As per sec 80IB profit from commercial production or refining mineral oil is eligible for claim deduction

IN THE INCOME TAX APPELLATE TRIBUNAL

“H” BENCH, MUMBAI

BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER, AND

SHRI R.S. PADVEKAR, JUDICIAL MEMBER

ITA no. 6477/Mum./2009

(Assessment Year: 2003-04)

ITA no. 2346/Mum./2010

(Assessment Year: 2004-05)

Income Tax Officer

Ward-9(2)-1, Aayakar Bhavan

101, M.K. Road, Mumbai 400 020

………….………. Appellant

v/s

M/s. Hindustan Oil Exploration Co. Ltd.

Anand House, Khatwari Darbar Road

Off Linking Road, Khar (West)

Mumbai 400 052 PAN – AAACH1407P

..…….………. Respondent

Revenue by: Mr. Goli Sriniwas Rao

Assessee by: Mr. Samir Shah a/w

                     Ms. Darshana Shah

Date of Hearing – 02.02.2012

Date of Order – 08.02.2012

O R D E R

PER J. SUDHAKAR REDDY, A.M.

These appeals preferred by the Revenue, are directed against the impugned separate orders dated 7th October 2009 and 7th October 2010, passed by the Commissioner (Appeals)-XX, Mumbai, for assessment years 2003-04 and 2004-05 respectively. Since the issue in both the years under assessment is common, except variation in figures, for the sake of convenience, these were heard together and are being disposed off by way of this consolidated order.

2. The common dispute in these appeals is whether or not the first appellate authority was justified in deleting the penalty of ` 8,48,53,636, for assessment year 2003-04 and ` 10,00,00,000, for assessment year 2004- 05, imposed by the Assessing Officer under section 271(1)(c) of the Income Tax Act, 1961 (for short “the Act”).

Facts in brief:-

3. The assessee is an oil exploration company and is engaged in extraction and sale of crude oil from PY-3 Block in the Cauveri Offshore area. The assessee claimed that it was an industrial undertaking eligible for 100% deduction of its profits derived from the undertaking under section 80IB of the Act. The Assessing Officer, however, declined the deduction holding that extraction and sale of crude oil does not amount to commercial production or refining of mineral oil in order to make the appellant eligible for deduction under section 80IB(9) of the Act. On appeal, the first appellate authority confirmed the order passed by the Assessing Officer. Consequently, penalty proceedings under section 271(1)(c), were initiated by the Assessing Officer.

4. The assessee, during the course of penalty proceedings, submitted that disallowance of any claim or expenditure would not lead to conclusion of concealment. The assessee further submitted that the assessment was completed on the basis of information available in the return of income and the same was provided during the course of assessment proceedings and the relief claimed is on bona fide belief that it was eligible for deduction under section 80IB of the Act.

5. The Assessing Officer, however, rejected the contentions of the assessee and observed that the assessee is represented by a reputed professionals, therefore, before issuing any audit certificate under section 80IB and making a claim thereof, it should have been ensured as to whether it had undertaken any commercial production or refining of material oil which qualified for claim of deduction under section 80IB(9). The Assessing Officer was of the opinion that the assessee has knowingly and deliberately claimed an ineligible deduction thereby furnishing inaccurate particulars of income. He held that the issue involved was not a mere case of disallowance of expenditure or deduction but bringing on record that the appellant had not made any commercial production of refining of mineral oil in order to claim deduction under section 80IB of the Act. Consequently, the Assessing Officer imposed penalty to the extent of 100% of the tax sought to be evaded for both the years under assessment.

6. Aggrieved, the assessee carried the matter before the first appellate authority, wherein the Commissioner (Appeals) deleted the penalty by following the Apex Court’s judgment in CIT v/s Atul Mohan Bindal [2009] 317 ITR 001 (SC). Aggrieved, the Revenue is in appeal before the Tribunal for both the years under assessment.

7. Before us, learned Counsel submitted that Mumbai “H” bench of the Tribunal has deleted the addition made by the Assessing Officer and sustained by the first appellate authority in respect of the relief claimed by the assessee under section 80IB(9) of the Act for both the years under assessment in ITA no.179/Mum./2007 and ITA no.1711/Mum./2008, order dated 28th December 2011. Accordingly, he prayed that the penalty may be cancelled. Learned Departmental Representative, on the other hand, did not make any objection to the submissions made by the learned Counsel.

