Cairn India Ltd. v. Deputy Commissioner Of Income Tax, Circle- 1(1), Gurgaon .

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Production Sharing Contracts (PSCs) in respect of certain Blocks/ Oil and Gas fields. The original return was filed declaring total income of Rs.872,47,84,553/- which was subsequently revised to Rs.871,98,02,154/- under normal provisions of the Act. The adjusted profit of Rs.4965,17,90,255/- was declared under the provisions of section 115JB of the Act. The Assessing Officer, while computing the book profits as per MAT provisions, made following two additions :-

3. The present demand has arisen primarily because of the aforementioned two additions made by the Assessing Officer.

4. Ld. Sr. Counsel referred to page 7 of the Paper Book, wherein, statement of profit and loss account for the year ending on 31^stMarch, 2012 is contained and pointed out that assessee had debited a sum of Rs.78,10,564 thousands under the head 'depletion, depreciation and amortization expenses'.

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5. Ld. Sr. Counsel referred to page 30 of the Paper Book, wherein, Schedule

23 Notes to Financial Statements containing details of depreciation and amortization expenses is contained, wherein, it is stated as under :-

Depreciation of tangible assets 3,405,988 3,118,967 Amortization of intangible assets 193,514 169,623 Less: Cost allocated to joint ventures (306,460) (296,857)

3,293,042 2,991,733

4,517,522 3,326,581

Depletion on producing facilities 7,810,564 6,318,314

6. Ld. Sr. Counsel further referred to page 11 of the Paper Book, wherein, the summary of significant accounting policies as mentioned in the notes to financial statement is contained and pointed out that for oil and gas assets, the company followed the successful efforts method of accounting for oil and gas assets as set out by the Guidance Note issued by the Institute of Chartered Accountant of India (ICAI) on "Accounting for Oil and Gas Producing Activities". Ld. Sr. Counsel further referred to page 25 of Paper Book to explain how the cost of producing facilities is capitalized by transfer from exploration, development and capital work in progress to cost of producing facilities (net). Ld. Sr. Counsel further submitted that the accounting policy as regards charging of depletion in profit and loss account was as under :-

"b. Depletion The expenditure on producing properties is depleted within each cost centre. Depletion is charged on a unit of production basis, based on proved reserves for acquisition costs and proved and developed reserves for other costs. Reserves for this

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purpose are considered on working interest basis which are reassessed atleast annually. Impact of changes to reserves are accounted for prospectively."

7. Ld. Sr. Counsel submitted that assessee had claimed depletion amounting to Rs.451,75,21,680/- on cost of producing facilities based on Unit of Production (UOP) Method prescribed under the Guidance Note since Schedule XIV to the Companies Act, 1956 was not applicable on the same. He submitted that under the UOP Method, depletion is charged on UOP basis, based on proved results for acquisition costs and proved and developed reserves for other costs as has been noted from the financial statements. He pointed out that this method has consistently been followed for depletion of cost of producing facilities in the past years and was accepted by the Assessing Officer till assessment year 2010-11. Ld. Sr. Counsel further pointed out that the Assessing Officer disputed this method for the first time in assessment year 2011-12 alleging that assets above the ground (fixed assets) and below the ground (producing facilities) are inseparable and are continuous. He further alleged that the assessee's submission, that schedule XIV to the Companies Act, 1956 was not applicable to the cost of producing facilities, is not correct. The Assessing Officer stated that as per Sl.No.II of the schedule XIV of the Companies Act, 1956, plant and machinery for which no special rates are given and are used for continuous process depreciation is to be allowed at the rate of

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5.28% on Straight Line Method ('SLM'). The Assessing Officer, accordingly, made disallowance of depletion reflecting difference between depletion claimed by the assessee as per UOP method and depreciation computed by him applying 5.28% as per SLM method. In doing so, the Assessing Officer relied upon Circular No.45/12/2000-CL.III dated 21^stFebruary, 2003 of Ministry of Finance and Company Affairs to allege that as per said circular, UOP method of depreciation has not been advised to be followed. Ld. Sr. Counsel submitted that by resorting to this method, ld. Assessing Officer re-casted the audited financial statements without referring to which particular Explanation 1 to section 115JB(2) had been invoked to make adjustment to adjusted book profits of the assessee which was contrary to the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT, 255 ITR 273 (SC).

