Business of prospecting for mineral oils
[As per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 54(1) of Income Tax Act 2025
54(1) Where the assessee undertakes specified oil exploration business, then deduction specified in sub-sections (3) and (4) shall be allowed while computing the income under the head “Profits and gains of business or profession”.
Section 54(2) of Income Tax Act 2025
54(2) In this section, “specified oil exploration business” means business consisting of prospecting for or extraction or production of mineral oils where the following conditions are fulfilled:—
- (a) the assessee has entered into an agreement with the Central Government;
- (b) such agreement is entered for association or participation of the Central Government or any person authorised by it; and
- (c) such agreement is laid before each House of Parliament.
Section 54(3) of Income Tax Act 2025
54(3) The deduction referred to in sub-section (1) shall be––
- (a) for the period before the beginning of commercial production, expenditure towards infructuous or abortive exploration incurred in respect of any surrendered area;
- (b) for the period after the commencement of commercial production, expenditure (whether before or after such production) in respect of drilling or exploration activities or services or in respect of physical assets used in that connection;
- (c) for the tax year of commencement of commercial production and such succeeding tax years as specified in the agreement, towards depletion of mineral oil in the mining area.
Section 54(4) of Income Tax Act 2025
54(4) The deductions referred to in sub-section (1) shall be––
- (a) either in lieu of, or in addition to, any allowance admissible under this Act as specified in the agreement; and
- (b) computed and made in the manner specified in the agreement and the other provisions of this Act shall be deemed to have been modified to such extent.
Section 54(5) of Income Tax Act 2025
54(5) Where the business or any interest therein as referred to in sub-section (1) is wholly or partly transferred as per the provisions of the agreement, the profit shall be charged to tax or deduction shall be allowed in the following manner:—
- (a) where A is less than C, then (C-A) shall be allowed as deduction in the tax year in which such business or interest is transferred;
- (b) where A is greater than C,––
- (i) but less than B, then (A-C) shall be the profit chargeable under the head “Profits and gains of business or profession” for the tax year in which such transfer takes place;
- (ii) in any other case, only (B-C) shall be the profit chargeable under the said head for the tax year in which such transfer takes place; and
- (iii) no deduction shall be allowed for the expenditure incurred remaining unallowed in the tax year in which such transfer takes place or any subsequent tax year,
where,––
- A = proceeds of the transfer (so far as they consist of capital sums);
- B = total amount of expenditure incurred in connection with the business or to obtain interest therein;
- C = amount of expenditure incurred remaining unallowed.
Section 54(6) of Income Tax Act 2025
54(6) If the business or interest therein is no longer in existence in the year of transfer, the provisions of sub-section (5) shall apply as if such business is in existence during the said year.
Section 54(7) of Income Tax Act 2025
54(7) Where the business or interest therein is transferred in a scheme of amalgamation or demerger and the resulting entity is an Indian company, then the provisions of sub-section (5) shall—
- (a) not apply to the amalgamating or demerged company; and
- (b) continue to apply to the amalgamated or resulting company as it would have applied to the amalgamating or demerged company as if the transfer has not taken place.
Section 54(8) of Income Tax Act 2025
54(8) In this section, “mineral oil” includes petroleum and natural gas.
FAQs on Section 54 of Income Tax Act 2025
1. What is Section 54 of the Income Tax Act, 2025, related to?
Section 54 provides for deductions available to assessees undertaking specified oil exploration business while computing income under the head “Profits and gains of business or profession.”
2. What is meant by “specified oil exploration business” under Section 54(2)?
It refers to the business of prospecting for, or extraction or production of, mineral oils where the assessee has an agreement with the Central Government, which is laid before both Houses of Parliament.
3. What are the key conditions for a business to qualify as “specified oil exploration business”?
(a) There must be an agreement with the Central Government.
(b) The agreement must involve association or participation of the Central Government or its authorised entity.
(c) The agreement must be laid before both Houses of Parliament.
4. What types of deductions are allowed under Section 54(3)?
Deductions include:
(a) Expenditure on infructuous or abortive exploration before commercial production for surrendered areas.
(b) Expenditure on drilling/exploration activities or physical assets used, incurred before or after commercial production.
(c) Depletion expenditure of mineral oil in the mining area for specified years starting from the commencement of commercial production.
5. Is the deduction under Section 54 in lieu of or in addition to other deductions under the Act?
The deduction may be either in lieu of or in addition to other allowances, as specified in the agreement with the Central Government.
6. How are deductions under Section 54(4) computed?
They are computed in the manner specified in the agreement, and other provisions of the Act are deemed modified accordingly.
7. What happens if the specified oil exploration business or any interest therein is transferred?
Section 54(5) outlines how profits are taxed or deductions allowed based on whether the transfer proceeds (A) are less than, more than, or equal to the unallowed expenditure (C) and total incurred expenditure (B).
8. How are transfer profits or deductions calculated under Section 54(5)?
Depending on the relationship between A, B, and C:
- If A < C, the difference (C-A) is allowed as a deduction.
- If A > C and A < B, (A-C) is taxed as profit.
- If A ≥ B, only (B-C) is taxed as profit.
- No further deductions are allowed for any unallowed expenditure.
9. What if the business no longer exists at the time of transfer?
Section 54(6) deems the business to be in existence for the purposes of applying the transfer provisions.
10. What are the tax implications in case of amalgamation or demerger involving the oil exploration business?
If the transfer is through a scheme of amalgamation or demerger and the resulting entity is an Indian company, then:
- The provisions of Section 54(5) do not apply to the amalgamating/demerged company.
- They continue to apply to the amalgamated/resulting company as if the transfer had not occurred.
11. What does the term “mineral oil” include under Section 54?
“Mineral oil” includes petroleum and natural gas.
12. Can expenditure incurred before commercial production be claimed after the production starts?
Yes, expenditure incurred before commercial production can be allowed as a deduction after the commencement of commercial production, provided it relates to drilling or exploration activities or relevant physical assets.
13. Is there a fixed period for claiming depletion-related deductions under Section 54(3)(c)?
No, the period is specified in the agreement between the assessee and the Central Government.
14. Are all types of expenditures incurred in oil exploration deductible?
Only specified expenditures, such as those on infructuous exploration, drilling, and depletion as detailed under Section 54(3), are eligible, subject to terms of the agreement.
15. Do the provisions of Section 54 override other provisions of the Act?
Yes, to the extent specified in the agreement, other provisions of the Income Tax Act are deemed modified.
Section 54 of the Income Tax Act, 2025, provides a comprehensive framework for granting tax deductions to assessees engaged in specified oil exploration businesses. These provisions recognise the high-risk and capital-intensive nature of such operations by allowing deductions for exploration, drilling, and depletion-related expenditures.
By aligning the tax treatment with the terms of agreements entered into with the Central Government, the section offers both flexibility and clarity. Understanding the eligibility conditions, computation mechanisms, and implications of transfer or restructuring is crucial for optimal tax planning and compliance in the mineral oil sector.
