2008-VIL-566-UTR-DT

Equivalent Citation: [2008] 305 ITR 68 (Uttarakhand)

UTTARAKHAND HIGH COURT

74, 76 and 77 of 2007

Date: 17.01.2008

COMMISSIONER OF INCOME-TAX AND ANOTHER

Vs

ENRON OIL AND GAS INDIA LTD.

Arvind Vashisth for the appellants.
S. Ganesh, Tarun Gulati and Vipul Sharma for the respondent in I. T. A. No. 74 of 2007.

BENCH

PRAFULLA C. PANT and DHARAM VEER JJ.

JUDGMENT

The judgment of the court was delivered by

PRAFULLA C. PANT J. — All these three appeals are directed against the same judgment and order dated September 29, 2006, passed by the Income-tax Appellate Tribunal, Delhi Bench "H", New Delhi, in Income-tax Appeal No. 1821 of 2005; Income-tax Appeal No. 1823 of 2005 and Income-tax Appeal No. 1824 of 2005, relating to the assessment years 1999-2000, 2000-01 and 1998-99, respectively, whereby the depreciation on account of foreign exchange loss allowed to the assessee by the Commissioner of Income-tax (Appeals), Dehradun, vide his order dated February 11, 2005, is affirmed.

2. Heard learned counsel for the parties and perused the record.

3. Following are the substantial questions of law involved in these appeals:

"In I. T. A. No. 74 of 2007:

Whether the Income-tax Appellate Tribunal erred in law in upholding the decision of the Commissioner of Income-tax (Appeals) on the facts and circumstances of the case, in allowing foreign exchange loss of Rs. 11,58,44,887 under section 42 of the Income-tax Act, 1961, without appreciating the fact that the loss is only a book entry and no loss was incurred by the company/assessee?

In I. T. A. No. 76 of 2007:

Whether the Income-tax Appellate Tribunal erred in law in upholding the decision of the Commissioner of Income-tax (Appeals) on the facts and circumstances of the case, in allowing foreign exchange loss of Rs. 46,54,30,105 under section 42 of the Income-tax Act, 1961, without appreciating the fact that the loss is only a book entry and no loss was incurred by the company/assessee?

In I. T. A. No. 77 of 2007:

Whether the Income-tax Appellate Tribunal erred in law in upholding the decision of the Commissioner of Income-tax (Appeals) on the facts and circumstances of the case, in allowing foreign exchange loss of Rs. 38,63,38,980 under section 42 of the Income-tax Act, 1961, without appreciating the fact that the loss is only a book entry and no loss was incurred by the company/assessee?"

4. In substance, in all the three appeals the same question is to be decided, whether the foreign exchange loss claimed by the assessee-company was admissible under section 42(1) of the Income-tax Act, 1961, in terms of the agreement entered into between the parties on account of foreign exchange loss?

Brief facts of the case:

