding that "exemption being in the nature of exception, it is to be construed strictly at the stage of determination whether the assessee falls within its terms or not and in case of doubt the benefit must go to the State. Once it is found applicable, full effect may be given.

38. In this case there is no any doubt in the language used in section 42(1) of the Income-tax Act as well as production sharing contract. The language used is quite clear and plain and therefore there is no scope of any double interpretation. The language of the statutory provision is not resulting or creating any unjust result. In fact the language used in the provisions of section 42 is plain, simple and is quite clear admits of no doubt inasmuch as that only those allowances are to be allowed which are specified in the agreement entered into by the assessee with Central Government.

39. The assessee had made this miss rectified in subsequent agreements and itself has provided specifically the allowances to be deducted under section 42 and the manner thereof and Department has allowed but that does exonerate the assessee from complying with the requirement in these agreements appearing in this year. The letters exchanged between two Departments of the Government to this effect also do not help the assessee as they only requested for clarification and nothing more. No action taken thereon for a long time might be indication or an impression otherwise. It only proves that while entering into these contracts with the assessee and GSPCL, the Central Government at that time have not thought it fit to provide special deduction under section 42 of Income-tax Act and therefore, no benefit thereof can be given in the circumstances. A plain reading of the statute is not producing any mainfestly unjust results and accordingly, there is no merit in reading down or modifying the language of the statutory provisions. We, therefore, hold that the CIT(A) is right in denying the claim of the assessee and in holding that the assessee is not entitled to any deduction under section 42.

40. As before the CIT(A), the assessee before us also raised a contention based on discrimination on the basis of Canada tax treaty that the assessee cannot be subjected to a more burdensome basis of taxation, since it would amount to discrimination, which is not permissible under the provisions of article 24 of the Indo-Canada tax treaty. In our opinion the CIT(A) rightly rejected its contention by observing that there is no difference in the provisions of Income-tax Act, more particularly, section 42 for Indian company and Canadian company. The same provisions of Income-tax Act, 1961 are being applied to the assessee (a Canadian company), which are being applied to M/s. GSPCL (Indian company). We therefore endorse his finding on the issue and hold that this argument of the assessee has no basis and is in fact misplaced.

41. The reliance on the case of M/s. GSPCL is also of no avail in absence of detailed discussion therein. The CIT(A) in that case has discussed the allow ability of specific expenditure with reference to the fact, whether same can be considered as drilling and exploration expenses or not and is thus covered under clause (b) of section 42(1) and not vis-a-vis the basic issue of provision of section 42 and the contents of specification thereof in the PSC.

42. Alternate claims for depreciation : Having held that the assessee is not entitled to deduction under section 42, we shall now deal with issue of depreciation allowed/disallowed by the CIT(A) on various assets.

43. On oil well : The first of these is oil well which is treated as plant by the CIT(A) and on which depreciation @ 100 per cent was allowed though restricted to 50 per cent because of user less than 180 days during the previous year under consideration. Here Revenue is in appeal because of allowance of 100 per cent depreciation and the assessee because one of the well was put to use on 1st Oct., 2000 and therefore, was in use for more than 180 days.

44. Nature of well can be described as that, the well is drilled below the ground. After every 30 ft., as the hole is deepened, the joint of drill pipe is added by a process known as mouse hole connection. During boring or drilling the well, drilling fluid or drilling mud is constantly circulated down the well bore. Afterwards casing of stainless steel is set for the completion of the well another tubing is lowered (this is basically a steel pipe), the perforation is done in the casing and cement by setting off explosive charges so that formation fluid can flow from formation into the well bore. Thereafter, valves and fittings controlling the production at the well head are installed which is known as "installing the Christmas tree". The wells are drilled below the ground to extract the gas from its natural reserves in the various layers of the earth. When the drill bit becomes worn out or damaged, entire drill pipe has to be removed by the process known as "tripping out".

45. Claim of the assessee is that it incurred expenditure of Rs. 12,14,56,473 on drilling tangibles and services towards drilling wells below the ground. It claims that in the business of mineral oil, which is extracted from the earth, the only way to access the natural resources and extract the same is through drilling a well. It is stated that the 'well' is thus the fundamental apparatus for production of mineral oil and hence qualifies as a 'plant'. The term 'plant' is defined in section 43(3) of theby way of an inclusive definition and is intended to include not only those items which are commonly known as plant but also those which are enumerated therein. The assessee treated it as a plant and claimed depreciation @ 100 per cent on the cost on drilling the wells as per Entry III(3)(ix)(b) of the Appendix I of the Income-tax Rules, 1962. It claimed that it would have been impossible for it to carry on its mineral oil business without the wells and accordingly the wells form the core of its "plant". It, being a tool in the assessee's business, is a "plant" as distinct from "building" which only refers to the premises or the setting where the business of the assessee is carried on. The decision of the Rajasthan High Court in CIT v. R.G. Ispat Ltd. [1995] 124 CTR (Raj.) 19 : [1994] 210 ITR 1018 (Raj.) is referred to in support of its claim.

46. The assessee also relied upon the decision of Supreme Court in the case of Scientific Engineering House (P) Ltd. v. CIT [1985] 49 CTR (SC) 386 : [1986] 157 ITR 86 (SC) which has laid down and formulated certain tests for determining, whether an asset qualifies as 'plant'. Applying the functional test laid down by the Supreme Court, it is submitted that in the oil and gas business, the well is a producing apparatus with which the business is carried on and hence, a 'plant' within the meaning of section 43(3) of the. The assessee also placed reliance on the certain decisions wherein even a tube well is held to be a plant, it being an apparatus used by the assessee for the purpose of deriving income from crude oil after drilling the well-(i) CIT v. Oil India Ltd. [1992] 105 CTR (Cal.) 356 : [1992] 198 ITR 701 (Cal.), (ii) Siemens India Ltd. v. CIT [1995] 126 CTR (Bom.) 282 : [1996] 217 ITR 622 (Bom.), (iii) CIT v. Hindustan Motors Ltd. [1988] 69 CTR (Cal.) 197 : [1988] 170 ITR 431 (Cal.), (iv) CIT v. Taj Mahal Hotel 1973 CTR (SC) 480 : [1971] 82 ITR 44 (SC); (v) CIT v. Warner Hindustan Ltd. 1978 CTR (AP) 228 : [1979] 117 ITR 15 (AP) and CIT v. Warner Hindustan Ltd. [1979] 117 ITR 68 (AP). Further the oil well is claimed to be materially different from the ordinary water well that is included in building. It is not equivalent to and there is no question of constructing a building in or on an oil well. The well, it is submitted, cannot be regarded as building, since it stands alone as structures and, therefore, not adjuncts to any building on the parity of reasoning by the Supreme Court in the case of Indore Municipal Corporation v. CIT [2001] 166 CTR (SC) 511 : [2001] 247 ITR 803 (SC) holding that roads not adjunct to building cannot be treated as building. In this case a road was constructed for dumping wastes and there were no buildings in the vicinity. As there was no construction other than the road, it is held, it could not be regarded as building. The ratio is squarely applicable to the case of the assessee as there is no construction other than the well and hence the same cannot be regarded as building by any stretch of imagination. The assessee thus claimed that 100 per cent depreciation be allowed on the capitalised value expenditure of Rs. 12,14,56,473 on drilling of wells.

47. The view of Assessing Officer is that the well constitutes building. It is specifically included in the definition of building given as per Note No. 1 below Appendix I of Income-tax Rules, 1962 which includes both well and a tube well in the definition of the building.

48. The CIT(A) held that oil well is undisputedly a specialised kind of well unlike normal water well; that even at the time of boring or drilling the well, drilling fluid or drilling mud is constantly circulated down the well bore; that after every 30 ft., as the hole is deepened, the joint of drill pipe is added by a process known as mouse hole connection; that when the drill bit becomes worn out or damaged, entire drill pipe was to be removed by the process known as "tripping out" that afterwards casing of stainless steel was set for the completion of the well and tubing islowered (this is basically a steel pipe), the perforation is done in the casing and cement by setting off explosive charges so that formation fluid can flow from formation into the well bore; that thereafter, valves and fittings controlling the production at the well head are installed which process is known as "installing the Christmas tree" and this makes clear that the oil well is certainty different from the ordinary water well and accordingly, oil well cannot be considered as building , which unlike the normal water well, if not used for any specific purpose, other than drawing the normal water for normal consumption, has been treated as building. He referred to Oil India Ltd. (supra), where oil well has been treated as plant. The decisions of Siemens India Ltd. ( supra); Scientific Engineering House (P) Ltd. (supra); Hindustan Motors Ltd. ( supra) are also referred to by the CIT(A). He held the gas/oil wells are admittedly and undisputedly, are below the ground and accordingly, as per the Entry at sub-clause (b) of clause (ix) of item No. III(3) of Appendix I of Income-tax Rules, the depreciation @ 100 per cent is allowable to the assessee on it, the assessee being a mineral oil concern.

49. He also noted that the gas/oil well cost includes the expenditure in relation to well Nos. 8 to 15 in the year under consideration. For the purpose of claiming depredation under section 32, the plant should be put to use during the year under consideration for more than 180 days. On going through the details of production of various wells furnished by the assessee, he noticed that well No. 8 has started production in February, 2001 well No. 12 has started production in the month of October, 2000 and well Nos. 13 and 14 have started production in the month of November, 2000 (to be exact, 12th Nov., 2000 and 6th Nov., 2000). He observed it undisputed that while discussing whether well is a plant or not, the Courts itself have held that oil well is an apparatus used by the assessee for the purpose of deriving income from crude oil. Accordingly if the oil well has not been used for the purpose of deriving income, it meant that it had not started commercial production and, therefore, it cannot be said to have been put to use. In view of the above, well Nos. 8, 12, 13 and 14 have been put to use for less than 180 days during the year under consideration. In such a situation, depreciation on these wells is allowable @ 50 per cent, as these have been used for less than 180 days during the previous year relevant to asst. yr. 2001-02. The cost of well Nos. 8, 12, 13 and 14 as shown during the assessment proceedings is Rs. 1,41,88,962, Rs. 2,05,26,337, Rs. 1,67,94,696 and Rs. 1,60,78,880 respectively totaling to Rs. 6,75,88,875. Accordingly, only 50 per cent of the above being Rs. 3,37,94,437 would be allowed and balance amount was to be disallowed for the year under consideration in respect of aforesaid four wells.

50. The submission of CIT-Departmental Representative is that the CIT(A) is wrong in allowing depreciation at 50 per cent of Rs. 6,75,88,875 on these wells by treating them as plant under sub-clause (b) of clause (ix) of item No. III(3) of Appendix I. According to him the Assessing Officer was right in allowing 10 per cent depreciation on well cost of Rs. 14,07,98,333 by treating them as building as per Note No. 1 below Appendix I of Income-tax Rules, 1962. He submitted that when the well has been specifically included in the buildings, there is no need to refer to the interpretation of the meaning of the well and to be treated as plant. The CIT(A) has not examined whether the decisions given for well as plant, are for the assessment year 1988-89 onwards or prior to that. However, no Court has held that the well is other equipment eligible for 100 per cent deduction. Even if the well be treated as plant, depreciation @ 25 per cent only is to be allowed as the well as a plant cannot be other equipment. Courts say, if plant, it should be treated as plant and nothing else. Reference may also be made to Tribeni Tissues Ltd. v. CIT [1991] 190 ITR 487 (Cal) and CIT v. Kiran Crimpers [1997] 140 CTR (Guj.) 418 : [1997] 225 ITR 84 (Guj.).

51. The CIT-Departmental Representative also submitted that CIT(A) is wrong in allowing depreciation @ 25 per cent on gas separator and floodlight mast by treating them as plant and machinery as against 10 per cent allowed by AO treating them as building. He further submitted that the figures of depreciation is to be modified to Rs. 1,62,51,820 as against Rs. 1,92,77,510, because of a totalling mistake.

52. The learned counsel for the assessee referred to the decision of the Supreme Court in the case of CGT v. N.S. Getti Chettiar 1972 CTR (SC) 349 : [1971] 82 ITR 599 (SC) and Jagatram' Ahuja v. CGT [2000] 164 CTR (SC) 1 : [2000] 246 ITR 609 (SC) and submitted that in interpreting a particular section purpose must be seen. According to him a "well" is included in the definition of "building" because it serves the purpose of building. He also referred to the decision of Calcutta High Court in the case of Tribeni Tissues Ltd. v. CIT (supra), regarding oil well, the decision of Kerala High Court in the case of CWT v. Sara Varghese [1987] 66 CTR (Ker) 231 : [1988] 170 ITR 436 (Ker), the decision of Bombay High Court in the case of Siemens India Ltd. v. CIT (supra), the decision of Supreme Court in the case of CIT v. Gwalior Rayon Silk Manufacturing Co. Ltd. [1992] 104 CTR (SC) 243 : [1992] 196 ITR 149 (SC), wherein the road is held to be a part of building, and the decision of Supreme Court in the case of Indore Municipal Corporation v. CIT (supra), wherein the road leading to the plant is held to be not a building because it was not leading to the building. The learned counsel for the assessee submitted that the decision of Gujarat High Court in the case of Shree Digvijay; Woollen Mills Ltd. v. CIT [1993] 114 CTR (Guj.) 396 dated 3rd April, 1993, relied upon by the learned CIT-Departmental Representative was not on the issue whether tube well is a plant but whether the expenditure on tube well is a capital or revenue

53. The learned Departmental Representative in reply submitted that link to building theory as propounded by the learned counsel fails in the case of a bridge included in the definition of "building" and, therefore, the definition cannot be restricted to the items connected only with the building.

54.Our finding : Section 32 prescribes 4 broad categories of assets for granting depreciation. These are : (i) buildings, (ii) machinery, (iii) plant, and (iv) furniture. The depreciation is allowed on these various assets as per rates prescribed in the Income-tax Rules Appendix 1. The term building is not defined in the, though now it stands defined in Appendix 1 to the Rules as including 'roads' 'bridges' 'culverts' wells' and 'tube wells' by the Income-tax (Fourth Amendment) Rules, 1983 with effect from 1st April, 1983. In Webster's New International Dictionary a building is defined to mean "that which is built specifically : As now generally used, a fabric or edifice, framed or constructed, designed to stand more or less permanently and covering a space of land for use as a dwelling, storehouse, factory, shelter for beasts or some other useful purpose. Building in this sense does not include a mere wall, fence, monument, hoarding, or similar structure, though designed for permanent use where it stands not being a steamboat, ship or a vessel of navigation. The existence of a roof may not be always necessary for a structure to be regarded as building. Non-residential. building may be without a roof. What is a building under a particular statute is always a question of degree, a question depending upon the facts of each case as held in Ghansiram Das v. Devi Prasad AIR 1966 1988 SC.

55. The term plant, on the other hand, is defined under section 43(3). Under this section again an inclusive definition, the "plant" includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of business or profession. It is an apparatus with which business is carried on. It is not a place within which the business is carried on. It is also not a setting in which business is carried on. The Rajasthan High Court in R.G. Ispat Ltd. (supra) quoting the definition of the term 'plant' observed that "from the above definition of "plant" it would be seen that it is not exhaustive and is illustrative and has a wide meaning, it could be the apparatus of a businessman by which he is carrying on the business which may be termed as plant. The apparatus need not be used by mechanical operation or by any other process. For the purpose of a building, it has to be seen whether it can be said to be an apparatus in which the business is being carried on. There may be heavy structures on which the machinery is instated with which the activities of a manufacturing are carried on. That structure could be covered within the term "plant". If the building or structure or apart thereof is such by which the business activities are carried on then it would amount to plant but where the structure plays no part in carrying on the business activities and is used as a space for carrying on the business, it will fall within the category of a building then it cannot be called plant. There may be a situation where part of the construction of the building is such which is specially designed and meant for carrying on the mechanical process and part of it is used as space for various activities like research, office or the like and in that case the part construction would not be treated as a plant. The functional test is whether a structure is used for carrying on the business and hence a tool of the trade or whether it is only the place of business in which the business is carried on. Cold storage, silos and well are such of the items which have been interpreted to fall within the term "plant".

56. To determine as to whether an asset is a 'plant', the Supreme Court in the case of Scientific Engineering House (P.) Ltd. ( supra) lays down certain tests. These are : "Does the article fulfil the function of a plant in the assessee's trading activity Is it a tool of his trade with which he earned on his business If this answer is in the affirmative, it will be a plant". The Supreme Court also referred to the material passage from the speech of Lindley J., in Yarmouth v. France [1887] 1.9 QBD 647 where a carthorse was held to be a plant by observing : "...that plant would include any article or object fixed or movable live or dead used by a businessman for carrying on his business and it is not necessarily confined to an apparatus which is used for mechanical operations or processes or is employed in mechanical or industrial business".

57. Applying these functional tests, a well may be the producing apparatus with which the business of oil and gas extraction business is carried on and hence could be a 'plant' within the meaning of section 43(3) of the. This view is also supported by decisions where a well and a tube well have been held to be plant. These are - (i) Oil India Ltd. (supra) holding the oil well as a plant, it being an apparatus used by the assessee for the purpose of deriving income from crude oil after drilling the well; (ii) Siemens India Ltd. (supra) holding a tube well in connection with setting up of a electroplating plant shop, a plant for a concern engaged in the manufacture of equipment for the generation and distribution of electricity, x-ray equipment and other electrical equipment; (iii) Hindustan Motors Ltd. (supra) holding that tube well used by the assessee for drawing water to be used in production constituted a plant for an assessee manufacturing automobile ancillaries used in its own business of manufacturing cars; (iv) Taj Mahal Hotel (supra) holding pipelines and sanitary fittings to be a plant for a hotel because of a wide definition under section 43(3) and based on the functional test; (v) the decision of Calcutta High Court in the case of Tribeni Tissues Ltd. v. CIT (supra), holding that tube-well is an apparatus with equipment necessary for drawing water from subterranean sources where water is used for production was a plant; and (vi) Warner Hindustan Ltd. (supra) and Warner Hindustan Ltd (supra), wherein a well even in a pharmaceutical factory was held to be in the nature of a plant and not a building. The decision of Gujarat High Court in the case of Shree Digvijay Woollen Mills Ltd. v. CIT [1993] 114 CTR (Guj.) 396 : [1993] 204 ITR 398 (Guj.) relied upon by the learned CIT-Departmental Representative was not whether tube well is a plant but it held that the expenditure on tube-well is a capital expenditure. It held that even if it did not result in the creation of an asset, it would not cease to be an expenditure of the nature of capital.

58. The decision of Supreme Court in the case of Indore Municipal Corporation (supra) wherein the expenditure on laying road was held to a capital expenditure road not leading to the building is held to be not a building. A claim in this case before the High Court was also made that road is a plant but was rejected by the High Court [Indore Municipal Corporation v. CIT [1981] 132 ITR 540 (MP)] because construction of metal roads for hauling compost cannot be an expenditure on plant and machinery.

