2014 (11) TMI 401 - AT - Income Tax

Allowability of depreciation on roads/bridges constructed by assessee as part of National High-ways project Held that - Depreciation cannot be allowed and relied on the Board circular No.9 of 2014 dated 23.04.2014 - the Board is aware that there were disputes as to whether the expenditure incurred on development and construction of infrastructural facilities like roads/high ways on BOT basis with right to collect toll, is entitled for deduction under section 32(1)(ii) or the same can be amortized by treating it as an allowable business expenditure under relevant provisions of the I.T. Act - The Circular went on to clarify that the amount can be amortized over the period of toll construction concessionaire agreement - the Board in fact has accepted that the cost incurred towards development of road/highways is revenue expenditure and relying upon Madras Industrial Investment Corporation Ltd., vs. CIT 1997 (4) TMI 5 - SUPREME Court allowed spreading over the liabilities over number of years - Since the amount is allowable as an expenditure that too as revenue expenditure, the Board circular is in fact advantageous to the assessee who are in development of infrastructure facilities but not owning the property which was constructed - assessee has initially treated the entire cost as building and claimed 10% depreciation in A.Y. 2009-10 - Since the CIT(A) allowed depreciation as claimed by assessee there is no reason to interfere with the order of CIT(A) as the entire cost incurred on the project is to be allowed as deduction to assessee either as amortized revenue expenditure or as depreciation Decided against Revenue.

Issues Involved:
1. Allowance of depreciation on roads/bridges constructed under a BOT agreement.
2. Classification of the right to collect toll as an intangible asset under section 32(1)(ii) of the IT Act.
3. Consistency in the depreciation claim across different assessment years.
4. Applicability of Board Circular No.9 of 2014 regarding amortization of expenditure.

Detailed Analysis:

1. Allowance of Depreciation on Roads/Bridges Constructed Under a BOT Agreement:
The core issue is whether the assessee is entitled to claim depreciation on roads constructed under a Build, Operate, and Transfer (BOT) agreement with the National Highway Authority of India (NHAI). The assessee had incurred significant expenditure on the construction of a road project and claimed depreciation on the basis that the right to collect toll is an intangible asset under section 32(1)(ii) of the IT Act. The Assessing Officer (AO) disallowed the depreciation claim, arguing that the ownership of the road is not with the assessee and that the right to collect toll does not qualify as an intangible asset.

2. Classification of the Right to Collect Toll as an Intangible Asset:
The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the depreciation claim by the assessee, relying on various case laws, including the decision of the ITAT Hyderabad Bench in the case of Nyse Infrastructure Private Limited and the Delhi High Court in the case of Noida Toll Bridge. The CIT(A) concluded that the right to collect toll is a commercial right or a business right, which qualifies as an intangible asset under section 32(1)(ii) of the IT Act. The CIT(A) noted that the assessee had acquired the right to exploit the asset (the road) for a period of 11 years, which is in the nature of a license granted by the owner (NHAI).

3. Consistency in the Depreciation Claim:
The AO had also objected to the inconsistency in the depreciation claims made by the assessee in different assessment years. In the previous year, the assessee had claimed depreciation at 10% towards building, while in the current year, it claimed 25% towards plant and machinery. The CIT(A) addressed this by stating that the principle of res judicata is not applicable in Income Tax proceedings, and the facts and case law support the stand of the assessee in the current year. The CIT(A) directed the AO to allow the depreciation claim of Rs. 52,84,84,830.

4. Applicability of Board Circular No.9 of 2014:
The Revenue's appeal also referenced Board Circular No.9 of 2014, which clarified that expenditure incurred on the development and construction of infrastructural facilities like roads/highways on a BOT basis with the right to collect toll can be amortized over the period of the toll concessionaire agreement. The tribunal noted that the circular supports the assessee's position, as it allows the cost incurred towards the development of roads/highways to be treated as revenue expenditure, which can be amortized. The tribunal concluded that since the assessee chose to claim depreciation, there was no reason to disallow it, and upheld the CIT(A)'s decision.

Conclusion:
The tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order that allowed the assessee's claim for depreciation on the basis that the right to collect toll is an intangible asset under section 32(1)(ii) of the IT Act. The tribunal found no merit in the Revenue's grounds and upheld the depreciation claim, supporting the view that the entire cost incurred on the project should be allowed as a deduction, either as amortized revenue expenditure or as depreciation. The appeal of the Revenue was dismissed, and the order was pronounced in the open court on 07.11.2014.

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