8. Ld. Sr. Counsel submitted that this issue is covered in favour of assessee by the decision of Chennai ITAT in the case of M/s Hardy Exploration & Production (India) Inc. vs. ADIT (2011) 13 taxmann.com 129 (Chennai-Trib.) contained at pages 37 to 73 of Paper Book. He further submitted that in this case it was held that depletion of capital expenditure under UOP method incurred by the assessee on account of the exploration and development expenditure must be allowed in computing book profits under section 115JB of the Act. He further submitted that this decision has been followed by Mumbai

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ITAT in the case of Tata Petrodyne Ltd. vs. ACIT (ITA No.5108/Mum/2004) contained at pages 74 to 84 of Paper Book.

9. Ld. Sr. Counsel further referred to the decision of Hon'ble Supreme Court in the case of Malayala Manorama Co. Ltd. vs. CIT, 300 ITR 251 contained at pages 94 to 103 of Paper Book, wherein, it has been held that an assessee is entitled to provide for depreciation in its books at rates which are higher than the rate specified in Schedule XIV to the Companies Act, 1956. Ld. Sr. Counsel further referred to the decision of Hon'ble Delhi High Court in the case of CIT vs. Oswal Agro Mills Ltd., (ITR 20/1998) contained at pages 104 to 108 of Paper Book, wherein, after having observed that Schedule XIV to the Companies Act, 1956 only prescribed minimum depreciation held that once a certificate is issued by statutory auditor that profit & loss account and balance sheet have been prepared in accordance with Schedule VI of the Companies Act, 1956 and the same is shown to the Assessing Officer, Assessing Officer ceased to have any jurisdiction to reassess or re-apprise the correctness of the certificate. The Hon'ble Delhi High Court in this case relied upon decision of the Hon'ble Supreme Court in the case of Apollo Tyres (supra) and Malayala Manorama Co. vs. CIT (supra). Ld. Sr. Counsel submitted that depletion is different from depreciation and the practice followed by assessee is internationally followed by all industries in this field. Ld. Sr. Counsel further

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submitted that the Circular relied on by the Assessing Officer had been issued in the context of steel industries and not in the context of oil industries. He further referred to page 36 of case laws compendium, wherein, said Circular is contained and pointed out that the said Circular was issued after consultations with the institutes of ICAI & ICWAI for observing that providing depreciation on Unit of Production Method will not be in tune with the basic concept of depreciation as efflux of time necessarily involved loss of value of assets. He pointed out that Guidance Note of Institute of Chartered Accountant of India still continued even after the issuance of this Circular and was not withdrawn. Ld. Sr. Counsel referred to section 210 of the Companies Act, 1956 and pointed out that even if the Assessing Officer is of the view that excess depreciation has been charged even then Assessing Officer cannot make adjustment to book profit as declared in the audited financial statements which was laid before shareholders. In this regard, he referred to the decision of Hon'ble Supreme Court in the case of Malayala Manorama Co. vs. CIT (supra). He, therefore, submitted that adjustment made by Assessing Officer to the book profit was outside the scope of Explanation. Ld. Sr. Counsel submitted that as far as second adjustment is concerned the Assessing Officer was not justified in invoking the provisions of section 14A for the purposes of section 115JB of the Act, which is disputed issue.

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10. Ld. CIT(DR) vehemently opposed the grant of stay and submitted that assessee has to first demonstrate that it has a strong prima-facie case in its favour for grant of stay. In this regard, ld. CIT(DR) relied on the decision of Hon'ble Apex Court in the case of ITO vs. M. K. Mohammed Kunhi, order dated 11^thSeptember, 1968. He submitted that the stay should be granted only when the Tribunal is satisfied that the entire purpose of the appeal will be frustrated or rendered nugatory by allowing the recovery proceedings to continue during the pendency of the appeal. Ld. CIT(DR) referred to the decision of ITAT, Delhi Bench in the case of Bechtel India Private Limited vs. ACIT 92 ITD 205, wherein, it has been held that while granting interim relief in the form stay of recovery of outstanding demand, the following four factors have to be kept in mind :-

(a) Prima-facie case,

(b) Balance of convenience,

(c) Possibility of irreparable injury, and

(d) Safeguarding of public interest.

