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01-07-2019, ONGC Videsh, Section 37, 32(1 )(ii), 42, Tribunal Delhi

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3 months 1 week ago #9967 by amit
Section - 37, 32(1 )(ii), 42, 10(1)
Order Date - 01-07-2019
Favouring - Assessee
Court - Tribunal Delhi
Appellant - ONGC Videsh Ltd.
Respondent - ACIT
Citation - 719Taxpundit56
Appeal No. - ITA No.3150/Del/2014
Asstt. Year - 2006-07



ITA No.3150/Del/2014 filed by the assessee and ITA No.3208/Del/2014 filed by the Revenue are cross appeals and are directed against the order dated 24th February, 2014 of the CIT(A)-16, Delhi, relating to assessment years 2006-07. For the sake of convenience, these were heard together and are being disposed of by this common order.

2. Ground of appeal No.(i) by the assessee and grounds of appeal No.1 and 2 by the Revenue are as under:-

Ground No.(i) by the assessee

“(i) Not allowing deduction under section 37 of the Act in respect of acquisition cost of participation interest in oil blocks

• That the Ld. CIT(A) erred in law and on facts of the case in not allowing deduction of 1NR 982.61 million being the acquisition cost paid during the year for acquiring participating interest in oil blocks under section 37 of the Act.

• Ld. CIT(A) has failed to appreciate that the cost of acquiring participating interest has been incurred in the normal course of its business and is wholly and exclusively for its business and hence allowable as deduction under section 37 of the Act.”

Ground Nos.1 & 2 by the Revenue

“1. The Ld. CIT(A) has erred in law and on facts by not considering the fact that in the AY 2002-03 the ITAT has erred in granting relief to the assessee by wrongly invoking provisions of Section 32(1 )(ii) of the Act.

2. The Ld CIT(A) has erred in law and on facts by ignoring the fact that to acquire a stake in any kind of business would amount to acquiring an intangible asset as the nature of the business or commercial right which is being covered in the section under discussion, is of a narrower scope than what has been envisaged and allowed by the ITAT.”

3. Facts of the case, in brief, are that the assessee is a company and is a wholly owned subsidiary of M/s ONGC and is engaged in the business of overseas exploration and production of hydrocarbon and oil and gas through acquiring participating interest in production sharing contracts to supplement the reserves of the parent company and to augment the national energy security of India. It filed its return of income on 29.11.2006 declaring total income of Rs.6,35,90,39,360/-. During the course of assessment proceedings, the Assessing Officer noted that the assessee has claimed depreciation in the following manner:-

“(a) Depreciation has been claimed on acquisition cost of participating interests in Sakhalin , Myanmar Block A-l and A-3, Sudan 5A & 5B, Ivory Cost, Egypt, Qatar, Libya Joint Venture the same being a right to carry oil exploration business In the specified block.

(b) Depreciation has been also claimed on support equipments/assets of Myanmar Block A-l & A-3, Libya Block NC-188, NC-189, Iran, Sudan 5A & 5B, Syria, Egypt and Qatar (joint venture projects for which commercial production has not yet started.) as these assets have been put to use for exploration and development activities.

(c) Alternatively it has been claimed in its return of income that in case the claim for depreciation on such acquisition cost of participating interest is disallowed the claim for allowability of deduction for the amounts paid for acquiring interest u/s 42 of the Act may be allowed.”

4. The Assessing Officer noted that as per the return of income filed, the assessee company has claimed depreciation on acquisition cost of participating interest @ 25% holding them as intangible assets and the total depreciation claim was to the extent of Rs.204,57,99,264/- in the following manner:-

“1. Sakhalin 1 Project 123, 32,70,024/-
2. Block A-1, Myanmar 61,89,614/-
3. Sudan 5A Project 43,75,81,441/-
4. Sudan 5B Project 19,63,04,039/-
5. Ivory Coast Project 46,90,237/-
6. Egypt Project 79,38,840/-
7. Qatar Project 8,19,37,500/-
8. A-3, Myanmar Project 4,42,72,569/-
9. 81-1 Libya Project 3,36,15,000/-

5. He, therefore, asked the assessee to justify the above claim in the return of income. Rejecting the various explanations given by the assessee, the Assessing Officer held that such an expenditure incurred could not be treated to be an expenditure incurred to acquire business or commercial rights as contemplated u/s 32(1)(ii) of the IT act. He also held that the nature of payment made by the assessee is that of capital expenditure on which the assessee is not eligible for any depreciation. The Assessing Officer analysed the production sharing contracts and noted that the analysis of the agreements shows that by making the payment the assessee has acquired a right of exploration and development of hydrocarbon, oil and gas. He observed that the rights acquired by the assessee are in the nature of business or commercial rights, but, not in the nature of rights as envisaged in section 32(1)(ii). He accordingly disallowed the claim of depreciation. The Assessing Officer further held that the expenditure incurred also does not fall within the ambit of section 42 of the Act although no such claim was made before him.

6. In appeal, the ld.CIT(A), following the order of the Tribunal in assessee’s own case for assessment year 2002-03 held that the participating interest in the products are intangible assets entitled to claim depreciation u/s 32(1)(ii) of the Act. He accordingly allowed the claim of depreciation which was disallowed by the Assessing Officer.

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