Circular No. 20/2019

Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes Circular No. 2.0/2019 New Delhi, dated 19th August, 2019 Subject: Clarification regarding treatment of Farm-in expenditure incurred by the Oil Exploration and Production(E&P) Companies - reg

What this is

Circular No. 20/2019 was issued by the Central Board of Direct Taxes on 19 August 2019. Its subject is Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes Circular No. 2.0/2019 New Delhi, dated 19th August, 2019 Subject: Clarification regarding treatment of Farm-in expenditure incurred by the Oil Exploration and Production(E&P) Companies - reg.

This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.

What it does

Deals with farm-in expenditure of oil exploration and production companies. Over the life of an oil and gas block such companies buy in and sell out participating interests in a production sharing contract, and farm-in expenditure is what an entity incurs when it acquires a participating interest from another and becomes party to the production sharing contract with the Central Government. The question put to the Board was whether farm-in expenditure, being in the nature of a right, should be allowed as an intangible asset under clause (ii) of sub-section (1) of section 32.

Why it was issued

A request was made to the Board to clarify the treatment of farm-in expenditure under clause (ii) of section 32(1).

Who it reaches

Oil and gas exploration and production companies acquiring participating interests
Parties to a production sharing contract with the Central Government
Advisers computing depreciation on a farm-in acquisition

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.32	s.33, s.66

The instrument, as the Board published it

The department publishes this one only as a PDF, so the words below were read out of that PDF by machine. That reading can carry its own mistakes — a misread number, a broken line. Check the signed document before you rely on a figure in it. The reading also stopped short of the end of the document: what is below is the opening, not the whole of it.

Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes Circular No. 2.0/2019 New Delhi, dated 19th August, 2019 Subject: Clarification regarding treatment of Farm-in expenditure incurred by the Oil Exploration and Production(E&P) Companies - reg.

Over the life cycle of an Oil & Gas block, E&P companies generally buy ('Farm in') and sell ('Farm out') their participating interests (PI) in the 'Production Sharing Agreement' (PSC). 'Farm-in' expenditure is incurred when an entity in this line of business acquires a PI from another entity(s) in oil/gas block(s) and becomes part of the PSC entered into with the Central Government. A request has been made to clarify whether 'Farm in' expenditure being in nature of rights should be allowed to be treated an 'intangible asset' under clause (ii) of section 32(1) of the Income-tax Act, 1961('Act').

What to watch

The text available here stops at the question and does not carry the Board's conclusion — read the circular in full before relying on it for a depreciation claim.
The subject is farm-in expenditure only; a farm-out is the other side of the transaction and is not what the question addresses.
The claim, if any, is under clause (ii) of section 32(1) as an intangible asset, so the ordinary conditions for depreciation on intangibles apply.

Where you meet it

When depreciation claimed on a participating interest acquired by farm-in is questioned in the assessment of an exploration and production company.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Circular No. 3/2017 — Circular No.- 3/2017 20 January 2017
Notification No. 123/2016/F. No. 133/33/2015-TPL (Part-I) / G.S.R. 1180(E) — ¹Hkkx IIµ[k.M 3(i)º Hkkjr dk jkti=k % vlk/kj.k 5 28 December 2016
Notification No. 103/2016 [F.No.370142/29/2016 -TPL] / SO 3399(E) — Ministry of Finance 7 November 2016
Notification No. 85 /2016 [F.No.142/13/2015-TPL] / SO 3075(E) — 2 the Gazette of INDIA : Extraordinary [Part Ii—sec. 3(ii)] 28 September 2016
Notification No. 13 /2016 [F. No.142/33/2015-TPL] / SO 650(E) — [To BE Published in the Gazette of INDIA Extraordinary, Part II, section 3, Sub-section (ii)] 3 March 2016
Notification No. 71/2015 [F.No.142/13/2015-TPL] / SO 2241(E) — [To BE Published in the Gazette of INDIA, Extraordinary, Part-ii, section 3, Sub-section (ii)] 17 August 2015

← Circular No. 21/2019 · Circular No. 19/2019 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.