59. The view of the Assessing Officer that a well constitutes a building in a mineral oil concern may also be not wrong, if we see it with the definition of a building which includes a well and a tube-well within its meaning. In Gwalior Rayon Silk Manufacturing Co. Ltd. (supra) the road was held to be a building and the view was supported by the amendment in the Rules. The Court observed "While enacting the Income-tax (Fourth Amendment) Rules, 1983, the rule making authority accepted this interpretation" consistently laid down by various High Courts that building includes roads and also elongated bridges, culverts, wells and tube-wells as building but prescribed fixed rates of depreciation setting at rest the variable rates claimed by the assessee. Rules validly made have the same force as the sections in the. The contention of the respondents that unless the itself is amended, the Rules would not cut down the meaning of the word "building" is without substance. The inclusive definition of "building" to include roads, etc., enlarges the scope of section 32 and does not whittle down its effect. It is true that in CIT v. Coromandel Fertilisers Ltd. [1985] 156 ITR 283 (AP), the High Court of Andhra Pradesh interpreted that "roads" fell within the meaning of "plant" and granted depreciation at the rates admissible to plant, CIT v. Sandvik Asia Ltd. [1983] 33 CTR (Bom.) 128 : (1983) 144 ITR 585 (Bom.) took the opposite view and held them to be building. In view of the consistent view of the other High Courts and which, in our view, is the correct one, the view of the High Court of Andhra Pradesh is not correct in law."

60. Would it, therefore, be permissible to give the well or a tube-well a meaning other than a building when the definition given in a statute says it is a building It might be true that as per certain decisions a well or a tube-well is an apparatus and, therefore, a plant but these decisions are all before their inclusion in the definition of building. These might therefore, be not helpful in treating them as plant for the period after the amendment in the Rules by including the well or a tube-well into the definition of the term 'building'. The language is clear and therefore, its natural meaning is to be given to the words, Rules having the same force as the sections in the. An oil well or a natural gas oil well is a well and also a tube-well as a steel tube is put to reach the reservoir source of oil and gas and therefore in absence of any compelling circumstances the gas oil well is to be treated as building. The contention of the assessee that intention to include well or a tube-well in the building because they serve the building and therefore only those wells are to be included which serve the purpose of a building or those lead to a building has no force. Bridges are also included in the building and they might not necessarily be leading to the building and therefore the leading to the building theory not sacrosanct and fails. Consequently all types of wells and tube-wells would be included in the term building.

61. The other contention of the assessee that there is no roof and therefore, it cannot be a building has also no force. Firstly, as aforesaid, there is no such requirement that to be a building it has to have a roof and secondly, the specific inclusion thereof in the definition of building is sufficient to hold it a building.

62. The purposive theory advanced by the learned counsel on the basis of the Supreme Court decisions in Getti Chetttar and Tirath Ram Ahuja would not assist us in taking a view and holding that a gas oil well is a plant in contradiction to its specific inclusion in the term 'building'.

63. In N.S. Getti Chettiar (supra) the Supreme Court dealt with the term 'transfer' of property in section 2(xxiv). The Court observes that clause (xxiv) enumerates several types of transfers and not to any other transactions; that it is also necessary to attach significance to the words "or other alienation of property" immediately after setting out the various types of transfers; that if we read the clause as a whole, it is clear that it deals with transfer of properties in various ways. The Court also noted the observations in Craies on Statute Law (Sixth Edition, p. 213), to the effect that an interpretation clause which extends the meaning of a word does not take away its ordinary meaning. An interpretation clause is not meant to prevent the word receiving its ordinary, popular and natural sense whenever that would be properly applicable, but to enable the word as used in the, when there is nothing in the context or the subject matter to the contrary, to be applied to some thing to which it would not ordinarily be applicable. Bearing in mind these principles, the Court examines the scope of section 2(xxiv), which speaks of "disposition" "conveyance", "assignment", "settlement", "delivery", "payment" or "other alienation of property". It held :

"A reading of this section clearly goes to show that the words 'disposition' 'conveyance', 'assignment', 'settlement', 'delivery' and 'payment' are used as some of the modes of transfer of property. The dictionary gives various meanings for those words but those meanings do not help us. We have to understand the meaning of those words in the context in which they are used. Words in the section of a statute are not to be interpreted by having those words in one hand and the dictionary in the other. In spelling out the meaning of the words in a section, one must take into consideration the setting in which those terms are used and the purpose that they are intended to serve. If so understood, it is clear that the word 'disposition' in the context, means giving away or giving up by a person of something which was his own, 'conveyance' means transfer of ownership, 'assignment' means the transfer of the claim, right or property to another, 'settlement' means settling the property, right or claim conveyance or disposition of property for the benefit of another 'delivery' contemplated therein is the delivery of one's property to another for no consideration and 'payment' implies gift of money by someone to another. We do not think that a partition in an HUF can be considered either as 'disposition' or 'conveyance' or 'assignment' or 'settlement' or 'delivery' or 'payment' or 'alienation' within the meaning of those words in section 2(xxiv).

This leaves us with clause (d) of section 2(xxiv) which speaks of a transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of another person. A member of an HUF who, as mentioned earlier, has no definite share in the family property before division, cannot be said to diminish directly or indirectly the value of his property to increase the value of the property of any other coparcener by agreeing to take a share lesser than what he would have got if he had gone to Court to enforce his claim. Till partition his share in the family property is indeterminate. He becomes entitled to a share in the family property only after the partition. Therefore, there is no question of his either diminishing directly or indirectly the value of his own property or of increasing the value of the property of anyone else. The 'transaction' referred to in clause (d) of section 2(xxiv) takes its colour from the main clause, viz., it must be a transfer of property in someway. This conclusion of ours gets support from sub-clauses (a) to (c) of clause (xxiv ) of section 2, each of which deals with one or the other mode of transfer. If Parliament intended to bring within the scope of that provision partitions of the type with which we are concerned, nothing was easier than to say so. In interpreting tax laws, Courts merely look at the words of the section. If a case clearly comes within the section, the subject is taxed and not otherwise."

64. Similarly in Jagatram Ahuja v. CGT [2000] 164 CTR (SC) 1 : [2000] 246 ITR 609 (SC) again it is held that in an unequal distribution of assets between the partners there is no transfer in general law and therefore section 2(xxiv)(d) would not apply.

65. The assessee dug the well and put steel pipes therein to reach the reservoirs of oil and natural gas. It is thus a passage created by the assessee to reach reservoir. The well is to protect, cover and put a structure around the space drilled from which mineral oil or gas is obtained. The cost is of digging and laying steel pipeline and is the expenditure claimed as cost of the plant but the cost of apparatus which is used to extract oil and natural gas is separately booked under the head machinery. This also gives an impression that the gas oil wells are not plant. It is but a setting through which the assessee extracted oil and gases, and therefore a part of the building within the extended meaning of the term building given in the Appendix 1 to Income-tax Rules. The depreciation would be allowed thereon @ 10 per cent as building.

66. In view of the above we need not discuss the alternate claim of the Revenue that even if it were a plant, depreciation @ 25 per cent alone can be allowed.

67. Second controversy in Revenue's appeal is with regard to claim of depreciation @ 25 per cent on the capitalised value of expenditure of Rs. 1.87,92,603 on gas separators and Rs. 4,84,907 on floodlight masts. The Assessing Officer allowed depreciation @ 10 per cent on these items as building rejecting the claim of the assessee that these are "plant" on the same analogy as is with regard to oil and gas wells.

68. The CIT(A) noted that these items were not part of well. He however agreed with the assessee that gas separator and floodlight masts could not be considered as building. According to him the gas separator, as the name suggests, has to be nothing but a plant. As regards flood light masts is concerned, the same is required to provide lighting at the field site to help in the production activity and in any case, same has not been separately classified in Appendix I of Income-tax Rules and, therefore, the same could not be considered as building. In view of these facts and also considering the decisions of various High Courts, he held the same was to be considered as plant. Accordingly, depreciation on gas separator and flood light masts was allowed @ 25 per cent. The assessee has not furnished the dates, of installation of these two assets, he therefore directed that if Assessing Officer, on examination, finds that the same has been installed after 30th September and have been put to use for less than 180 days, half of the allowable depreciation may be allowed.

69. We have heard the parties and considered the rival submissions. The gas separator separates the gas and oil from the mix and is thus a machine used for the production of natural gas and as the name suggests, it has to be a plant. 'Flood light masts' is used to provide lighting at the field site to help in the production activity and would be similarly a part of plant and machinery. In any case, same has not been separately classified and included in the term 'building' in Appendix I of IT Rules the same cannot be considered as building. In view of these facts and circumstances the same is considered as plant. Accordingly, we hold that the CIT(A) is right in allowing depreciation on gas separator and flood light masts @ 25 per cent and in directing to allow half of the allowable depreciation as the assessee has not furnished the dates of installation of these two assets if the Assessing Officer found that these have been installed and have been put to use for less than 180 days.

70. In the appeal of the assessee (ground No. 4.1) these expenditure along with others were claimed and allowed as deductible under section 42, but the CIT(A) held them not allowable as the assessee, according to him, did not satisfy the condition laid therein. We have upheld the view of the AO and of the CIT(A) on this issue that the assessee is not entitled to deduction under section 42 of the. On delineation of claim of Rs. 5,41,95,406, the Assessing Officer allowed the claim but the CIT(A) withdrew it. The assessee submits that the Assessing Officer allowed 10 per cent in assessment year 1998-99, the first year where the dispute was whether the platform is a plant, therefore, that order is to be followed. The CIT(A) allowed depreciation at 10 per cent as if it was building. Assessing Officer is directed to follow the final view in assessment year 1998-99.

71. Ground No. 4.2 in the appeal of the assessee is for allowance of 50 per cent depreciation in respect of well No. 12 which according to the assessee was installed and used on 1st Oct., 2000 and thus the user was for more than 180 days and therefore full depreciation should be allowed and not 50 per cent thereof. Assessing Officer may verify this aspect and grant necessary relief to the assessee on this aspect.

72. Ground No. 4.3 in the appeal of the assessee is regarding depreciation @ 100 per cent on expenditure of Rs. 5,68,93,238 on dry wells. It was argued that the expenditure incurred on drilling of the well that turned out to be a dry well also qualifies as an expenditure on plant below ground in field operations. The assessee further claimed that upon completion of drilling of the well it became known that the wells in question were dry, in the sense that it was commercially not feasible to produce mineral oil from such well. It was therefore decided to abandon the well after using the same and abandoned to cap its losses and, therefore, claimed for allowance of 100 per cent depreciation. This alternate claim of depreciation @ 100 per cent on delineation well is rejected by the Assessing Officer in view of the admitted fact that the delineation well has not been put to use because the production has not commenced from this well and accordingly, the well has been abandoned. This according to him is nothing but a dry hole a dead expense.

73. The CIT(A) found it evident and also undisputed that "dry well" was the well which has not started production; that the assessee incurred heavy expenditure on drilling this well but turned out to be dry and that accordingly the same had to be abandoned; that it is thus clear that this well has not started production and was not put to use for the purpose of the business of the assessee; and that in view of these facts, the depreciation cannot be allowed on expenditure incurred on dry well. He held that it was a capital expenditure not allowed to be deducted under any provisions of the. He also mentioned that such type of expenditure has been considered to be allowable under section 42 of the Income-tax Act as the assessee is engaged in the business of prospecting for or production of mineral oils, provided the various conditions stipulated in section 42 are satisfied. Accordingly, it would lead to very anomalous situation and will also be totally unjust, as such type of expenditure was not infrequent for the mineral oil concerns. However as discussed in the earlier paras, the assessee is not entitled to deduction under section 42. Here in the case of the assessee, incidentally the aforesaid amount of expenditure on dry well is not allowable under any of the section of Income-tax Act.

74. The assessee submitted that well No. 12 was installed on 1st Oct., 2000. It was found to be an unproductive well and, therefore, assessee wrote it off. It is contended that (i) it is revenue expenditure because the oil is stock-in-trade; (ii) if oil were found, it would have been a plant and (iii) it was used for determining the availability of oil and, therefore, it was used. The learned CIT-Departmental Representative says it did not come into existence, it was not used and, the deemed/passive user cannot be a ground for allowing deduction. He then referred to the decision of the Karnataka High Court in the case of Dy. CIT v. Yellamma Dasappa Hospital [2007] 207 CTR (Kar.) 523 : [2007] 290 ITR 353 (Kar.).The claim is only for depreciation and not for a deduction as revenue expenditure. He also referred to decision of Madras High Court in the case of B. Nagi Reddy v. CIT [1993] 199 ITR 451 (Mad.) the decision of Allahabad High Court in the case of CIT v. Bazpur Co-operative Sugar Factory Ltd. [1982] 30 CTR (All.) 266 : [1983] 142 ITR 1 (All.) regarding tube well not a plant. Reliance is also placed on the decision of Gujarat High Court in the case of Shree Digvijay Woollen Mills Ltd. v. CIT [1993] 114 ITR (Guj.) 396 : 118 Taxation 92 : [1993] 204 ITR 398 (Guj.), wherein according to him it is held that tube well is not a plant.

75. We have heard the parties and considered the rival submissions. The decision of Gujarat High Court in the case of Shree Diguijay Woollen Mills Ltd. (supra) relied upon by the learned CIT-Departmental Representative was not whether tube-well is a plant but it held that the expenditure on tube well was a capital expenditure. It held that even if it did not result in the creation of an asset, it would not cease to be an expenditure of the nature of capital. It is an abortive expenditure and would have to be disallowed as capital expenditure. That being so we hold that no deduction therefore is allowable to the assessee and we uphold the order of the CIT(A) on this issue. However another alternate claim of the assessee for amortization as prospecting expenses under section 35E may be considered in accordance with law. We accordingly set aside the order to this extent to the file of Assessing Officer to decide the issue in accordance with law and after giving an opportunity to the assessee to present his case.

76. Ground No. (4.4) in the appeal of the assessee is again the alternate submissions made in relation to the assets, being the land based drilling platform and causeway as plant used by the assessee for exploration and production of mineral oils vide Entry III (I) of the Appendix I of the Income-tax Rules, @ 25 per cent.

The Assessing Officer allowed 100 per cent deduction under section 42. The CIT(A) found that the assessee has reclaimed the sea bed and this land based drilling platform has been constructed about 1-1/2 to 2 kms. inside the sea; that on this platform, having area about 2 sq. kms. well Nos. 8 to 23 have been drilled (till the year under consideration well Nos. 8 to 15 have been drilled). This platform supports the various wells; that this platform has been prepared by highly specialized technical expertise and therefore, it is clear that the aforesaid amount included not only amount of expenditure incurred on platform itself but also on the approach road/path developed to reach to the platform. According to him at least, the approach path/road cannot be considered to be plant. He therefore allowed depreciation @ 10 per cent on the expenditure incurred onapproach path/road. He further noted that expenditure of Rs. 23,04,579 consisted of expenditure of escape bridge of Rs. 14,93,855 and expenditure on bituman road on causeway of Rs. 8,10,724, both being related to the approach path to the land based drilling platform and accordingly, he allowed depreciation @ 10 per cent as building. He thus rejected the claim of the assessee and he confirmed the action of Assessing Officer.

78. We have heard the parties and considered the rival submissions. The assessee has reclaimed the seabed and the land based drilling platform has been constructed about 1-1/2 to 2 kms. inside the sea; that on this platform, having area about 2 sq. kms. well Nos. 8 to 15 have been drilled. This platform supports the various wells and that this platform has been prepared by highly specialized technical expertise and therefore, the aforesaid amount included not only amount of expenditure incurred on platform itself but also on the approach road/path developed to reach to the platform and therefore cannot be a plant. Depreciation @ 10 per cent on the expenditure incurred on approach path/road is rightly allowed by the CIT(A). Similarly on the expenditure of Rs. 23,04,579 consisting of Rs. 14,93,855 on escape bridge and Rs. 8,10,724 being on bituman road on causeway, both being related to the approach path to the land based drilling platform, depreciation would be allowable as building @ 10 per cent. We accordingly uphold the order of the CIT(A) on this point.

79. Claim of deduction under section 80-IB : The next three grounds (5, 6 and 7) in Revenue's appeal are concerning the claim of the assessee for deduction under section 80-IB. The assessee, by way of appending a note in the return of income, reserved the right for claiming the deduction in respect of the well which began commercial production after 1st April, 1997. The exact amount of deduction was not quantified, in view of the likelihood of getting the claim of deduction under section 42. Since, the same was disallowed on most of the expenditure, a ground has been taken in the appellate proceedings before the CIT(A). The claim is that its undertaking is engaged in the eligible business of production of mineral oil and it is entitled to deduction under section 80-IB(9) of the.

80. The Assessing Officer has discussed the issue in the assessment order stating that thoughthe assessee made a plea that it reserves its right to claim exemption of income under section 80-IB(9), however, has not staked any such claim so far; that the claim of the assessee was also not as per law, and that the assessee was not entitled to exemption of any part of income under section 80-IB(9) because it had already began commercial production before 1st April, 1997.

81. As the deduction was not quantified before the Assessing Officer in view of the likelihood of getting the claim of deduction under section 42 and as that was not allowed, the ground was taken in the appeal before the CIT(A). The assessee filed the details of deduction before the CIT(A) who sent the details to Assessing Officer for examination, scrutiny and his comments.

82. Preliminary objection was raised by the Assessing Officer in his report for entertaining the ground by the CIT(A) mentioning in the report as under :

'The assessee-company has filed its return of income on 30th Nov., 2001 for year 2001-02 declaring total income of Rs. 11,02,58,873. In this return, or in the computation of income, the assessee has not claimed any deduction under section 80-IB(9) of the. The assessee has filed a revised computation vide letter dated 6th Jan., 2004 to recalculate MAT credit due to completion of assessments of past years. No claim under section 80-IB is made in the revised computation of income also. However, the assessee mentioned in its letter dated 8th December 2003 as under :

"'As you are aware, Niko has commenced commercial production on some of the wells after 1st April, 1997. Each well being a separate undertaking, Niko reserves its right to claim deduction in respect of profits derived from such wells under section 80-IB of the Income-tax Act'."

The assessee has further mentioned in its letter dated 9th Feb., that without prejudice to the claim under section 42, the company reserves its right to claim benefit under section 80-IB(9) for the tax holiday for the Hazira wells. Except this there is no claim for deduction under section 80-IB(9) for the tax holiday for the Hazira wells. Except this there is no claim for deduction under section 80-IB(9) of the Income-tax Act. The assessee never specified the number of wells whose commencement was claimed after 1st April, 1997. The assessee also did not specify the amount of income from the eligible wells, if any which was claimed to qualify for deduction under section 80-IB(9) of the Income-tax Act. The assessee has also not submitted separate P&L a/c and balance sheet of the undertaking in respect of which deduction under section 80-IB(9) is claimed either along with the return of income or during the course of assessment proceedings. Even in the grounds of appeal (ground No. 11) of the appeal memo, the assessee has not specified the number of wells and quantum of income eligible for deduction under section 80-IB(9) of the Income-tax Act. The Assessing Officer has mentioned in para 14.1 of the assessment order as under :

"In the course of assessment proceedings the assessee has made a plea that it reserves its right to claim exemption of income under section 80-IB(9) in respect of the well which began commercial production after 1st April, 1997. The assessee has however not stated any such claim so far. The claim of the assessee is also not as per law. The assessee is not entitled to exemption of any part of income under section 80-IB(9) because it has already begun commercial production before 1st April, 1997."