11. Ld. CIT(DR) submitted that the first submission of assessee is that while computing book profit u/s 115JB, no adjustment could be made to the net profit as declared in Profit & Loss Account placing reliance on the decision of Apollo Tyres (supra). In this regard, ld. CIT(DR) referred to the decision of Special

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Bench of Hyderabad ITAT in the case of Rain Commodities Ltd. vs. DCIT, (2010) 40 SOT 265 (Hyd.) (SB), wherein, after considering various decisions including the decision of Hon'ble Supreme Court in the case of Apollo Tyres (supra), inter-alia, held in para 8 as under :-

"18. We have considered the rival submissions and perused the materials available on record and the case laws relied upon by both the parties. We have taken into consideration the ratio decidendi of all the decisions relied upon by the rival parties. The omission of reference to some of the cases in the order is either due to their irrelevance or to relieve the order from the repetitive nature of the decisions. Under Minimum Alternate Tax [MAT] provisions, the assessing officer is concerned with the adjustments to be made with the net profit as shown in the profit and loss account. One of the moot question relevance to the issue before us is whether the assessing officer has power to alter the net profit? In our considered opinion, Yes. We agree that it is settled law that assessing officer has the power to alternate the net profit. In the following two cases, the assessing officer can rewrite the profit and loss account i.e. to say that assessing officer should recalculate the net profit and then follow the adjustments of MAT as usual: [1] If it is discovered that profit and loss account is not drawn up in accordance with Part II and Part III of Schedule VI of the Companies Act. However, the assessing officer cannot disturb the Net Profit as shown by the assessee where there are no such allegations, fraud or misrepresentation but only a difference of opinion as to whether a particular amount should be properly shown in the profit and loss account or in the Balance sheet [2] If accounting policies, accounting standards not adopted for preparing such accounts and method, rate of depreciation which have been incorrectly adopted for preparation of profit and loss account laid before the Annual General Meeting. Except for the above two cases, the assessing officer has no power to alter the net profit shown by the companies for the purpose of computing the book profit. Thus it is clear that under MAT, the assessing officer should take the net profit as computed by the assessee and then makes the adjustments under S.115JB of the Act. It is common that some companies follow an accounting Year under the Companies act, 1956 which is different from the Financial Year under Income tax Act, 1961. These companies generally prepare two sets of accounts - one for Companies Act and another for Income Tax Act. The reason being different accounting policies, standards, depreciation methods and rates are adopted in two sets of Account so that higher profit is reported to shareholders and lower profit for the Income tax authorities. To curb the above practice only this recalculation of net profit under MAT was incorporated so that there should be a consistency in accounting policies, standards, methods and rates of depreciation within the knowledge of Income tax authorities."

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12. Ld. CIT(DR) submitted that the Assessing Officer's case is that Profit & Loss Account has not been drawn as per Schedule VI Part II and III of the Companies Act because of incorrect depreciation claimed and, therefore, the Assessing Officer was entitled to disturb the Profit & Loss Account. Ld. CIT(DR) further referred to the decision in the case of Sumer Builders (P.) Ltd. vs. DCIT, (2012) 19 taxmann.com 43 (Mum.) to submit that the decision of Hon'ble Supreme Court in the case of Apollo Tyres (supra) is not applicable in the case of applicability of provisions of section 115JB because the provisions of section 115J and 115JB stand on different footings and under such circumstances, the Assessing Officer has power to go behind the accounts and see whether same have been prepared in accordance with the requirements of Part II and III of Schedule VI of the Companies Act, 1956. This finding was based on the decision of Special Bench in the case of Rain Commodities Ltd. (supra). LD. CIT(DR) further submitted that section 42 dealing with the special provisions for deduction in the case of business for prospecting etc. for mineral oil is not applicable to section 115JB because that is only for the purposes of computation of total income. Section 42 cannot be override, Section 115JB which introduces a legal fixation by which specific percentage of the book profit of the assessee is deemed to be his total income. In this regard, he relied on the decision in the case of Niko Resources Limited vs. CIT, 234 ITR 828

