Per Dr. B. R. R. Kumar, Accountant Member:

1. The present appeals have been filed by the assessee and the Revenue against the orders of ld . CIT(A)-XXIX, New Delhi dated 10.09.2013 and the order of ld. CIT(A)-42, New Delhi dated 25.07.2018.

2. The revenue has raised the following grounds in ITA No . 6357/Del/2013 for Assessment Year 2010-11:

“1 . On the facts and in the circumstances o f the case, the Ld CIT(A) has erred in allowing the exploration and development expenditure o f Rs .

2 ,05 ,14 ,89 ,785/- which had been disallowed by the A .O on the ground that the assessee during the relevant previous year has contravened the provision o f chapter XVII—B read with section 40a(i) and 40a(ia) o f the Income Tax Act 1961 and these were also found unascertainable & unveri fiable by the 2 . Ld. CIT(A) has erred in allowing time cos t and expenses o f Rs. 11 ,88 ,89 ,517/- whereas the Assessing O f ficer had found these expenses without any actual evidences being made available for veri fication, their genuineness cannot be relied simply on the basis of certi fication/mechanism of charging such expenses to the UJV by the CA firm . Ld CIT(A) has also not gone in to the reasonablenes s and genuineness o f the total claim made by the Appellant .

3 . Ld. CIT(A) has erred in allowing expenses o f Rs . 16 ,95 ,79 ,348/- without discussing the basis o f issue raised by the A .O and has based on the finding given by the CIT(A) in earlier year where these expenses were allowed as deferred revenue expenses in 5 years starting from A .Y . 2010-11.

4 . Ld. CIT(A) has erred in holding the interest of income Rs . 5 ,16 ,06 ,907/- and interest from FD Rs. 36 ,19 ,348/- as business income in place o f income from other sources,whereas in both the cases the investments have been made out o f the excess/surplus funds which was found idle by the appellant at the stage o f investment with a sole purpose of earning interest. As such these interest incomes are “Income from other sources” on whi ch no netting/set of f is available as there is no such diminishing provision in section 57 of the Income Tax Act .

5 . Ld. CIT(A) has erred in allowing in u/s 80IB even though the asses see was statutorily required to make such claim in the first year o f commencement o f production and this claim should have been made in the return o f income irrespective of the fac t whether there is positive income or not.”

3. The assessee has raised the following grounds in ITA No . 6346/Del/2013 for Assessment Year 2010-11:-

“1 . THAT in the facts and circums tances of the case & in law, the Ld . CIT(A) erred in treating the interes t income amounting to Rs . 36 ,19 ,348/- as income from other sources instead o f income from business or pro fession.

2 . THAT in the facts and circums tances of the case & in law, the Ld . CIT(A) erred in not allowing expenses incurred in the preceding years without appreciating that these expenses were disallowed by the Ld AO in the respective assessments on the ground that these expenses were to be allowed in the year o f actual commencement o f commercial production and the same ought to have been allowed in the captioned year wherein the commercial production has commenced .”

4. The revenue has raised the following grounds in ITA No . 5988/Del/2018 for Assessment Year 2013-14:-

“1 . Whether, on the facts and in the circums tances o f the case, the Ld. CIT(A) has erred in allowing the exploration and development expenditure o f Rs . 1 ,46 ,39 ,18 ,152/- which had been disallowed by the AO on the ground that the assessee company during the relevant previous year has contravened the provision o f chapter XVII-B read with section 40a(i) and 40a(ia) o f the Income Tax Act , 1961 and these expenses were also found unascertainable & unveri fiable by the assessing o f ficer .

2 . Whether, on the facts and in the circums tances of the case, the Ld. CIT(A] has erred in allowing the total time cost and expenses recharged by the operator to the Unincorporated Joint Venture (UJV) amounting to Rs . 83 ,37 ,49 ,190/- (being part of E & D expenditure of Rs . 1 ,46 ,39 ,18 ,152/-) which is the appellant share in the cos t.The same has been disallowed by the AO as these were all estimated basis and no actual evidence was produced during the course o f hearing.

3 . Whether, on the facts and in the circums tances of the case, the Ld. CIT(A) has erred in allowing the payment o f Rs. 12 ,06 ,69 ,199/- (being part o f E & D expenditure o f Rs . 1 ,46 ,39 ,18 ,152/-) made for parent company overhead which has been made from the books of Rajasthan block to parent company o f operator , thus it was considered as head of fice expenditure covered u/s 44C for the block . The same has been di sallowed by the AO as the same was on estimated basis without any evidence to support the same.”

5. The assessee has raised the following grounds in ITA No . 6277/Del/2018 for Assessment Year 2013-14:-

“1 . That on the fac ts and circumstances o f the case & in law, the Ld. C1T(A) erred in confirming action o f Ld . AO in allowing claim o f additional depreciation amounting to Rs . 10 ,43 ,83 ,712 (Rs . 18 ,26 ,71 ,497-7 ,82 ,87 ,784) under section 32(1 )(iia) o f the Act and recomputed the deprecation of Rs 359 ,20 ,57 ,325 after giving e ffec t to Assessment order o f AY 12-13 despite the Appellant had not claimed the additional deprecation in Income Tax Return o f the AY 2013-14 .

1 .1 . That on the fac ts and circumstances o f the case & in law, the Ld . CIT(A) erred in confirming Ld. AO’s allegation that the claim of additional depreciation was to be mandatorily allowed in terms o f Explana tion 5 to section 32(1) o f the Act , wi thout appreciating that additional depreciation being optional in nature, is not covered within the purview o f the said Explanation.

1 .2 . That on the fac ts and circumstances o f the case & in law, the Ld CIT(A) erred in not appreciating that the additional depreciation, provided under Section 32(l)(iia) o f the Act is in the nature o f an incentive and cannot , therefore, be treated at par with ‘normal depreciation’.”

6. The assessee has raised the following grounds in ITA No . 6278/Del/2018 for Assessment Year 2014-15:-

1 . That on the fac ts and circumstances o f the case & in law, the Ld . CIT(A) erred in confirming action of Ld . AO in allowing claim o f additional depreciation under section 32(l)(iia) o f the A ct and recomputed the depreca tion o f Rs 350 ,49 ,97 ,998 after giving ef fec t to Assessment order of AY 12-13 despite the Appellant had no t claimed the additional deprecation in Income Tax Return o f the AY 2014-15 .

1 .1 . That on the fac ts and circumstances o f the case & in law, the Ld . CIT(A) erred in confirming Ld. AO’s allegation that the claim of additional depreciation was to be mandatorily allowed in terms o f Explana tion 5 to section 32(1) o f the Act , wi thout appreciating that additional depreciation being optional in nature, is not covered within the purview o f the said Explanation.

1 .2 . That on the fac ts and circumstances of the case & in law, the Ld CIT(A) erred in not appreciating that the additional depreciation, provided under Section 32(l)(iia) o f the Act is in the nature o f an incentive and cannot , therefore, be treated at par with ‘normal depreciation’.

7. The revenue has raised the following grounds in ITA No . 5989/Del/2018 for Assessment Year 2014-15:-

“1 . Whether , on the fac ts and in the circumstances o f the case, the Ld. CIT(A) has erred in allowing the exploration and development expenditure o f Rs . 8 ,79 ,43 ,82 ,537/- which had been disallowed by the AO on the ground that the assessee company during the relevant previous year has contravened the provision o f chapter XVII-B read with section 40a(i) and 40a(ia) o f the Income Tax Act , 1961 and these expenses were also found unascertainable & unveri fiable by the assessing o f ficer .

2 . Whether , on the fac ts and in the circumstances o f the case, the Ld. CIT(A) has erred in allowing the total time cost and expenses recharged by the operator to the Unincorporated Joint Venture (UJV) amounting to Rs . 3 ,06 ,62 ,31 ,823/- (being part o f E & D expenditure of Rs . 8 ,79 ,43 ,82 ,537/-) which is the appellant share in the cos t. The same has been disallowed by the AO as these were all estimated basis and no actual evidence was produced during the course o f hearing.

