Gujarat High Court
Niko Resources Limited vs Assistant Commissioner Of Income Tax on 11 February, 2025
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 1965 of 2008
With
R/TAX APPEAL NO. 82 of 2009
With
R/TAX APPEAL NO. 1184 of 2009
With
R/TAX APPEAL NO. 1967 of 2008
With
R/TAX APPEAL NO. 1968 of 2008
With
R/TAX APPEAL NO. 1969 of 2008
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NIKO RESOURCES LIMITED
Versus
ASSISTANT COMMISSIONER OF INCOME TAX
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Appearance:
MRS SWATI SOPARKAR(870) for the Appellant(s) No. 1
MR NIKUNT K RAVAL(5558) for the Opponent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR.JUSTICE D.N.RAY
Date : 11/02/2025
COMMON ORAL ORDER
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. Heard learned advocate Mr.B.S.Soparkar for
learned advocate Mrs.Swati Soparkar for the
appellant and learned advocate Mr.Rudram
Trivedi for learned Senior Standing Counsel
Mr.Nikunt K. Raval for the respondent.
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2. These appeals are admitted on the
following substantial question of law:
"Whether in the facts and circumstances
of the case, the Income Tax Appellate
Tribunal was right in law in not
allowing the special deduction under
sec. 42 of the Income-tax Act, 1961 to
the assessee for the years under
consideration?"
3. At the outset, learned advocate
Mr.B.S.Soparkar for the appellant submitted
that the admitted question in these appeals
are no more res-integra in view of the
decision of the Hon'ble Supreme Court in case
of Joshi Technologies International Inc.
Versus Union of India. Learned advocate
Mr.B.S.Soparkar invited the attention of this
Court to the findings given by the Hon'ble
Apex Court regarding the issue of deduction
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under Section 42 of the Income Tax, 1961 which
read as under :
"35. From the reading of the writ
petition filed in the High Court, the
impugned judgment rendered by the High
Court thereupon, and also having regard
to the arguments advanced before us
which have already been taken note of,
it is apparent that the fulcrum of the
issue, which has to be focused and to
be answered, pertains to the benefit of
the deductions permissible under
Section 42 of the Act. In fact, as is
clear from the prayers made by the
appellant in the writ petition, the
very first direction which the
appellant sought was to declare that
the appellant is entitled to such
deductions in terms of the two PSCs
dated 20-02-1995. Incidental issues,
while deciding the aforesaid primary
issue, which arises relate to the
construction of the terms of the said
PSCs and also the nature of the
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contracts which the parties intended
to. Another issue relates to the
jurisdiction of the High Court under
Article 226 of the Constitution to pass
Mandamus for amending the PSCs. All
these issues are formulated in the
precise form hereunder:
(i) Whether in terms of the provisions
contained in two Production Sharing
Contracts (PSCs) dated 20-02-1995
executed between the appellant and the
Central Government, appellant is
entitled to the special allowances
stipulated under Section 42 of the Act?
(ii) Whether Model Production Sharing
Contract (MPSC) can be read as part of
and incorporated in the PSCs?
(iii) Whether there was any intention
between the contracting parties,
namely, the MoPNG and the appellant for
giving benefit of deductions under
Section 42 of the Act?
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(iv) If so, whether non-inclusion of
such a provision in the contract can be
treated as accidental and unintentional
omission.
(v) If the answer to question no.
(iv) is in the affirmative, whether
mandamus can be issued by the Court to
the parties to amend the contract and
incorporate provisions to this effect?
36. We would now proceed to answer
these questions seriatum.
37. Answer to question No.(i) - First
and foremost aspect which has to be
kept in mind while answering this issue
is that the Income Tax Authorities
while making assessment of income of
any assessee have to apply the
provisions of the Income Tax Act and
make assessment accordingly.
