Section 42

Section 42 — the law in short

What the courts have decided on section 42, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Carborandum Co v CIT Supreme CourtHelps taxpayer
  We are a foreign company paid a technical service fee by an Indian company. Does that fee accrue in India if all our work was done abroad?
  No. The Supreme Court held that the technical service fee neither accrued nor was deemed to accrue in India. Know-how was supplied from outside India, and the foreign personnel were made available outside India, taken on by the Indian company as its employees, paid by it and working under its control, so the services were rendered wholly abroad. Even assuming a business connection existed, no part of the operations was carried out in India, so the deeming provision was not attracted at all. The Court also held that the High Court should not have entertained a business connection point raised for the first time on reference.
• Niko Resources Ltd v CIT Advance RulingHelps departmentSuperseded by amendment
  We are a foreign oil and gas exploration company entitled to the special deductions in s.42. Can we take those deductions before working out book profit for minimum alternate tax?
  No. The Authority ruled that Niko Resources Ltd, a Canadian company exploring and developing oil and gas fields in India with Gujarat State Petrochemical Corporation Ltd under a contract with the Central Government, could not claim the special s.42 deductions in the calculation of book profit under s.115JA. Section 42 operates only when business income is computed under Chapter IV-D; s.115JA is a self-contained code that applies notwithstanding anything else in the Act, and neither s.42 nor s.293A cuts it down. The provisions of s.115JA applied to the applicant. The ruling binds only the applicant.
• John A. Sayre v CIT Advance RulingHelps departmentSuperseded by amendment
  I am a geologist running production at three oil and gas fields in India for a foreign oil company. Am I a technician in mining, or in constructional operations, for the section 10(5B) exemption?
  No, on both routes. The Authority held that mining in the Explanation to s.10(5B) is not used in a broad sense that takes in prospecting for or extraction of mineral oil, because the Income-tax Act consistently treats mineral oil as something separate from minerals and makes its own special provision for it in ss.42, 44BB and 293A. It also rejected the alternative case that the applicant was a technician in constructional or manufacturing operations: he had a degree in geology and no shown special knowledge of construction, and he was employed to run oil and gas field production, not to build. It did accept the applicant's answer to the Commissioner's threshold objection - the second category of technician, one employed in any business carried on in India, need not be in government or public employment. The ruling binds only the applicant.
• Statutory position — s.33ABA: the Site Restoration Fund for petroleum and natural gas — the deposit must be in before the year ends, the ceiling is twenty per cent, and the closure clawback is net of the Government's production share CBDT Circulars & InstructionsCuts both ways
  My client is an oil and gas producer under a production sharing contract. It missed the year end and deposited into the Site Restoration Account in April. Does the six-month grace that tea companies get apply here too, and what is the ceiling?
  No. Section 33ABA gives no grace at all: the deposit must be made "before the end of the previous year", not within six months of it, and that single word is the commonest way the deduction is lost. The section applies to an assessee carrying on the business of prospecting for, or extraction or production of, petroleum or natural gas or both in India in relation to which the Central Government has entered into an agreement with that assessee. The deposit is either with the State Bank of India in a special account under a scheme approved by the Government of India in the Ministry of Petroleum and Natural Gas, or in a Site Restoration Account under a deposit scheme framed by that Ministry. The deduction is the LOWER of the amount deposited and twenty per cent of the profits of that business computed under "Profits and gains of business or profession" before any deduction under section 33ABA — twenty, not the forty per cent that section 33AB allows — and it is given before brought-forward losses are set off under section 72. The section was inserted by the Finance (No. 2) Act, 1998 with effect from 1 April 1999, so it governs AY 1999-2000 onwards. One later amendment matters: Act No. 12 of 2020, with effect from 1 April 2020, substituted the audit limb of sub-section (2), so that from AY 2020-21 the accounts must be audited, and the report furnished, before the specified date referred to in section 44AB — one month before the section 139(1) due date — rather than along with the return.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.