3 . Whether , on the fac ts and in the circumstances o f the case, the Ld. CIT(A) has erred in allowing the payment o f Rs. 23 ,73 ,64 ,140/- (being part o f E & D expenditure o f Rs . 8 ,79 ,43 ,82 ,537/-) made for parent company overhead which has been made from the books of Rajasthan block to parent company o f operator , thus it was considered as head of fice expenditure covered u/s 44C for the block . The same has been di sallowed by the AO as the same was on estimated basis without any evidence to support the same.”

8. Cairn Energy Hydrocarbons Limited (‘the Appellant’ or ‘CEHL’ or ‘the Assessee’) is a company incorporated in Scotland , U.K. and is a wholly owned subsidiary of Cairn India Holdings Limited , a company registered in Jersey Channel Island . The assessee is primarily engaged in the business of prospecting, drilling, exploring , producing and generally dealing in minerals, oils, gas and other related by-products.

9. The assessee acquired 50% Participating Interest (‘PI’) in the contract area RJ/ON-90/1 (located in Ra jasthan) (‘Ra jasthan Block’ or ‘Block’) with the approval of Government of India. The remaining PI was held by Cairn Energy India Pty Ltd. (‘CEIL’) . It is to be noted that Oil and Natural Gas Corporation Ltd. (‘ONGC’) was also a partner in the Ra jasthan Block. CEIL being the operator under the Production Sharing Contract (‘PSC’).

10. Subsequently, on 13t h January 2005, ONGC , as per clauses o f PSC, exercised its option to acquire 30% interest in the Ra jasthan Block. Accordingly, the revised PI in the block, with effect from the said date is mentioned hereunder:

Name of Parties	Exploration Stage	Development           & Production Stage
CEHL	50	35 %
Cairn Energy India Pty Ltd (CEIL)      now     Cairn     India Ltd.	50	35 %
ONGC	0	30 %

11. The key events pertinent to the case are enumerated below:

Sr. No.	Events	Date
1 .	Production Sharing Contract ( PSC) entered into between Government of India, Oil and Natural Gas Corporation Limited and Shell India Production Development ( SIPD) in respect of Block RJ- On- 90 / 1 ( Rajasthan) and tabled before Houses of Parliament.	May 15 , 1995
2 .	First amendment to PSC wherein 50 % of participating interest was transferred to Cairn Energy India Pty. Ltd. ( CEIL) by SIPD	December 20 , 1999
3 .	The balance 50 % of participating interest transferred to Appellant by way of Asset Sale Agreement.	May 7 , 2002
4 .	Intimation by SIPD to Government of India to assign their interest to the Appellant.	July 19 , 2002
5 .	Contributions to the Cash Calls to  Operator ( Appellant’ s share of expenditure  on Contract Area)	May, 2002 to March, 2003
6 .	Approval      from      Government      of        India through          Directorate          General          of Hydrocarbon effective from June 20 , 2003	July 4 , 2003
7 .	First Return of income for AY  2003 - 04	November 23 , 2003
8 .	Commercial discovery on the said Block	October 15 , 2004
9 .	ONGC, as per clauses of PSC, exercised its option to acquire 30 % interest in the Rajasthan Development Area.	January 13 , 2005
10 .	Commercial    Production     started    in      said block	August 29 , 2009

12. The Assessee does not have any other operations in India except, to the extent of PI in the aforesaid block. All the activities viz. seismic acquisition & survey, geological and geophysical studies, drilling of wells etc. for the exploration and development for the area are undertaken by the Operator i.e . CEIL. The Assessee as well as ONGC contribute their shares by way of cash calls in proportion to their PI in these expenses.

ITA No. 6346/De l/2013: A.Y. 2010-11 (Assessee ’s Appeal)

Ground No .1

ITA No. 6357/De l/2013: A.Y. 2010-11 (Revenue Appeal)

Ground No .4

Interest Income from Temporary Investments –Rs. 51606907/-

Interest income from FDs- Rs. 36,19,348/-

13. Facts relevant to the ad judication o f this issue are that the assessee deposited their surplus funds in the bank on which an interest amounting to Rs.36 ,19,348/- was earned and the same offered to tax under the head ‘income from business and profession’ . The AO erred in treated the interest earned from fixed deposits under the head income from other sources.

14. The ld. CIT(A) confirmed treated income from FDs as income from other sources and interest income from temporary investments as business income a fter examining the judgment of the Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd . Vs. CIT (227 ITR 172).

15. Before us, it was submitted that the entire interest earned arose from its business activity and not out o f any independent activity. Therefore, by no stretch of imagination can it be categorized under the head income from other sources. To support the a foresaid contention, the Appellant places reliance on the decisions of the Hon'ble High Court of Bombay in the case of CIT vs. Paramount Premises (P.) Ltd .[(1991) 190 ITR 259] and CIT vs. Lok Holdings [(2009) 308 ITR 356] wherein it was categorically held that interest earned from deposit of funds linked to any business activity is income from business & profession and thus, cannot be categorized as income arising from other sources.

16. The ld . AR placed reliance on the decision of the Hon’ble Supreme Court in case of CIT vs. Bokaro Steel Ltd . 236 ITR 315 (SC) wherein it was held that the interest income on the deposits cannot be treated as income where the income flows from deposits made by the assessee’s which were inextricably linked t the process of setting up of its plant & machinery. We were also appraised of the decision o f the Hon’ble Delhi High Court in case of Indian Oil Panipat Power Consortium Ltd . v. ITO 315 ITR 255 (Del) wherein the ld . AR argued that where interest on money received as share capital is temporarily placed in fixed deposit awaiting acquisition of land , a claim that such interest is a capital receipt entitled to be set off against pre-operative expenses, is admissible , as the funds received by the assessee company by the joint venture partners are "inextricably linked" with the setting up of the plant and such interest earned cannot be treated as income from other sources. It was held as-

“5.2 It is dear upon a perusal of the facts as found by the authori ties below that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classi fied as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses .”

17. Heard the arguments of both the parties and perused the material available on record .

18. We have gone in details the judgment of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd . v. CIT (1997) 227 ITR 172 (SC). It says,

“Und er the IT Ac t, 1961 , the total income o f the company is cha rgeable to tax under Sec tion 4. The to tal income has to be compu ted in ac cordanc e with the p rovi sions o f the Ac t . Sec . 14 lays down that for the purpose o f computation , income o f an as sessee ha s to be cla s sified unde r six heads :

(A) Salaries . (B) Inte res t on Securities .

(C) Income f rom hous e p roper ty .

(D ) Profits and gains o f busines s o r p ro fes sion .

(E) Capital gains .

(F ) Income from other sourc es .

By an amendmen t made in 1988 Int eres t on s ecurities ha s been made cha rgeable to tax a s busines s income when such int eres t form s pa r t o f busines s p rofits and in all o ther cases und er s . 56(2)(id) a s income f rom othe r sourc es . The amendment made in 1988 ha s no relevanc e for the purpose o f this cas e . We shall take thi s Ac t as it s tood a t the mat erial time in the a s st . yr . 1983-84.

The compu ta tion o f income unde r ea ch o f the above six heads will ha ve to b e made ind ep enden tly and s ep arat ely . There a re speci fic rules o f deduc tion and allowances unde r each head . No deduc tion or ad jus tmen t on ac count o f any expendi ture can be made except a s provided by the Ac t .