The assessee has filed details for its claim for deduction under section 80-IB(9) before the CIT(A) vide its letter dated 9th Dec., 2004 and has contended that it has earned profits and gains from undertaking H-2. The undertaking H-2 has commenced commercial production on 27th Aug., 1998, and hence eligible for deduction under section 80-IB(9). The assessee has further submitted that this is the third year of claim and the profit eligible for deduction are Rs. 3,66,52,752 and has also enclosed chartered accountant's certificate dated 8th Dec, 2004 along with P&L a/c of the said undertaking, However from the records it seems that no such claim for deduction under section 80-IB was made in earlier years i.e. assessment year 2000-01."

83. The CIT(A) rejected the preliminary objection of the Assessing Officer that it was a new claim raised by the assessee which should not be allowed by observing as under :

"12.5 I have considered the argument taken by the appellant and also the objections raised by the Assessing Officer. It is undisputed that the appellant had requested the Assessing Officer for reserving its rights for making claim under section 60-IB, which was not made considering that appellant may get deduction under section 42 of the Income-tax Act. There was reasonable cause before the appellant for quantifying the claim under section 80-IB for the first time before the CIT(A), though, the intention to claim the deduction was already put up and made known to the Assessing Officer during the assessment proceedings. The Assessing Officer was given opportunity by the undersigned to examine the claim of the appellant regarding deduction under section 80-IB and furnish his report. It may be mentioned that the appellant has not taken any additional ground before the CIT(A) but this ground was included in the appeal originally filed before the CIT(A). Thus, it is not a new ground taken by the appellant. In view of the facts and circumstances of the case, it is held that the claim of the appellant under section 80-IB is required to be decided on its merits and same is, not ab initio rejected."

84. The learned CIT-Departmental Representative pressing the reliminary objection for entertaining the claim for deduction by the CIT(A), submitted that no deduction was claimed in the original return fled that no claim was made in the revised computation dated 6th Jan., 2004 also; that assessee claimed that gas of 395.958 SCM produced in well No. 6 in August, 1998 and gas of 53.474 SCM in well No. 7 in September, 1998. These months though fall partly in assessment year 1999-2000, however, the assessee has not claimed deduction under section 80-IB(9) for the assessment years 1999-2000, 2000-01 and 2001-02. It is further submitted that for claim of deduction under section 80-IB, certain basic conditions under sections 80-IB(1) and 80-IB(2) are to be fulfilled, namely—(i) that the gross total income of the assessee should include any profit and gains derived from any business referred to in sub-sections (3) to 11, 11A and 11B, in this case it is sub-section (9); (ii) that the accounts of the industrial undertaking are audited and the assessee furnishes such audit report along with the return of income. (Refer sections 80-IB(13) and 80-IA(7)); (iii) that it is an "industrial undertaking", a term relevant for the assessment year under consideration for 80-IA(7) applicable for section 80-IB; and (iv) that the eligible business of assessee is to produce mineral oil and natural gas which was started before 1st April, 1997 and the assessee was not entitled to deduction under section 80-IB(9).

85. It is submitted that since no claim was made before the Assessing Officer while filing return of income, filing revised computation of income and even before the Assessing Officer during the course of assessment proceedings, the Assessing Officer could not examine the claim and the plea of the assessee was rejected and even no P&L a/c and balance sheet for well Nos. 6 and 7 was filed before the Assessing Officer; that the claim not made in the return or revised return cannot be allowed by the Assessing Officer (reliance is placed on the decision of the Supreme Court in the case of Goetze (India) Ltd v. CIT [2006) 204 CTR (SC) 182 : [2006] 284 ITR 323 (SC), wherein it was held that the Assessing Officer cannot entertain a claim otherwise than by filing a revised return); that the assessee raised the ground before the CIT(A) as under : (refer p. 102)

"11. Ground No. 11 : Disallowance of deduction claimed under section 80-IB of the.

During the assessment proceedings, your appellant .... or after 1st April, 1997.

The Assessing Officer………commence production prior to 1st April, 1997.

The Assessing Officer ……… computing deduction under section 80-IB of the…… (These re-extracts of statement of facts and not grounds as stated by the CIT-Departmental Representative)".

86. He further submitted that the language used in the ground of appeal basically wrong as-(a) no claim was made before the Assessing Officer; (b) no P&L 3/c and balance sheet was filed for the claim; (c) no audit report in Form No. 10CCB was filed which is a primary condition to entertain claim under section 80-IB; (d) the assessee has not filed everything, nor satisfied all the conditions and the Assessing Officer is also not satisfied with the claim; (e) an audit report is not furnished along with the return, which is mandatory to be filed. Even if the furnishing of audit report during assessment proceedings is deemed to be declaratory, then also the audit report should be filed before the completion of assessment; and (f) the claim cannot be allowed on reserving or dereserving any right but allowed on fulfilment of conditions laid down in the provisions of the as before the Assessing Officer the assessee made only a plea that it reserves the right to claim exemption under section 80-IB(9) in respect of the well which began commercial production after 1st April, 1997.

87. The grounds of appeal taken before the CIT(A) is basically wrong and he should have rejected the claim outright which may be done now; that the appeal was filed before the CIT(A) on 6th April, 2004 and no P&L a/c and balance sheet of well Nos. 6 and 7 was filed along with the appeal. Likewise, no audit report in Form No. 10CCB was filed along with the appeal memo and thus, the claim of the CIT(A) was to be rejected without considering the merits of the case; that the CIT(A) has exceeded his powers in deciding the relevant ground. He has decided an issue which was neither before the Assessing Officer nor before the CIT(A); that the finding of the CIT(A) in deciding ground No. 11 is contrary to the provisions of law and deserves to be rejected; that the CIT(A)'s finding is contrary to the provisions of section 250(5) as the appellant has neither modified its ground of appeal nor raised additional ground during the course of appellate proceedings; that the finding recorded against the express provisions of section 250(5) deserves to be rejected; and that the coterminous powers with that of theO, has not been correctly interpreted by the him and he cannot go beyond the return of income filed/revised return filed as the Apex Court in Goetze (India) Ltd (supra) has restricted the powers of Assessing Officer, which is also applicable to the CIT(A) as far as coterminous powers are concerned.

88. The learned counsel of the assessee on the other hand submitted that the CIT-Departmental Representative is wrong in stating that the assessee claimed deduction under section 80-IB for the first time before CIT(A). The assessee raised a plea that it is entitled to claim deduction under section 80-IB(9) in the return as well as in the assessment proceedings by its letter dated 8th Dec., 2003. In the assessment order, the Assessing Officer has also dealt with the claim by observing that the deduction was not available on account of the undertaking having started commercial production before 1st April, 1997. In any case claim can be raised for the first time before the CIT(A) in view of the decision of the Supreme Court in Jute Corporation of India Ltd. v. CIT [1990] 88 CTR (SC) 66 : [1991] 187 ITR 688 (SC); National Thermal Power Co. Ltd. v. CIT [1999] 157 CTR (SC) 249 : [1998] 229 ITR 383 (SC). The assessee also relied on the decisions of B.L. Choudhary v. CIT [1976] 105 ITR 371 (Ori); Tara Devi Goenka v. CIT [1980] 122 ITR 14 (Cal.); CIT v. Jay Textile Mills [1981] 21 CTR (P&H) 115 : [1981] 128 ITR 480 (P&H); and Baij Nath v. CIT [1981] 132 ITR 7 (P&H), wherein it is held that the CIT(A) is vested with the power of making further enquiry in the matter and allow the assessee to produce additional papers or additional evidence. It was also submitted that the Assessing Officer is fastened with the responsibility of drawing attention of the assessee to claims/relief which an assessee is entitled to in the course of assessment proceedings vide Circular No. 14 (XL-35), dated 4th April, 1955 of CBDT. Accordingly, even if the assessee had not claimed the deduction, it was to be entertained. The Supreme Court decision is also referred to, which had the occasion to comment on the circular in the case of CIT v. Mahendra Mills observing to the effect that the circular imposes a duty on the officers of the Department to assist the taxpayers in every reasonable way, particularly in the matter of claiming and securing relief.

89. We have heard the parties and considered the rival submissions. The assessee did put a note in the return of income reserving a right for making claim under section 80-IB as the assessee was hoping to get the claim for deduction under section 42 the claim was not made and quantified. It was however discussed by Assessing Officer and he has given a finding on it saying it as not allowable because the production started much before 1st April, 1997. The assessee had also taken a ground for seeking deduction in the memo of appeal filed before the CIT(A). The claim under section 42 was accepted by the Assessing Officer but withdrawn by the CIT(A) and therefore, there was a reasonable cause for quantifying the claim under section 80-IB before the CIT(A) for the first time. Truly speaking it is not a new ground. In any case claim can be raised for the first time before the CIT(A) in view of the decisions of the Supreme Court in Jute Corporation of India Ltd. (supra) and National Thermal Power Co. Ltd. (supra) as relied upon by the assessee. The contention that a claim not made in the return or revised return cannot be allowed by the Assessing Officer on the basis of the Supreme Court in the case of Goetze (India) Ltd. (supra) has no force as in that case it was held that the Assessing Officer cannot entertain a claim otherwise than by filing a revised return and the Supreme Court made it specific that they are not dealing with the case of entertaining the claim by raising additional ground in view of the decisions of Jute Corporation of India and National Thermal Power Corporation. The preliminary ground by the assessee is therefore rejected.

90.Merits of section 80-IB(9) claim : In the assessment order, the Assessing Officer disallowed the deduction as not available because the assessee undertaking had started commercial production before 1st April, 1997. In remand report submitted pursuant to the requisition of CIT(A), the Assessing Officer added :

"As regards the merit of the claim of the assesses for deduction under section 80-IB(9), the section allows 100 per cent deduction in respect of an undertaking which begins commercial production or refining of mineral oil for a period of 7 consecutive assessment years including the initial assessment year. Provided that where the undertaking is located in north-east region it has begun commercial production of mineral oil before 1st April, 1997 and where it is located in any part of India, it begins commercial production of mineral oil on or after 1st April, 1997.

The assessee-company in its letter dated 9th Dec, 2004 (filed before the CIT(A)) has submitted that the company has earned profits and gains from undertaking H-2. The undertaking H-2 has commenced commercial production on 27th Aug., 1998 and hence it is eligible for deduction under section 80-IB(9) of the Income-tax Act. It is further submitted that the undertaking H-2 comprises of well Nos. 6 and 7. The assessee has submitted a copy of letter dated 25th Feb., 1997 from the Director General of Hydrocarbons, New Delhi regarding permission of drilling well No. 6. The assessee has further submitted the production details of different wells for the financial year 1998-99 wherein it is mentioned that in the month of August, 1998 the production of natural gas of 395.958 (standard cubic meter) in well No. 6 and in well No. 7 in the month of September, 1998, 53.474 (s.c.m) natural gas was produced. The assessee has submitted the figures of yearly production of natural gas from well Nos. 6 and 7 for the financial years 1998-99 and 2000-01 also. The assessee has contended that the word mineral oil includes petroleum and natural gas as defined in section 44BB of the Income-tax Act but this definition is relevant only for that section, the word mineral oil has not been defined in section 80-IB(9) and therefore, it has to be understood in the common parlance. The assessee has also submitted a separate P&L a/c and balance sheet in respect of undertaking H-2 (well Nos. 6 and 7) and has also furnished the P&L a/c of Hazira field by different cost centers and has contended that each undertaking H-1 to H-3 is a separate undertaking and since the undertaking H-2 began commercial production after 1st April, 1997, it is eligible for deduction under section 80-IB(9). The amount of eligible profit from this undertaking as per the P&L a/c and the computation of income filed as per assessee's letter dated 9th Nov., 2004 is Rs. 36,652,752. The assessee has also submitted a copy of the order of the CIT(A), Gandhinagar dated 16th July, 2004 in the case of Gujarat State Petroleum Corporation Ltd, Gandhinagar for assessment year 2001-02 who is a co-partner of the assessee in the joint venture for exploration of oil. The assessee contended that in the above referred order the CIT(A) has allowed the claim of the assessee for deduction under section 80-IB(9). From the discussion made as above, it is not clear whether each well can be said to be a separate undertaking and it is also not known whether the decision of the learned CIT(A), Gandhinagar in the case of G.S.P.C, cited by the assessee, has been accepted by the Department or not The assessee's claim for deduction under section 80-IB(9) of the Income-tax Act may be viewed from this context. The copies of the papers submitted by assessee as mentioned in para 7 of this letter are being forwarded along with this report".

91. CIT(A) allowed the claim of the assessee by observing by taking each well as an undertaking, separate and independent comparing it with similar deductions under sections 80J and 80-I as have been allowed with reference to the industrial undertaking and not with reference to the assessee on fulfilling the conditions specified in the then sections 80J and 80-I by the undertaking; that one assessee might have more than one undertaking and it is the profits and gains of the undertaking which has to be considered for the purpose of deduction; that the provision of section 80-IB are coterminous with the provisions of earlier sections 80J and 80-I insofar as issue regarding undertaking is concerned; and that in the newly introduced section 80-IB(9) granting deduction to the assessee engaged in business of extraction and production of mineral oil, the phrase used is "the amount of deduction to an undertaking" contradistinct from the phrase used in other sub-sections 80-IB, namely, sub-sections (4) and (5), as applicable to other business where the phrase used is "the amount of deduction in the case of an industrial undertaking."

92. The CIT(A) in view of meaning given to the term 'undertaking' as held by the Supreme Court decisions of Textile Machinery Corporation Ltd. v. CIT 1977 CTR (SC) 151 : [1977] 107 1TR 195 (SC), CIT v. Indian Aluminium Co. Ltd. [1977] 108 ITR 367 (SC) and CIT v. Orient Paper Mills Ltd [1989] 176 ITR 110 (SC); held that each well or a cluster of wells is a physically separate independent unit, which existed on its own as a viable unit capable of earning income would be an undertaking by itself; that each well has got substantial investment and therefore resulted in the creation of separate, distinct and new undertaking; that the total capital investment in undertaking H2 is to the tune of Rs. 3.44 crores and H3 to the tune of Rs. 30.22 crores as on 31st March, 2001; that each well produced revenue independently; that the undertaking H2 produced marketable quantity of gas and generated revenue on its own; that operation of undertaking H2 was not affected by other wells in the field and thus undertaking H2 is independent from undertaking H3; that the assessee has got separate approval for land wells 6 and 7 from the Director General of Hydrocarbons, who is the Government authority for giving such type of approvals indicating that "land wells 6 and 7" were separate from the other wells and constituted a distinct undertaking; and that the assessee maintained undertaking-wise quantitative production data and furnished the same to the Director General of Hydrocarbons. He thus held that cluster of wells 6 and 7 can be treated as one undertaking named as H2 and cluster of wells from 8 to 15 (later on 8 to 23), which have been drilled on land based drilling platform can be considered as another undertaking namely, H3. He also referred to the case of CIT v. Associated Cement Companies Ltd. [1979] 118 ITR 406 (Bom.), holding on Perusal of the certificate of the engineer that the new kiln at each factory worked independently of the old kilns and that even though the construction of each of the new kilns at each of the four factories "had resulted in expansion of the factory itself, yet the new kilns were completely integrated units which could be put into production independently of the other units or production therefrom could cease without affecting the production from the other kilns and that therefore even though the business of the industrial establishment as a whole had been expanded by the addition of a new kiln, each new kiln by itself constituted a new industrial undertaking. He accordingly, held that the assessee is entitled to deduction under section 80-IB(9) of theon the Profits and gains of undertaking H2 and H3, in as far as concept of undertaking is concerned, as these undertakings have started production alter 1st April, 1997. The undertaking H3 was however not granted any deduction and held to be not eligible to the deduction as it showed overall loss.

93. The CIT(A) also held the assessee was engaged in production of "mineral oil" which term though has not been defined separately under section 80-IB included petroleum and natural gas; that the mineral oil has been used in the section at 3 other places in the Income-tax Act, namely sections 42, 44AB and 293A and at each of these places, the mineral oil has been stated to include petroleum and natural gas; that as per the Mines and Minerals (Development & Regulation Act, 1957), "the mineral oil" includes petroleum and natural gas, as per section 3(b) of the aforesaid Act; that similarly, as per Oil Industries Development Act, "mineral oil" includes petroleum and natural gas as per section 3(h) of aforesaid Act; that opinion of the Attorney General as mentioned in the case of Dy. CIT v. Schlumberger Seaco Inc. [1995] 51 TTJ (Cal.) 72 : [1994] 50 ITD 348 (Cal.) also so stated that petroleum and natural gas are mineral oils. He therefore held that mineral oil includes natural gas and accordingly, the assessee is also covered under section 80-IB(9) for deduction. He also noted that in the case of M/s. Gujarat State Petroleum Corporation Ltd. (assessment year 2001-02), who is a joint venture partner of the assessee in relation to all the five PSCs, the learned CIT(A), Gandhinagar has held that the assessee is entitled to deduction under section 80-IB.

94. To quantify the deduction he noted that the assessee's working of deduction under section 80-IB amounted to Rs. 3,85,73,368 wherein he found that though the production expenses and the revenue has been taken on the basis of actual sales related to each undertaking, the administrative expenses have been divided on the basis of investment made in each undertaking during the year for which he did not agree. According to him the investment made during the year cannot at all be considered as the basis and the better basis is to allocate the expense in 'the ratio of production/sales of the various undertakings". Accordingly, on that basis the sale ratio of the Hazira field was worked out to 99.34 per cent and accordingly, out of total administrative expenses, the expenses relatable to Hazira comes to Rs. 6,75,36,595, within the Hazira field, the sale of H2 undertaking is 9 per cent and HI and H3 are respectively 40 per cent and 51 per cent. As only H2 undertaking is eligible for deduction under section 80-IB, the administrative expenses relatable to H2 undertaking comes to Rs. 60,78,293, being 9 per cent of Rs. 6,75,36,595. Accordingly, the claim of the assessee was reduced by this amount and the net claim of Rs. 3,24,95,075 alone was held to be allowable to the assessee under section 80-IB.

