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December 2016

21. Business expenditure – Section 37 – A. Y. 2005-06- Capital or revenue expenditure – Assessee engaged in oil exploration – Expenses on dry dockings of rigs and vessels – is expenditure on maintenance of assets – deductible

By K. B. BHUJLE
Advocate
Reading Time 1 mins

CIT
vs. ONGC Ltd; 387 ITR 710 (Uttarakhand):

The assessee was engaged in oil exploration.
For the A. Y. 2005-06, the Assessing Officer disallowed expenditure on dry
docking of its rigs and vessels treating the same as capital expenditure. The
Tribunal allowed the assessee’s claim for deduction. The Tribunal found that
under the Merchant Shipping Act, every floating rig and vessel has to undergo a
compulsory survey at specified intervals in order to determine whether it is
seaworthy and can withstand the safety standards laid out. Under such survey,
the structural and mechanical fitness of a floating installation is tested. The
expenses on dry docking were on account of removing the old paint and
repainting the rigs and vessels, overhauling the propellers, thrusters, gears
and electric motors, repair and replacement/upgrading of the obsolete
equipment. Such expenses were, therefore, only for maintaining and preserving
the existing assets. It was deductible.

On appeal by the Revenue, the Uttarakhand High Court upheld the decision
of the Tribunal and held as under:

“The expenditure on dry docking is revenue expenditure and hence
deductible.”

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