IN HIGH COURT OF UTTARAKHAND AT NAINITAL Income Tax Appeal No. 19 of 2010 Commissioner of Income Tax. . . Appellant Versus Oil & Natural Gas Corporation Ltd. ... . Respondent Income Tax Appeal No. 20 of 2010 Commissioner of Income Tax. . . Appellant Versus Oil & Natural Gas Corporation Ltd. ... . Respondent Income Tax Appeal No. 21 of 2010 Commissioner of Income Tax. . . Appellant Versus Oil & Natural Gas Corporation Ltd. ... . Respondent & Income Tax Appeal No. 22 of 2010 Commissioner of Income Tax. . . Appellant Versus Oil & Natural Gas Corporation Ltd. ... . Respondent Mr. H.M. Bhatia, Advocate for appellant. Mr. Rupesh Jain, Advocate for respondent. JUDGMENT Coram: Hon ble K.M. Joseph, C.J. Hon ble V.K. Bist, J. Dated: 14th May, 2015 2 K.M. JOSEPH, C.J. (Oral) These matters being interconnected, they are being disposed of by this common judgment. 2. only substantial question of law, which is raised in these appeals, is whether ITAT has erred in law in holding that expenditure incurred on Dry Docking Expenses are revenue in nature. 3. Incidentally, Income Tax Appeal Nos. 19 of 2010 and 22 of 2010 relate to very same assessment year, i.e. 2005-2006; but, according to learned counsel for appellant, appeal and cross-appeal in Tribunal occasioned filing of two appeals. We say this because learned counsel for respondent would point out that Income Tax Appeal No. 19 of 2010 may not be maintainable. 4. Respondent / assessee is engaged in oil exploration. Assessing Officer disallowed expenditure incurred by respondent / assessee towards maintenance of vessels and rigs on basis that it will be capital expenditure. In appeal, appellate Commissioner allowed appeal of respondent / assessee holding that it is revenue expenditure. This finding has been affirmed by Tribunal. It is against same that Revenue has come up in appeals under Section 260-A of Income Tax Act. 5. relevant finding recorded by Tribunal is being reproduced hereunder: 15. We have considered rival submissions and perused material on record and have gone through orders of authorities below. We find that AO has disallowed this claim in present year on basis that in Asstt. Year 2001-02, learned CIT(A) has decided this issue against assessee. In Asstt. Year 2001-02, assessee has explained expenses on basis that these are in nature of repairs and maintenance and to fulfil requirements of American Bureau Standards (ABS), for which, various surveys are to be undertaken, some of which are to be taken yearly, some are to be undertaken two and half yearly and 3 remaining are to be undertaken five yearly. It has been pointed out that it is obligatory on part of ONGC to carry out surveys as per ABS for insurance and other purposes like requirement of mandatory authorities and hence, these expenses are revenue expenditure in nature of repairs and maintenance but still in that year, issue was decided by AO against assessee by stating that claim of assessee is devoid of merits as aforesaid expenses are clearly capital expenditure. No reasoning is given in assessment order as to how these expenses are of capital nature. CIT(A) in that year has noted in para 9 of his order that assessee in its written submissions has explained nature of Dry Docking expenses and it is apparent from description that expenditure involved are not just repair but total overhaul and renovation of vessels. He further stated that assessee had also not been claiming these expenses as revenue expenditure in its books of accounts and these expenses are not debited to profit and loss account as discussed in assessment order and by making these observations, learned CIT(A) in that year has upheld assessment order. When we go through these explanations of assessee as reproduced by AO in assessment order for that year and also explanations given by assessee before us, we are satisfied that these expenses are to keep vessels in working condition and to fulfil mandatory requirements of various authorities and for safety purpose and it does not enhance or improve capacity of vessels and hence, these expenses cannot be classified as capital expenditure. We, therefore, decide this issue in principle in favour of assessee and hold that Dry Docking expenses are revenue in nature but for qualification of amount, we find that details are not before us. AO in assessment order for Asstt. Year 2004-05 says that assessee has incurred expenditure of Rs. 111.62 crores and claimed same as deduction on account of Dry Docking expenses in computation of income but this is not clear as to whether this amount of Rs. 111.62 crores is total amount of such expenses or whether part of total amount has already been debited in P&L account on basis of amortization of expenditure and this amount of Rs. 111.62 crores is remaining part of total expenditure. This is also not clear as to whether expenses debited in present year to P&L account with regard to earlier years has been added back in computation of assessee or not, as submitted by assessee before AO because AO has started computation with figures of income declared by assessee as present year income and assessee has not furnished before us computation of income filed by it along with return of income and profit and loss account for relevant years. Under these facts, we feel that for purpose of verification of amount actually incurred by assessee on this account in these three years, matter should go back to file of AO. We, therefore, restore this matter back to file of AO in all three years for limited purpose of verifying amount of deduction claimed by assessee and amount of actual expenditure incurred by assessee in relevant years. 