95.Revenue's submission : Shri N.S. Dayam submitted that the deduction on merits also is not allowable to the assessee. He referred to provisions of section 80-IB(1) and 80-IB(9) and analysing the provisions of section 80-IB(1), he submitted that-(1) sub-section (1) of section 80-IB is the charging section whereas section 80-IB(9) is machinery section; (2) it applies to an assessee where its total income includes the profits and gains of the eligible business. On analysing the provisions of section 80-IB(9), he submitted that—(1) it is applicable to undertaking which begins commercial production or refining mineral oil; (2) the undertaking begins commercial production after 1st April, 1997; and (3) the quantum of deduction will be 100 per cent for consecutive seven assessment years including the initial assessment year. He submitted that sub-section (1) of section 80-IB prescribes as to whom the deduction will be allowable, whereas sub-section (9) of section 80-IB prescribe the quantum of deduction, the period of deduction and the year from which deduction will be allowable and the rider of non-deduction. The CIT(A), according to him has not considered the express provisions in the proper perspective. His observation in admitting the ground are contrary to the provisions of the as the claim cannot be allowed on reserving or de-reserving the right as it is allowable on fulfilling certain conditions of the provisions under which the relief is claimed. He also submitted that the provisions of section 80-IB(1) applicable to the eligible business and not to the individual wells. The assessee on its own benefits treated combination of wells as three separate industrial undertakings because it started commercial production before 1st April, 1997 and thus in H-1 cluster it included well Nos. 1 to 5, in H-2 cluster well Nos. 6 and 7 and in H-3 cluster well Nos. 8 to 15 (later 8 to 23). He further submitted that while deciding the issue of wells as separate undertakings, the CIT(A) has not examined whether the wells are separate units or not. This issue has been examined by the Assessing Officer for the assessment year 2003-04. The finding of Assessing Officer has been reproduced by the CIT(A) in his appellate order for asst. yr. 2003-04 which order is available in Appeal Nos. 97 and 412/Ahd/2007 filed by the Department as well as assessee in January, 2007. These are : (a) That the explored gas from wells in being carried through a common pipeline into a separator plant. There is no separate unit for processing and selling for each well separately; (b) Gas merges in common pipeline for carrying it to the plant for processing and selling. At the time of processing and selling, there are no well-wise or undertaking-wise separations; (c) What comes out of the well is a mix of oil vapours and natural gases and there is no commercial sales of this mix. The mix is passed through a separator wherein natural gas is separated from oil. What is sold is the output of the separator plant and not what comes out from the well; (e) Commercial production is with reference to the delivery point and the sale is effected only when the oil and gas is delivered at the gathering station of ONGC/other buyer. What is delivered at the gathering station is not a mine of natural gases and oil is recovered from the wells but natural gas and oil separated/processed at the separate unit; (f) No separate books for each well/cluster of well or fields are maintained by the appellant. This is not possible because there is no well-wise or field-wise sales or billing is available; (g) Intermixing of employees. No 20 employees; (h) No separate stock inventory; and (i) No separate excise/sales- tax records.

96. The CIT-Departmental Representative further submitted that--(i) the CIT(A) has not considered the above things while accepting the wells as separate undertaking. He ignored the provisions of section 80-IB(13) and the definition of industrial undertaking as given in Explanation of section 33B which reads as : "In this section 'industrial undertaking' means any undertaking which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining"; (ii) the CIT(A) has not properly considered the decisions of the apex Court reported in Textile Machinery Corporation Ltd. v. CIT (supra), CIT v. Orient Paper Mills Ltd. (supra); (iii) the assessee cannot be said to be fulfilling test Nos. 2, 4 and 5 (p. 81 of the CIT(A)'s order); (iv) the finding recorded by the CIT(A) in para 12.7.4 at p. 83 is not said to be correct; (v) the CIT(A) was not correct in deciding that "mineral oil" would include petroleum and gases; (vi) the CIT(A) misguided himself by the provisions of sections 42, 44BB (not 44AB) and section 293A and by other Acts. However, the meaning should be restricted as is given in the section 80-IB itself. Sections 44, 44BB and 293A, though explain the meaning but that is restricted to those sections only and should not be imported in section 80-IB. The Explanations in all these sections state "For the purposes of this section "mineral oil" includes petroleum and natural gases"; (vii) the legislature restricted the meaning of mineral oil only to those sections specifically which show that the legislature did not want it to be generally applied.

97. He also mentioned that this issue was examined by the CIT(A) while deciding the case of the assessee for the assessment year 2003-04 and referred to the relevant discussion in paras 7.20 to 7.26 pp. 66 to 76. He relied on the finding of the CIT(A) that mineral oil does not include natural gases and assessee will not be entitled for deduction under section 80-IB as the assessee has produced the natural gases and not mineral oil.

98. Submissions of assessee as advanced by learned counsel of the assessee Shri S.E. Dastur, on the other hand, are that the CIT(A), in assessment year 1983-84, accepted that the assessee complied with the conditions and allowed the deduction but disallowed only on the ground that it was not producing mineral oil. Referring to the various parts of the section he submitted that sub-section (3) provides deduction for 25 per cent to an industrial undertaking for 10 years; sub-section (4) provides 100 per cent deduction to an industrial undertaking for five years if the industrial undertaking is in backward area and 25 per cent thereafter for ten years; sub-section (5) provides for deduction to an industrial undertaking if it is in a notified backward district at 100 per cent for first five years and 25 per cent thereafter; sub-section (6) provides for deduction to shipping industry; sub-section (7) to hotel, sub-section (8) and (8A) to the scientific research company, sub-section (9) to an industrial undertaking not being infrastructure undertaking, sub-section (10) to an infrastructure company, sub-section (11) to a cold chain facility for agricultural produce for operating cold chain facilities for agricultural produce, and sub-section (11A) to an undertaking which is deriving profit from integrated business handling, storage and transportation of food grains. Sub-section (12) extends the benefit to a transferred company under the scheme of amalgamation or demerger and sub-section (13) provides for the applicability of sub-sections (5), (7) to (12) of section 80-IA to the eligible business under this section. He submitted that the requirement of sub-section (2) to be fulfilled is not required by an industrial undertaking under section 80-IB(9) and each sub-section is governed by the set-out conditions therein. He submitted that though Assessing Officer held in assessment year 2003-04 that certain conditions are not complied with by the assessee but the CIT(A) held all these conditions are complied with by the assessee in the appeal of that year. He further submitted that section 80-IB(13) r/w section 80-IA(7) as it stood for 2000-01 does not require the fulfilment of the audit by a company. It was introduced only with effect from 1st April, 2003 and, therefore, this condition was not applicable insofar as this year is concerned. He further submitted that under section 2(17) a foreign company is also a company and the assessee being a company under the Canadian law, would be a company under this section. He further submitted that there is a mark distinction between an "undertaking" and an "industrial undertaking" in clause (7) of section 80-IA with effect from 1st April, 2002. In any case, the assessee has filed audit report before the CIT(A) and, therefore, complied with the conditions, it being procedural one.

99. He further contended that the assessee may have many undertakings and what is to be seen for granting deduction is whether it is an undertaking independent to the other undertaking carried on by the assessee. He refers to the decisions of Supreme Court in the case of Textile Machinery Corporation Ltd. (supra); Indian Aluminium Co. Ltd. (supra) as well as the Government approval. He submitted that the assessee is an operator with a joint venture with Gujarat Gas Company having 33 per cent and 1/3rd share of profit. He then referred to the decision of the Madras High Court in the case of CIT v. Premier Cotton Mills Ltd. [1999] 154 CTR (Mad.) 538 : [1999] 240 ITR 434 (Mad.), the decision of Bombay High Court in the case of CIT v. Associated Cement Companies Ltd. [1979] 118 ITR 406 (Bom.), the decision of Patna High Court in the case of CIT v. Hindusthan Malleables & Forgings Ltd. [1991] 191 ITR 70 (Pat.) and the decision of Bombay High Court in the case of CIT v. Metropolitan Springs (P.) Ltd. [1991] 95 CTR (Bom.) 265 : [1991] 191 ITR 288 (Bom.).

100. He further submitted that the same business theory will not deprive the claim because an assessee may have many businesses which may be or may not be same business. An undertaking does only one business which is a separate from the assessee. In this connection he relied upon the decision of Karnataka High Court in the case of International Instruments (P.) Ltd. v. CIT [1979] 9 CTR (Kar.) 291 : (1980) 123 ITR 11 (Kar.), the decision of Calcutta High Court in the case of CIT v. Rohtas Industries Ltd. [1979] 120 ITR 110 (Cal.), the decision of Bombay High Court in the case of Mahindra Sintered Products Ltd. v. CIT [1989] 75 CTR (Bom.) 83 : [1989] 177 ITR 111 (Bom). He also referred to the Board circulars dated 15th May, 1963 and 13th Dec., 1963, where a deduction is allowed to a transferred company for the remaining period showing that the deduction is for an undertaking and not to the assessee.

101. He then referred to reference of the terms 'mineral oil' and 'natural gas' in production sharing agreement and the definition given under various Acts, like The Oil and Fuel (R&B) Act, 1948, section 3(c); The Mineral oil Petroleum Rules, 1959, section 2(k); The Petroleum, Oil Industrial (Development) Act, 1974, section 2(h); The Mineral oil, Mines and Mineral Act, 1957, section 3(h); The Mineral oil, Mines Act, 1952, section 2(jj); The Mineral oil, Offshore (D.R.); 2002, section 4(m); The mineral oil agreement PSC. The entries should be construed in a broad and comprehensive and understood in a liberal manner in view of the decision of Supreme Court in the case of CIT v. Krishna Copper & Steel Rolling Mills [1991] 100 CTR (SC) 114 : [1992] 193 ITR 281 (SC). He then referred to the Finance Minister's Speech dated 28th Feb., 1997, Petrol Guide, 1999-section 3(h), 3( j), 5(11) on petrol and petroleum-Ministry of Petroleum letter dated 19th Oct., 2000.

102. He further submitted that definitions in Explanations in sections 42, 44BB, 293AA are inclusive one for specific purpose and includes petroleum, which is only clarificatory. In any case, if it were not defined in section 80-IB(9), the otherwise prevalent meaning should be given unless contrary intention is indicated. He then referred to the decision of the Supreme Court in the case of Strawboard Manufacturing Co. Ltd. ( supra) wherein paper and pulp entry was interpreted to include strawboard paper and contended that similar mineral oil industry should be interpreted to include natural gas. He referred to the decision of Association of Natural Gas v. Union of India & Ors. [2004] 4 SCC 489, where Entry No. 53 held to cover the natural gas. He then referred to the decision of the Tribunal, Calcutta Bench, in the case of Dy. CIT v. Schlumberger Seaco Inc. [1995] 51 TTJ (Cal.) 72 : (1994) 50 ITD 348 (Cal.), wherein it is held that mining includes natural gas for the purpose of section 9(1)(vii). He then referred to the decision reported as 1988 SOT 631, 641-42, wherein also it is held that mining included natural gas for the purpose of section 9(1)(vii). He then referred to a decision of Madras High Court wherein the deduction is granted to meter for the four entry of electricity and the decision of Supreme Court in the case of CIT v. Nirlon Synthetic Fibres & Chemicals Ltd. [1981] 22 CTR (SC) 130 : [1981] 130 ITR 14 (SC).

103. It is submitted that if the issue is considered with reference to the assessee, it could be said that it had started production before 1st April, 1997 but what section 80-IB requires is the start of the production by an undertaking and not by the assessee. The assessee has many undertakings which are independent and separate undertakings by themselves. The undertaking HI consisting of well Nos. 1 to 5 had started production before 1st April, 1997 but undertaking H2 consisting of well Nos. 6 and 7 for which the assessee has claimed deduction has started production in August-September 1998. The term 'undertaking' has to be construed as distinct from the 'assessee'. Unit H2 is a separate undertaking since it is a physically separate unit eligible for tax holiday under section 80-IB(9) of the. It is well established that a person may be owner of several undertakings and all such undertakings may not be set up at the same time. Undertakings may be set up by stage and from time to time.

104. Referring to various provisions of section 80-IB the learned counsel submitted that sub-section (9) grants benefit to an "undertaking" and there is no need of it to be an "industrial undertaking" and therefore the requirements for eligibility of deduction by an "industrial undertaking" as contained in sub-section (2) are not applicable and not to be complied with.

105. According to him the Assessing Officer is wrong in forming the view that as undertakings H1 and H2 were part of Hazira fields and therefore the whole field should be regarded as one undertaking considering that there is one contract and undertaking is to be seen as a whole. The assessee submitted that the field is the premises for conducting business and not an undertaking. The production of mineral oil is carried out by undertakings within the field allotted and earmarked by the Government. An assessee may set up several production units within the same premises and they cannot be disregarded merely on that ground. Each undertaking operates on a standalone basis and produces revenue independently and therefore is a distinct and separate unit. In the aforesaid background, it is submitted that land wells Nos. 6 and 7 together with gas separators and pipelines constitute the undertaking H-2 for the purposes of section 80-IB(9).

106. It is further contended that the production sharing contract (PSC) lays down the terms for conducting business and does not have any role in the formation of an undertaking separately. The assessee cannot do production activities beyond the contract area and hence the undertakings have to be located within the contract area, which as per article 1.14 of the PSC means the area described in Appendix A and delineated on the map attached as Appendix B, or any portion of the said area remaining after relinquish merit or surrender from time to time pursuant to the terms of this contract. Similarly article 2.21 of PSC defines "Development area" to mean that part of the contract area corresponding to the area of an oil filed or gas field delineated in simple geometric shape together with a reasonable margin of additional area surrounding the field consistent with petroleum industry practice and approved by the management committee of the Government as the case may. Thus the assessee can only operate from the specified territory of the contract area.

107. It is further submitted that the Supreme Court held in the case of Indian Aluminum (supra) that the proximity between the new undertaking and the old undertaking is held could not be the basis for denial of benefits to the new undertaking. The view of the Assessing Officer that undertaking should be considered as a whole and not unit-wise is contrary to the circular of the CBDT No. F. No. 15/5/63-IT(AL), dated 13th Dec., 1963 in which "the Board" agrees that the benefit of section 84 of the Income-tax Act, 1961 attaches to the undertaking and not to the owner thereof. The successor will be entitled to the benefit for unexpired period of five years provided the undertaking is taken over as a running concern, and also the Circular No. 281, dated 22nd Sept., 1980 stating that "In computing the quantum of 'tax holiday' profits in all cases, taxable income derived from the new industrial units, etc., will be determined as if such unit were an independent unit owned by an assessee who does not have any other source of income."

108. The learned counsel of the assessee also referred to the object for introducing the provision for deduction as originally allowed under section 80-IA(4E) of thebefore its division in two parts-sections 80-IA and 80-IB. It is submitted that with the energy requirements of India far exceeding its productive capacity, leading to huge import of oil with consequential damaging affect on the foreign exchange reserves, it was imperative for India to exploit its natural resources to their fullest capability. Therefore the deduction as tax holiday vide section 80-IB(9) formerly contained in section 80-IA(4E) of thewas introduced as part of a "two prone strategy to diminish the gap between the demand and supply of energy by liberalizing the foreign investment norms in the oil and gas sector and by establishing fiscal incentives by way of tax holiday.

109. Conclusion : We have heard the parties and considered the rival submissions. The assessee is engaged in the business of exploration and development of oil and gas fields. For this purpose the assessee has embarked upon exploitation of the reservoir by drilling operations, that is, land based onshore or offshore, each of these operations being different and independent upon the nature of the field to be exploited. Thus a single land based well or the phases in offshore might be an undertaking eligible for availing the tax holiday under section 80-IB(9) of the. Section 80-IB for the sake of convenience is reproduced as under :

"80-IB. (1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to (11) [and (11A)] (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section.

(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :

(i)

it is not formed by splitting up, or the reconstruction, of a business already in existence :

Provided that this condition shall not apply in respect of an industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;

(ii)		it is not formed by the transfer to a new business of machinery or plant previously used for any purpose;
(iii)		it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India :

Provided that the condition in this clause shall, in relation to a small scale industrial undertaking or an industrial undertaking referred to in sub-section (4) shall apply as if the words "not being any article or thing specified in the list in the Eleventh Schedule" had been omitted.

Explanation 1 : For the purposes of clause (ii), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely :

(a)		such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;
(b)		such machinery or plant is imported into India from any country outside India; and
(c)		no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.

Explanation 2 : Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with;

(iv)

in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.

(3) The amount of deduction in the case of an industrial undertaking shall be twenty-five per cent (or thirty per cent where the assessee is a company), of the profits and gains derived from such industrial undertaking for a period of ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) beginning with the initial assessment year subject to the fulfilment of the following conditions, namely :

(i)		it begins to manufacture or produce, articles or things or to operate such plant or plants at any time during the period beginning from the 1st April, 1991 and ending on the 31st March, 1995 or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular undertaking;
(ii)		where it is an industrial undertaking being a small scale industrial undertaking, it begins to manufacture or produce articles or things or to operate its cold storage plant [not specified in sub-section (4) or sub-section (5)] at any time during the period beginning on the 1st April, 1995 and ending on the 31st March, 2002.

(4) The amount of deduction in the case of an industrial undertaking in an industrially backward State specified in the Eighth Schedule shall be hundred per cent of the profits and gains derived from such industrial undertaking for five assessment years beginning with the initial assessment year and thereafter twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from such industrial undertaking :

Provided that the total period of deduction does not exceed ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) subject to fulfilment of the condition that it begins to manufacture or produce articles or things or to operate its cold storage plant or plants during the period beginning on the 1st April, 1993 and ending on the 31st March, 2002 :

Provided further that in the case of such industries in the North-Eastern Region, as may be notified by the Central Government, the amount of deduction shall be hundred per cent of profits and gains for a period of ten assessment years, and the total period of deduction shall in such a case not exceed ten assessment years.

(5) The amount of deduction in the case of an industrial undertaking located in such industrially backward districts as the Central Government may, having regard to the prescribed guidelines, by notification in the Official Gazette, specify in this behalf as industrially backward district of category 'A' or an industrially backward district of category 'B' shall be,—

(i)

hundred per cent of the profits and gains derived from an industrial undertaking located in a backward district of category 'A' for five assessment years beginning with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains of an industrial undertaking :

Provided that the total period of deduction shall not exceed ten consecutive assessment years or where the assessee is a co-operative society, twelve consecutive assessment years :

Provided further that the industrial undertaking begins to manufacture or produce articles or things or to operate its cold storage plant or plants at any time during the period beginning on the 1st Oct., 1994 and ending on the 31st March, 2002;

(ii)

hundred per cent of the profits and gains derived from an industrial undertaking located in a backward district of category 'B' for three assessment years beginning with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains of an industrial undertaking :

Provided that the total period of deduction does not exceed eight consecutive assessment years (or where the assessee is a co-operative society, twelve consecutive assessment years) :

Provided further that the industrial undertaking begins to manufacture or produce articles or things or to operate its cold storage plant or plants at any time during the period beginning on the 1st Oct., 1994 and ending on the 31st March, 2002.

(6) The amount of deduction in the case of the business of a ship shall be thirty per cent of the profits and gains derived from such ship for a period of ten consecutive assessment years including the initial assessment year provided that the ship—

(i)		is owned by an Indian company and is wholly used for the purposes of the business carried on by it;
(ii)		was not, previous to the date of its acquisition by the Indian company, owned or used in Indian territorial waters by a person resident in India; and
(iii)		is brought into use by the Indian company at any time during the period beginning on the 1st April, 1991 and ending on the 31st March, 1995.