4 . The ba sic p roposition tha t has to be bo rne in mind in this ca s e is that it is p os sible for a company to have six di f ferent sources o f income , ea ch one o f which will b e cha rgeable to income tax . Pro fit s and gains of busine ss o r p ro fes sion is only one o f the heads und er which the companys income is liable to be a sses s ed to tax . I f a company ha s no t commenc ed busines s , there cannot be any ques tion o f a s ses sment o f its p ro fit s and gains of busines s . Tha t does not mean tha t until and unles s the company commenc es its busines s , it s income from any other source will no t be taxed . I f the company, even be fo re it commence s busines s , inves ts the surplus fund in its hand for pu rcha se o f land o r hous e p rop ert y and la te r sells it at p ro fit , the gain made by the company will b e as s essable unde r the head Capital gains . Simila rly , i f a company purcha ses a rent ed hous e and get s rent , such rent will be a s s es sable to tax und er s . 22 as income f rom hous e p rope rt y. Lik ewise , a company may have income from o ther sou rces . I t ma y buy shares and get dividends . Such divid ends will be taxable unde r s . 56 o f the Ac t . The comp any may also , a s in this case , keep the su rplus fund in shor t- te rm d ep osit s in orde r to ea rn int eres t . Such in te res ts will be cha rgeable unde r s. 56 o f the Ac t .

The company ha s chos en not to keep it s surplus capital idle , but ha s decided to inves t it fruit fully . The f ruits o f such investmen t will clea rly be o f revenue nature . This p osition in law wa s explained by Sir George Lowndes in the o ft -quo t ed pa s sage in the ca s e o f CIT vs . Shaw Walla c e & Co. (1932) 50 I .A . 206 (PC) :

"Income , their Lordship s think , in this Ac t conno tes a pe riodical mone ta ry return coming in with some so rt o f regula rit y o r exp ec t ed regularity f rom de finit e sourc es . The sou rc e is not nec es sarily one which is exp ec t ed to be con tinuously p roduc tive , but it mus t b e one whose ob jec t is the p roduc tion o f a de finit e retu rn, excluding anything in the na tu re of a me re wind fall . This income ha s been lik ened pic torially to the f ruit o f a t ree , or the c rop o f a field . It is es sen tially the produc e o f something , which is o ft en loosely sp ok en o f as capital ."

In o ther words , i f the capital o f a company is f ruit fully u tilis ed ins t ead of k eeping it idle the income thus gene ra ted will be o f revenue nature and not a c cretion o f capital . Whe ther the company rais ed the capital by is sue o f shares o r deben tures or b y bor rowing will no t mak e any di f ference to this p rinciple . I f bo rrowed capital is us ed for the pu rpos e o f ea rning income that income will ha ve to be taxed in a c cord ance with law . Income is something which flows f rom the p rope rty . Some thing rec eived in place o f the p rope rt y will be capital receipt . The amoun t o f in t eres t rec eived by the company flows from its inves tmen t s and is its income and is clear ly taxable even though the in te rest amount is ea rned by utilising bo rrowed capital .

It is t rue tha t the comp any will have to p ay in te res t on the money bo rrowed by it . But that cannot b e a ground for exemp tion o f int eres t ea rned b y the company by u tilising the bor rowed funds as i ts income . It wa s righ tly poin ted ou t in the ca s e o f Kedar Narain Singh vs . CIT tha t "any thing which can p rope rly be d es c ribed as income is taxable unde r the Ac t unles s exp res sly exemp ted" . The in t eres t ea rned by the a sse s see is clea rly it s income and unles s it can be shown tha t any p rovision lik e s . 10 has exemp ted it f rom tax , it will be taxable .

5 . The fa c t tha t the sourc e o f income was bor rowed money does not det rac t any thing f rom the Revenue cha rac t er o f the receipt . The ques tion o f ad jus tmen t o f in te rest payable b y the company agains t the in te res t ea rned by it will d ep end upon the p rovisions o f the Act . The expenditure would have been d educ tible a s incu rred for the pu rpos e of busines s if the as s es sees business had commenc ed . But that is no t the case he re . The a s ses see may b e entitled to capitalis e the int eres t payable by it . Bu t what the as s essee canno t claim is ad jus tmen t o f this exp enditure agains t in te res t as sessable unde r s . 56. Sec . 57 o f the Ac t s et s ou t in its cls . (i) to (iii) the expenditu res which a re allowable a s deduc tion f rom income as ses sable unde r s . 56. I t is no t the ca se o f the as s es see tha t the in te res t payable by it on t erm loans a re allowable a s d educ tion unde r s . 57 o f the Ac t .

……… . Whether a par ticular rec eipt is o f the nature of income and falls within the cha rge o f s . 4 o f the IT Ac t is a ques tion o f law which ha s to be decided by the Cour t on the basis o f the p rovisions o f the Ac t and the in te rp reta tion o f the te rm income given in a la rge numbe r o f decisions o f the High Cou r t s , the Privy Council and also this Cou rt . I t is well-s et tled tha t income at t rac t s tax a s soon as it ac c rues . The applica tion or des tina tion of the income has no thing to do with it s ac c rual or taxabilit y. I t is also well-s ettled tha t int eres t income is always o f a revenue na tu re unles s it is rec eived by wa y o f damages or comp ensation .

In the p remis es , we are o f the view tha t the Madras High Cou rt came to a cor rec t decision in the c a se o f CIT vs . Sesha sayee Pape r & Boa rd s Ltd . (sup ra ) . The cont ra ry view s exp res s ed in the ca ses of CIT vs . Naga r juna S t eels Ltd . ,; C IT vs . Elec trochem Oris sa Ltd . and CIT vs . Maharasht ra Ele ct rosmelt Ltd . a re e rroneous .”

19. We have also gone through the judgment o f Hon’ble Apex Court in the case of CIT vs. Bokaro Steel Ltd . 236 ITR 315 (SC) and the specific facts involved in that case and the ratio laid down thereof. It reads,

“We will take the firs t three head s und er which the as ses see ha s rec eived ce rtain amoun t s . These a re , the ren t cha rged by the as ses see to it s cont rac tors for housing wo rk ers and s ta f f employed by the contra c to r for the const ruc tion work o f the as ses s ee including cer tain amenities gran t ed to the s ta f f by the as sess ee. Secondly , hire cha rges for plan t and ma chine ry which wa s given to the cont rac tors by the a s s es see for the purp os e o f facilita ting the work o f const ruction. The a c tivities o f the a ss es see in connec tion with all thes e th ree rec eip t s are direc tly connec ted wi th or are incid en tal to the work of cons truc tion o f it s plant under ta ken by the a s ses s ee . Broadly speaking , thes e p er tain to the a rrangement s made by the as ses see with it s con t ra c to rs p er taining to the work of const ruc tion . To fa cilitat e the work o f the con t ra c to r , the as s essee p ermit ted the con t ra c to r to us e the p remis es o f the as ses see fo r housing its s ta f f and worke rs engaged in the cons t ruc tion ac tivity o f the as ses see's plant . This was clea rly to facilitat e the wo rk o f cons t ruc tion . Had this facility not been p rovided b y the as ses see , the cont ra c to rs would ha ve had to ma ke their own ar rangement s and this would have been re flec t ed in the charges o f the con t rac tors for the cons t ruc tion work . Ins tead , the a s ses s ee had provided the se fa cilities. The same is t rue o f the hire cha rges for plant and machinery which was given by the as ses see to the con t ra c tor for the a s s es see's cons truc tion wo rk . The rec eip ts in this connec tion also go to compens at e the as sessee for the wear and t ea r on the ma chine ry . The advanc es which the as ses see mad e to the cont rac tor to facilitat e the cons t ruc tion ac tivi ty o f putting together a very large p ro jec t wa s as much to ensu re that the work o f the con t rac tors p roceed ed withou t any financial hit ches as to help the cont ra c to rs . The arrangement s which were made between the as ses see-company and the con t ra c to rs per taining to thes e three receipt s are ar rangement s which are int rinsic ally connec t ed with the cons t ruc tion o f its s teel plan t . The receip t s ha ve been ad jus ted agains t the charges pa yable to the con t ra c to rs and ha ve gone to reduc e the cost of cons t ruc tion . They ha ve , there fore , been rightly held a s capital receipt s and not income o f the as ses see f rom any ind ep enden t source .

