Section 80-IB (9) of the Income Tax Act, 1961 (‘Act’) provides for a tax holiday to an undertaking engaged in commercial production of mineral oil or refining of mineral oil. Tax holiday is available for a period of 7 consecutive tax years, starting from the year in which the undertaking begins commercial production or refining of mineral oil.
The interpretation of the term ‘mineral oil’ has always been a contentious issue with the Revenue Authorities. Prior to Finance Bill, 2009, position on tax holiday for natural gas was not clearly articulated in the law nor was any clarification issued by the Revenue Authorities. The Revenue Authorities has always argued and considered that the expression ‘mineral oil’ as mentioned in section 80-IB (9) of the Act does not include natural gas.
While presenting the 2008 Edition of Budget in the Memorandum / Notes on clauses to the Finance Bill, 2008 it was stated that for the purpose of section 80IB(9), ‘mineral oil’ does not include petroleum and natural gas. It is not surprising that NELP VII ensured regressive bidding. However, it was later clarified in the context of the NELP VII round of bidding for oil blocks, that the availability of tax holiday under section 80-IB (9) of the Act shall be available to bidders as and when the same is interpreted by the Courts.
The Hon’ble Finance Minister, while presenting the budget on 6 July 2009 has proposed to amend section 80-IB (9) of the Act so as to provide tax holiday to an undertaking engaged in commercial production of natural gas on or after 1 April 2009 in oil blocks licensed under the VIIIth Round of bidding under the New Exploration Licensing Policy announced by Government of India.
It is pertinent to note that such an action of Hon’ble Finance Minister has further strengthened an important decision of Ahmedabad bench of Income Tax Appellate Tribunal wherein it was held by the Tribunal that commercial production of natural gas would amount to production of ‘mineral oil’ and would be eligible for tax holiday under section 80IB(9).
In another instance of judicial examination [re special reference filed under article 143(1) of the Constitution of India], the Supreme Court held that the terms ‘petroleum’, ‘petroleum products’ and ‘mineral oil resources’ include natural gas. The said ruling would be a detrimental factor in providing guidance for the interpretation of ‘mineral oil’ is concerned.
The above policy statement shall have a positive ramification. The proposal would provide tax incentives to production of natural gas from 1 April 2010 in relation to assessment year 2010-11 and subsequent years. The fate of tax disputes relating to earlier assessment years still remains unanswered. Though, on past years, at the moment there isn’t enough clarity, however one can be optimistic enough to succeed in the pending tax litigations.
The Finance Minister should have taken this opportunity to clarify the law before the introduction of new Direct Tax Codes rather than leaving it for courts to interpret and decide which would take considerable time.
Aseem Chawla is partner and Amit Nayyar is consultant at Tax Practice Group, Amarchand & Mangaldas & Suresh A Shroff & Co