(7) The amount of deduction in the case of any hotel shall be—

(a)

fifty per cent of the profits and gains derived from the business of such hotel for a period of ten consecutive years beginning from the initial assessment year as is located in a hilly area or a rural area or a place of pilgrimage or such other place as the Central Government may, having regard to the need for development of infrastructure for tourism in any place and other relevant considerations, specify by notification in the Official Gazette and such hotel starts functioning at any time during the period beginning on the 1st April, 1990 and ending on the 31st March, 1994 or beginning on the 1st April, 1997 and ending on the 31st March, 2001 :

Provided that nothing contained in this clause shall apply to a hotel located at a place within the municipal jurisdiction (whether known as a municipality, municipal corporation, notified area committee or a cantonment board or by any other name) of Calcutta, Chennai, Delhi or Mumbai, which has started or starts functioning on or after the 1st April, 1997 and before the 31st March, 2001 :

Provided further that the said hotel is approved by the prescribed authority for the purpose of this clause in accordance with the rules made under this Act and where the said hotel is approved by the prescribed authority before the 31st March, 1992, shall be deemed to have been approved by the prescribed authority for the purpose of this section in relation to the assessment year commencing on the 1st April, 1991;

(b)

thirty per cent of the profits and gains derived from the business of such hotel as is located in any place other than those mentioned in sub-clause (a) for a period of ten consecutive years beginning from the initial assessment year if such hotel has started or starts functioning at any time during the period beginning on the 1st April, 1991 and ending on the 31st March, 1995 or beginning on the 1st April, 1997 and ending on the 31st March, 2001:

Provided that nothing contained in this clause shall apply to a hotel located at a place within the municipal jurisdiction (whether known as a municipality, municipal corporation, notified area committee, town area committee or a cantonment board or by any other name) of Calcutta, Chennai, Delhi or Mumbai, which has started or starts functioning on or after the 1st April, 1997 and before the 31st day of March, 2001;

(c)

the deduction under clause (a) or clause (b) shall be available only if—

(i)		the business of the hotel is not formed by the splitting up, or the reconstruction, of a business already in existence or by the transfer to a new business of a building previously used as a hotel or of any machinery or plant previously used for any purpose;
(ii)		the business of the hotel is owned and carried on by a company registered in India with a paid-up capital of not less than five hundred thousand rupees;
(iii)		the hotel is for the time being approved by the prescribed authority :

Provided that any hotel approved by the prescribed deemed to have been approved under this sub-section.

(8) The amount of deduction in the case of any company carrying on scientific research and development shall be hundred per cent of the profits and gains of such business for a period of five assessment years beginning from the initial assessment year if such company—

(a) is registered in India;

(b) has the main object of scientific and industrial research and development;

(c) is for the time being approved by the prescribed authority at any time before the 1st April, 1999.

(8A) The amount of deduction in the case of any company carrying on scientific research and development shall be hundred per cent of the profits and gains of such business for a period of ten consecutive assessment years, beginning from the initial assessment year, if such company—

(i) is registered in India;

(ii) has its main object the scientific and industrial research and development;

(iii) is for the time being approved by the prescribed authority at any time after the 31st March, 2000 but before the 1st April, 2003;

(iv) fulfils such other conditions as may be prescribed;

(9) The amount of deduction to an undertaking which begins commercial production or refining of mineral oil shall be hundred per cent of the profits for a period of seven consecutive assessment years including the initial assessment year :

Provided that where the undertaking is located in North-Eastern Region, it has begun or begins commercial production of mineral oil before the 1st April, 1997 and where it is located in any part of India, it begins commercial production of mineral oil on or after the 1st April, 1997:

Provided further that where the undertaking is engaged in refining of mineral oil, it begins refining on or after the 1st Oct., 1998.

(10) The amount of profits in case of an undertaking developing and building housing projects approved before the 31st March, 2001 by a local authority, shall be hundred per cent of the profits derived in any previous year relevant to any assessment year from such housing project if—

(a) such undertaking has commenced or commences development and construction of the housing project on or after the 1st Oct., 1998 and completes the same before the 31st March, 2003;

(b) the project is on the size of a plot of land which has a minimum area of one acre; and

(c) the residential unit has a maximum built-up area of one thousand square feet where such residential unit is situated within the cities of Delhi or Mumbai or within twenty-five kilometres from the municipal limits of these cities and one thousand and five hundred square feet at any other place.

(11) Notwithstanding anything contained in clause (iii ) of sub-section (2) and sub-sections (3), (4) and (5), the amount of deduction in a case of industrial undertaking deriving profit from the business of setting up and operating a cold chain facility for agricultural produce, shall be hundred per cent of the profits and gains derived from such industrial undertaking for five assessment years beginning with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from the operation of such facility in a manner that the total period of deduction does not exceed ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) and subject to fulfilment of the condition that it begins to operate such facility on or after the 1st April, 1999 but before the 31st March, 2003.

(11A) The amount of deduction in a case of an undertaking deriving profit from the integrated business of handling, storage and transportation of foodgrains, shall be hundred per cent of the profits and gains derived from such undertaking for five assessment years beginning with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from the operation of such business in a manner that the total period of deduction does not exceed ten consecutive assessment years and subject to fulfilment of the condition that it begins to operate such business on or after the 1st April, 2001.

(12) Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger -

(a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and

(b) the provisions of this section shall, as far as may be, apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place.

(13) The provisions contained in sub-section (5) and sub-sections (7) to (12) of section 80-IA shall, so far as may be, apply to the eligible business under this section.

(14) For the purposes of this section,—

(a) "cold chain facility" means a chain of facilities for storage or transportation of agricultural produce under scientifically controlled conditions including refrigeration and other facilities necessary for the preservation of such produce;

(b) "hilly area" means any area located at a height of one thousand meters or more above the sea level;

(c) "initial assessment year"-

(i) in the case of an industrial undertaking or cold storage plant or ship or hotel, means the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things, or to operate its cold storage plant or plants or the cold chain facility or the ship is first brought into use or the business of the hotel starts functioning;

(ii) in the case of a company carrying on scientific and industrial research and development, means the assessment year relevant to the previous year in which the company is approved by the prescribed authority for the purposes of sub-s. (8);

(iii) in the case of an undertaking engaged in the business of commercial production or refining of mineral oil referred to in sub-section (9), means the assessment year relevant to the previous year in which the undertaking commences the commercial production or refining of mineral oil;

(iv) in the case of an undertaking engaged in the integrated business of handling, storage and transportation of foodgrains, means the assessment year relevant to the previous year in which the undertaking begins such business;

(d) "North-Eastern Region" means the region comprising the States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura;

(e) "place of pilgrimage" means a place where any temple, mosque, gurdwara, church or other place of public worship of renown throughout any State or States is situated;

(f) "rural area" means any area other than—

(i) an area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the preceding census of which relevant figures have been published before the first day of the previous year; or

(ii) an area within such distance not being more than fifteen kilometers from the local limits of any municipality or cantonment board referred to in sub-clause (i), as the Central Government may, having regard to the stage of development of such area including the extent of, and scope for, urbanisation of such area and other relevant considerations specify in this behalf by notification in the Official Gazette;

(g) "small-scale industrial undertaking" means an industrial undertaking which is, as on the last day of the previous year, regarded as a small-scale industrial undertaking under section 11B of the Industries (Development and Regulation) Act, 1951 (65 of 1951)."

110. On a close reading of the provisions we notice that sub-section (1) of section 80-IB provides for the deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section where the gross total income of an assessee includes any profits and gains derived from eligible business referred to in sub-sections (3) to (11) and (11A). The deduction is to be in accordance with and subject to the provisions of this section.

Sub-section (2) provides that this section applies to any industrial undertaking which fulfils all the following conditions, namely; - (a) it is not formed by splitting up, or the reconstruction, of a business already in existence (except in respect of an industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section); (b) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation 1 however relaxes this condition of this clause (ii ), if any machinery or plant which was used outside India by any person other than the assessee is not to be regarded as machinery or plant previously used for any purpose, if (a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) such machinery or plant is imported into India from any country outside India; and (c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee. Explanation 2 further relaxes the condition in the case of an industrial undertaking, if any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business; (c) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India. In relation to a small-scale industrial undertaking or an industrial undertaking referred to in sub-section (4) this condition shall apply as if the words "not being any article or thing specified in the list in the Eleventh Schedule" had been omitted; and (d) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.

112. Sub-section (3) provides for the amount of deduction in the case of an industrial undertaking to be at twenty-five per cent (or thirty per cent where the assessee is a company), of the profits and gains derived from such industrial undertaking for a period of ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co operative society) beginning with the initial assessment year on fulfilment of the conditions that : (i) it begins to manufacture or produce, articles or things or to operate such plant or plants at any time during the period beginning from the 1st April, 1991 and ending on the 31st March, 1995 or such further period as the Central Government may; by notification in the Official Gazette, specify with reference to any particular undertaking; (ii) where it is an industrial undertaking being a small scale industrial undertaking, it begins to manufacture or produce articles or things or to operate its cold storage plant (not specified in sub-section (4) or sub-section (5) at any time during the period beginning on the 1st April, 1995 and ending on the 31st March, 2002.

Sub-section (4) provides 100 per cent deduction of the profits and gains derived from an industrial undertaking for five assessment years beginning with the initial assessment year and thereafter twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from such industrial undertaking in the case of an industrial undertaking in an industrially backward State specified in the Eighth Schedule, provided that the total period of deduction does not exceed ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) subject to fulfilment of the condition that it begins to manufacture or produce articles or things or to operate its cold storage plant or plants during the period beginning on the 1st April, 1993 and ending on the 31st March, 2002. but if such industries in the notified North-Eastern Region, the amount of deduction shall be hundred per cent of profits and gains for a period of ten assessment years, and the total period of deduction shall in such a case not exceed ten assessment years.

114. Sub-section (5) provides for 100 per cent deduction to an industrial undertaking located in the notified industrially backward districts of category 'A' for five assessment years and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company). Provided that the total period of deduction shall not exceed ten consecutive assessment years or where the assessee is a co-operative society, twelve consecutive assessment years. Provided further that the industrial undertaking begins to manufacture or produce articles or things or to operate its cold storage plant or plants at any time during the period beginning on the 1st Oct., 1994 and ending on the 31st March, 2002. The deduction of 100 per cent is for three assessment years beginning with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains of an industrial undertaking if it is located in industrially backward district of category 'B'. Provided that the total period of deduction does not exceed eight consecutive assessment years (or where the assessee is a co-operative society, twelve consecutive assessment years). Provided further that the industrial undertaking begins to manufacture or produce articles or things or to operate its cold storage plant or plants at any time during the period beginning on the 1st Oct., 1994 and ending on the 31st March, 2002.

115. Sub-section (6) provides the deduction in the case of the business of a ship at thirty per cent of the profits and gains derived from such ship for a period of ten consecutive assessment years including the initial assessment year provided that the ship-(i) is owned by an Indian company and is wholly used for the purposes of the business carried on by it; (ii) was not, previous to the date of its acquisition by the Indian company, owned or used in Indian territorial waters by a person resident in India; and (iii) is brought into use by the Indian company at any time during the period beginning on the 1st April, 1991 and ending on the 31st March, 1995.

116. Sub-section (7) provides for deduction to an approved hotel at fifty per cent of the profits and gains derived for a period of ten consecutive years beginning from the initial assessment year if it is located in a hilly area or a rural area or a place of pilgrimage or a notified other place and it starts functioning at any time during the period from 1st April, 1990 to 31st March, 1994 or from 1st April, 1997 to 31st March, 2001, provided it is not located within the municipal jurisdiction of Calcutta, Chennai, Delhi or Mumbai started or starts functioning on or from 1st April, 1997 to 31st March, 2001. The deduction is thirty per cent for other hotel if started or starts functioning from 1st April, 1991 to 31st March, 1995 or 1st April, 1997 to 31st March, 2001 if it is not located within the municipal jurisdiction of Calcutta, Chennai, Delhi or Mumbai, and it started or starts functioning from 1st April, 1997 to 31st March, 2001 this deduction is available only if (i) the business of the hotel is not formed by the splitting up or the reconstruction, of a business already in existence or by the transfer to a new business of a building previously used as a hotel or of any machinery or plant previously used for any purpose; or (ii) the business of the hotel is owned and carried on by a company registered in India with a paid-up capital of not less than five hundred thousand rupees; or the hotel is for the time being approved by the prescribed authority.

117. Sub-section (8) grants deduction to any company carrying on scientific research and development at 100 per cent for a period of five assessment years beginning from the initial assessment year if such company—(a) is registered in India; (b) has the main object of scientific and industrial research and development; and (c) is for the time being approved by the Prescribed authority at any time before the 1st April, 1999.

118. Sub-section (8A) provides for a deduction at 100 per cent for a further period of ten consecutive assessment years, beginning from the initial assessment year, if such company—(i) is registered in India; (ii) has its main object the scientific and industrial research and development; (iii) is for the time being approved by the prescribed authority at any time after the 31st March, 2000 but before the 1st April, 2003; and (iv) fulfils such other conditions as may be prescribed.

119. Sub-section (9) with which we are concerned in this case provides for 100 per cent deduction to an undertaking which begins commercial production or refining of mineral oil for a period of seven consecutive assessment years including the initial assessment year. As per the 1st proviso it should begin commercial production of mineral oil on or after the 1st April, 1997 if the undertaking is located in North-Eastern Region but if it is located in any part of India it has begun or begins commercial production of mineral oil before the 1st April, 1997 in case the undertaking is engaged in refining of mineral oil, it begins refining on or after the 1st Oct., 1998.

120. Sub-section (10) provides 100 per cent deduction to an undertaking developing and building housing projects approved before the 31st March, 2001 by a local authority, if,—(a) such undertaking has commenced or commences development and construction of the housing project on or after the 1st Oct., 1998 and completes the same before the 31st March, 2003; (b) the project is on the size of a plot of land which has a minimum area of one acre; and (c) the residential unit has a maximum built-up area of one thousand square feet where such residential unit is situated within the cities of Delhi or Mumbai or within twenty-five kilometres from the municipal limits of these cities and one thousand and five hundred square feet at any other place.

121. Sub-section (11) provides for 100 per cent deduction to an industrial undertaking deriving profit from the business of setting up and operating a cold chain facility for agricultural produce, irrespective clause (iii) of sub-section (2) and sub-sections (3), (4) and (5), for five assessment years and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) not exceeding ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) and subject to fulfilment of the condition that it begins to operate such facility on or after the 1st April, 1999 but before the 31st March, 2003.

122. Sub-section (11A) grants 100 per cent deduction to an undertaking deriving profit from the integrated business of handling, storage and transportation of food grains, for five assessment years beginning with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) not exceeding ten consecutive assessment years and subject to fulfilment of the condition that it begins to operate such business on or after the 1st April, 2001.

123. Sub-section (12) provides for deduction to the successor company in a scheme of amalgamation or demerger for the remaining period but no deduction admissible for the previous year in which the amalgamation or the demerger takes place.

124. Sub-section (13) incorporates the provisions of sub-section (5) and sub-sections (7) to (12) of section 80-IA to the eligible business under this section.

125. Sub-section (14) defines various terms for the purposes of this section vide clauses (a) to (g). Clause (c) defines the "initial assessment year" for various businesses mentioned in clause (i) to (iv). Clause (iii ) thereof provides that in the case of an undertaking engaged in the business of commercial production or refining of mineral oil referred to in sub-section (9), to mean the assessment year relevant to the previous year in which the undertaking commences the commercial production or refining of mineral oil.

126. Background : The assessee developed Hazira field located at the mouth of the Tapti river, approximately 25 kms. west of the city of Surat, in Gujarat State on the west coast of India. The stages of development can be discussed in three parts-first step, the signing of PSC with Government of India, the second step, the pre-development stages (pre-commercial production) and the third step, the drilling operations-commercial production. The PSC agreement is a tripartite one amongst Government of India, the Gujarat Gases Company and the assessee. Pre-development stages (pre-commercial production), involved couple of stages, which are briefly : (i) Development plan and its approval which contains detailed proposals for the construction, establishments and operation of all the facilities and services for and incidental to the recovery storage and storage and transportation of the petroleum from the proposed development area to the delivery point together with all data and supporting information including out not limited to : (a) Characteristics of reservoir, data, production profiles, etc. (b) Outlines of the development project and/or alternative development projects, if any, describing the production facilities to be installed and the number of wells to be drilled under such development project and/or alternative development: projects, if any; (c)(d ) (e) (f) …… Work programme and budget for development and production operation; (g) and (h) (ii ) Submission of plan to the management committee for approval on the basis of the approved development plan, the assessee then undertakes various steps for development of wells and support production facilities; (iii) Development of wells/setting up of undertakings on the basis of approved development plan, the assessee initiates the process of making investments for discovery of gas and on developing the undertakings. In drilling operations-commercial production land based wells, on the basis development plans approved by Director General of Hydrocarbons, the assessee drilled either one well or multiple wells for exploiting the field.

127. Initially on the basis of data vailable, one well started commercial production in July, 1995 and later on drilling of land well Nos. 3 to 5 was undertaken. Subsequent to this, based on further information, the need for drilling additional well Nos. 6 and 7 was established. To summarise, to exploit the field, various undertakings comprising, a well or number of wells, were set up; --(i) Undertaking H1 : Consisting, well Nos. 1, 3, 4 and 5 started commercial production prior to 1st April, 1997; (ii) Undertaking H2 : Comprising, well Nos. 6 and 7 started commercial production in 1998-99; and (iii) Undertaking H3 : comprising well No. 8 onwards.

128. Hazira land based drilling platform ('LBDP') a portion of the sea is reclaimed and drilling platform is constructed thereon. Reservoir data obtained pointed that the field was located in the sea and hence LBDP was conceived. The field was located 1-1/2 Kms. inside the sea, and LBDP platform was commissioned with 8 wells initially, that is, well Nos. 8-15, in respect of, which commercial production has in commenced in financial year ended 31st March, 2001. Based on the methodology adopted for producing mineral oil, each well or a cluster of wells, depending on the nature of reservoir to be exploited, shall constitute an "undertaking" for the purposes of claiming a deduction under section 80-IB(9) of the. These are the basis of formation of separate distinct and identifiable undertakings.

129. Each well an undertaking : Each well or a cluster of wells is a physically separate independent unit, which can exist on its own as a viable unit capable of earning income and would be an undertaking, eligible for tax holiday. Therefore, depending upon the facts of each case/addition of each single land based well or cluster of wells or additional well(s) would be a separate undertaking. Similarly, in case of LBDP, the cluster of wells in the platform would be said to be a separate and distinct unit capable of independent existence. Substantial investment is made by the assessee in the wells to the tune of Rs. 3,44,35,436 (total capital investment in undertaking H2 as on 31st March, 2001) and Rs. 30,22,23,646 (total capital investment in undertaking H3 as on 31st March, 2001) and therefore result in the creation of separate, distinct and new undertaking. Each well produces revenue independently. The anatomy of oil exploration is determined by the nature of land. The methodology of the oil exploration business clearly depicts that in case of land based drilling operations, even a single oil and gas well fits within the characteristics of a 'new and separate undertaking'. The economics of land based drilling operations clearly demonstrates the independence and viability of each drilling operation as a separate independent undertaking capable of earning revenue and has independent working from other wells. The actual development of the onshore field clearly depicts that land wells have been drilled at intervals, as per the requirements of exploration and each well served the purpose of exploiting the reservoir. The operations of undertaking H2 are not affected by the other wells in the field. The assessee has separate approvals from the Director General of Hydrocarbons for land well Nos. 6 and 7 which indicates that well Nos. 6 and 7 are separate from the other wells and constitute a distinct undertaking. The assessee is required to maintain undertaking-wise quantitative production data and furnish the same to the DGH. The assessee prepares separate records for each undertaking. For the financial year relevant to the subject assessment year 2001-02 the assessee prepared separate P&L a/c for undertaking H2.

130. With the commissioning of undertaking H-2 in financial year 1998-99, the total gas production went up from 89,068,959 SCM (gross) to 109,198,817 SCM (gross), for the part year. This increase constituted more than 1.8 per cent of the total production, which increased to 20 per cent during financial year 1999-2000 for the full year of production.Similarly for the year under assessment (financial year 2000-01), with the commissioning of undertaking H-3, the total gas production went up from 141,850,588 SCM (gross) to 291,820,249 SCM (gross) for the part year. This increase constitutes more than 51 per cent of the total production, which increased to 75 per cent during financial year 2001-02. These all indicate that there was a substantial expansion by additions of wells and plant and machinery which constitute a new undertaking in addition to the old ones.

