2019 (7) TMI 1816 - AT - Income Tax

Allowability of depreciation on the expenditure incurred for development and construction of roads/highways on BOT basis - owner of the roads - as per AO project from the commencement day (CDD) 20.1.2013 is 4863 days and during the relevant financial year the assets were put to use only for 71 days - proportionate expenditure to be amortized for the relevant financial year - HELD THAT - Decision of the Coordinate Bench of the Tribunal in the case of Ashoka Infrastructure Ltd 2014 (1) TMI 443 - ITAT PUNE the Bench had brought out the distinction between the claim made in both the case i.e. the claim of depreciation u/s 32 in the case of North Karnataka Expressway 2014 (11) TMI 351 - BOMBAY HIGH COURT as against the claim of depreciation u/s 32(1)(ii) as on intangible asset in the case of West Gujarat Expressway Ltd. 2015 (5) TMI 305 - ITAT MUMBAI . The Special Bench of the Tribunal in the case of Progressive Constructions Ltd 2017 (3) TMI 1167 - ITAT HYDERABAD has held the license to operate and collect the toll fee as a commercial right falling within the definition of intangible asset whereas the Hon ble Bombay High Court was considering whether the assessee be granted depreciation on tollway which are not owned by it. Since the distinction between both the cases before the Bombay High Court has been clearly brought out by the Coordinate Bench of the Tribunal at Pune in the case of Ashoka Infrastructure Ltd we are of the opinion that the decision of the Coordinate Bench is applicable to the facts of the case before us. There is no decision by the Hon ble Bombay High Court that the right to collect toll fee over the roads built and operated by the assessee is not an intangible asset particularly when it is held that the expenditure incurred by the assessee is not revenue in nature. Accordingly the assessee s grounds of appeal on this issue are allowed. Disallowance of the provision made by the assessee towards repairs and maintenance of the Expressway built and operated by it after the initial period of 5 years - HELD THAT - As the assessee is required to construct operate and maintain the project for a period of 15 years commencing from the appointed date. Therefore it is clear that there is a liability on the assessee to maintain the roads for the period of the agreement. In the years in which the assessee is constructing the roads there would not arise any expenditure towards repairs and maintenance but thereafter major at times. To meet such liability which is certain but the quantum of the funds that would be required is uncertain the assessee would have to be prepared and for this purpose it can create a provision from the current income to meet the likely future liability In the case before us the concessionaire agreement itself specifies the O M obligations of the concessionaire under Article 17 of the Agreement and requires the assessee to prepare and maintain a maintenance manual and to carry out the work of repairs and maintenance in accordance with the said manual. At page 59 of the paper book the assessee has placed the copy of the letter dated 11.04.2018 of the Consultant to the Project Director of NHAI for the maintenance work to be carried out by the assessee as per the Operation and Maintenance Manual . As per Article 37 of the agreement if the concessionaire i.e. the assessee herein if it defaults or acts in breach of the maintenance requirements or the safety requirements the agreement is liable to be terminated. Thus it is clear that the obligation of repairs and maintenance has accrued on the assessee but only the quantification and execution is to be on a future date. However the basis of quantification of the fund and that the provision is made on a scientific basis has not been established by the assessee nor has it been looked into by the AO. Therefore we deem it fit and proper to remit this issue to the file of the AO with a direction to examine the scientific method followed by the assessee in making the provisions. If it is found to be reasonable and on a scientific criteria then the AO shall not disallow the same. Therefore assessee s ground of appeal on this issue is treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Allowability of depreciation on BOT projects.
2. Disallowance of provision for major maintenance expenses.

Issue-wise Detailed Analysis:

1. Allowability of Depreciation on BOT Projects:
The assessee, a Special Purpose Vehicle formed for the construction of a highway awarded by NHAI on a Build, Operate, and Transfer (BOT) basis, claimed depreciation on BOT projects. The Assessing Officer (AO) disallowed a major portion of this claim based on CBDT Circular No. 9/2014, which mandates that such expenditure be amortized evenly over the concession period. The AO observed that the project commenced operations in the financial year 2012-13, with the concession period lasting until 14.05.2026. Consequently, the AO allowed only a proportionate amount of depreciation for the relevant financial year and disallowed the remaining Rs. 12,78,47,171.

The assessee argued that the expenditure incurred for constructing roads under a BOT contract gives rise to an intangible asset as per Explanation 3(b) read with Section 32(1)(ii) of the Act, thus eligible for depreciation at the specified rate. The assessee cited various judicial precedents, including the Special Bench decision in Progressive Constructions Ltd and decisions from the Pune and Visakhapatnam Tribunals, supporting the claim that such rights constitute intangible assets eligible for depreciation.

The Tribunal examined the applicability of these decisions and found that the Hon'ble Bombay High Court's decisions in North Karnataka Expressway Ltd and West Gujarat Expressway Ltd, which denied depreciation on the basis that the assessee was not the owner of the roads, did not address whether the right to collect toll fees could be considered an intangible asset. The Tribunal noted that the Pune Tribunal in Ashoka Infrastructure Ltd had distinguished between ownership of roads and the right to collect tolls, recognizing the latter as an intangible asset eligible for depreciation.

The Tribunal concluded that the right to collect toll fees over the roads built and maintained by the assessee under the concessionaire agreement is an intangible asset. Therefore, the assessee is entitled to claim depreciation under Section 32(1)(ii) of the Act. This decision was applied to the appeals for A.Ys 2014-15 and 2015-16 as well.

2. Disallowance of Provision for Major Maintenance Expenses:
The AO disallowed the provision for major maintenance expenses amounting to Rs. 1,11,47,486, arguing that the expenditure was not actually incurred during the year but was merely a provision for future maintenance. The AO held that only expenses incurred during the relevant financial year are allowable under the Income Tax Act.

The assessee contended that the provision was made as per the concessionaire agreement with NHAI, which mandates the maintenance of the project for five years and covers major repairs thereafter. The assessee relied on judicial precedents, including Bharat Earth Movers vs. CIT and Rotork Controls India (P) Ltd vs. CIT, which allow provisions for future liabilities if made on a reasonable and scientific basis.

The Tribunal acknowledged the obligation under the concessionaire agreement for the assessee to maintain the roads, which creates a present liability to be discharged in the future. The Tribunal cited the Supreme Court's rulings in Bharat Earth Movers and Rotork Controls India (P) Ltd, which support the recognition of such liabilities if they can be estimated with reasonable certainty.

However, the Tribunal found that the assessee had not established the scientific basis for quantifying the provision. Therefore, the issue was remitted to the AO to examine the method used by the assessee in making the provision. If found reasonable and based on scientific criteria, the AO should allow the provision. This decision was also applied to the appeals for A.Ys 2014-15 and 2015-16.

Conclusion:
The appeals for A.Ys 2013-14, 2014-15, and 2015-16 were partly allowed for statistical purposes. The Tribunal directed the AO to allow depreciation on the right to collect toll fees as an intangible asset and to re-examine the provision for major maintenance expenses based on scientific criteria.