COMMISSIONER OF INCOME TAX, DEHRADHUN & ANR. versus ENRON OIL & GAS INDIA LTD.

Citation: [2008] 12 S.C.R. 1168 · Decided: 02-09-2008 · Supreme Court of India · Bench: S.H. KAPADIA · Disposal: Dismissed

Judgment (excerpt)

[2008] 12 S.C.R. 1168 
A 
COMMISSIONER OF INCOME TAX, DEHRADUN & ANR. 
'"Y 
, 
\/. 
ENRON OIL & GAS INDIA LTD. 
(Civil Appeal No. 5433 of 2008) 
B 
SEPTEMBER 2, 2008 
[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.] 
~ 
Income Tax Act, 1961 - s. 42 (1) - Deduction under -
Product Sharing Contract (PSC) - For depletion of mineral 
c oil in th~ mining area - Between Government of India and a 
consortium of companies, Operator whereof was a foreign 
Company -
Return of income filed by foreign Company, 
deducting foreign exchange losses on account of foreign 
currency translation - Deduction not allowed by Assessing 
D Officer - Allowed by authorities/Courts below - On appeal, 
held such deduction is admissible - In view of Appendix C to 
the·PSC which provides for translation of currency, such loss 
-,. 
is actual and not merely notional. 
Words and Phrases - 'Production Sharing Contract' -
E 
Meaning of 
' ' 
Government of 'India, through Petroleum Ministry 
awarded contract for development of concessional " 
blocks to a consortium of Companies i.e. respondent-a 
F 
foreign company and two other Indian Companies. 
Respondent was designated as the Operator. The > 
respondent along with two other companies executed 
..(, 
Production Sharing Contract (PSC) with Government of 
India. Under the PSC each co-venturer remitted money, 
known as Cash Call to the Operator in USA. The· 
G expenditure for the joint venture was made, out of the 
said account. The Trial Balance was required to be made 
....-.. 
at the end of the month in USO which was then required 
to be translated on the basis of accounting procedure 
mentioned in Appendix 'C' to PCS. As per Notification 
H 
1168 
COMM. OF INCOME TAX, DEHRADUN & ANR. 
1169 
v. ENRON OIL & GAS INDIA LTD . 
.. 
'""' 
dated 8.3.1996 u/s 293A of Income tax Act, 1961, each co-
A 
venturer was liable to be assessed for his own share of 
income. 
Respondent filed its return of income for the 
Assessment year 1990-2000. It debited its Profit and Loss B 
Account by the loss due to exchange of currency. 
.... 
Assessing Officer disallowed the same on the ground 
that it was only a book entry and not actual loss. In appeal 
CIT (A) allowed the deduction. The order was further 
confirmed by appellate Tribunal as well as High Court. 
Hence the present appeal. 
c 
Dismissing the appeal, the Court 
HELD: 1.1 The respondent-assessee was entitled to 
claim deduction for foreign exchange losses on account 
of foreign currency translation. Due to the kind of D 
structure of the Product Sharing Contract (PSC), 
inherently _there has to be frequent conversion from one 
currency to the other. Cash calls were made in USO; some 
of the cash calls were required to be converted to INR for 
local expenses; some of the expenses stood incurred in E 
USO whereas some to be incurred in INR; the sale price 
of oil was in USO whereas the accounts were drawn up 
in USO. At the time of sale, the INR - USO rate would 
change from that on the date of the cash calls. Similarly, 
the accounts were required to be drawn up in USO. For F 
...... 
that purpose also one had to reconvert the costs from 
> 
barrels to monetary terms. For the said reasons, clauses 
1.6.1 and 1.6.2 of appendix 'C' to the PSC envisaged 
booking of all currency gains and losses irrespective of 
whether such gains/losses stood realized or remained 
G 
unrealized. In case of gains, a part of the credit would go 
to the Government, and taxes would be payable on the 
income to the extent of such ga.ins credited. Therefore, 
currency gains and losses constituted an inextricable 
part of the accounting mechanism for expenses incurred H 
1170 
SUPREME COURT REPORTS 
[2008] i2 S.C.R. 
A on the development and production of oil. [Paras 9 and 
15] [1174,H; 1178,B-F] 
1.2 Section 42(1) of Income tax Act, 1962 provides 
for- admissibility in respect of three types of allowances 
provided they are specified in the PSC. They relate to 
8 expenditure incurred on account of abortive exploration, 
expenditure incurred, before or after the commencement 
of commercial production, in respect of drilling or 
exploration activities and expenses incurred in relation 
to depletion of mineral oil in the mining area. The above 
C three allowances are admissible only if they cire so 
specified in the PSC. [Para 19] [1179,D-F] 
1.3 Article 20.2 of PSC inter alia states that the rates 
of exchange for the purchase and sale of currency by the 
0 
Contractor shall be the prevailing r

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