131. Certain decisions with regard to determination of a new undertaking are cited and can be discussed :

(a) Textile Machinery Corporation Ltd. (supra) : In this case the expansion of an existing business is held to be a new undertaking by the Supreme Court. It was observed that the fact that an assessee by establishment of a new industrial undertaking expands his existing business which he certainly does, would not, on that score, deprive him of the benefit under section 15C. Every new creation in business is some kind of expansion and advancement. The true test is not whether a new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking, separate and distinct from the existing business. It is also held that the new activity may produce the same commodities of the old business or it may produce some other distinct marketable products, even commodities which may feed the old business. The Court held that new industrial undertaking must be an integrated unit by itself wherein articles are produced. In order to be entitled to the benefit under section 15C (of the old Act), the following facts have to be established by the assessee :

(1) Investment of substantial fresh capital in the industrial undertaking set up.

(2) Employment of requisite labour therein.

(3) Manufacture or production of articles in the said undertaking.

(4) Earning of profits clearly attributable to the said new industrial undertaking and

(5) Above all, a separate and distinct identity of the industrial unit set up.

(b) Indian Aluminium Co. Ltd. (supra) : In this case, there was a manufacturer of aluminium ingots from ore and it had four manufacturing centers at Belur, Kalwa, Alupuram and Hirakud. The assessee made an extension to the existing centers at Belur and Alupuram and installed new plant and machinery there. The production of aluminium ingots went up by double. The additional units set-up cost was over Rs. 50 lacs at Belur and about the same amount at Alupuram. It was held that in view of the nature of the investments that the units were new industrial undertakings by themselves, that these units were set up side by side with the old ones and added to the assessee's total output and therefore, the assessee was entitled to relief under section 15C of Income-tax Act, 1922. Section 15C of the old Act was replaced by section 80J of the new Income-tax Act, 1961 and the language of section 80-IB is more or less is same as that of section 80J at least in relation to industrial undertaking or undertaking.

(c) Premier Cotton Mills Ltd. (supra) : The Court held that "an undertaking is not to be equated with the legal entity that owns the undertaking. A single legal entity may own and operate more than one undertaking and the fact of common ownership does not render undertakings, which are otherwise capable of being separate into a common undertaking. What is of relevance is the existence of all the facilities including factory building, plant, machinery, godowns and things which are incidental to the carrying on of manufacture or production all of which taken together are capable of being regarded as an industrial undertaking."

132. Applying the aforesaid tests to the facts of this case undertaking H2 is a separate and distinct unit and therefore, the deduction under section 80-IB(9) is allowable to the assessee in respect thereof, particularly in view of the facts that a sum of Rs. 3,44,35,436 has been invested in setting up this undertaking and the fact that it had employed 20 employees in undertaking H2 for the extraction of mineral oil; the undertaking independently produces natural gas a part of mineral oil; it earns profits which are clearly attributable to the new undertaking and above all, a separate and distinct identity of the industrial undertaking set-up.

133. In the course of the hearing a note was furnished by the assessee stating that the fluid that is produced by each well is metered at each wellhead and subsequently at various stages the gas produced is metered. The objective of the measurement at the wellhead is to monitor the daily production from each of the wells and carry out reconciliation with the gas actually sold and the internal consumption. The final production at each well is based on the production measured at each well and finally reconciled to that at separation plant. To illustrate, if five wells together have produced 1,000 units of fluid and the final production measured after the separation is of 990 units of gas, then, the production at each wellhead is determined by reducing from the production measured at wellhead, a sum equivalent to 1 per cent thereof. This system is adopted because more than 99.9 per cent of the production of the undertaking is natural gas. Even if each well were producing a mix i.e., natural gas and crude oil, then also the metering system and the software available would enable the final production of the different products to be allocated to each well on a scientific basis. The production figures so derived are furnished to the Directorate General of Hydrocarbons ('DGH'), Ministry of Petroleum and Natural Gas, Government of India on monthly and quarterly basis. An extract of the monthly report to April, 2000 and the quarterly report for the last quarter viz., January to March, 2001 clearly indicate the well-wise production for each field. In fact the monthly report provides the details of field-wise production and the daily production of natural gas from each well and the quarterly report provides the details of cumulative production of each well from the inception of commercial production till the period covered by the report. The figures of month-wise production match the figures furnished in the report for the quarter. This shows that the production at each oil and gas well is distinctly identifiable and in fact has been ascertained and full details thereof are filed with the DGH and accepted by the DGH.

134. The natural gas is sold as and when it is produced and consequently there is no inventory of gas at any point of time. The figure of sales of Rs. 5,42,66,784 on the basis of which the profit derived from H-2 undertaking are determined, is worked out on the basis of the production of gas of the undertaking multiplied by the average sales realization of gas from the Hazira field, which in turn is determined by dividing the total sales value realized from the Hazira field for the entire financial year. These are all indications of the independent and identifiable undertaking of wells. In subsequent years' appeal, the CIT(A) has accepted all this though he denied the claim by holding that the assessee was not producing mineral oil as this term did not include production of natural gas.

135. Natural gas is mineral oil : We shall now discuss whether the assessee produces mineral oil. What is mineral oil and whether natural gas produced by the assessee is production of mineral oil The term mineral oil is not defined in section 80-IB. We have therefore to find out its meaning elsewhere as ordinarily understood by people dealing with it. There are many statutes dealing with mineral oil, petroleum and natural gas etc. These contain the meaning of these terms and are as discussed hereunder :

(a) The Oil Fields (Regulation Development) Act, 1948 was first enacted by the Government of India for regulating the exploitation of natural oil resources. It seems that because of the coexistence of gas and petroleum, a term common to both being 'mineral oil' was used for both.

(b) In the enactments relating to mines and minerals also the petroleum and natural gas were denoted as 'mineral oil'. The Mines and Minerals (Development and Regulation) Act, 1959, the Oil Industry (Development) Act, 1974, the Regulation for foreign direct investment in India and in notification issued (No. GSR 304(E) dated 31st March, 1983 for extending the applicability of the to the continental shelf of India natural gas is part of 'mineral oil'.

(c) New Exploration Licensing Policy (NELP) was formulated by the Government of India inherently to incite the private sector for efficient and timely utilization of natural hydrocarbon resources. To give philip to the policy the incentives under the taxation law were introduced as explained by the Finance Minister by giving the salient features in his Speech, while presenting the Union Budget of 1997-98. The NELP was for exploration and production of mineral oil, which means petroleum and natural gas. Under NELP, the Government of India has awarded contracts under which the exploration for oil and natural gas in India could be done only in pursuance of the production sharing contract (PSC) entered into with the Government and on terms and conditions, which are approved by the Parliament. In the PSC signed between the Government of India and the successful bidding party, there has to be invariably a clause dealing with the tax payable by the bidding company on its profits and gains from the business of petroleum operations. As specific methodology is provided to compute in the profits and gains from such business, the Income-tax Act as well as PSC have specific overriding provisions to compute the profit and gains of business, which included deductions under section 42, computation of profit and gain under section 44BB and under section 293A of the Income-tax Act, 1961, as well as deductions under sections 80-IA/80-IB of the said Act. PSC is binding to all the parties entering into the contract including the Government of India.

(d) In 1999, the Petroleum Tax Guide was published by the Ministry of Petroleum and Natural Gas, Government of India to communicate to the prospective bidders for oil fields under new exploration and licensing policy. Clause 5(11) of the Guide states that under section 80-IA of the Income-tax Act, 1961, PSC participants who begin commercial production of petroleum in any part of India on or after 1st April, 1997 shall be entitled to claim deduction of 100 per cent of their profits and gains derived from such business for initial seven years commencing from the first year of commercial production. Clause 3(j) of the Guide defines "Petroleum" to mean crude oil and/or natural gas existing in their natural conditions but excluding Helium occurring in association with petroleum or shale.

(e) Considering the peculiar nature of the business of oil exploration, specific provisions for computing the profits or gains of any business of the prospecting for or extraction or production of mineral oils in relation to which the Central Government has entered into an 'agreement' with any person were made by way of incorporating section 42 of the Income-tax Act. It was clarified in the section itself that mineral oil 'includes' petroleum and natural gas. The meaning of mineral oil in context of the business of exploration of mineral oil was also clarified while enacting the provision under section 44BB for computation of income of 'services and facilities provider' to the person engaged in the business of exploration of oil. The same clarification of the meaning of 'mineral oil' to include natural gas is found in the same context of the business of prospecting for extraction of mineral oil in section 293A dealing with power to grant exemption etc, in relation to participation in business of prospecting for extraction of 'mineral oil'.

(f) As the activity of oil exploration was capital intensive and carried a high risk of losses due to uncertainty of exploration being successful, the Government's approach in taxation was clearly embedded in the tax provisions. On the one hand tax provisions allowed deductions of unsuccessful and abandoned exploration and as the same time provided incentive by way of deductions of profits and gains of the business activity of exploration of oil and gas. Initially 80-IA(4E) was introduced in the to promote oil and gas exploration activity. Thus, the context of the meaning of the word 'mineral oil' remains the same wherever used in the i.e. business of exploration, extraction or production of 'mineral oil'.

136. In Association of Natural Gas (supra), natural gas, petroleum and mineral oil-are described by the Supreme Court with reference to various dictionaries and statutes, Indian as well as foreign and Entries in List of the Constitution of India as :

"20. In Kirk-Othomer : Encyclopaedia of Chemical Technology (3rd Edn.). Vol. 11, p. 630, "natural gas" is defined as a naturally occurring mixture of hydrocarbon and non-hydrocarbon gases found in the porous geologic formations beneath the earth's surface, often in association with petroleum.

21. To obtain a marketable product, the raw natural gas flowing from gas or oil wells must be processed to remove water vapour, inert or poisonous constituents and condensable hydrocarbons. The processed gas is principally methane, with small amounts of ethane, propane, butane, pentane, carbon dioxide and nitrogen. This gas can easily be transported from the producing areas to the market in underground pipelines under pressure or liquefied at low temperatures and transported in specially designed ocean-going tankers.

2. Natural gas is found in areas of the earth that are covered with sedimentary rocks. These sediments were first laid down during the Cambrian period, ca 500 million years ago, and this process continued until the end of the Tertiary period ca 100 million years ago. These sediments contain the organic source materials from which natural gas and petroleum were produced. Gas and petroleum, being less dense than the water present in the rocks, tended to migrate upward until contained under impervious rock barriers.

23. On p. 634 of the above Encyclopaedia natural gas is classified in several broad categories based on the chemical composition, which are :

(1) wet gas contains condensable hydrocarbons such as propane, butane and pentane; (2) lean gas denotes an absence of condensable hydrocarbons; (3) dry gas is a gas whose water content has been reduced by dehydration process; (4) sour gas contains hydrogen sulphide and other sulphur compounds; and (5) sweet gas denotes an absence of hydrogen sulphide and other sulphur compounds. Natural gas sold to the public is described as lean, dry and sweet.

24. The composition of natural gas at the wellhead varies widely from field to field. Many undesirable components may be present that must be removed by processing before delivery to the pipeline.

25. The technological advancement in the use of liquefied natural gas (LNG) provided the gas industry with new methods to solve the problems of storage and transportation. Natural gas can be reduced to 1/600 of the volume occupied in the gaseous state by cryogenic processing, safely stored or transported in double-walled insulated metal containers at near atmospheric pressure and when required, can be regasified.

26. Natural gas is used mainly as fuel to provide heat for homes, commercial buildings and industrial processing.

27. In Vol. 17 on p. 119, it is stated that the term "petroleum", literally rock oil, is applied to the deposits of oily material found in the upper strata of the earth's crust. Petroleum was formed by a complex and incompletely understood series of chemical reactions from organic, material laid down in previous geological eras. Large deposits have been found in widely different parts of the world and their chemical composition varies greatly. Consequently, no single composition of petroleum can be defined. It is not surprising that the composition varies, since the local distribution of plant, animal and marine life is quite varied and, presumably, was similarly varied when the petroleum precursors were formed.

28. As per The New Book of Popular Science, Vol. 2, petroleum is an oily, inflammable liquid made up mostly of hydrocarbons - compounds containing only hydrogen and carbon. The hydrogen content of petroleum ranges from 50 per cent to 98 per cent. The rest is made up chiefly of organic compounds containing oxygen, nitrogen or sulphur.

29. According to a widely held theory, the remains of countless small marine animals and plants dropped to the ocean bottom and were covered over by mud. Many layers of mud and plant and animal remains accumulated in the course of time. These sediments were subjected to great pressure and heat and were often squeezed and distorted as the earth's crust moved. Gradually they were converted into layers of sedimentary rock. The plant and animal remains contained within them were transformed into petroleum and natural gas. The details of this transformation are not quite clear.

30. Gas and oil are found in huge subterranean caverns. They both occur in minute pores of such rocks as sandstone and limestone. They are held captive under great pressure by surrounding rock formations that are impervious to see-page. Finally, they are released when the shifting of the earth's surface cracks the cap rock.

31. "Natural gas" has been defined in the Webster's New 20th Century Dictionary, unabridged 2nd Edn., as follows :

'Natural gas : A mixture of gaseous hydrocarbons, chiefly methane, occurring naturally in the earth in certain place, from which it is piped to cities, etc. to be used as a fuel.' (p. 756)

32. In Ballantine's Law Dictionary, 3rd Edn., 1969, "natural gas" has been defined as "a mineral in the form of a vapour". A gas characterized by hydrocarbons in mixture, occurring naturally in the crust of the earth, obtained by drilling, and piped to cities and villages, industrial and commercial centres, for use in heating, illumination and other purposes.

33. ……….

34. ……….

35. All the materials produced before us would only show that natural gas is a petroleum product. It is also important to note that in various legislations covering the field of petroleum and petroleum products, either the word "petroleum" or "petroleum products" has been defined in an inclusive way, so as to include natural gas. In Encyclopaedia Britannica, 15th Edn., Vol. 19, p. 589 (1990), it is stated that "liquid and gaseous hydrocarbons are so intimately associated in nature that it has become customary to shorten the expression 'petroleum and natural gas' to 'petroleum' when referring to both". The word petroleum literally means "rock oil". It originated from the Latin terms petra and oleum (petra means rock or stone and oleum means oil). Thus, natural gas could very well be comprehended within the expression "petroleum" or "petroleum product".

36. …….

37. A survey of the various legislations on the topic would show that the term "petroleum" or "petroleum products" has been given a wide meaning to include natural gas and other similar products.

38. In the Pipelines Act, 1962 of the United Kingdom, "petroleum" has been defined as follows :

"Petroleum includes any mineral oil or relative hydrocarbon and natural gas existing in its natural condition in strata, whether or not it has undergone any processing; but does not include coal or bituminous shales or other stratified deposits from which oil can be extracted by destructive distillation."

39. Petroleum has been variously defined in different Acts noted hereinbelow :

Petroleum (Production) Act, 1934 (UK)

"Petroleum includes any mineral oil or relative hydrocarbon and natural gas existing in its natural condition in strata, but does not include coal or bituminous shales or other shales or other stratified deposits from which oil can be extracted by destructive distillation :

Petroleum Act, 2000 (s. 4), Australia

"Petroleum" means a naturally occurring substance consisting of a hydrocarbon or mixture of hydrocarbons in gaseous, liquid or solid state but does not include coal or shale unless occurring in circumstances in which the use of techniques for coal seam methane production or in situ gasification would be appropriate."

Liquid Fuel Emergency Act, 1984 (s. 3) "petroleum" means :

(a) any naturally occurring hydrocarbon or mixture of hydrocarbons, whether in a gaseous, liquid or solid state; or

(b) any naturally occurring mixture of a hydrocarbon or hydrocarbons and of another substance or other substances, whether in a gaseous, liquid or sold state.

40. The various legislations passed by the Indian Parliament and the relevant rules also would show that "natural gas" was treated as mineral oil resource or petroleum product.

1. The Oilfields (Regulation and Development) Act, 1948

"3. (c) 'mineral oils' include natural gas and petroleum;"

2. Mines Act, 1952

"2. (ii) 'minerals' means all substances which can be obtained from the earth by mining, digging, drilling, dredging, hydraulicking, quarrying or by any other operation and includes mineral oils (which in turn include natural gas and petroleum);"

3. The Mines and Minerals (Regulation and Development) Act, 1957

"3. (b) 'mineral oils' include natural gas and petroleum;"

4. Petroleum and Natural Gas Rules, 1959

"3. (k) 'petroleum' means naturally occurring hydrocarbons in a free state, whether in the form of natural gas or in a liquid, viscous or solid form, but does not include helium occurring in association with petroleum, or coal, or shale, or any substance which may be extracted from coal, shale, or other rock by the application of heat or by a chemical process.

(n) 'petroleum product' means any commodity made from petroleum or natural gas and shall include refined crude oil, processed crude petroleum, residuum from crude petroleum, cracking stock, uncracked fuel oil, fuel oil, treated crude oil residuum, casing head gasoline, natural gas gasoline, naphtha, distillate gasoline, kerosene, waste oil, blended gasoline, lubricating oil, blends or mixture of oil with one or more liquid products or by-products derived from oil condensate, gas or petroleum hydrocarbons, whether herein enumerated or not."

5. The Petroleum and Minerals Pipelines (Acquisition of Right of User in Land) Act, 1962

"2. (c) 'petroleum' has the same meaning as in the Petroleum Act, 1934, and includes natural gas and refinery gas;"

6. The Oil Industry (Development) Act, 1974

"2. (h) 'mineral oil' includes petroleum and natural gas;

(m) 'petroleum product' means any commodity made from petroleum or natural gas and includes refined crude oil, processed crude petroleum, residuum from crude petroleum, cracking stock, uncracked fuel oil, fuel oil, treated crude oil residuum, casing head gasoline, natural gas gasoline, naphtha, distillate gasoline, kerosene, bitumen, asphalt and tar, waste oil, blended gasoline, lubricating oil, blends or mixture of oil with one or more liquid products or by-products derived from oil or gas and blends or mixtures of two or more liquid products or by-products derived from oil condensate and gas or petroleum hydrocarbons not specified hereinbefore;"

41. Under Entry 53 of List I, Parliament has got power to make legislation for regulation and development of oilfields, mineral oil resources; petroleum, petroleum products, other liquids and substances declared by Parliament by law to be dangerously inflammable. Natural gas product extracted from oil wells predominantly comprises of methane. Production of natural gas is not independent of the production of other petroleum products; though from some wells natural gas alone would emanate, other products may emanate from subterranean chambers of earth. But all oilfields are explored for their potential hydrocarbon. Therefore, the regulation of oilfields and mineral oil resources necessarily encompasses the regulation as well as development of natural gas. For free and smooth flow of trade, commerce and industry throughout the length and breadth of the country, natural gas and other petroleum products play a vital role.

