2016-TII-231-ITAT-MAD-INTL

MOSBACHER INDIA LLC Vs ADDL DIT: ITAT CHENNAI (Dated: November 30, 2016)

Income Tax - Sections 44(2)(b), 139(5), 143(3) & 144C.

Keywords - business income - capital gains - participating interest - sale consideration

The assessee, a company incorporated in the State of Delaware, USA, is engaged in the business of exploration, extraction and processing of oil and natural gas. In the course of this business that the assessee entered into production sharing contracts with Hindustan Oil Exploration Ltd (HOEC) and Petrodyne Inc, covering PY 1 contract area, (PSC1) and with HOEC and Energy Equity India Petroleum Pty Ltd (EEIPPL), covering CY-OSN-97/1 contracts area. The assessee transferred all his participating interests in PY 1, and part of his interests in CY-OSN-97/1, to HOEC. Under this agreement, the assessee was to receive US$13.5 million for transfer of participating interest in PY 1. Out of this amount of US$ 13.5 million, the assessee received US$ 10.5 million as upfront consideration, in AY 2006-07. The balance amount of US$ 3 million was paid in the relevant AY. As regards the consideration for transfer of partial interests in PY2, the assessee received US$ 1,97,512, out of which US$ 1,67,353 pertained to the Overriding Royalty Interest (ORRI) payment and US$ 30,159 pertained to interest on ORRI due. These receipts were also in the period relating to the relevant AY. In the return for AY 2006-07, receipt of US$ 10.5 million was disclosed and capital gains were offerrred to tax. The balance amounts of sale consideration for PY 1, i.e. US 3 million and sale consideration for partial interests in PY 2, i.e. US$ 1,97,152, were, however, not offered to tax in the AY 2006-07.

While filing the return for relevant AY, the assessee disclosed these receipts of US$ 3 million plus USD 1,97,152 as income under the head business and profession but offered the same to tax @ 21.1115%. However, AO observed that the entire income from sale of PY1 was offerred to tax under PGBP. It was also observed that the tax should have been calculated @ 40%. Assessee contended while the tax was correctly computed by the assessee @ 21.1115%, the inadvertent error committed by the assessee was in showing the income as business income, whereas the income in question was actually a capital gain which can only be brought to tax @ 21.1115%. AO was urged to take into account the same and treat the same as capital gains. AO did not accept the submissions of the assessee and held that the time limit for filing an income tax return u/s 139(5) had already elapsed & the assessee cannot file any revised return at this stage. The AO further held that after filing the original return of income, the assessee cannot change the head of income through filing a letter during the course of assessment proceedings and that there is no bonafide inadvertent mistake on the part of the assessee. Upon appeal, CIT(A) upheld AO's stand.

Having heard the parties, the Tribunal held that,

Whether draft assessment order u/s 144C can be issued if AO does not propose to make any variation in the income or loss returned by the assessee but makes such variations only in respect of tax payable thereunder - NO: ITAT

+ assessee contended that the assessment order be quashed as the AO issued the order directly without first issuing a draft assessment order u/s 144C. One of the important conditions for invoking Section 144C is that AO proposes to make "any variation in the income or loss returned by the assessee which is prejudicial to the interest of such assessee". Since the AO had merely accepted the returned income, as filed by the assessee, the second condition is not fulfilled. In the present case, while making the impugned assessment under section 143(3), the AO had not made any variation in the income or the loss returned by the assessee. The Assessing Officer has simply accepted the income returned by the assessee, and the variations, if at all, are in the computation of tax payable in respect of income returned by the assessee. The variation, as the statutory provision unambiguously states, has to be vis-à-vis returned income or loss. Accordingly, the above contention was rejected.

Whether when the assessee has by mistake disclosed the income as business income instead of capital gains the matter is to be examined on merit at the appellate stage and not be put against the assessee - YES: ITAT

+ the second issue related to whether when the assessee, though by mistake, disclosed the income as business income, as against the capital gains, can the same be put against the assessee at the appellate stage. In this regard it was held that the return ought to have been examined on merits, particularly when assessee, in the course of scrutiny assessment proceedings, specifically stated that there was an error in filing of the income tax return inasmuch as what was filed as business income was infact a capital gain, and that this error was corroborated by the fact that the rate computed on the income offered to tax was as applicable on capital gains, rather than rate as applicable on business income. The claim of the assessee has to be essentially examined on merits at least at the appellate stage.

Whether tax u/s 44(2)(b) can be levied on sale consideration in an AY when the sale of asset did not take place in that AY - NO: ITAT

+ When the assessee gets sale consideration which is more than the expenses incurred, but remaining unallowed, by the assessee that the provision of Section 44(2)(b) are invoked. In the present case the total prospecting expenses incurred by the assessee were Rs 36,62,59,800 and no part of these expenses were ever allowed as deduction in computation of business income. When no part of these expenses was ever allowed as deduction, there cannot be any occasion to bring anything to tax under section 44(2)(b). As for the amount of Rs 18,59,965, which is taken into account for computation of income u/s 44(2)(b) as expenses unallowed, the AO accepted that this is the expenses remaining unallowed for the present assessment year 2010-11 and it has nothing to do with the asset transferred in respect of which the amounts in question are received. When the related asset is transferred in the assessment year 2006-07, the expenditure incurred and remaining unallowed subsequently cannot even get into that computation. The related asset was not transferred in the relevant AY. Therefore, going by the plain words of the statue, no income can be brought to tax in this assessment year. Thus, no part of the receipts in question could be brought to tax, in the hands of the assessee, u/s 44(2)(b) of the Act.

Whether gains on transfer of participation rights in a project be treated as capital gain and not business income - YES: ITAT

+ The amounts in question represent consideration received by the assessee for transfer of his entire participating interests in PY 1, and part of his interests in CY-OSN-97/1, to Hindustan Oil Exploration Ltd, and that since definition of capital asset, under section 2(14), includes "property of any kind held by an assessee, whether or not connected with business or profession", these participation interests are required to be treated as capital assets. The gains on transfer of these participation rights is, therefore, required to be treated as capital gain and is liable to be taxed in the year in which the transfer of related asset takes place.

Assessee's appeal partly allowed