5. Enron Oil and Gas India Limited (in short "EOGIL") is a non-resident company (NRC), engaged during the relevant assessment years, viz., 1998-99, 1999-2000 and 2000-01 in production of crude oil from Panna and Mukta oil fields along with its joint venture partners M/s. Oil and Natural Gas Corporation Limited and M/s. Reliance Industries Limited under the production sharing contract entered with into the Government of India. During the assessment year 1998-99, the assessee-NRC has debited foreign exchange loss of Rs. 46,54,30,105 to its profit and loss account (P&L account). During the assessment year 1999-2000, the assessee-NRC has debited foreign exchange loss of Rs. 38,63,38,980 to its profit and loss account. And, during the assessment year 2000-01, the assessee-NRC has claimed debit of foreign exchange loss to the tune of Rs. 11,58,44,887 to its profit and loss account. In all the three appeals, for translation purposes the previous month's average daily means of the buying and selling rate of exchange as per State Bank of India are used for the month in which the transaction has occurred as provided under the production sharing contract. The assessee-NRC draws monthly balances. And monthly balances are translated in the balance-sheet at the prevailing exchange rates as on the date of the balance-sheet. Foreign currency loans are repaid out of the sale proceeds received, in US dollars from Indian Oil Corporation Limited and Gas Authority of India Limited. The assessee-NRC admittedly borrows in US dollars and repays it in the same currency. On these facts, the Assessing Officers in the aforesaid assessment years took the view that the foreign exchange loss claimed by the assessee-NRC was notional and the same was not admissible to it as depreciation. The respondent-assessee-NRC preferred appeals against the orders of the Assessing Officers before the Commissioner of Income-tax (Appeals), Dehradun (for brevity "the CIT(A)"), who registered the same as Appeal No. 21/DDN/CIT(A)-II/2004-05 against the order passed by the Assessing Officer in respect of the assessment year 1990-2000; Appeal No. 22/DDN/ GET(A) -11/2004-05 against the order passed by the Assessing Officer in respect of the assessment year 1998-99 and Appeal No. 51/DDN/CIT(A)-II/ 2004-05 against the order passed by the Assessing Officer in respect of the assessment year 2000-01. After hearing the parties, the Commissioner of Income-tax (Appeals), Dehradun, allowed all the three appeals, accepting the assessee-NRC's claim of foreign exchange loss, vide his order dated February 11, 2005, in the three appeals, mentioned above. Aggrieved by the same the Revenue filed Income-tax Appeal No. 1821 of 2005 against the order dated February 11, 2005, passed by the Commissioner of Income-tax (Appeals) in Appeal No. 21/DDN/CIT(A)-II/2004-05 in respect of the assessment year 1999-2000; Income-tax Appeal No. 1823 of 2005 against e order dated February 11, 2005, passed by the Commissioner of Income x (Appeals) in Appeal No. 51/DDN/CIT(A)-II/2004-05 in respect of the assessment year 1999-2000 and Income-tax Appeal No. 1824 of 2005 against the order dated February 11, 2005, passed by the Commissioner of Income-tax (Appeals) in Appeal No. 22/DDN/CIT(A)-II/2004-05 in respect of the assessment year 1998-99. All the three appeals were heard and decided by the Income-tax Appellate Tribunal, Delhi Bench "H", New Delhi, which dismissed the three appeals vide its orders dated September 29, 2006. Hence, these appeals are preferred by the Revenue under section 260A of the Income-tax Act, 1961, on the substantial questions of law, mentioned above.

Relevant provision of law and relevant clauses of the agreement entered into between the parties:

6. Before further discussion, it is pertinent to mention here, the relevant provision of law applicable to the case. Section 42 of the Income-tax Act, 1961, reads as under

"42. Special provision for deductions in the case of business for prospecting, etc., for mineral oil.— For the purpose of computing the profits or 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 authorized 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 allowance admissible under this Act, such allowances as are specified in the agreement in relation—

(a) to expenditure by way of infructuous or abortive exploration expenses in respect of any area surrendered prior to the beginning of commercial production by the assessee;

(b) after the beginning of commercial production, to expenditure incurred by the assessee, whether before or after such commercial production, in respect of drilling or exploration activities or services or in respect of physical assets used in that connection, except assets on which allowance for depreciation is admissible under section 32 :

Provided that in relation to any agreement entered into after March 31, 1981, this clause shall have effect subject to the modification that the words and figures 'except assets on which allowance for depreciation is admissible under section 32' had been omitted; and

(c) to the depletion of mineral oil in the mining area in respect of the assessment year relevant to the previous year in which commercial production is begun and for such succeeding year or years as may be specified in the agreement……….

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.

Explanation.— For the purposes of this section, 'mineral oil' includes petroleum and natural gas."

7. Now, we deem it proper to quote article 1.6.1 and 1.6.2 of the production sharing contract ("PSC") entered into between the parties, which provides accounting procedure. The same are being reproduced below:

1.6 Currency exchange rates

1.6.1 For translation purposes between United States dollars and Indian rupees or any other currency, the previous month's average of the daily means of the buying and selling rates of exchange as quoted by the State Bank of India (or any other financial body as may be mutually agreed between the parties) shall be used for the month in which the revenues, cost, expenditure, receipts or income are recorded. However, in the case of any single non-US dollar transaction in excess of the equivalent of one hundred thousand US dollars (US dollars 100,000), the conversion into US dollars shall be performed on the basis of the average of the applicable exchange rate for the day on which the transaction occurred.

1.6.2 Any realized or unrealized gains or losses from the exchange of currency in respect of petroleum operations shall be credited or charged to the accounts. A record of the exchange rates used in converting Indian rupees or any other currencies into United States dollars as specified in section 1.6.1 shall be maintained by the contractor and shall be identified in the relevant statements required to be submitted by the contractor in accordance with section 1.4.2.