42. In Cauvery Water Disputes Tribunal, the right to flowing water of rivers was described as a right "publici juris" i.e., a right of the public. So also the people of the entire country have a stake in natural gas and its benefit has to be shared by the whole country. There should be just and reasonable use of natural gas for national development. If one State alone is allowed to extract and use natural gas, then other States will be deprived of its equitable share. This position goes on to fortify the stand adopted by the Union and will be a pointer to the conclusion that "natural gas" is included in Entry 53 of List I. Thus, the legislative history and the definition of "petroleum", "petroleum products" and "mineral oil resources" contained in various legislations and books and the national interest involved in the equitable distribution of natural gas amongst the States—all these factors lead to the inescapable conclusion that "natural gas" in raw and liquefied form is petroleum product and part of mineral oil resources, which needs to be regulated by the Union.

43. Natural gas being a petroleum product, we are of the view that under Entry 53 List I, the Union Government alone has got legislative competence…………

In view of this specific Entry 53, for any petroleum and petroleum products, the State legislature has no legislative competence to pass any legislation in respect of natural gas. To that extent, the provisions contained in the Gujarat Act are lacking legislative competence."

137. All the material including relevant provisions dealing with the business of exploration and production have used the word 'mineral oil' in the same context including the Finance Minister, while introducing provisions included his Speech under the head 'Oil and gas', which are always used together, while referring to exploration and production of the same. The reference to the highlights of NELP by the Finance Minister in his Speech affirms the view of the Cabinet and the Parliament, while accepting the NELP. The definition of 'mineral oil' was specifically defined along with the producing sharing contract (PSC), which gives the details of the computation of profits and gains of business of oil and gas as a co-developer of the oil fields. PSC is binding on all parties including Government of India. Since there is Cabinet and Parliament approval for the NELP which is referred to by the Finance Minister in his Speech and consequently various contracts based on the NELP have been entered into by the Government of India, it makes it absolutely clear that treatment of 'oil and gas' has been made inseparable for all purposes including all the tax provisions.

138. This approach of the Government of India declared through Ministry of Petroleum was vetted by the Ministry of Finance as well. Accordingly, tax provisions were incorporated to allow deductions of unsuccessful exploration expenses, allowance of capital expenses as revenue and deduction of profits on exploration and production of oil and gas by way of sections 80-IA/80-IB.

139. Rules of interpretation : One very important rule of interpretation is that "where the draftsman uses the same word or phrase in similar contexts, he must have presumed to intend it in each place to bear the same meaning"- Farrell v. Alexander [1976] 2 All. ER 721, 736 (HL); Central Bank of India v. Ravindra AIR 2001 SC 3095, 3114; that words are generally used in the same sense throughout in a statute, unless there is something repugnant in the context-Justice Wanchoo in Boghilal Chunnilal v. State of Bombay AIR 1959 SC 356; that the principles of harmonious construction also states that same meaning should be attributed to the same word used in the same statute unless it leads to absurd result; that "when the legislature uses same word in different parts of the same section or statute, there is a presumption that the word is used in the same sense throughout- G.P. Singh in his book Principles of Statutory Interpretation.

140. The context of the word 'mineral oil' in all the sections namely sections 42, 44BB, 293A and 80-IA(4E)/80-IB(9) is the same though not specifically defined or clarified in sections 80-IA(4E)/80-IB(9) but clarified in part of the statute of income-tax and the relevant laws dealing with mineral oil and petroleum. The best way however is to understand the meaning in a natural sense.

141. Under the rules of interpretation when an Explanation for defining a particular word is introduced and it says that it includes then it may mean that it is merely a clarification of the natural meaning of the word and the Explanation only clarifies its nature. While clarifying the meaning of the word 'mineral oil' in sections 42, 44BB and 293A there is only a clarification of the natural meaning of the word which is also used in all other statutes as well as by the concerned Ministry and the Regulatory Authority.

142. In its ordinary meaning mineral oil includes natural gas. There is no exclusion of 'natural gas' from the meaning of the term "mineral oil" while granting benefits under section 80-IA(4E) and section 80-IB(9). Therefore, the term "mineral oil" had to be understood in its ordinary sense and we have to see whether for the purposes of section 80-IB of the Act, the term mineral oil includes "natural gas". Various statutes have referred to petroleum and natural gas as mineral oil and none have excluded natural gas from the concept of mineral oil hence there should not be any element of doubt on this issue and as aforesaid even otherwise mineral oil, as understood in commercial parlance and under other statutes also includes petroleum and natural gas. The production sharing agreement between the Government of India and Gujarat State Petrochemical Corporation Ltd. and the assessee Niko Resources, Canada refers to the Oil Fields (Regulation and Development) Act, 1948 wherein mineral oil is defined to include natural gas. Therefore mineral oil for the purposes of the PSC has to be understood to include natural gas as it defines petroleum to mean crude oil and natural gas. The Government has defined mineral oil to include petroleum and natural gas. Further the PSC has been placed before both houses of Parliament. Hence Parliament has also accepted the agreement clearly there is nothing in the or other statutes or commercial document which suggest that mineral oil does not include natural gas. The Mines and Minerals (Development and Regulation) Act, 1957, defines, by section 3(b), the term "mineral oils" to include petroleum and natural gas. Sec. 3(h) of The Oil Industry (Development) Act, 1974 defines "mineral oils" to includes petroleum and natural gas. Under the Mines Act, 1952, "minerals" means oil substances which can be obtained from the earth by mining, digging, drilling dredging, hydrolysing, quarrying, or by any other operation and includes mineral oils. The opinion of the Attorney General of India in the case of Dy. CIT v. Schlumberger Seaco Inc. [1995] 51 TTJ (Cal) 72 : [1994] 50 ITD 348 (Col.) as quoted in the aforesaid judgment states that petroleum and natural gas are mineral oils and therefore, they are minerals and mines and consequently would fall within the expression "mining" as contemplated by Explanation 2 to section 9(1)(vii). Explanation to section 44BB defines mineral oil as including petroleum and natural gas." Regulations for foreign direct investment in India also include natural gas within the category - Petroleum (other than refining). Therefore it emerges from the definitions under the and other statutes that natural gas and petroleum are so intertwined that it is not conceivable that mineral oil would exclude natural gas.

143. In view of the above we hold that the assessee is engaged in the production of natural gas which amounts to production of mineral oil and is therefore eligible for deduction under section 80-IB(9) of the. The assessee extracted natural gas underneath the ground which is a marketable commodity and therefore amounts to the production of an article or thing for the purposes of section 80-IB of theand we hold accordingly.

144. The reliance by the CIT-Departmental Representative on order of the Assessing Officer for the assessment year 2003-04 is of not much assistance inasmuch as the CIT(A) held the assessee complied with all requirements but for the production of mineral oil. The Assessing Officer in assessment year 2003-04 has held that the explored gas from wells was being carried through a common pipeline into a separator plant but that does not mean it is not a separate undertaking because a meter is provided at production point itself identifying the production of each well therefore the fact that gas merges in common pipeline for carrying it to the plant for processing and selling therefore does not deter us to hold that it was a separate undertaking, that at the time of processing and selling, there are no well-wise or undertaking-wise separations as that what comes out of well is a mix of oil vapours and natural gases and there is no commercial sales of this mix that is passed through separator wherein natural gas is separated from oil and what was sold is the output of the separator plant and not what comes out from the well is not a fact but a meter is provided at production point itself identifying the production of each well and so the sales. A well-wise production sheet was filed to prove the fact of separate identifying unit. Similarly the fact that saleable production is with reference to the delivery point and the sale is effected only when the oil and gas is delivered at the gathering station of ONGC/other buyer. Again the fact that what is delivered at the gathering station is not a natural gas or the oil recovered from the wells but natural gas and oil separated/processed at the separate unit would be of no avail because of separate recording of well-wise production. It is not a fact that no separate books for each well/cluster of well or fields are maintained by the appellant or that it is not possible because there is no well-wise or field-wise sales or billing is available. The accounts are prepared on the 'basis of metered production well wise, in this case H2 cluster of two wells 6 and 7. There are no intermixing of employees. H2 undertaking has employees of their own and they exceeded 20 employees. The stock is not left at any stage as the entire stock is sold the moment gas is separated, therefore separate stock inventory question would not arise. It is also not a requirement to maintain separate excise/sales-tax records. As aforesaid the CIT(A) has considered the above things while in the appeal of assessment year 2003-04 and accepting the wells as separate undertaking.

145. The contention that the CIT(A) has ignored the provisions of section 80-IB(13) and the definition of industrial undertaking as given in Explanation of section 33B, namely 'industrial undertaking' means any undertaking which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining". The CIT(A) has discussed this point also in that appeal for assessment year 2003-04 and that assessee is an industrial undertaking. Be that as it may, the said Explanation is not required to be complied with as section 80-IB(9) applies to an undertaking and not to an industrial undertaking. It may be noted that section 80-IB(13) r/w section 80-IA(7) as it stood for 2000-01 does not require the fulfilment of the audit by a company in this year as it was introduced only with effect from 1st April, 2003 and, therefore, this condition was not applicable insofar as this year is concerned. Sub-section 2(17), a foreign company is also a company and the assessee being a company under the Canadian law, would be a company under this section. He further submitted that there is a mark distinction between an undertaking and an industrial undertaking in clause 7 of section 80-IA with effect from 1st April, 2002. In any case, the assessee has filed audit report before the CIT(A) and, therefore, complied with the conditions it being procedural one.

146. On a query from the Bench as to theory of same business principles, it was submitted that the same will not apply because the assessee may have many businesses which may be or may not be same business. An undertaking does only one business which is separate from the assessee. In this connection he referred to the decision of Karnataka High Court in the case of International Instruments (P.) Ltd. v. CIT [1979] 9 CTR (Kar) 291 : [1980] 123 ITR 11 (Kar.), decision of Calcutta High Court in the case of CIT v. Rohtas Industries Ltd. [1979] 120 ITR 110 (Cal.), decision of Bombay High Court in the case of Mahindra Sintered Products Ltd. v. CIT [1989] 75 CTR (Bom.) 83 : [1989] 177 ITR 111 (Bom.).

147. In International Instruments (P.) Ltd. (supra) briefly, the facts were that the assessee had different shops or units which operate at different stages of production and claimed that each such unit should be taken as a separate and independent industrial undertaking within the meaning of section 80J of the. These units were—(1) Press shop started in 1962; (2) Machine shop in 1963; (3) Dial printing shop in 1965; (4). Plastic moulding shop in 1965; (5) Cable shop in 1962; (6) Others in 1961; and (7) Die casting shop in 1966. The ITO held that the entire plant and machinery constituted a single industrial undertaking which commenced operation even as early as asst. yr. 1962-63 when they started production of dashboard instruments by mainly assembling imported parts. According to the assessee, however, each of the above so- called shops should be taken as separate and independent industrial undertaking and the profits of the same should be given the relief under section 80J up to the limits prescribed in sub-section (2) of that section. The Tribunal upheld the view of Assessing Officer. The High Court observed that the principal grounds on which the relief was denied by the Tribunal were : (i) that all the new undertakings in respect of which relief was claimed, had come into existence as a result of a single collaboration agreement ; (ii) that the manner of functioning by the assessee and its method of accounting showed that there were no independent units at all because no separate accounts had been kept for each unit; (iii) that there were no inter-Departmental sales noted and the cost of production in each stage had not been separately ascertained ; and (iv) that, in similar circumstances, the High Court of Calcutta had denied relief in CIT v. Textile Machinery Corporation [1971] 80 ITR 428 (Cal.). The Court however noted that the Tribunal did not hold that each of the seven units referred to above had not been established in the respective years as claimed by the assessee and that some articles were being manufactured there. It also did not disbelieve the case of the assessee that formerly it was securing from abroad the articles which were later on manufactured in the several units, for the purpose of using them in the manufacture of dashboard instruments. In the circumstances, it is reasonable to hold that it was possible for the assessee to manufacture dashboard instruments even without the several units which came into existence subsequently. It follows that each one of the units has to be treated as a new industrial undertaking in which new articles came to be manufactured as and when it was established. It is no doubt true that in similar circumstances the Calcutta High Court had denied relief to the assessee in the case of CIT v. Textile Machinery Corporation (supra). That decision has subsequently been reversed by the Supreme Court in Textile Machinery Corporation Ltd. v. CIT (supra). It is seen from the decision of the Supreme Court that the grounds on which the Tribunal denied relief to the assessee are irrelevant. Merely because pursuant to a single collaboration agreement the units in question came into existence it cannot be said that they are not new industrial undertakings or separate units. The fact that the assessee was getting articles produced from the new undertakings from abroad for manufacturing dashboard instruments earlier, shows that they were marketable commodities and they answered one of the tests adopted by the Supreme Court in determining whether an undertaking is a new industrial undertaking or not. The fact that there was common management or the fact that separate accounts had not been maintained, would not also lead to the conclusion that they were not separate undertakings. Even if separate account is not maintained the investment on each of the units can be reasonably determined with the material which the assessee may make available to the Department. The High Court therefore held that the finding of the Tribunal that the assessee was not entitled to relief under section 84 and deduction under section 80J of theduring the assessment years in question, is erroneous.

148. In Rohtas Industries Ltd. (supra) the Calcutta High Court held that "It has been found that the new paper machinery, the chemical factory, the power house and the cement factory of the assessee are engaged in manufacture or production of articles yielding additional profit and these undertakings have been set up by fresh outlay of capital in separate and distinct units. The Tribunal has specifically found the amount of fresh capital employed for the setting up of these particular units. The Tribunal has also categorically found that the new industrial units are physically separate from the old units, they are using a separate building and they are fed with power from a new power house. No one challenged that they cannot exist on their own and function independently. At no earlier stage in the proceedings it was challenged by the Revenue that the productions which were the results of these new undertakings were being used by the assessee in its old undertaking. But even if the products are being so used, it would really make little difference to the position because such products have been found by the Tribunal to be distinct marketable products though used for the purpose of feeding the old business. So far as electricity is concerned, it appears from the order of the AAC for the asst. yr. 1955-56 that the assessee was supplying electricity to the Government of Bihar under an agreement whereunder the Government of Bihar was claiming rebate on the electricity charges. The assessee's claim for deduction of this rebate granted was disallowed by theO. This would show that the assessee was supplying electricity to other consumers." The contention of Mr. Pal that no separate accounts are maintained for the new industrial undertakings is also held to be of little substance in view of the decision of this Court in the case of CIT v. Dunlop Rubber Co. (I.) Ltd. [1977] 107 ITR 182 (Cal.). In the absence of accounts, computation of the claim of the assessee may be difficult but that is a question with which we are not concerned in the present reference.

149. In Mahindra Sintered Products Ltd. (supra) the assessee company carried on a business of manufacture of sintered bearings out of copper and iron powder. Up to the assessment year 1969-70, it was importing copper powder. During the previous year for the assessment year 1969-70, it started a new unit for the manufacture of copper powder. The assessee claimed that the new unit was entitled to relief under section 80J of the. TheO accepted the returns under section 143(1) of the Income-tax Act, 1961. The Addl. CIT following the Calcutta High Court decision in CIT v. Textile Machinery Corporation (supra), held that the new unit set up by the assessee was not an industrial undertaking within the meaning of section 80J and that the assessee had not maintained separate accounts for the new unit. The Tribunal confirmed the order of the Addl. CIT as according to it also the new unit started for manufacture of copper powder amounted to reconstruction of business and was hit by the provisions of section 80J(4)(i) of the. Distinguishing the case of CIT v. Indian Aluminium Co. Ltd. [1973] 88 ITR 257 (Cal.), the Tribunal agreed with the Addl. CIT that the assessee had not maintained separate accounts for its new unit and that in view of the Supreme Court decision in the case of CIT v. Manmohan Das [1966] 59 ITR 699 (SC), the Addl. CIT was justified in considering the question of deduction under section 80J of thein the proceedings for the assessment year 1970-71 as the claim under section 80J was given set off for the first time in that year. The Bombay High Court observed that the judgment of the Calcutta High Court in Textile Machinery Corporation (supra) has been reversed by the Supreme Court in Textile Machinery Corporation Ltd. (supra). The judgment in the case of Indian Aluminium Co. Ltd. (supra) has been confirmed in Indian Aluminium Co. Ltd. (supra). It has been held that a new activity launched by an assessee by establishing a new plant and machinery by investing substantial funds may produce some commodities of the old business or it may produce some other distinct marketable products or even commodities which may feed the old business. These products may be reconsumed by the assessee in his old business or may be sold in the open market. Such an undertaking cannot be said to have been formed by the reconstruction of the old business and denied the benefit of section 15C which corresponds to section 80J of the new Act merely because it goes to expand the existing business of the assessee in some directions. Two reasons given by the Addl. CIT and upheld by the Tribunal in this case for holding that the new unit started by the assessee is not an industrial unit within the meaning of section 80J are (1) that the new unit was manufacturing copper powder which it was earlier importing from abroad and which powder it was using in its own factory for manufacture of its old products, and (2) no separate accounts were maintained in respect of this activity. As regards the first objection, we have already stated that the Supreme Court had reversed the Calcutta High Court's decision on the basis of which the new unit was not considered to be a new industrial undertaking within the meaning of section 80J(4) by the Addl. CIT as well as the Tribunal. As regards the second objection that no separate accounts were maintained in respect of this activity, section 80J does not envisage any such requirement. Moreover, separate accounts in the ledger have been kept by the assessee in respect of the new unit upon the basis of which the profits have been determined.

150. On the quantification of deduction under section 80-IB, we find that the CIT(A) is right in directing to work out profit by allocating proportionate administrative expenses on the basis of sales and not investment made in each undertaking during the year as in our opinion that is more a scientific method.

151. Other issues : In assessee's appeal the other grounds are now dealt with. The first ground in assessee's appeal is regarding disallowance of expenditure of Rs. 89,055 incurred in respect of 'Canada Day' claimed as towards publicity and promotion of its business. The expenditure is in two parts - Rs. 50,000 paid to Canadian Embassy and Rs. 78,110 for organizing lunch with business 'associates and contacts on several occasions. The Assessing Officer disallowed the amount of Rs. 50,000 paid to Canadian Embassy on 'Canada Day' by the assessee by observing that the assessee does not have either any business or any customer in Canada and assessee has not brought any evidence on record that the donation has brought benefit to the assessee by way of publicity or otherwise. The CIT(A) upheld the disallowance of Rs. 50,000 by observing that the Canadian Embassy is a representative of Canadian Government and accordingly, it is not understood as to for what exact purpose, the payment was made to the Canadian Embassy. Admittedly, the contended help for the trade promotion given by the Canadian Embassy, will in anyway, be given in the normal course and the trade promotion wing of the Canadian Embassy is expected and will also be doing such work of helping the Canadian companies, for which no payment is required to be made. Hence "Canadian Embassy" will not be the recipient of the amount. Out of the balance amount of Rs. 78,110, he allowed 50 per cent by partly agreeing with the claim of the assessee that same was spent towards business promotion for organizing lunch with business associates and contacts on several occasions as the assessee has not furnished the specific details of these expenses claimed to be business promotion expenses.