In the cas e of Addl . Commis sioner o f Income-tax , New Delhi V . Indian D rugs and Pha rmac eu ticals ltd . ([1983] 141 ITR 134) , the Delhi High Cour t consid ered a cas e where the wo rk of cons t ruc tion o f the fac tory o f the as sessee was in p rogres s and p roduc tion had not commenced . rec eip t s from sale o f tende r forms and supply o f wa t er and elec t ricit y to the con t rac tors engaged in const ruc tion a s also rec eip ts on ac count o f sale o f s tones , boulde rs , g ra s s and t rees we re held to be rec eipt s not f rom indep endent sourc es but were considered as inex t ricably linked with the p roces s of s etting up o f busines s . These were directly relat ed to the capital s t ructure o f busines s and were held to b e capital in na tu re . We agree wi th this view tak en by the D elhi High Court .

The appellant , howeve r , relied up on the decision o f this Cou r t in Tu tico rin Alkali Chemicals and Fer tilize rs Ltd . v . Commi s sioner o f Income-tax (sup ra) . That ca s e dealt with the question whe ther inves tment o f bo rrowed fund s p rior to commencement o f busines s , resulting in earning o f int eres t by the as ses see would amount to the as ses see ea rning any income. This Cour t held tha t if a person bo rrows money for busines s purposes , bu t utilizes tha t money to ea rn int eres t , howeve r t emporarily , the in te res t so genera ted will be his income . This income can be u tilized b y the as ses s ee whicheve r way he lik es . Merely be caus e he utilized it to re-pay the in t eres t on the loan taken , will no t mak e the in t eres t income as a capital receipt . The d epartmen t relied upon the ob servations made in that judgment (a t page 179 ) to the e f fec t tha t it the company , even be fore it commences busines s , inves ts su rplus funds in it s hands fo r purchas e o f land o r house p rop er ty and la ter sells it a t p rofit , the gain made by the company will be a s s es sable unde r the head "capital gains" . Similarly , i f a comp any pu rcha s es ren t ed hous e and get s rent , such rent will be as ses sable to tax unde r Se ction 22 as income f rom hous e prope rt y . Likewis e , the company may have income from o ther sou rces . The comp any may also , a s in tha t cas e, keep the surplus fund s in sho rt -t erm dep osit s in o rde r to ea rn in teres t . Such int eres t will b e cha rgeable unde r Sec tion 56 o f the Income-tax Ac t . This Cou rt also emphasis ed the fa c t tha t the company wa s not bound to utilize the in t eres t so earned to ad jus t it agains t the in te res t paid on bo rrowed capital. The comp any wa s f ree to use this income in any manner it liked . However , while in te res t earned by inves ting bo rrowed capital in shor t-te rm deposit s is an independent sou rc e o f income no t connec ted with the cons t ruc tion ac tivities o r busines s ac tivities o f the as ses see , the same c anno t b e said in the p res ent case whe re the u tilisation o f va rious a s set s o f the company and the paymen ts rec eived for such u tilisa tion are direc tly linked with the ac tivity o f se tting up the s t eel plan t o f the a ssess ee . Thes e rec eipt s are inex t ricably link ed with the se tting up o f the capital s t ructure o f the as sess ee-company . They must , therefo re , be viewed as capital rec eip ts going to reduce the cos t o f cons t ruc tion . In the cas e o f Challap alli Sugars Ltd . v . Commi ssione r o f Income-tax , A .P . ([1975 ] 98 ITR 167) , this Cou rt examined the ques tion whether int eres t paid b efore the commenc emen t o f p roduc tion by a company on amoun t s bor rowed for the a cquisition and ins tallation o f plan t and machinery would fo rm a pa rt o f the a c tual cos t o f the a s set to the as ses see within the meaning of tha t exp res sion in Sec tion 10(5) o f the Indian Income-tax Ac t , 1922 and whether the a s ses see will be en titled to dep reciation allowances and development reba te with re ferenc e to such int eres t also . The Cou r t held that the a cc ept ed ac countancy rule for dete rmining cos t o f f fixed a ssets is to includ e all expenditu re neces s ary to b ring such a s sets in to exis t ence and to put them in working condition . In ca s e money is bor rowed b y a newly s tart ed company which is in the p roc es s o f const ructing and erec ting it s plan t , the in te res t incu rred b e fore the commencemen t o f produc tion o f such bo rrowed money can be capitalis ed and add ed to the cos t o f the fixed as sets c rea ted a s a resul t o f such expenditure . By the same rea soning i f the as s es see such expenditu re. By the same reasoning i f the a s ses see receives any amount s which a re inext ricably linked with the p roc es s o f setting up it s plan t and machinery , such re ceip ts will go to reduc e the cos t o f it s as s ets . These a re rec eipt s o f a capital nature and cannot be taxed a s income. The same rea soning would apply to royalty rec eived b y the as ses see company for s tone etc . excava ted f rom the a s ses s ee comp any's land . The land had been allowed to be u tilized by the cont ra c to rs fo r the pu rpos e o f excavating s tones to be used in the const ruc tion work o f as ses see's s t eel plan t . The cos t o f the plan t to the ex tent o f such royalty rec eived , is reduc ed fo r the a s ses see . It is therefore, righ tly taken a s a capital rec eipt .

In the a s ses smen t year 1971 -72 , the a s ses see had shown in its book s o f a c coun ts a sum o f Rs .7 ,39 ,232/- as income f rom int ere s t received f rom M /s . Hindus tan St eel Ltd . fo r the eigh t locomotives supplied by the as ses see-company to them . The en t ry in this rega rd wa s revers ed in the nex t year sinc e M/s . Hindus tan Steel ltd . had replaced the eigh t locomo tives lent by the a s ses s ee-company to it by new ones . The entire na ture o f the t ransac tion wa s changed between the pa rties . The re was a resolu tion of the a s ses see-company in this rega rd and the income from in te res t did no t result a t all as the original ag reement ceas ed to be op erative ab initio. The en t ry in the book s which was made was abou t a hypo thetic al income which did not mat erialis e and the en t ry wa s revers ed in the nex t year . Bo th the Tribunal a s well as the High Cour t ha ve held tha t sinc e this ent ry re flec t ed only hyp othetic al income , it could not be b rought to tax a s income . Only real income can be b rough t to tax .

In suppor t o f this finding , the as s essee ha s d rawn our at tention to a decision o f this Court in Godhra Elec t ri city Co . Ltd . v . Commis sioner o f Income-tax ([1997] 225 ITR 746 ) whe re the Cou rt , in te r alia , examined the ca s e sys tem and the me rcan tile sys t em o f ac counting in the con t ex t o f hypo thetic al income. The computation o f income is made in a c cordan ce with the method o f a c coun ting regularly employed b y the as ses see . I t may b e either the cas e sys tem whe re en t ries are made on the b asis of a c tual rec eip ts and a c tual outgoings or disburs ement s ; or it may be the mercantile s ys t em where ent ries are made on a c c rual b asis , that is to say , a c c rual o f the righ t to rec eive payment and the ac c rual o f the liabilit y to disburse or p ay . However, in bo th c ases unles s there is real income , there canno t be any income-tax . Consid ering the fac t s be fo re it , the Cour t said that although the as s es see-company was following the mercantile sys tem o f ac coun ting and had made ent ries in the book s rega rding enhanced cha rges fo r the supply o f elec t ricity made to it s consumers , no real income had a c c rued to the a s s es see-comp any in resp ec t of thos e enhanced charges in view o f the fac t tha t soon a ft er the as sess eecompany decided to enhanc e the ra te , rep res enta tive suits were filed by the consume rs which were dec reed by the cour t and ultima t ely , a ft er various p roc eedings which took plac e , the as ses s ee-company wa s not able to realis e the enhanc ed charges . The Cour t held tha t no real income had a c c rued to as s es see-company and henc e the en t ries in respec t o f enhanced charges did no t re flec t the real income of the as ses see and could no t b e b rought to tax by the Income-tax O f fic e r. In the p res ent ca se also the en t ry which was initially made a s int eres t was reversed the nex t year be cause in fa c t the na ture of the transa c tion was changed and the as se ssee did no t rec eive any real income . The High Cour t has , there fo re , righ tly held this en try as not re flec ting the real income o f the as ses see and hence not exigible to income-tax .”