4 Deduction should be allowed by AO to extent of amount incurred by assessee for this purpose in relevant year ensuring that any amount debited in profit and loss account for relevant years on account of such expenses of earlier years should be added back in computation of income if same were not already added back by assessee in its computation. With these observations, this issue in all three years is restored back to file of AO for this limited purpose. AO should pass necessary orders as per law as per above discussion in all three years after providing adequate opportunity of being heard to assessee. 6. Mr. H.M. Bhatia, learned counsel appearing for appellant, would submit, essentially, that this is case, where respondent / assessee, in his own accounts, has not laid foundation by debiting profit and loss account by amount allegedly spent towards maintenance of rig and it was claimed to be capital expenditure and, in fact, Assessing Officer was pleased to accept claim and even provided depreciation at rate of 25 per cent and only balance amount has been disallowed being treated as capital expenditure. 7. Per contra, learned counsel for respondent / assessee would submit that there is alternate claim of depreciation and main claim was that it is revenue expenditure; but, he does admit that, in accounts, amount claimed as spent towards maintenance was not debited to profit and loss account; but his contention is that accountancy practice cannot be treated as conclusive. In this context, he drew our attention to unreported judgment of Hon ble Apex Court in Civil Appeal Nos. 6366-6368 of 2003 with Civil Appeal Nos. 6946- 6948 of 2004 dated 23rd March, 2015. Therein, we notice following finding: 19. In instant case, as noticed above, assessee did not want spread over of this expenditure over period of five years as in return filed by it, it had claimed entire interest paid upfront as deductible expenditure in same year. In such situation, when this course of action was permissible in law to assessee as it was in consonance with provisions of Act which permit assessee to claim expenditure in year in which it was incurred, merely because different treatment was 5 given in books of accounts cannot be factor which would deprive assessee from claiming entire expenditure as deduction. It has been held repeatedly by this Court that entries in books of accounts are not determinative or conclusive and matter is to be examined on touchstone of provisions contained in Act. [See Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income Tax (Central), Calcutta (1972) 3 SCC 252; Tuticorin Alkali Chemicals & Fertilizers Ltd, Madras v. Commissioner of Income Tax, Madras (1997) 6 SCC 117; Sutlej Cotton Mills Ltd. v. Commissioner of Income Tax, Calcutta (1978) 4 SCC 358; and United Commercial Bank, Calcutta v. Commissioner of Income Tax, WB-III, Calcutta (1999) 8 SCC 338.] 8. There are well known tests for determining whether expenditure fulfills requirement of Section 37 of Act and would amount to revenue expenditure or capital expenditure. In fact, Assessing Officer proceeded on basis that Dry Docking expenses were held to be capital expenditure in nature by Commissioner of Income Tax in deciding assessment for year 2001-2002 and same are treated as capital expenditure. Though large body of case-law was cited, Assessing Officer proceeded to hold that cases are quite distinguishable from facts of assessee s case under consideration, inasmuch as, none of cases related to issue of shifting or floating vessel, which was involved in these cases. appellate Tribunal, finding that it was not in position to arrive at exact amount, which could be claimed as revenue expenditure, has remitted matter back. We also notice following finding by Commissioner of Income Tax (Appeals): 8.2 I have gone through order of AO and submissions of AR very carefully. Under Merchant Shipping Act, every floating rigs and vessels have to undergo compulsory survey within specified intervals in order to determine whether it is seaworthy and can withstand safety standards laid out. Under such surveys, structural and mechanical fitness of floating installation is tested. expenses on dry docking are on account of removing old paint and repainting same, overhauling propellers, thrusters, gears and electric motors, repair and replacement / upgrading of obsolete equipments. Such expenses are, therefore, only for maintaining and preserving existing assets. Allahabad High Court in case of CIT Vs. B. Hill & Co. Pvt. Ltd. 142 ITR 188, following Supreme Court judgment in case of CIT Vs. Kalyanji Mavji & Co. 122 ITR 49, 6 has held that expenditure for repair and reconstruction of already existing assets are revenue in nature. According to accepted principles, capital expenditure is something which is spent once for all, while revenue expenditure is that which has to be incurred from year to year. If expenditure is to bring into existence or advantage for enduring profit of business, then expenditure may be capital in nature but where expenditure has direct nexus, connection or relation to carrying on or conducting business of assessee, it must be recorded as integral part of profit making process and hence revenue in nature. maintenance of these vessels and rigs is sine-qua-non for carrying on its business of exploration and production of oil. In case of appellant, expenditure to extent of Rs. 139,20,54,819/- was claimed as revenue. I am, therefore, of opinion that AO was not right in disallowing expenditure as capital expenditure. Appellant gets relief of Rs. 139,20,54,819/-. Appellant vide ground no. 4.2 has claimed that deptt. should allow depreciation on this expenditure considered as capital in A.Y. 2001-02 to 2003-04. AO is directed to allow depreciation on WDV of capitalized value during this year. 9. We are of view that view taken by appellate authority, as affirmed by Tribunal, cannot be faulted. In such circumstances, we are of view that question of law raised has to be answered against Revenue. We do so and, consequently, appeals fail and are dismissed. No order as to costs. (V.K. Bist, J.) (K.M. Joseph, C. J.) 14.05.2015 14.05.2015 G Commissioner of Income-tax v. Oil & Natural Gas Corporation Ltd