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AAR. Ld. CIT(DR) further submitted that the Circular referred by the Assessing Officer is not applicable only to steel industry but to all companies. He submitted that the decision relied upon by ld. Sr. Counsel for the assessee of Chennai and Mumbai Tribunal were rendered without taking into consideration the circular referred to by the Assessing Officer. Ld. CIT(DR) further pointed out that the assessee's reliance on the Guidance Note of the Institutes of Chartered Account of India is misplaced as Guidance Note is only recommendatory in nature. It becomes mandatory only if adopted as one of the accounting standard formulated by the accounting standard committee and issued by the Institute of Chartered Accountant of India. Ld. CIT(DR) filed a list of accounting standards mandatory as on September 01, 2014 to submit that this Guidance Note has not been adopted as accounting standard. Only depreciation accounting standard is mandatory. Ld. CIT(DR) further pointed out that the assessee had filed a writ petition (2016-17 taxmann.com 30) before the Hon'ble Punjab & Haryana High Court challenging the identical adjustment for assessment year 2011-12 which had been dismissed by the Hon'ble Court and, therefore, assessee has no prima-facie case in its favour. Ld. CIT(DR) further referred to Guidance Note on accounting for depreciation in companies in the context of Schedule II to the Companies Act, 2013 and referred to page 10 onwards of the Guidance Note, wherein, Unit of Production Method of

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depreciation has been described and pointed out that in para 30 it has been noted that as a result of application of Schedule II, a company may use UOP Method where appropriate, keeping in view various factors mentioned in para 12 of AS-6. He further referred to para 32 and pointed out to the observation therein that under Schedule XIV primarily two methods of depreciation i.e. written down value and straight line method are prescribed. He further referred to para 34, wherein, it has been observed as under :-

"In view of the above, with the introduction of UOP method in Schedule II, a company may change from SLM or WDV method to UOP method."

13. With the reference to these observations, ld. CIT(DR) submitted that it is very evident that UOP method was not in vogue in the relevant assessment year and, therefore, assessee was not entitled to adopt the same for charging depletion to the Profit & Loss Account.

14. As regards the assessee's plea regarding following consistent method of accounting for depletion, ld. CIT(DR) referred to the decision of Hon'ble Delhi High Court in the case of CIT vs. Usha International Ltd. (2012) 25 taxmann.com 200 (Delhi) (FB), wherein, it has been held in respect of principle of "change of opinion" that when specific query is raised by the Assessing Officer and it is answered by the assessee then it will be termed as 'change of opinion'. However, in the present case, in earlier years, no query was raised on

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this count by Assessing Officer, therefore, this cannot be said to be a case of change of opinion. He submitted that principle of consistency flows from the facts that an opinion is formed by the Revenue on any particular issue then it cannot change in subsequent year. Ld. CIT(DR) further referred to the decision of Hon'ble Delhi High Court in the case of Krishak Bharati Cooperative Ltd. (2012) 23 taxmann.com 265 (Delhi), wherein, it has been held that there cannot be a wild application of the principle of consistency after interpreting the judgment given by the Hon'ble Apex Court in the case of Radhasoami Satsang which has been relied upon by the assessee. He further referred to the decision of Hon'ble Apex Court in the case of Distributors (Baroda) (P.) Ltd. vs. Union of India, (1985) 155 ITR 120, wherein, it has been held that to perpetuate an error is no heroism and to rectify it is the compulsion of the judicial conscience. As regards the reliance placed by ld. Sr. Counsel on the decision of CIT vs. Excel Industries, 358 ITR 295, ld. CIT(DR) submitted that the Hon'ble Apex Court has held that when the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further, it cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers' money in pursuing litigation for the sake of it. He submitted that this is not the case here because there is no question of any flip-flop as this issue was raised for the first time in the AY 2011-12.