20. Hence , respec tfully following the detailed judgmen t o f Hon’ble Apex Court in the case o f Tu ticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (supra), we hold that the interest earned ou t o f temporary investments made out o f borrowed funds not immediately required for utilization in business be treated as business income as the commercial production has s tarted from 29.08.2009. Ergo , the assessee gets relief o f an amount o f Rs. 5,16 ,06,907/-.

21. With regard to earning of interest of Rs. 3619348/- from FDs wherein the assessee has invested the surplus funds in the FDs has nothing to do with the business connection. In the instant FDs , we find that there was no compulsion on the part of the assessee to invest in bank FDs as a part o f an agreement. No business contingency was brought out whether in this case the surplus funds have been kept as fixed term deposits in the bank which yielded interest. It is a passive income which is not directly relatable to the main functions of the business or the venture of oil exploration . This interest would be received even in the absence o f lull/cessation of exploration activity . The interest was received is to be treated under a separate head for the purpose of tax as per the provisions of Section 14 of the Income Tax Act, 1961 which reads as under:

“14 . Head s o f income Save as o therwise p rovided by this Ac t , all income shall , for the pu rpos es of cha rge o f income- tax and compu ta tion o f to tal income , be clas sified under the following head s o f income:- A .- Salaries . 1 B .-] C .- Income from hous e p rope rt y. D .- Pro fit s and gains o f busines s o r p ro fe s sion. E .- Capital gains . F .- Income f rom othe r sourc es . A .- Salaries .”

22. Further, Section 56 of the Income Tax Act reads as under:

“Income of eve ry kind which is no t to be excluded from the total income und er this Ac t shall be cha rgeable to income-tax und er the head “ Income from o the r sourc es” , if it is not chargeable to incometax unde r any o f the head s sp ecified in sec tion 14 , items A to E .”

23. Ergo, appeal of the assessee on this ground is dismissed .

[Ground No .2

Pr ior Per iod Expenses:

24. The Assessee in previous years (AY 2003-04 to 2008- 09) had claimed expenses on account of Exploration, however, the AO in those years disallowed the expense on the basis that the same should be allowed in the year of commercial production i.e. the instant year under consideration being Assessment Year 2010-11. Since the Assessee has commenced commercial production in the captioned assessment year on 29 August 2009, accordingly, the ld . AR argued that as per the above stand o f the AO read with clause 16.2.3 of PSC, such exploration expenses ought to be allowed in the current assessment year .

25. It was argued that in addition to the exploration expenditure, the operating expenses and depreciation were also disallowed during the previous assessment years from AY 2003-04 to AY 2009-10 on similar analogy holding that the same should be allowed in the year of commercial production.

26. It was brought to our notice that the instant year , the revenue [(AO and Ld . CIT(A)] erred in not allowing the aforesaid past years’ exploration expense, operating expense and depreciation , thereby resulting in selfcontradicting stand vis-a-vis the finding given the past years on allowing such past expenses in the current year of commencement.

27. We have gone through the decision of the ld . CIT(A) on this issue and the reasons given thereof. The AO disallowed the preoperative expenses in the Assessment Years 2003-04 to 2009-10, the assessee went into appeal and subsequently opted for VSV Scheme , thus resting all the litigation . Since, the matter attained finality the payment o f tax wherever applicable, this ground cannot be re-entertained at this juncture .

ITA No. 6277/De l/2018: A.Y. 2013-14 (Assessee ’s Appeal)

ITA No. 6278/De l/2018: A.Y. 2014-15 (Assessee ’s Appeal)

Ground No .1

Addit iona l Depreciat ion u/s 32(1)(iia):

28. The assessee aggrieved with mandatory allowance of additional depreciation in terms of Explanation -5 to Section 32(1) of the Income Tax Act, 1961 without appreciating that the additional depreciation has not been claimed by the assessee and deduction u/s 80IB was recomputed after allowing additional depreciation. The issue to be decided is whether the additional depreciation is a “Mandatory Claim” or an optional claim at the convenience of the assessee or not.

29. It is a fact on record that the assessee has not claimed additional depreciation admissible under clause (iia) of section 32(1). The assessing o fficer decided in the Assessment Order that the assessee has no choice not to the claim o f additional depreciation under clause (iia) of section 32(1) in pursuance to the Explanation 5 which reads as under:

“[Explana tion 5 .—For the removal o f doubts , it is hereby declared that the provisions o f this sub-section shall apply whether or not the assessee has claimed the deduction in respect o f depreciation in computing his total income;]”

30. The assessee contended that the said explanation is not applicable to the provisions of clause (iia) of section 32(1) because the explanation is placed before the said clause In the act. The assessee relied on the judgment in the case of Commissioner of Agricultural Income Tax Vs. The Plantation Corporation of Kerala Ltd AIR 2000 SC 3714, M/s. Patel Roadways Ltd . vs. M/s. Prasad Trading Co AIR 1992 SC 1514) and Mohanlal Hargovinddas vs. State of M.P.AIR 1967 SC 1022/ to stress on the relevance of positioning of explanation .

31. The ld . CIT(A) held that a general rule, the explanations incorporated in the Income tax act specifically provide that a particular explanation applies to a 'section' or sub-section' or 'clause' or 'sub-clause'. There fore, there is no ambiguity in the applicability of a particular explanation in the act.

32. Explanation 5 specifically mentions that it is applicable for the 'sub-section' . The 'sub-section' in this case is 'sub-section' 1 of section 32 of the Act. The scheme of the Act clearly lays out that a sub-clause falls under a clause and a clause falls under a sub-section and further , sub-section falls under section. Therefore , the explanation 5 which is applicable for the sub-section will be applicable for all clauses and sub clauses of the said sub-section. Since 'clause (iia)' falls under 'sub-section 1' of 'section 32', there is no doubt regarding applicability of explanation 5 to the said clause (iia) of section 32(1).

33. Further, the explanation 5 was introduced with ef fect from 1/04/2002 and clause (iia) was reintroduced from 01/04/2003. The later insertion of clause (iia) con not be the basis for non applicability o f explanation 5 to the said clause because if the intention of the parliament was there to restrict the explanation to a particular clause only , it would have amended the phrase "sub-section" to "clause" or "sub-clause" as the case may be. It may be interesting to note that explanation 2 to the sub-section 1 of section 32 was modified from the phrase "[For the purposes of this [clause]" to "For the purposes of this [sub-section]" by the Finance Act, 2002, w.e .f. 1-4-2003.

34. The case laws cited by the assessee do not pertain to Income Tax Act but to Evidence Act and Agriculture Income Tax Act and there may be ambiguity in the scope of applicability of "explanation" in the respective Acts.

35. Accordingly, the AO has rightly allowed the additional depreciation in this case even without its claim by the assessee . The appeal of the assessee on this ground is dismissed .