Arguments

8. Mr. Arvind Vashisth, learned counsel for the appellants (the Revenue) argued that the foreign exchange loss claimed by the assessee-NRC in respect of the assessment years in question, is nothing but only a loss shown in the book entry as the assessee-NRC had invested the amount under the contract in US dollar and it has been repaid in the same currency. However, as against this, on behalf of the respondent/assessee-NRC it is submitted that the loss claimed by the assessee -NRC is the actual loss on account of change in the foreign exchange rates. It is contended on behalf of the respondent/ assessee-NRC that for the profits shown by the assessee-NRC due to the change in foreign exchange rates in other assessment years, the Assessing Officers have charged and accepted the tax on such profits shown, therefore, for the assessment years in which loss has occurred, for the same reason the depreciation cannot be denied. Lastly, it is submitted on behalf of the respondent/assessee-NRC that when the other co-venturers, namely, Oil and Natural Gas Corporation Limited and Reliance Industries Limited were allowed depreciation on account of change of exchange rates, the assessee being foreign company cannot be deprived of the same.

Discussion:

9. On behalf of the appellants/Revenue it is submitted that the decision of the Income-tax Appellate Tribunal, Delhi, in Oil and Natural Gas Corporation Ltd. v. Deputy CIT (Assessment) [2003] 261 ITR (AT) 1 (Delhi) [SB] relied on by the Commissioner of Income-tax (Appeals) in the impugned order dated February 11, 2005, has been set aside by this High Court, vide its judgment and order in CIT v. Oil and Natural Gas Corporation Ltd. [2008] 301 ITR 415 (Uttarakhand) (along with eight connected appeals). On that ground it is argued that the depreciation cannot be allowed unless there is actual loss to the assessee-NRC. We have gone through the aforesaid judgment and order passed by this court which interprets section 37 of the Income-tax Act, 1961, and in that case no repayment of loan claimed was found to have been made by the borrowing company in the relevant assessment year, and only in the account books it was shown as expenditure. In the case in hand, the facts are different and it is nobody's case that no expenditure had taken place in the relevant assessment years. The point of dispute is whether, on the expenditure made by the assessee-NRC, is it entitled to the further loss incurred by it on account of change in the foreign exchange rates, or not ?

10. Section 42 of the Income-tax Act, 1961, quoted above, contains a special provision whereby the expenditure incurred by the assessee-NRC in commercial production of mineral oil is to be depreciated in terms of the agreement mentioned therein. It is not the case of the parties that the agreement between the parties is not covered or it does not fulfil the requirements under section 42 of the aforesaid Act. It is clear from article 1.6.1 of the accounting procedure, quoted above, set out in the Appendix C to the production sharing contract (PSC) that expenditure incurred in foreign exchange by the co-venturer during any particular calendar month has to be converted into Indian rupee at the rate which has to be determined at the end of the calendar month. The example quoted by the Commissioner of Income-tax (Appeals) in his judgment, passed in Appeal No. 21/DDN/ CIT(A) -II/2004-05, is relevant to be reproduced here

"To understand the conversion loss, let us take an example in the case of borrowing; the assessee borrows dollar one lakh USD at Rs. 38 a dollar in the year 1999. Entry for the borrowing will be made at Rs. 38 lakhs. Now, the proceeds of sale which the assessee receives is at Rs. 41 a dollar as per the PSC. It repays the loan so borrowed out of sale proceeds converted at the rate of Rs: 41 a dollar. Though he borrows in dollars and repays in dollar but actually he had incurred a loss of Rs. 3 per dollar because the dollar which he borrowed was at Rs. 38, he repaid loan in dollar which was converted at Rs. 41. Therefore, it is clear that he has incurred loss of Rs. 3 lakhs. This kind of transaction may also result in gain or profit in the case of currency appreciation. Under these circumstances, to say that the assessee incurring notional loss, is incorrect."

11. For the reasons as discussed above, we agree with the reasoning given by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal in holding that the depreciation claimed by the assessee-NRC on account of foreign exchange loss was admissible to it under section 42 of the Income-tax Act, 1961, read with the clauses of the agreement, quoted above. We are also of the view that when the Revenue is accepting the tax on the profits/gains arisen out of the change in foreign exchange rates in other assessment years accrued to the respondent/assessee-NRC, it cannot deny depreciation on account of loss incurred for that reason.

12. Accordingly, all the three substantial questions of law are answered against the Revenue. The appeals are liable to be dismissed. The same are dismissed.

 

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