Section 42 of the Income Tax Petroleum Business Allowance

Section 42 Special provisions for deduction in case of business for prospecting etc. for mineral oil.

Section 42 of the Income Tax Mineral Oil Business Deduction.

Section 42 of the Income Tax Petroleum Business Allowance allows taxpayers to claim allowances that are not allowed under general principles. B. A provision for expenses that are considered capital gains because they constitute an asset for permanent use in starting a business or represent initial costs incurred in setting up income-producing machinery. It should also be noted that this concession can only be used for contracts or agreements entered into by the central government for the exploration, extraction, or production of mineral oil.

1. Allowable Expenditures 

The allowable amount under this section shall be approximately the cost of fruitless or unsuccessful exploration expenditures on areas that are abandoned before the commencement of commercial production by the taxpayer.
Costs incurred by a taxpayer in connection with drilling or exploration activities or services, or physical property used in connection therewith, after the commencement of commercial production, whether before or after commercial production.
relates to the depletion of petroleum in the field concerning the assessment year relative to the year before commercial production commenced and any subsequent year specified in the contract.

2. Deductions 

The sum of these allowances shall be calculated in the manner specified in the agreement entered into by the Central Government with any association or person participating in the Central Government or with any person authorized by the Central Government and the deduction shall be made. must be done. It conducts businesses such as mineral oil search or exploration. For the purposes of this recognition, it is expressly provided that the other provisions of this Act shall be deemed to be modified to the extent necessary to give effect to the provisions of this Agreement. Please note that allowances in this regard may be granted instead of or in addition to other allowances permitted by law, depending on the terms of the contract.  

3. Tax liability in the case of transfers

Transaction-related deductions in the case of transfers of companies or interests in oil and gas production are explained in various cases.

Case 1: If the proceeds from the transfer are less than the remaining disallowed expenses, the deduction allowed in the year of transfer is the difference between the remaining disallowed expenses and the sales proceeds. Nondeductible expenses less capital gains are accounted for in the year before the business or participation is transferred. Deduction Amount = Expenses Remain Disallowed - Sales Revenue

Case 2:

If the proceeds from the transfer exceed the remaining disallowed expenses, either the excess amount or the expenses allowed up to the date of transfer. Deduct the lesser amount. It is considered as taxable gain in the year of transfer. If the business ceases to exist in the year of transfer, the tax liability is calculated as if the business were still in operation. Taxable as profits and profits from business and occupation = sales revenue - expenses still disallowed or Expenses allowed to date

Case 3: If the proceeds from the transfer equal or exceed the remaining disallowed expenses, no deduction is allowed for those expenses in the year of the transfer or subsequent years. Deduction Amount = Zero

Case 4:

If the transfer does not fall under Case 2 and the disallowed expenses are not fully covered by the proceeds, the deduction allowed in the year of the transfer is the difference between the disallowed expenses. It becomes. expenses and proceeds. Allowable deduction = Disallowed expenses - Revenue from sales Transfer of business under the scheme of amalgamation Where amalgamating company sells or transfers the business to an amalgamated company which is an Indian company under the scheme of amalgamation The provisions of section 42 apply to the amalgamated company in the same way as they would apply if the amalgamated company did not transfer any business or shares. Regarding the merged company, the tax treatment in (1) 1, 2, 3, and 4 will not apply. Transfer of business under a scheme of demerger Where a splitting company sells or transfers a business to a demerged company which is an Indian company under a demerger scheme The provisions of Article 42 shall remain unchanged in the demerged company. shall apply. It also applies to spin-off companies where the business or its shares have not been transferred. Tax treatment in (1) 1, 2, 3, and 4 does not apply to the split company.