ITA No. 6357/De l/2013: A.Y. 2010-11 (Revenue Appeal)

ITA No. 5988/De l/2018: A.Y. 2013-14 (Revenue Appeal)

ITA No. 5989/De l/2018: A.Y. 2014-15 (Revenue Appeal)

Ground No .1

Exp lorat ion & Development Expend iture u/s 40(i)(ia):

36. For the year under consideration, the company filed its return of income on 13.10 .2010 declaring Nil income under the normal provisions of the Act and Rs .34,54,72 ,045/- under MAT as per provisions of Section 115JB of the Act. During the year under assessment, the Assessee claimed the exploration and development expenses of Rs.205,14,89,785/- under section 42 of the Act read with the terms of PSC.

37. The AO disallowed entire expenditure on following grounds:

• The claim o f the assessee regarding exploration cost in the Profit and Loss Account as well as the total development and exploration cost as reflected in the Balance Sheet has been disallowed in earlier years.

• The entire edifice of the assessee’s claim is hovering around its incorrect interpretation of the various clauses of PSC. The assessee has intentionally and deliberately avoided clauses 16.2 and 16.2.2 of the PSC which clarifies the impugned issue satisfactorily and logically.

• The said expenditure being unapproved and unauthorized cannot be allowed .

• Due to the same being unascertainable and unverifiable, the entire development cost as claimed in the return of income is disallowable .

• Such disallowance of development expenditure is therefore, permanent in nature and only exploration cost shall be admitted for deduction a fter commencement o f actual production in terms of the provisions of section 42 of the Act read with various articles of the PSC.

• It does not deduct any TDS on expend iture charged to its Prof it and Loss account and st ill cla ims the same as deduct ible in contravent ion to the prov is ions of Chapter XVII-B read w ith sect ion 40a(i) and 40a( ia) of the Act.

38. The ld . CIT(A) deleted the addition made on the grounds that in the earlier years the production was not commenced whereas in the current year the production has commenced . The ld. CIT(A) has also deleted the addition made on account of failure to adhere to provisions of section 40a(i) and 40a(ia) of the Act holding that the operator responsible has already deducted the TDS on the payments.

39. Heard the arguments of both the parties and perused the material available on record .

40. With regard to non-deduction of TDS on the expenditure charged to P&L account , we hold that,

• The assessee has a Participating Interest (PI) in the unincorporated joint-venture.

• The business o f prospecting and exploration o f mineral oil in India could be done only by the way of Production Sharing Contracts (PSC) with Government o f India .

• ONGC is one part o f the PSC on behalf o f the Government o f India .

• The assessee (CEHL) acquired 50% participating interest in exploration, development and production of oil and natural gas in the contract area RJ ( the block) with the approval of the Government of India .

• ONGC and Cairn Energy India Pvt. Ltd . (CEIL) are the other partners in the block .

• CEIL is the operator o f this contract area.

• CEIL holds 35%, CEHL holds 35% and ONGC holds 30% interest during the development and production stage.

• As per the Article 1.4.4 Appendix C of PSC and in terms o f the aforesaid Articles , the operator namely CEIL is required to maintain , on behalf o f all contractor parties, all the accounts of the Petroleum Operations in accordance with the provisions of the PSC and also timely filing of reports and payment of fees, levies, taxes etc . Such expenditure/sums paid by the operator on behalf o f all contracting parties and thus allocated to the parties, based upon which profit/loss accounts are drawn . Thus disallowance under section 40(a)(i) and 40(a)(ai) is totally unwarranted and uncalled for.

• Though, even after mentioning that the commercial production has been started which was one o f the main reasons for disallowance in earlier years, however, the AO erroneously disallowed the total development and exploration cost amounting to Rs .205,14 ,89,785/- alternatively by invoking the provisions of Section 40(a)(i).

• Article 6.4 of PSC reveals that the operating functions will be performed by the operator i.e. CEIL.

• The said Article reads as under:

“The ope ra ting func tions required o f the Con t rac tor und er this con t ra c t shall be per formed by the Op erator on behal f o f the all cons tituen ts of cont ra c to r , sub jec t to , and in ac co rdanc e with the te rm s and p rovisions of this Con t ra c t and generally ac cept ed in te rna tional pet roleum indus t ry prac tice .”

• The operator is also responsible for the maintenance o f books of accounts and others records including audit thereof in accordance with the terms of the PSC. Article 1 .4.4 of Appendix C of the PSC provides that Operator shall be responsible for maintaining at business o ffice in India , on behalf of the contractor , all the accounts of the Petroleum Operations in accordance with the provisions o f the Accounting Procedure and the contract. Also, as per the Joint Operating Agreement entered by the parties to the PSC, operator is required to carry out Petroleum Operations in compliance with the obligations imposed upon the Contractor by the laws of India and the Contract including the timely filing o f reports and payment o f all fees, levies , taxes etc.

• Clause 27 of the Tax Audit Report for the UJV certifies that the operator has complied with the requirement o f Chapter XVII-B regarding deduction of tax at source & deposit thereof to the credit of Central Govt.

• The appellant further submitted that the Hon’ble CIT(A) in its order for AY 2006-07 has held that operator has complied with provisions of TDS contained in Chapter XVII of the Act.

• During AY under consideration , commercial production has commenced , therefore, even under provisions of IT Act, exploration and development expenses becomes allowable during AY under consideration .

• The ld . CIT(A) has categorically held that the assessee (CEHL) has furnished tax audit report of the operator CEIL perusal of which shows that TDS requirement have been duly complied with the operator.

hence, the disallowance made by the AO on account of exploration & development expenditure per se and on account of infraction of provisions of Section 40(a)(ia) o f the Income Tax Act, 1961 are liable to be deleted. The order of the ld . CIT(A) on this ground is a ffirmed .

Ground No .2

Disal lowance of T ime Cost Expenses:

41. The time cost expenses recharged by the operator to the UJV amounted to Rs .349,54 ,83,532/- and assessee’s share works out to Rs .1,11,88,89 ,517/- (being 50% of the cost incurred outside development area and 35% o f the cost incurred inside development area) (erroneously mentioned as Rs. 55,94 ,44,758/-).

42. The AO held that the same is not allowable u/s 40A o f the Act being excessive in nature on the following grounds:

• The charges computed by the operator are notional and on estimated basis.

• ii. Development cost was charged on notional basis without actual evidence being made available for verification .

• These charges , being part o f the total exploration and development cost claimed by the Assessee and hence, are not allowable under section 42 of the Act. Also , these expenses being treated as excessive, unreasonable and unverifiable cannot be allowed as per the provisions of section 40A of the Act read in conjunction with Article 16.2.1(b) of the PSC.

43. The ld . CIT(A) in its order for AY 2003-04 to 2006-07 has allowed these expenses as deferred revenue expenses for 5 years starting from the AY 2010-11 i.e. the relevant assessment year in the present case . For the same, the CIT(A) has relied upon the judgment of the ITO vs. Aravali Swachalit Vahan P. Ltd. [(1987) 27 TTJ 161]. The ld. CIT(A) a fter going through the earlier orders held that since the production has commenced now and the AO has not given any reasons for invoking the provisions of Section 40A are not attracted . The ld . CIT(A) held that these expenses are otherwise allowable as deduction now and earlier the same were disallowed owing to unreasonable delay in starting commercial production.

44. Heard the arguments of both the parties and perused the material available on record . The entire issue is as under:

45. During the year under consideration, the UJV in which the assessee has a participating interest made payments to the operator i.e. Cairn Energy India Pvt. Ltd . for the time cost and expenses incurred by operator at aforesaid contract area at cost. The same has been certified by the Auditor that the payments were at cost reimbursement.

46. During the course of assessment proceedings, the AO asked the Assessee to furnish the details of the expenditure covered under section 40A of the Act. The Assessee submitted that in terms of clause 16.2 .1(b) of the PSC, the assessee's share in expenses is INR 1,11,88 ,89,517/-. The AO without going through the facts disallowed the entire expenditure of INR 1,11,88,89,517/- (erroneously mentioned as INR 55,94 ,44,758) under section 40A read with Clause 16.2 .1(b) of the PSC.