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15. Ld. Sr. Counsel, in the rejoinder, submitted that the decision, relied on by the ld. CIT(DR) with reference to alteration of net profit as declared in the Profit & Loss Account, were rendered in different context and the latest decision on the issue is of Hon'ble Karnataka High Court in the case of Sri Hariram Hotels (P.) Ltd. vs. CIT, (2016) 66 taxmann.com 233 (Kar.), wherein, it has been held that only power vested with the Assessing Officer is to make increase and deduction as provided in Explanation to section 115JB; he has no power to embark upon a fresh enquiry with regard to entries made in books of account of company and has to rely upon authentic statements of accounts of company, being scrutinized and certified by statutory auditors. As regards the ld. CIT(DR)'s submissions that the assessee's writ petition for assessment year 2011-12 is being dismissed by Hon'ble Punjab & Haryana High Court, ld. Sr. Counsel filed a copy of the said decision and referred to page 7 - 8 of the said decision, wherein it has been observed as under :-

"The propositions of law enunciated in these pronouncements are unexceptionable. However, as we have refrained from entertaining the writ petition on the ground of availability of efficacious alternative remedy to the petitioner, it is not considered appropriate to express any opinion regarding the applicability or otherwise of these judgments to the present case.

10. Relegating the petitioner to avail alternative remedy under the Act, we are not inclined to entertain this petition in writ jurisdiction under Article 226 of the Constitution of India. Consequently, the petition stands dismissed. Needless to say, anything observed herein before shall not be taken to be an expression of opinion on the merits of the controversy."

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16. We have considered the submissions of both the parties and have perused the record of the case. As noted earlier very detailed submissions have been advanced by both the sides in the stay petition. One of the submissions of ld. CIT(DR) was that since detailed submissions have been advanced by assessee seeking stay, therefore, there is no strong prima-facie case in its favour. We are not inclined to accept this plea of ld. CIT(DR). Strong prima-facie case does not imply open and shut case. It has to be established by the assessee as to how it has strong prima-facie case and for that purpose the assessee has to advance detailed submissions particularly when different facets of the issues are to be considered. The main issue is whether depletion was correctly charged in accounts or not. The Assessing Officer has not disputed that this was not at all allowable but the difference is on the method of charging the same. The assessee is fortified by various decisions of Tribunal, noted earlier, but Revenue's case is that they are per incuriam as relevant circular of Ministry of Corporate Affairs was not considered. In our opinion, considering the ferocity of arguments of both the sides, noted earlier, on various aspects, it cannot be concluded that assessee does not have any strong prima-facie arguable case in its favour. However, we are of the opinion that the demand be stayed subject to following conditions :-

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(a) Assessee will deposit Rs.65 crores on or before 30^thMay, 2017 and will produce the challan for the said payment before the Registry.

(b) The assessee will furnish security for the balance amount to the satisfaction of Assessing Officer.

(c) The assessee's appeal will come up for hearing on 01^stJune, 2017, on which date, the assessee will inform the Bench about the compliance with the aforementioned conditions of stay.

(d) The assessee will not seek any adjournment without any reasonable cause.

17. Subject to fulfillment of the above conditions, the demand shall remain stayed for a period of six months or till the disposal of appeal, whichever event occurs earlier.

18. In the result, the stay application is allowed in terms of aforementioned observations.

Order was pronounced in the open court on this 17^thday of May, 2017.

Sd/- Sd/-

(KULDIP SINGH) (S.V. MEHROTRA)

JUDICIAL MEMBER VICE PRESIDENT

Dated: 17-05-2017.

Sujeet

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Copy of order to: -

1) The Appellant

2) The Respondent

3) The CIT

4) The CIT(A)

5) The DR, I.T.A.T., New Delhi By Order

//True Copy//

Assistant Registrar

ITAT, New Delhi