8. After hearing the learned Departmental Representative, Mr. Goli Srinivas Rao, appearing on behalf of the Revenue as well as the learned Counsel, Mr. Samir Shah a/w Ms. Darshana Shah, who appeared on behalf of the assessee, we are of the considered opinion that when the quantum

addition in respect of the relief claimed by the assessee under section 80IB(9) of the Act itself is deleted by co-ordinate bench of this Tribunal in assessee’s own case for both the years under assessment vide order dated 28th December 2011, the very foundation of the impugned penalty ceases to exist. The penalty under section 271(1)(c) imposed by the Assessing Officer and sustained by the Commissioner (Appeals) does not have legs to stand. For these reasons, we approve the conclusion arrived at by the first appellate authority for both the years under assessment and decline to interfere in the matter as such. The co-ordinate bench of the Tribunal, while deleting the quantum addition, observed as follows:-

“8 We have considered the rival contention and carefully perused the relevant material on record. The Assessing Officer denied the deduction on the ground that the assessee is not carrying out any process by which brings into existence new goods or brings series of changes which takes the commodity to the point where commercially it can no longer be regarded as original commodity. The Assessing Officer observed that the assessee does not undertake any process which gives crude oil new form, qualities or combination. Though, the Assessing Officer has also denied deduction for want of 10CCB report as it was not filed at the time of submission of the return; but, since the CIT(A) has decided the issue of filing of 10CCB report subsequent to the filing of the return in favour of the assessee and the revenue is not in appeal before us; therefore, the said issue attain the finality at the stage of CIT(A) order. The CIT(A) confirmed the action of the Assessing Officer on similar lines and mainly on the ground that what is extracted and transported by the assessee is nothing but crude oil which remains as it is without undergo any change or any process. The CIT(A) was of the view that some distillation process would not render the product different than the one extracted i.e. the crude oil itself.

8.1 It is to be noted that the term used in section 80IB(9) is production and more specific, the production of mineral oil and not the mineral. Therefore, the issue is related with the ‘production’ and not ‘mineral’. It is settled proposition of law as laid down by the Hon’ble Supreme Court that the word production as used in sec. 80IB of the I T Act has a wider connotation as compared to the word manufacture. In all the cases, on which reliance has been placed by the ld Sr counsel for the assessee, some amount of process at various stages was involved and in that view of the matter, the Hon’ble Supreme Court as well as Hon’ble High Courts have held that there certainly an activity which gives in the character of production.

8.2 In the case of CIT vs Sesa Goa Ltd , the Hon’ble Supreme Court had an occasion to consider mining of ore production. It was noted that the assessee in the extracting process of iron ore, the High Court came to the conclusion that extraction of iron ore and the various process would involve ‘production’ within the meaning of sec 32A(2)((b)(iii) of the I T Act and consequently, the assessee was entitled to the benefit of investment allowance under sec. 32A. The view expressed by the High Court that the activity of extraction and processing of iron ore constitute production has been affirmed by the Hon’ble Supreme Court. It was held by the Hon’ble Supreme Court that the word ‘production’ has a wider connotation than the word ‘manufacture. It was further observed that every manufacturer can be characterised as production, every production need not amount to manufacture.

8.3 In the case of Commissioner of Income-tax v. Budharaja (N.C.) and Co.(supra), the Hon’ble Supreme Court has held that the word ‘manufacture’ and ‘production’ have received extensive judicial attention both under sales tax and central sales tax Acts. The Hon’ble Supreme Court has observed that for determining whether the manufacture can be said to have been taken place is whether the commodity which is subject to the process can no longer be regarded as original commodity. The word ‘production’ when used in juxtaposition with the word ‘manufacture’ takes in brining into existence new goods by a process which may or may not amount to manufacture. Thus, it is clear that if the activity which is something manufactures and which brings a new product into existence then the activity constitutes production.

9. In the case in hand, we are concerned with the clause (ii) of sub.sec. (9) of sec. 80iB. It is not the case of manufacture or production of any article or thing but u/s 80IB, deduction is allowed for commercial production of mineral oil. Therefore, sub.sec (9) stipulates production of specific product i.,e. mineral oil. As far as the contention of the assessee that when the assessee was allowed deduction u/s 35E for production of mineral oil cannot be denied u/s 80IB. Deduction u/s 35E would not conclusively prove that the assessee has carried out the activity of production of mineral oil because as per sec 35E (1), a deduction of expenditure is allowed where an assessee is engaged in any operations relating to prospecting for, or extraction or production of any mineral. Thus, deduction u/s 35E is allowable, if the assessee is engaged in any of the activity relating to prospecting for or extraction or production and therefore, if a deduction u/s 35E is allowed, that would not establish that the assessee has carried out the production of mineral oil. This aspect will not help the assessee’s claim.