Translating this as general proposition
contextually, what we intend to convey
is that the Assessing Officer is
supposed to focus on Section 42 of the
Act on the basis of which he is to
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decide as to whether deductions
mentioned in the said provision are
admissible to the assessee who is
claiming those deductions. In other
words, the Assessing Officer is
supposed to find out as to whether the
assessee fulfills the eligibility
conditions in the said provision to be
entitled to such deductions. We have
already reproduced the language of
Section 42, which deals with special
provisions of deductions in the case of
business for prospecting, etc. for
mineral oil. Since, the appellant
herein, in its income tax returns for
the assessment year in question, i.e.,
Assessment Year 2005-06, had claimed
the deductions mentioned in Section
42(1)(b) and (c) of the Act, we should
take note of the nature of these
deductions. Section 42(1)(b) provides
for deductions of expenditure incurred
in respect of drilling or exploration
activities or services or in respect of
physical assets used in that
connection, except for those assets on
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which allowance for depreciation is
admissible under Section 32. Section
42(1)(c) speaks of allowances
pertaining to the depletion of mineral
oil in the mining area. In order to be
eligible to the deductions, certain
conditions are stipulated in this very
section which have to be satisfied by
the assessees. As is clear from the
reading of this Section, these
conditions are as under:
(a) it grants such special allowances
to those assessees who carry on
business in association with the
Central Government or with any person
authorized by it;
(b) business should relate to
prospecting for, extracting or
producing mineral oils, petroleum or
natural gas;
(c) there has to be an agreement in
writing between the Central Government
and the assessees in this behalf;
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(d) it is also a requirement that such
an agreement has been laid on the Table
of each House of Parliament;
(e) the allowances which are claimed
are to be necessarily specified in the
agreement entered into between the two
contracting parties; and
(f) allowances are to be computed and
made in the manner specified in the
agreement.
38. From the nature of allowances
specified in this provision, it is
clear that such allowances are
otherwise inadmissible on general
principles, for e.g. allowances
relating to diminution or exhaustion of
wasting capital assets or allowances in
respect of expenditure which would be
regarded as on capital account on the
ground that it brings an asset of
enduring benefit into existence or
constitutes initial expenditure
incurred in setting up the profit
earning machinery in motion.
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39. It is for this reason this
Section itself clarifies that the
provisions of this Act would be deemed
to have been modified to the extent
necessary to give effect to the terms
of the agreement, as otherwise, the
other provisions of the Act
specifically deny such deductions. A
fortiorari, the PSC entered into
between the parties becomes an
independent accounting regime and its
provisions prevail over generally
accepted principles of accounting that
are used for ascertaining taxable
income (See - Commissioner of Income
Tax, Dehradun & Anr. v. Enron Oil and
Gas India Limited(Supra).
40. In the present case, it is an
admitted fact that conditions mentioned
in Section 42 of the Act are not
fulfilled. In the two PSCs, no
provision is made for making admissible
the aforesaid allowances to the
assessee. It is obvious that the
Assessing Officer could not have
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granted these allowances/deductions to
the assessee in the absence of such
stipulations, a mandatory requirement,
in the PSCs.
41. The appellant is conscious of
this position. It is for this reason
the attempt of the appellant was to
read the provisions of MPSC into the
agreement.That bring us to the second
issue.
42. Answer to question no.(ii) -
Endeavour of Mr. Ganesh, on this
aspect, was to show that the bids were
invited on the basis of terms stated in
the MPSC which specifically mentioned
about deductions under Section 42 of
the Act. He also endeavored to
demonstrate that thee appellant had
submitted its bid keeping in view such
a categorical stipulation in the MPSC.
He also pointed out that on MPSC,
opinion of Law Ministry was solicited
vide Memo dated 22-06-1992 and that the
Ministry of Law gave its opinion dated
21-07- 1997 opining that benefit of
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both Sections 293(A) and Section 42 of
the Act should be extended to the
foreign companies in order to make
their participation in these oil fields
viable. As per the appellant, it was
also made abundantly clear by the
Ministry of Law that it was in relation
to "foreign companies to be engaged in
exploration, development and production
of oil ion small sized oil and gas
fields under the proposed Production
Sharing Contract", thus, drawing no
distinction between fields to be
explored and those already discovered
and also making specific reference to
the MPSC. Taking sustenance from the
aforesaid material, a passionate plea
was made by Mr. Ganesh to read the
provisions of Section 42 contained in
MPSC, as opined by the Ministry of Law,
into the PSCs which were ultimately
signed between the parties.
