Section 54 of the Income-tax Act, 2025

Where this section sits

Section 54 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.

← Section 53  ·  Section 55 →

What this section does

Sub-section (1) allows the deductions in sub-sections (3) and (4) to an assessee carrying on a 'specified oil exploration business' while computing income under 'Profits and gains of business or profession', and sub-section (2) defines that business as prospecting for, or extraction or production of, mineral oils under an agreement with the Central Government for the association or participation of the Government or a person authorised by it, which agreement has been laid before each House of Parliament. Sub-section (3) sets out three deductions: infructuous or abortive exploration expenditure on a surrendered area before commercial production begins; drilling, exploration and physical-asset expenditure once commercial production has commenced (whenever incurred); and an allowance for depletion of mineral oil in the mining area for the year commercial production starts and the succeeding years specified in the agreement. Sub-section (4) makes the deductions either in lieu of or in addition to allowances otherwise available, computed as the agreement specifies, with the rest of the Act deemed modified to that extent. Sub-sections (5) to (7) tax or relieve a transfer of the business or an interest in it using the A/B/C formula — transfer proceeds, total expenditure and unallowed expenditure — apply that formula even if the business no longer exists in the year of transfer, and switch off the charge for the amalgamating or demerged company where the successor is an Indian company, carrying it instead to the amalgamated or resulting company.

Why it is there

Production sharing contracts are negotiated instruments, and this section makes the tax computation follow the contract: it lets the agreement fix how exploration, drilling and depletion costs are relieved and expressly deems the general provisions of the Act modified to that extent. The transfer rules then square up the relief already given when the participating interest is sold.

Who it applies to

• An assessee undertaking specified oil exploration business under an agreement with the Central Government laid before each House of Parliament
• An amalgamated company or resulting company that is an Indian company

What this means in practice

The agreement, not the section, is the operative document — sub-section (4)(b) says the deductions are computed and made in the manner the agreement specifies and that the other provisions of the Act are deemed modified accordingly, so the quantum and the years of the depletion allowance come from the contract. On a farm-out or other transfer of the business or interest, run the A/B/C computation in sub-section (5): a shortfall gives a deduction, an excess is business profit, capped at (B–C) where the proceeds exceed total expenditure, and no unallowed expenditure survives the transfer year. In an amalgamation or demerger into an Indian company, sub-section (7) defers all of this to the successor.

An example

A company holding a participating interest in an oil block under an agreement with the Central Government laid before each House of Parliament farms out that interest. Its total expenditure in connection with the business (B) is Rs. 500 crore and the expenditure remaining unallowed (C) is Rs. 120 crore. If the capital sums received on transfer (A) are Rs. 200 crore, then A exceeds C but is less than B, so under sub-section (5)(b)(i) the difference of Rs. 80 crore is charged as profits and gains of business or profession in the year of transfer, and sub-section (5)(b)(iii) then bars any deduction of the unallowed expenditure in that year or any later year. Had the proceeds been only Rs. 90 crore, A would be less than C and sub-section (5)(a) would instead allow Rs. 30 crore as a deduction in that year.

Where you meet this section

In the computation of business income of an oil exploration undertaking and in the assessment that tests it — but the operative document is the agreement with the Central Government, since sub-section (4)(b) makes the deductions computable in the manner that agreement specifies and deems the rest of the Act modified accordingly. The transfer computation surfaces on a farm-out or assignment of a participating interest.

The words themselves

What people get wrong

• Assuming any oil or gas business qualifies. Sub-section (2) requires an agreement with the Central Government, for Government or authorised-person association or participation, and that the agreement be laid before each House of Parliament.
• Reading sub-section (3) figures into the section. It states no rates, no percentages and no year limits — the depletion allowance runs for 'such succeeding tax years as specified in the agreement'.
• Missing sub-section (6): the formula still applies where the business or interest is no longer in existence in the year of transfer.
• Overlooking sub-section (5)(b)(iii) — once the transfer charge is applied, the unallowed expenditure is not deductible in the transfer year or in any later year.

What this replaced

• 42 - Special provision for deductions in the case of business for prospecting, etc., for mineral oil

See the full 1961 to 2025 concordance.

Notifications that reach this section

• GSR88- — An exemption granted under section 42 of the Income-tax Act, 1961 2001-02-09

See the notifications index.