10. The definition of mineral oil has not been given in sec. 80IB; however, u/s 42 where the deduction in case of business for prospecting etc., for mineral oil the terms ‘mineral oil’ has been explained in the Explanation as under:

[Explanation.—For the purposes of this section, “mineral oil” includes petroleum and natural gas.]

We further note that u/s 293A, the meaning of mineral oil has been given as under:

“Mineral oil’ includes petroleum and natural gas – Notification No.GSR 645(E) dated 6.7.1987.

11. We further note that as per Production Sharing Contract dated 30th Dec 1994, the definition of crude oil is given under clause 1.27 as under:

“Crude oil” means crude mineral oil, asphalt, ozokerite and all kinds of hydrocarbons and bitumens, both in solid and in liquid form, in their natural state or obtained from Natural Gas by condensation or extraction, including distillate and Condensate when commingled with the heavier hydrocarbons and delivered as a blend at the delivery point but excluding verified natural gas.”

11.1 The term ‘oil’ as understood by parties i.e. Government of India and other companies including the assessee as ‘crude oil’ as per clause 1.58 of the said Contract and crude oil means crude mineral oil along with the other contents as given in clause 1.27 of the Contract. Therefore, oil, crude oil, petroleum are considered as synonymous to each other.

11.2 As per clause 1.65 ‘Petroleum’ means crude oil and natural gas existing in their natural condition. Therefore, the term commercial production of mineral oil has to be understood in the context of activity of petroleum operations or production operation involved in extracting the crude oil.

11.2 When the mineral oil does not require to undergo any process except separation of natural gas and other sediments elements by process of distillation and filtering then the express production of mineral oil as used in sec. 80IB(9) has to be understood as the oil extract from underneath the surface and nothing more. When the mineral oil itself is taken as raw crude oil as extracted from the earth then the consequent steps requires to be taken are only to ensure the storage and transportation of the commercial commodity called as crude oil or mineral oil.

12. In the case of CIT vs Singareni Collieries Co Ltd (supra) the Hon’ble Andhra Pradesh High Court has observed as under:

“Thus, the expression ‘production of mineral’ is used in the allied provisions of the Act itself and it is definite point that Parliament employed the expression ‘production’ to the minerals extracted from underneath the surface as well as just as the legislature history taken into account by the Supreme Court, the internal aid to interpretation furnished by a cognate provision can be ultimately taken into account. Viewed from any angle, we are of the view that the benefit of sec 32A is available to the respondent assessee The correct legal position regarding deduction of investment allowance should not be left in doubt and an uncertainty created in the mind of the respondent assessee which is a public sector undertaking in the guise of raising a question as to interpretation of a provision which admits of no doubt. We, therefore, decline reference on the second question.”

12.1 Therefore, meaning for the definition given in Explanation to sec. 42, section 293A as well as in various clauses of Production Sharing Contract it does not require to undergo any process of any physical or composition change but after the process of separation of gas, water and other sedimentary elements become commercial commodity. Therefore, commercial production of mineral oil as per sec. 80IB (9) involves the activity of extracting oil from underneath of surface and transport it for sale and nothing else.

12.2 Even otherwise, as per Production Sharing Contract, the massessee and other joint ventures have to explore, develop, extract and deliver the crude oil. This process includes distillation and separation of verified natural gas. Therefore, as per the agreement, the assessee is bound to perform its part and once the assessee is carried its operation in accordance with the terms and conditions of the said Agreement with the Govt. the benefit of the deduction u/s 80IB is allowable to the assessee.”

9. In the result, Revenue’s appeals are dismissed.

Order pronounced in the open Court on 8th February 2012

                                           Sd/-                                               Sd/-

                                R.S. PADVEKAR                  J. SUDHAKAR REDDY

                              JUDICIAL MEMBER            ACCOUNTANT MEMBER

MUMBAI, DATED: 8th February 2012

Copy to:

(1) The Assessee;

(2) The Respondent;

(3) The CIT(A), Mumbai, concerned;

(4) The CIT, Mumbai City concerned;

(5) The DR, “H” Bench, ITAT, Mumbai.

//TRUE COPY//

                                                                                                      BY ORDER

Pradeep J. Chowdhury                                                     

                                                                                        ASSISTANT REGISTRAR

Sr. Private Secretary                                              ITAT, MUMBAI BENCHES, MUMBAI