152. We have heard the parties and considered the rival submissions. It is true that the Assessing Officer has erroneously held the expense as "donation" but it is also not actually in the nature of business promotion expenses incurred on grounds of commercial expediency. Out of a total expenditure of Rs. 1,28,110 the assessee had paid Rs. 50,000 to the Canadian Embassy on the occasion of "Canada Day" and the balance amount of Rs. 78,110 was spent towards business promotion expenses for organizing lunch/dinner meetings with business associates and contacts on several occasions. It is true that the assessee, being a Canadian company, needs to interact regularly with the Canadian Embassy in India, which is a representative of the Canadian Government and that the assessee has to seek the help of the trade promotion wing of the Canadian Embassy on a regular basis to interact with Indian businesses but the function organized by the Canadian Embassy cannot be held to provide a platform to explore business interests of the assessee. Reliance placed by assessee on the following observations of the Bombay High Court in CIT v. Sales Magnesite (P) Ltd. [1995] 125 CTR (Bom.) 389: (1995) 214 ITR 1 (Bom.) is of no help as in that case the Court observed that one of the tests often applied is whether it is incurred by the assessee in his character as a trader and to hold it to be an expenditure allowable as a deduction under section 37, it is not essential that it should be necessary, legally or otherwise, to incur the same or that it should directly and immediately benefit the business of the assessee and that even expenditure incurred voluntarily on the ground of commercial expediency and in order indirectly to facilitate the carrying on of business would be deductible under this section but here in this case the expenditure has not been incurred as a trader or a businessman but because it was independence day of Canada and was a Canadian company. We, therefore, the order of the CIT(A) on this disallowance. As regards other expenses also we find ourselves in agreement with CIT(A) in allowing only 50 per cent of the expenditure as full details were not submitted and the claim of the assessee was that same was spent towards business promotion for organizing lunch with business associates and contacts.

153. Next dispute in the appeal by the assessee is regarding ad hoc disallowance of expenditure of Rs. 70,000 out of expenditure of Rs. 7,14,778 incurred in providing residential accommodation to expatriate employees on the ground that the assessee had incurred expenditure on maintenance and running of guest house. The expenditure was of the general manager of the assessee company who was an expatriate and did not have any other residence and who availed of guest house facility. The Assessing Officer observed that the bulk of the facilities were availed of by him for his personal purpose and were not related to business activities and that the assessee had not furnished complete details as to who others have availed of guest house facility and no records have been maintained to that effect. Therefore, in his view the entire amount incurred on running and maintenance of guest house cannot be held to be relating to the business needs and accordingly, disallowed a sum of Rs. 1,00,000 as not been incurred for business purposes.

154. The CIT(A) restricted the disallowance to 10 per cent and upheld the addition of Rs. 70,000 by observing as under :

"I have considered the argument taken by the assessee and perused the assessment order. It is noticed that the expenditure of Rs. 7,14,778 has been incurred on providing guest house accommodation at Baroda and Surat, as mentioned by the assessee. It is also undisputed fact that no records have been maintained as to who have availed of the guest house facility apart from the general manager of the company. The assessee also contended that by Finance Act, 1997, the artificial ceiling for the business expenditure by way of specific disallowance has been removed and accordingly, no disallowance be made. I have considered this argument. Prior to assessment year 1997-98, the itself has specific subsection under section 37, wherein, the ceiling on the expenditure was provided. That ceiling was operative even if the assessee proves that the expenditure was incurred for wholly and exclusively for business purpose. It is only this specific ceiling which has been removed. Accordingly, the basic ingredient that for allowing deduction of the expenditure, same should be wholly and exclusively incurred for the business purpose is unaltered. In view of these facts, the contention of the assessee is not accepted. As, undisputedly, completed details of persons, staying in the guest house and how stay of each of them was required for business purpose, is not available, accordingly, whole of the expenditure cannot be treated to be wholly and exclusively incurred for the business purpose. However, considering that most of the time, the guest house at Surat was utilized by the general manager as he was not provided any other residential facility, it would be proper and just, if the disallowance is restricted to Rs. 70,000 being approx. 10 per cent of the expenditure incurred amounting to Rs. 7,14,778."

155. We have heard the parties and considered the rival submissions. The assessee's project sites are located in Hazira, Cambay, Bhandut, Sabarmati and Matar, away from urban areas. It is stated that the assessee has employed certain non-Indian/expatriate project engineers in these project sites. These engineers are required to work in such remote areas, away from their homes and families. Therefore, in keeping with the industry practice, the assessee was required to and so provided accommodation facilities to such project engineers at Surat. Also, the project engineers are required to work in the project sites under extreme external conditions/such as high temperature/humidity etc. It, therefore, becomes important for the assessee, as any other employer in this industry, to ensure that its employees' heath and safety are well taken care of. Therefore, the assessee has to provide accommodation facilities to its employees close to home standards. The expenditure was basically to provide such facilities to expatriates and therefore was wholly for the purposes of the business of the assessee. No part of the expenditure could be alleged for any other purpose. We, therefore, delete the disallowance and direct to allow entire expenses.

156. Ground No. 5 is for the claim for section 44C being 'head office expenses' on the enhanced income is consequential and may be considered by the Assessing Officer.

157. Ground No. 6 is for charge of interest under section 234B. Assessing Officer charged it @ 18 per cent the rate applicable on 1st April, 2001. On the date of completion of assessment the rate was 15 per cent. The assessee, therefore, claims that interest should be charged @ 15 per cent in view of decision on section 214 of Madras High Court in the case of Addl. CIT v. Madura South India Corporation (P.) Ltd. [1977] 110 ITR 322 (Mad.), holding that it is the rate governed on the date of assessment which governed the chargeability and the decision of the Tribunal, Pune, Third Member Bench, in the case of ITO v. B.A. Patravali & Sons [1995] 53 TTJ (Pune) (TM) 615 : [1995] 54 ITD 1 (Pune) (TM).

158. We have heard the parties and considered the rival submissions. In Madura South India Corporation (P) Ltd. ( supra) the rate of granting interest was held to be as applicable on the date of assessment. It observed. "The liability to pay interest on the part of the Government and correspondingly the right of the assessee to receive interest arises only when the assessment is completed. So long as the assessment has not been completed," it will not be possible to find out whether the advance tax paid by the assessee is in excess of the ultimate tax payable by him or falls short of that tax. This position as to whether the advance tax paid exceeds the tax liability or is short of the tax liability can be ascertained only when the assessment is completed. Consequently, the provisions of section 214 as in force on the date when the assessment is completed will be the only provision that will be applicable with regard to payment of interest on the said excess amount. As we have pointed out already, in this case the assessment was completed on 30th Nov., 1968. The ITO himself awarded interest @ 9 per cent from 1 Oct., 1967. However, he took the view that for the period from 1st April, 1967 to 30th Sept., 1967, the assessee was entitled to interest only at 6 per cent per annum. We are unable to find any justification for this attitude on the part of theO. As a matter of fact, after 1st Oct., 1967, the only statutory provision in force with reference to payment of interest is section 214 and that section provides for payment of interest only at 9 per cent It does not reserve or save the liability of the Government to pay interest only at 6 per cent for any anterior period. There being no provision to that effect, namely, that for the period anterior to 1st Oct., 1967, the rate of interest will be only 6 per cent, theO will have no jurisdiction to refuse to award interest at 9 per cent for any period simply because that period happens to be anterior to 1st Oct., 1967. A plain reading of section 214 will make it clear that whatever the period with reference to which the interest is payable, once the liability to pay interest arises on or after 1st Oct. , 1967, then the interest will have to be calculated only at 9 per cent and not at 6 per cent.

In this context, the amendment made to section 18A(5) of the Indian Income-tax Act, 1922, can be usefully contrasted. Section 18A(5) also dealt with the liability of the Government to pay interest on the excess advance tax paid by an assessee. That provision was amended by section 14 of the Finance Act, 1955, with effect from 1st April, 1955. While so amending, the statutory provision made it clear that the interest will be payable at the previous rate for the period anterior to 1st April, 1955, and at the amended rate for the period after 1st April, 1955. The said statutory provision, after its amendment in 1955, stood as follows :

"18A (5) The Central Government shall pay simple interest :

(i) at two per cent per annum on any amount payable in accordance with the provisions of this section before the 1st April, 1955, and paid accordingly;

(ii) at four per cent per annum on any amount payable in accordance with the provisions of this section after the 1st April, 1955, and paid accordingly ;

from the date of payment to the date of the provisional assessment made under section 23B, or if no such assessment has been made, to the date of the assessment (hereinafter called the 'regular assessment) made under section 23 of the income, profits and gains of the previous year for an assessment for the year next following the year in which the amount was payable."

Consequently, if the intention of the legislature was to pay interest at 6 per cent for the period anterior to 1st Oct., 1967, and to pay interest at 9 per cent only for the period on or after 1st Oct., 1967, it would have made specific provision in this behalf. An argument which appears to have been advanced before the Tribunal is that if it is held that section 214 of theas amended with effect from 1st Oct., 1967, is to be applied to the period anterior to 1st Oct., 1967, it would give retrospective effect to the amendment, and the Tribunal rejected such a contention. We are of the opinion that the Tribunal was right. Simply because the period with reference to which the interest payable is a period anterior to the date of coming into force of the amendment, it cannot be held that the provision as such will have retrospective effect.

159. Similarly in Hindustan Tile Works v. Dy. CIT [1995] 54 ITD 1 (Coch) the assessment for 1983-84 was completed only on 25th March, 1986. It is held that only after the completion of the assessment and determination of the tax, the question of charging interest or granting interest can arise. Till the stage of determination of tax on the income assessed, the provisions applicable to the concerned assessment year will regulate the assessment procedure. As the levy of interest or granting of interest can arise only after the completion of the assessment, it cannot be considered as a substantive provision. Therefore, the law as it stood as at the date of the completion of the assessment should regulate the levy of interest or grant of interest. In this case, when the assessment was completed on 25th March, 1986, the amended provisions have already come into force. Therefore, it is only the amended provisions of section 214(1A) that should apply to the facts of the case.

160. These two cases are of refund and might have different principles to follow but insofar as the liability to tax is concerned, it arises on the last day of the previous year and only the determination is postponed to the date of assessment order as noted in the decisions of Supreme Court discussed hereunder :

(a) In CWT v. K.S.N. Bhatt [1983] 37 CTR (SC) 273 : [1984] 145 ITR 1 (SC) it is observed that 'Towards the close of its order the Tribunal pointed to the fact that the different demands of tax were served on the assessee subsequent to the respective valuation dates and, on that ground, observed that the tax liabilities did not fall within the prohibition of section 2(m)(iii)(a) and had to be taken into account as debt owed by the assessee on the valuation dates. It seems to us that the Tribunal has not correctly appreciated the scope of section 2(m)( iii)(a). Section 2(m)(iii )(a) denies deduction to an amount of tax which is outstanding on the valuation date if the assessee contends in appeal, revision or other proceeding that he is not liable to pay the tax. It presupposes that there is a subsisting tax demand and the assessee has challenged its validity. It refers to the initial stage only where an appeal, revision or other proceeding is pending merely. It does not proceed beyond that stage to the point where, in consequence of such appeal, revision or other proceeding, the tax liability has been found to be nil. Once it is determined that the tax liability is nil, it cannot be said that any amount of tax is outstanding. Such a situation does not bring section 2(m)(iii)(a) into operation at all, as is clear indeed from its very terms. If upon the ultimate determination it is found that the amount of tax is nil, the assessee is denied the deduction claimed by him not on the ground of section 2(m)(iii)(a) but because the superior authority has found that there is no tax liability whatever. It must be taken that in law there never was any tax liability.

So far as the remaining tax liabilities are concerned, the Tribunal is right in allowing the income-tax, wealth-tax and gift-tax liabilities to be deducted in computing the net wealth of the assessee for the respective assessment years, even though the assessment orders were finalised after the respective valuation dates: We may point out that it has not been shown to us that the assessee filed appeals questioning the income-tax, wealth-tax and gift-tax liabilities other than the income-tax liability of Rs. 72,399 and the gift-tax liability of Rs. 1,13,650 for the assessment year 1965-66 referred to earlier."

(b) CWT v. Vadilal Lallubhcd, [1983] 37 CTR (SC) 277 : [1984) 145 ITR 7 (SC) again observes "In these appeals, it is contended on behalf of the Revenue that the High Court has erred, and that on a true construction of section 2(m) of the Wealth-tax Act, defining the expression "net wealth" the tax liability disclosed by the assessee in his returns should be taken as representing the debt owed by the assessee on the valuation date. Now, it is settled law that an income-tax liability becomes crystallized on the last day of the previous year corresponding to the particular assessment year and a wealth-tax liability becomes crystallized on the valuation date corresponding to the particular assessment year. In each case the liabilities are perfected debts on the last day of the previous year or the valuation date, as the case may be. See Kesoram Industries & Cotton Mills Ltd. v. CWT [1966] 59 ITR 767 (SC) and H.H. Setu Parvati Bayi v. CWT [1968] 69 ITR 864 (SC). Likewise, we think a gift-tax liability becomes crystallized, and, therefore, a perfected debt, on the last day of the previous year relevant to the particular assessment year. [See CWT v. K.S.N. Bhatt], Civil Appeals Nos. 384 to 387 of 1978, judgment delivered on 21st Oct., 1983 (supra). The object and purpose of the assessment procedure prescribed by the relevant tax statute be it the Income-tax Act, the Wealth-tax Act or the Gift-tax Act, is to quantify the precise amount of the tax liability. The process is initiated ordinarily by the assessee filing a tax return and thereupon the assessment machinery swings into motion. The tax return is scrutinised by the assessing authority and in accordance with the procedure detailed in the relevant statute the assessing authority proceed to determine the true figure, in its opinion, of the assessee's taxable income or taxable wealth or total value of the taxable gifts, depending on whether it is a case of income-tax, wealth-tax or gift-tax. The assessment order made by the assessing authority specifies the assessed income, wealth or value of the gifts, and on that the corresponding tax liability is computed, followed by a notice of demand. The assessment order may be subjected to consideration in appeal before the AAC and thereafter the case may be carried in second appeal to the Tribunal, in reference to the High Court and ultimately in appeal before this Court. At every stage, the endeavour of the authority, Tribunal or Court is to adjudicate on questions which will lead in the final result to a true determination of the tax liability. There may be cases where the assessment finally made may be reopened in accordance with the procedure and subject to the conditions stated in the relevant statute. There may also be cases where a rectification of apparent errors is effected pursuant to jurisdiction granted by the relevant statute. Both these proceedings are similarly intended for the true quantification of the tax liability. When, in the course of a wealth-tax assessment, the assessee makes a claim to deduction on account of income-tax, wealth-tax and gift-tax liabilities subsisting as debts owed by him on the valuation date, it is the final quantification of the particular tax liability which must be taken into account. Where the wealth-tax assessment so made is carried in appeal, we have no doubt that the appellate authority will take into account the ultimate quantification of the tax liability, even though such ultimate quantification has been reached after the relevant valuation date and during the pendency of the wealth-tax appeal.

Upon the aforesaid considerations, we are of opinion that the High Court has acted rightly in holding that in computing the net wealth of the assessee the deduction admissible must be calculated on the basis of the tax as finally quantified on assessment even though the assessment may have been made subsequent to the valuation date. Once an assessment order is passed, the data disclosed by the assessee in his return arc no longer determinative of the assessee's tax liability because in law they stand superseded by the assessment order."

(c) CWT v. Smt Vimlaben Vadilal Mehta [1983] 37 CTR (SC) 280 : [1984] 145 ITR 11 (SC) even rectification liability is considered to be on same footing. It observed "The second question raises the point whether the income-tax liability and wealth-tax liability created in consequence of rectification orders passed after the relevant valuation date can be the subject of a claim to deduction in the computation of an assessee's net wealth. It appears from the record before us that while the WTO completed the assessment proceeding for the assessment year 1964-65 by the assessment order dated 23rd Nov., 1964, the rectification order under section 154 of the Income-tax Act for the assessment year 1958-59 was made on 13th May, 1966, and the rectification order under the same provision for the assessment year 1960-61 was made on 1st Jan., 1965, and the rectification order under section 35 of the Wealth-tax Act for the assessment year 1961-62 was made on 10th June, 1965. In short, the rectification orders were made after the assessment proceeding had been completed by the WTO. It would seem that the claim to deduction on account of the income-tax liabilities and the wealth-tax liability was made in the course of the appeal before the AAC. From the record, it appears also that the income-tax liabilities, the wealth-tax liability and the gift-tax liabilities claimed as a deduction were quantified by assessment orders made after the WTO had completed the assessment proceeding. Those assessment orders were apparently brought to the notice of the AAC by the assessee during the hearing of the appeal filed by the assessee. Shri S.C. Manchanda, learned counsel for the Revenue, urges that the judgment of the Gujarat High Court in CWT v. Kantilal Manilal [1973] 88 ITR 125 (Guj.), does not conclude the question arising on this claim because the High Court was concerned with a claim to deduction on account of income-tax, wealth-tax and gift-tax liabilities which had arisen before the WTO had completed the assessment before him. Be that as it may, it is well settled that when an appeal is filed against an assessment order before the AAC, the assessment case is thrown open and the appellate proceeding constitutes a continuation of the assessment proceeding. Even if the tax liabilities, of which a deduction was claimed, were created by rectification orders or by assessment orders made after the date of the wealth-tax assessment order under appeal the law requires the claim to deduction being considered on the same basis as if it had been made in the original wealth-tax assessment proceeding. It is true that the rectification orders and the gift-tax assessments related to tax liabilities which were not claimed by the assessee in the course of the original assessment proceeding before the WTO, but, as the AAC permitted the claim to be made during the hearing of the appeal, we see no reason why the assessee should be denied a consideration of his claim. And, as regards the quantification of the other income-tax and wealth-tax liabilities effected after the WTO had completed the original wealth-tax assessment proceeding, the quantification of the liabilities related to a claim which had already been raised before the WTO in the course of the original assessment proceeding. As we have observed in CWT v. Vadilal Lallubhai in Civil Appeals Nos. 1524 to 1547 of 1973 (judgment dated 21st Oct., 1983), (supra), the rectification of an assessment must be treated on the same basis as an original assessment for the purpose of a claim to deduction in the computation of the assessee's net wealth. The rectification merely quantifies the true tax liability which had already been crystallised and become a debt on the last day of the previous year in the case of an income-tax liability, on the valuation date in the case of a wealth-tax liability and on the last day of the previous year in the case of a gift-tax liability."

Section 234B creates the liability to pay interest with effect from 1st April of the financial year immediately following the end of previous year relevant to the assessment year. This liability like income-tax arises on the basis of law as applicable on the 1st day of the assessment year. It reads as under :

162. The liability arises on lower payment of advance tax in the financial year i.e., previous year and the extent of that deficiency is determined on the regular assessment being made by the Assessing Officer under section 143(3)/147. Default is committed by the assessee in the financial year of the relevant assessment year and only its quantification is determined on assessment. Therefore, the law as applicable and in force on 1st day of the assessment year would be applicable and as the rate of interest under section 234B prevalent on that day was 15 per cent that would be applicable in the present case.

163. Ground No. 7 in assessee's appeal is for charge of interest under section 234C. Before the CIT(A), the assessee charged a higher rate of Rs. 27,04,623 as against the amount of Rs. 16,74,400. The CIT(A) noticed that the assessee had not given any details as to how the calculation of Assessing Officer was incorrect. In any case, he has directed the Assessing Officer to work out the correct interest and if there is any mistake which is apparent on record, the same can be rectified by the Assessing Officer on being pointed out by the assessee. The matter has already been set aside to the file of Assessing Officer to rework out the interest in accordance with law. Nothing further is required to be adjudicated upon. The ground is, accordingly, rejected.

164. In the result, the appeals are partly allowed.