2008 (4) TMI 704 - AT - Income Tax

Computation of income - Disallowance of net interest on Bonds and Bond issue expenses - Revision u/s 263 by CIT - Determination of Block of assets and Depreciation rate - the flyover, roads, bridges, express highway, ROB, etc., classified under plant and machinery or building . Computation of Income - Disallowance of net interest on Bonds or Bond issue expenses - HELD THAT - From the records, we find that the assessee has filed an appeal before the Tribunal, for the AY 2000-01 against the disallowance of interest paid to bonds. But before the Tribunal, the appellant did not press the claim for interest paid on bonds. However, there is no res judicata on the matter of legal interpretation. Since assessee is an infrastructure company, requiring huge funds to implement the projects, it was required to borrow and pay interest on such borrowing to complete the various projects undertaken by it. Apex Court in the case of Dy. CIT v. Core Health Care Ltd. 2008 (2) TMI 8 - SUPREME COURT , Bombay High Court in the case of CIT v. Tata Chemicals Ltd. 2002 (4) TMI 42 - BOMBAY HIGH COURT and the Madras High Court in the case of Carborandum Universal Ltd. 2006 (2) TMI 649 - MADRAS HIGH COURT among other decision, they held that if the borrowings is for the purpose of business and is utilised in the business, interest payable thereon is an allowable business expense. The ratios of judgments on such treatment of interest cost as deferred revenue in the books and writing off the same under Income-tax Act, is not prohibitive and is an allowable expenditure. Therefore, the interest so written off in tax computation is allowable expenditure irrespective of its treatment in the books of account by the assessee since project has to be considered as substantially completed and post that date interest has to be allowed as revenue expenditure irrespective of the fact that the same has been capitalised by the assessee in the books of account. We find that the lower authorities have not examined this issue in detail and the facts are not before us to enable us to decide on this issue, we, therefore, set aside the matter to the file of the AO directing him to redo the issue in accordance with the law after taking into consideration, the ratio of the decisions of the Apex Court and various High Courts regarding the allowance of interest on borrowings utilised for the purpose of business. Revision u/s 263 by CIT - Determination of block of assets and deprecation rate - the flyover, roads, bridges, express highway, ROB, etc., classified under plant and machinery or building - In assessee s own case for the AY 2000-01, the CIT invoked the powers u/s 263 as the AO allowed 25 per cent for the assessee treating them as Plant. The Supreme Court in the case of CIT v. Dr. B. Venkata Rao 1999 (2) TMI 11 - SUPREME COURT held that hospital should be considered as plant because building was used not only to house patients and nurse them but also to treat them, for which various kinds of equipment and instruments were installed. If the building or structure constituted an apparatus or a tool of the taxpayer by means of which business activities were carried on, it amounted to a plant but where the structure played no part in the carrying on of those activities but merely constituted a place wherein they were carried on, the building could not be regarded as a plant. In the case of CIT v. Mazagoan Dock Ltd. 1991 (3) TMI 114 - BOMBAY HIGH COURT applying the functional test has held that concrete walls constructed on the sides of the dock constituted plant entitled to depreciation and development rebate. In the case before us, the assessee is building flyover, roads, bridges, express highway, ROB, etc. It is by permitting vehicles to ply over these structure the assessee is carrying on its activities of developing and maintaining infrastructure facilities. These assets cannot be considered as merely setting in which the business is carried on. They are essential tools of the trade and adjuncts of business without which the assessee could not have carried on their business. Without these there is no business of the assessee. Following the above precedents, we have no hesitation in holding that roads, flyover, bridges, etc., constructed and owned by the assessee and utilised in their business of providing infrastructure is the tool of their trade and an essential adjunct to their business and not merely a setting in which the business is carried on and, therefore, would constitute plant and will be entitled to depreciation at 25 per cent. We also find that the CIT u/s 263 had proposed to revise the assessment in the immediately preceding AY 2000-01, for granting depreciation on roads, bridges, etc., of the assessee at the rate applicable to building, viz., 10 per cent instead of 25 per cent applicable to Plant and machinery granted by the AO in the assessment. After examining the submissions of the assessee, the CIT came to the conclusion that there was no error in the order of the AO granting depreciation for these assets at 25 per cent and thereby dropped proceedings u/s 263. Thus, we allow the assessee s appeal on this issue - In the result, the assessee s appeal is allowed.

Summary

Issues Involved:
1. Disallowance of net interest on bonds and bond issue expenses in the computation of income.
2. Depreciation rate applicable on bridges and flyovers.

Issue-wise Detailed Analysis:

1. Disallowance of Net Interest on Bonds and Bond Issue Expenses:

The first ground of appeal pertains to the disallowance of net interest on bonds amounting to Rs. 60,88,05,000 and bond issue expenses of Rs. 1,05,48,537 in the computation of income. The Assessing Officer (AO) held that this issue was similarly disallowed in the previous assessment year 2000-01 and confirmed the disallowance, adding it to the income of the assessee. The assessee, involved in constructing the Mumbai Pune Expressway (MPEW), had filed a statement showing interest expenses post-substantial completion of parts of the MPEW, which were carried forward in books as deferred revenue expenses and claimed as expenses for the year under tax return. The assessee also filed an Annual Report indicating capitalized expenditure on projects during the construction period.

The CIT(A) confirmed the disallowance of interest following the earlier year's order. The assessee appealed, arguing that the interest for the prior period was capitalized, whereas the balance interest pertains to the post-construction period and has been amortized as deferred revenue expenditure. The assessee claimed current year interest expenses, supported by the Annual Report under 'Capital work-in-progress,' showing substantial completion and use of parts of the MPEW.

The Tribunal noted that the lower authorities did not examine this issue in detail and set aside the matter to the AO, directing him to redo the issue in accordance with the law, considering the ratios of decisions from the Apex Court and various High Courts regarding the allowance of interest on borrowings utilized for business purposes.

2. Depreciation Rate Applicable on Bridges and Flyovers:

The second ground of appeal concerns the depreciation rate applicable on bridges and flyovers, claimed by the assessee at 25% but determined by the AO at 10%. The CIT(A) confirmed the AO's determination. The assessee argued that these structures are essential assets for their business and should be treated as 'Plant' under section 43(3) of the Income-tax Act, which defines 'Plant' inclusively, covering anything necessary to carry on any trade or mechanical business.

The Tribunal considered various judicial precedents, including the Supreme Court's decision in CIT v. Anand Theatres, which established that a characteristic of 'Plant' is that it is an adjunct to carrying on a business and not the essential site or core of the business itself. Applying the functional test, the Tribunal held that the flyovers, roads, bridges, express highways, and ROBs constructed and owned by the assessee are essential tools of their trade and not merely settings in which the business is carried on. Therefore, these assets qualify as 'Plant' and are entitled to a depreciation rate of 25%.

The Tribunal also noted that the CIT under section 263 had proposed to revise the assessment for the preceding assessment year 2000-01 but concluded that there was no error in the AO's order granting depreciation at 25%, thereby dropping the proceedings under section 263.

Conclusion:

In conclusion, the Tribunal allowed the assessee's appeal on both issues. The AO was directed to re-examine the disallowance of interest on borrowings, and the depreciation rate on bridges and flyovers was confirmed at 25%, treating them as 'Plant' under section 43(3) of the Income-tax Act. The assessee's appeal was thus allowed in full.