43. In order to appreciate this
argument, we shall have to traverse
through the PSCs dated 20-02-1995 which
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were ultimately signed between the
Government and the appellant. We would
like to mention here that when this
argument was being advanced by the
learned senior counsel for the
appellant the Court asked him to
produce the copy of PSCs, which were
otherwise not brought on the record as
the Court wanted to find out as to
whether there was any such intention
expressed in the agreement, namely, to
incorporate the provisions of MPSC or
the correspondence exchanged between
the parties earlier to the signing of
this agreement:
"(5) The Government has agreed to
enter into this Contract with the
Companies with respect to the area
referred to in Appendices A & B of
this Contract on the terms and
conditions herein set forth.
Article 1 - In this Contract,
unless the context requires
otherwise, the following terms shall
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have the meaning ascribed to the
then hereunder:
xxx xxx xxx
Article 1.18 "Contract" means this
agreement and the Appendices
mentioned herein and attached hereto
and made an integral part hereof and
any amendments made thereto pursuant
to the terms hereof.
Article 32 - ENTIRE AGREEMENT,
AMENDMENTS, WAIVER AND MISCELLANEOUS
32.1 This Contract supersedes and
replaces any previous agreement of
understanding between the Parties,
whether oral or written, on the
subject matter hereof, prior to the
Effective Date of this Contract.
32.2 This Contract shall not be
amended, modified, varied or
supplemented in any respect except
by an instrument in writing signed
by all the Parties, which shall
state the date upon which the
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amendment or modification shall
become effective.
32.3 No waiver by any Party of any
one or more obligations or defaults
by any other Party in the
performance of this Contract shall
operate or be construed as a waiver
of any other obligations or defaults
whether of a like or of a different
character.
32.4 The provisions of this Contract
shall inure to the benefit of and be
binding upon the Parties and their
permitted assigns and successors in
interest.
32.5 In the event of any conflict
between any provisions in the main
body of this Contract and any
provision in the Appendices, the
provision in the main body shall
prevail.
32.6 The headings of this Contract
are for convenience of reference
only and shall not be taken into
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account in interpreting the terms of
this Contract."
44. Intention behind the aforesaid
clauses is more than apparent, namely,
not to look into any other document or
correspondence which took place between
the parties prior to the signing of
this agreement. Not only this, even the
so-called "understanding" between the
parties is to be ignored as well. It
is, therefore, impermissible for the
appellant to take the aid of MPSC or
the clauses contained therein while
construing the terms of PSCs.
Therefore, it was not even open to the
Income Tax Authorities to go beyond the
stipulations contained in the PSCs
while making the assessment and had to
exclusively remain within the
provisions of the Agreement. On that
touchstone, the Assessing Officer had
no option but to deny the benefit of
deductions/allowances claimed by the
appellant in its income tax returns
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filed for the Assessment Year 2005-06.
This bring us to the next question.
45. Answer to question no.(iii) - We
have already noted that Article 32.2
categorically provides that this
Contract shall not be amended,
modified, varied or supplemented in any
respect except by an instrument in
writing signed by all the parties,
which shall state the date upon which
the amendment or modification shall
become effective. In continuation to
what has been observed by us while
answering point no.(ii) above, it
becomes apparent that the question of
any intention to the contrary between
the parties does not arise. It is
because of the reason that Article 32
of the Agreement specifically
supersedes any understanding between
the parties prior to the effective date
of this contract."
4. In view of the above dictum of law, we
answer the question in affirmative i.e. in
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favour of the assessee and against the
revenue. The appeals are accordingly disposed
of.
(BHARGAV D. KARIA, J)
(D.N.RAY,J)
PALAK
