Section 42 of of Income tax Act "Special provision for deductions in the case of business for prospecting, etc., for mineral oil"
42. (1) For the purpose of computing the profits or gains
of any business consisting of the prospecting for or
extraction or production of mineral oils in relation to
which the Central Government has entered into an agreement
with any person for the association or participation of the
Central Government or any person authorised by it in such
business (which agreement has been laid on the Table of each
House of Parliament), there shall be made in lieu of, or in
addition to, the allowances admissible under this Act, such
allowances as are specified in the agreement in relation-
(a) to expenditure by way of infructuous or abortive
exploration expenses in respect of any area surrendered
prior to the beginning of commercial production by the
assessee ;
(b) after the beginning of commercial production, to
expenditure incurred by the assessee, whether before or
after such commercial production, in respect of drilling or
exploration activities or services or in respect of physical
assets used in that connection, except assets on which
allowance for depreciation is admissible under section 32 :
Provided that in relation to any agreement entered into
after the 31st day of March, 1981, this clause shall have
effect subject to the modification that the words and
figures "except assets on which allowance for depreciation
is admissible under section 32" had been omitted; and
(c) to the depletion of mineral oil in the mining area in
respect of the assessment year relevant to the previous year
in which commercial production is begun and for such
succeeding year or years as may be specified in the
agreement;
and such allowances shall be computed and made in the
manner specified in the agreement, the other provisions of
this Act being deemed for this purpose to have been modified
to the extent necessary to give effect to the terms of the
agreement.
(2) Where the business of the assessee consisting of the
prospecting for or extraction or production of petroleum and
natural gas is transferred wholly or partly or any interest
in such business is transferred in accordance with the
agreement referred to in sub-section (1), subject to the
provisions of the said agreement and where the proceeds of
the transfer (so far as they consist of capital sums)-
(a) are less than the expenditure incurred remaining
unallowed, a deduction equal to such expenditure remaining
unallowed, as reduced by the proceeds of transfer, shall be
allowed in respect of the previous year in which such
business or interest, as the case may be, is transferred;
(b) exceed the amount of the expenditure incurred remaining
unallowed, so much of the excess as does not exceed the
difference between the expenditure incurred in connection
with the business or to obtain interest therein and the
amount of such expenditure remaining unallowed, shall be
chargeable to income-tax as profits and gains of the
business in the previous year in which the business or
interest therein, whether wholly or partly, had been
transferred :
Provided that in a case where the provisions of this clause
do not apply, the deduction to be allowed for expenditure
incurred remaining unallowed shall be arrived at by
subtracting the proceeds of transfer (so far as they consist
of capital sums) from the expenditure remaining unallowed.
Explanation.-Where the business or interest in such business
is transferred in a previous year in which such business
carried on by the assessee is no longer in existence, the
provisions of this clause shall apply as if the business is
in existence in that previous year;
(c) are not less than the amount of the expenditure incurred
remaining unallowed, no deduction for such expenditure shall
be allowed in respect of the previous year in which the
business or interest in such business is transferred or in
respect of any subsequent year or years:
Provided that where in a scheme of amalgamation or demerger,
the amalgamating or the demerged company sells or otherwise
transfers the business to the amalgamated or the resulting
company (being an Indian company), the provisions of this
sub-section-
(i) shall not apply in the case of the amalgamating or the
demerged company; and
(ii) shall, as far as may be, apply to the amalgamated or
the resulting company as they would have applied to the
amalgamating or the demerged company if the latter had not
transferred the business or interest in the business.
Explanation.-For the purposes of this section, "mineral oil"
includes petroleum and natural gas.