47. It was submitted during the assessment proceedings that the recharge is on cost to cost basis and the very question o f applying the provisions of section 40A of the Act does not arise. Article 16.2.1 of the PSC is reproduced below:

“16 .2 .1 . Sub ject to the provisions herein below, deductions at the rate o f one hundred percent (100%) per annum shall be allowed for all expenditures incurred in respect of Exploration Operations and drilling opera tions . The expenditure incurred in respect of Development Operations , and Production Operations other than drilling operations will be allowable as per the provisions o f the Income Tax Ac t , 1961 . The expenses so incurred are subject to the following:

a) whe re any expenditure is no t solely incur red on Pet roleum Op era tions or is incu rred as par t o f or in conjunc tion with any o ther business only tha t p ropor tion o f the to tal expenditure which can be proved to the a ss es sing o f ficer to rep resent a fair p rop or tiona t e pa rt thereo f, having regard to the fac t s and ci rcum s tances , shall be allowed . b) sec tion 40A and 44C o f the Income Tax Ac t , 1961, shall apply .”

48. The disallowance is called for only where any expenditure is not incurred solely for Petroleum operations or is incurred as part o f or in con junction with other business, then the Assessing Officer having regard to facts and circumstances, shall allow only a fair proportion thereof. In the present case, it is an admitted position that the assessee does not have any other business in India except PI in the block and has not incurred any expenditure itself, rather it has made contribution to the cash calls made by the operator which has incurred the expenditure .

49. It is a settled position of law that for making a disallowance under section 40A of the Act, the onus is on the AO to establish that the payments made by the assessee were excessive and unreasonable . In the present case, the AO made disallowances without discussing even the nature o f expenses and its reasonableness. Hence , the disallowance proposed to be made is bad in law and deserves to be deleted . Ergo , the decision of the Ld . CIT(A) is hereby a ffirmed .

Ground No .3

Disal lowance of Overhead Expenses:

50. The Parent Company overheads are primarily overhead payments by the operator to its parent company under the PSC to support and manage petroleum operation under the contract. During the year under assessment, the company has accounted for its share o f cost of Parent Company Overheads which was Rs.16 ,95,79 ,248/-.

51. The AO disallowed these charges for the following stated reasons:

• In the assessment orders of the earlier assessment years, it has been categorically held that such expenditure is permanently disallowable. The allowability will not change after commercial production;

• It is evident from the reply of the assessee that the impugned amount was paid to the parent company of operator from the UJV;

• It is merely an attribution of an estimated expenditure incurred at the head office without any evidence to support the same;

• The fact that there exists no separate assessment of the joint venture for the Ra jasthan block, application of the provisions o f section 44C is squarely required in terms o f the Article 16.2.1(b) of the PSC;

• In fact, the payment o f INR 16,95 ,79,248/- (erroneously mentioned as INR 16,38,17 ,569/-) for parent company overhead has been made from the books of the Ra jasthan Block to the parent company of operator , thus it is a head office expenditure covered u/s 44C for the block;

• If the benefit of section 293A of the Act would not have been available to the block, the UJV would have been treated as an assessable entity . In that case, this expenditure would have fallen u/s 44C and would have stood disallowed;

• The assessee has categorically admitted the fact of having incurred such expenditure which falls within the ambit of section 44C but has claimed the same as allowable merely in terms o f Appendix C o f the PSC. However, Article 16.2 .1(b) of the PSC specifically permits operation of the provision of section 44C of the Act and therefore, the said expenditure cannot be held as allowable .

52. The ld . CIT(A) deleted the addition holding that the addition made in the earlier years was due to the fact that the commercial production was not started and the AO has not given any reasons as to how the provisions o f 44C are applicable .

53. Heard the arguments of both the parties and perused the material available on record .

54. The provisions of Section 44C are as under:

“Deduct ion of head off ice expend iture in the case of non - res idents .

44C . No twiths tanding any thing to the con t ra ry con tained in s ec tions 28 to 43A, in the ca se of an as s es see , being a non-residen t , no allowance shall be made , in computing the income cha rgeable und er the head "P ro fi ts and gains of busines s or p ro fes sion" , in respec t o f so much o f the expenditure in the na ture o f head o ffice expenditu re as is in exc es s of the amoun t comput ed a s hereunde r, namely:—

(a ) an amount equal to five p er cen t o f the ad justed to tal income; o r

(b) [***]

(c ) the amount o f so much o f the exp enditu re in the nature o f head o f fic e expenditure incu rred by the as ses see as is att ributable to the business o r p rofes sion o f the a s ses s ee in India , whichever is the leas t :

Prov ided that in a case whe re the ad just ed to tal income o f the as ses see is a los s , the amoun t under claus e (a) shall be compu ted at the rat e o f five p er cen t o f the average ad jus t ed to tal income o f the as ses see .

Explana tion .—For the purpos es o f this s ection ,—

(i) "ad jus t ed to tal income" means the to tal income compu ted in ac co rdanc e with the p rovisions o f this Ac t , wi thout giving e f fect to the allowanc e re fer red to in this s ec tion or in sub-s ec tion (2) o f s ec tion 32 o r the d educ tion re fe rred to in sec tion 32A or s ec tion 33 o r sec tion 33A or the first p roviso to clause (ix ) o f sub-s ec tion (1) o f s ec tion 36 or any los s carried forward unde r sub-s ec tion (1) o f s ec tion 72 o r sub-s ec tion (2) o f s e c tion 73 or sub -s ec tion (1) or sub-s ec tion (3) o f s ection 74 or sub -s ec tion (3 ) o f s ec tion 74A or the deductions und er Chapt er VI-A;

(ii) "a verage ad jus t ed total income" means ,—

(a) in a case whe re the total income of the as sess ee is a s ses sable for ea ch o f the th ree as s es smen t years immedia tely preceding the relevan t a s s es smen t yea r, one-third o f the aggrega te amount o f the ad jus ted to tal income in respec t o f the previous yea rs relevan t to the a fo resaid three a s se s sment years ;

(b) in a ca s e whe re the total income of the as sess ee is a s ses sable only for two o f the a fo resaid three as ses sment years , one-half o f the aggrega te amoun t o f the ad jus t ed to tal income in respec t o f the previous yea rs relevan t to the a fo resaid two a s s es sment years;

(c ) in a case where the to tal income o f the as s essee is as ses sable only for one of the a fo resaid th ree a s ses sment yea rs , the amoun t o f the ad jus ted total income in respect o f the p revious year relevan t to that as ses smen t year;

(iii) [*** ]

(iv ) "head o ffic e expenditu re" means execu tive and gene ral adminis t ration expenditu re incu rred by the as ses s ee out side India , including expenditure incu rred in respec t o f

(a) ren t , ra tes , taxes , repairs or insu ranc e o f any p remis es ou t side India us ed for the purposes o f the busines s or p ro fes sion;

(b) salary , wages , annuity , p ension , fees , b onus , commis sion , gra tuit y, pe rquisit es o r p ro fit s in lieu o f o r in addition to salary , whether paid o r allowed to any employee o r othe r p erson employed in , or managing the a f fairs o f , any of fic e ou tsid e India ;

(c ) t ravelling b y any employee or o ther pe rson employed in , or managing the a f fai rs o f , any o f fic e out side India; and

(d) such o ther ma tt ers connec ted with execu tive and gene ral adminis t ration a s may be p res c rib ed .”

55. The cost paid to the parent company by the operator is to support and manage the petroleum operations under the PSC and not the head office expenditure and general administrative expenditure on which provisions of section 44C of the Act is attracted .

56. During the course of assessment proceedings, the Assessee submitted vide letter dated March 15 , 2013 that the Assessee has accounted for its share of the Parent Company Overheads to the extent of INR 16,95 ,79,248/-. These expenditures are basically paid to the Parent company of the operator as per the PSC to support and manage the petroleum operations under the contract.

