Deductions in case of business of prospecting, etc., of mineral oil

Introduction

The Income-tax Act disallows some expenses on the ground of capital expenditure, initial expenditure etc. These expenses are allowed to an assessee engaged in the business of prospecting, extracting or producing mineral oils, petroleum or natural gas if it has entered into an agreement for association with the Central Government and such expenses are covered under this agreement.

1. About

The deduction under this provision is allowed to an assessee (resident or non-resident) engaged in the business of prospecting, extracting or producing mineral oils, petroleum or natural gas. The deduction under this provision is allowed for the eligible expenses if the Central Government has entered into an agreement, either on his own or through any person authorised with it, for association or participation with such assessee. Such deductions can be allowed either in lieu of or in addition to the allowances which are already allowable under the existing provisions.

2. Eligible Expenses

The assessee is eligible to claim deduction of the following expenses specified in the agreement with the Central Government:

(a) 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) Expenditure incurred, whether before or after the commercial production, in respect of drilling or exploration activities or services or in respect of physical assets used in that connection. Such expenditure shall be allowed as a deduction after the beginning of commercial production; and

(c) Depletion of mineral oil in the mining area in respect of the tax year in which commercial production has begun and for such succeeding year or years as may be specified in the agreement.

Such allowances are allowed only if these are provided in the agreement. These are to be computed and made in the same manner as specified in the agreement.

3. Transfer of business

Where the business of the assessee is transferred, whether wholly or partly, or any interest in such business is transferred in accordance with the agreement, the deficiency, if any, shall be allowable as deduction. Similarly excess deduction claimed, if any, shall be chargeable to tax.

3.1. Deficiency

Where the amount of expenses remaining unclaimed exceeds the proceeds from transfer, the deficiency (difference between unclaimed expenditure and proceeds from transfer) shall be allowed as deduction in the year of transfer. However. where proceeds from transfer is not less than the amount remaining unclaimed, no deduction shall be allowed in the year of transfer or in any subsequent year.

3.2. Excess Deduction

Where the proceeds from transfer exceed the amount remaining unclaimed, such excess, to the extent it is already allowed (difference between the proceeds from transfer and unclaimed expenditure to the extent deduction has already been allowed) shall be chargeable as business income of the assessee.

Where business of the assessee does not exist during the year of transfer, such excess shall be taxable as business income as if the business is in existence.

Example, Mr. X commenced the business of the extraction of mineral oil in year 20XX, in respect of which he entered into an agreement with the central government. He incurred total expenditure of Rs. 15 crores, which is allowable as deduction in accordance with the agreement. In year 20X9, he transferred such business, upto which he had claimed Rs. 10 crores as exemption. The amount remaining unclaimed was Rs. 5 crores.

Case 1: The business is transferred for Rs. 4 crores.

Since the proceeds from transfer are less than the amount remaining unclaimed, difference between such proceeds and unclaimed expenses shall be allowed as deduction in the year 20X9. Thus Rs. 1 crore shall be allowed as deduction in the year 20X9.

Case 2: The business is transferred for Rs. 7 crores.

Since the proceeds from transfer exceeds the amount remaining unclaimed, difference between the proceeds from transfer and            unclaimed expenditure, to the extent already allowed, shall be taxable a business income. Thus, Rs. 2 crores shall be taxable as business income in the year 20X9.

Case 3: The business is transferred for Rs. 5 crores.

Since the proceeds from transfer does not exceeds the unclaimed expenditure, no amount is taxable. Similarly, as the proceeds are not less than the unclaimed expenditure, nothing shall be allowable as deduction.

3.3. Transfer in case of business reconstruction

Provision of this section shall not apply where the business of the assessee is transferred in the scheme of amalgamation or demerger and the amalgamated or resulting company is an Indian company.

The amalgamated company or the resulting company will continue to claim the deduction available to the amalgamating company or demerged company as if no amalgamation or demerger had taken place.

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.