57. Section 44C of the Act provides for a ceiling on allowance in respect of the Head Office expenditure which is in the nature of executive and general administrative expenses incurred by the foreign head o ffices in so far as such expenses can be related to their business or profession in India.

58. The AO disallowed the Parent Company Overheads as Head office expenditure by treating the same as expenditure under section 44C of the Act. The AO further stated that the said expenses were not to be allowed as revenue expenditure even in the year of commencement of production i.e. the relevant assessment year .

59. Reliance is placed on the decision of CIT Vs. Emirates Commercial Bank [(2003) 262 ITR 55 (Bom)] wherein Bombay High Court held that section 44C of the Act contemplates allocation o f expenses amongst various entities . The expenditure which is covered by section 44C of the Act is of common nature , which is incurred for the various branches or which is incurred for the head office and the branch . Expenditure incurred by the head office exclusively for the Indian branch will not be subject to ceiling under section 44C of the Act. This judgment was followed by the Hon’ble Bombay High Court in the case of John Wyeth And Brother Ltd . vs. CIT [(2008) 174 Taxman 451 (Bom .)] and also by the Mumbai Tribunal in the case of ADIT vs. Bank o f Bahrain and Kuwait [(2011) 44 SOT 693 (Mum)].

60. It was argued that the assessee would qualify for head office expenditure, on the grounds that,

 • that section 44C of the Act begins with a non obstante clause;

• it restricts deduction to least of two parameters mentioned in clauses (a) and (c) of section 44C o f the Act and in the absence of any one out of the two prescribed parameters, the entire section becomes non-workable. Consequently , the Assessee would become entitled to full deduction under section 37(1) of the Act in respect of its head office expenses. - CIT v. Deutsche Bank A .G. [(20oy) Taxman 37 (Bom.)]

61. We find that the Ld. CIT(A) in his order for AY 2010- 11 has allowed these expenses by holding as under:

“(a) It is seen that then CIT(A) in his appellate order for AY 2004-05 and subsequent AY has held that the appellant may claim such expenses over a period o f 5 years starting from AY 2010-11 . The ld . CIT(A) ha s given a finding that the provisions o f section 44C do not apply to these expenses and these are otherwise allowable as deduction. However , he did not allow such deduc tion for those earlier AYs on the reasoning that there is unreasonable delay in s tarting commercial production. (b) That the AO has not given the reasoning as to how these expenses are hit by the provisions of section 44C and has simply disallowed these expenses on the basis o f the stand taken by the Assessing O f ficer in earlier assessment years .

(c) The expenses are allowable since it is undisputed that the commercial produc tion started in AY 2010-11 .”

62. In view of the above, we find no infirmity in the order of the Ld . CIT(A) in allowing the parent company overheads.

Ground No .5

Disal lowance of Deduct ion u/s 80IB(9):

63. During the year under consideration, the Assessee commenced the commercial production o f mineral oil and hence, sub ject year being the initial assessment year, the assessee was eligible for tax holiday benefit under section 80IB(9) of the Act for a period o f 7 consecutive years i.e. from FY 2009-10 (AY 2010-11) to FY 2015-06 (AY 2016- 17).

63. During the year under consideration, the Assessee commenced the commercial production o f mineral oil and hence, sub ject year being the initial assessment year, the assessee was eligible for tax holiday benefit under section 80IB(9) of the Act for a period o f 7 consecutive years i.e. from FY 2009-10 (AY 2010-11) to FY 2015-06 (AY 2016- 17).

65. The aforesaid eligibility for deduction under section 80IB(9) of the Act is only evident from the report issued by the Chartered Accountant on deduction under section 80IB(9) of the Act in compliance with Form no. 10CCB under Rule 18BBB of the Income Tax Rules , 1962. The report says,

“the company is eligible for deduction u/s 80-IB(g) of the Income Tax Act, 1961 in respect of commercial production of mineral oil. However, no deduction is being claimed for the year under assessment as he assessee is expecting a negative Gross Total Income. However, the gross total income is sub ject to final determination.”

66. The Assessee submitted that despite the fact that deduction under section 80IB(9) of the Act was available , since the returned income was Nil there was no occasion to claim deduction under section 80IB(9) of the Act. Further , the Assessee also submitted that during the assessment proceedings, vide letter dated 8 March 2013, that disallowances of expenses under normal provision will not affect the taxability under normal provision since to the extent of increase in taxable income on account of disallowance , amount of tax holiday will also increase.

67. During the assessment proceedings, the assessee submitted the revised calculation of deduction u/s 80IB(9) of the Act vide letter dated 22 March 2013. It was submitted before the AO that the Assessee being eligible for deduction u/s 80IB(9) of the Act, in case if there is a positive income due to addition made, a deduction u/s 80IB(9) should also be allowed accordingly.

68. The claim o f the Appellant with respect to deduction u/s 80IB(9) o f the Act was not allowed by the AO on the sole reason that such claim was not claimed in the return of income and no adverse observations was made by the AO on the veracity of the claim o f the Appellant u/s 80IB(9).

69. Heard the arguments of both the parties and perused the material available on record .

70. Circular NO .14(XL-35) dated 11 April, 1955 issued by the Central Board of Direct Taxes (‘CBDT’) states as under:

"Of ficers of the department must not take advantage o f ignorance o f an assessee as to hi s rights . It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter o f claiming and securing reliefs and in this regard the o f ficers should take the initiative in guiding a taxpayer where proceedings or other particulars be fore them indicate that some refund or relief is due to him . This attitude would, in the long run, benefit the department , for it would inspire confidence in him that he may be sure o f getting a square deal from the department . Although, therefore , the responsibility for claiming refunds and reliefs rests wi th the assessee’s on whom it is imposed by law, of ficers should—

(a) draw thei r attention to any re funds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other; (b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs .”

71. The assessee would further like to submit that eligibility to get the benefit of deduction under section 80IB(9) of the Act being an undisputed fact, the AO was bound by law to allow the claim made by the Assessee so that a fair amount o f income and tax thereon could be assessed .

72. The Ld . CIT(A) has allowed the deduction claimed under section 80IB by holding as under:

(a) The appellant has submitted that since its returned income was nil , there was no occasion to claim deduction u/s 80IB in its return of income . However , in the tax audit report , it has been expressly mentioned that the appellant is eligible for deduc tion u/s 80IB and it is not being claimed in view o f nil returned income.

(b) Further , the appellant has also furnished its report in Form 10CCB during the assessment stage as at the time of filing o f return, the same could not be uploaded as it was filed elec tronically where no annexures are required to be uploaded. The appellant has relied upon various case laws in support o f its claim.

(c) It is noted that the AO has not commented upon the eligibility o f the appellant for claiming deduction u/s 80IB. The AO has simply commented that since deduction has not been claimed in the return o f income, it cannot be allowed. This argument is fallacious as when there is no taxable income in the return, then how can the appellant claim such a deduction.

(d) Therefore, there is no valid reason to deny such deduc tion to the appellant i f during assessment proceeding, there comes some positive income. The AO is therefore direc ted to allow the claim o f deduc tion u/s 80IB o f the Act, i f there is a positive income a fter giving ef fect to this order . The ground o f appeal is accordingly allowed .

73. We are in agreement with the finding o f the ld . CIT(A), the AO has simply commented that since deduction has not been claimed in the return of income , it cannot be allowed . This argument is fallacious as when there is no taxable income in the return , then how can the appellant suppose to claim such a deduction. Once the income of the assessee is turns positive (instead of loss) then the deduction eligible should also be allowed in principle. Hence, the appeal of the revenue on this ground is dismissed .

74. In the result, the appeals of the assessee are partly allowed and the appeals of the revenue are dismissed .