2019 (4) TMI 2011 - AT - Income Tax

Revision u/s 263 by CIT - depreciation claimed @ 25% on the appellant s right to collect toll - Debatable issue - legal owner of asset - as per CIT AO has passed the assessment order without taking note of CBDT Circular No 9 of 2014 and wrongly allowed the claim of depreciation at the rate of 25% on the cost of infrastructure facility being toll road Built Owned and Transfer treating it as an asset in the nature of intangible right - HELD THAT - Assessee need not be a legal owner of an asset to claim depreciation. In case where an assessee is entitled to hold the property to the exclusion of all others and exercise dominion over the property and have the right to use and occupy the property and/or to enjoy its usufruct in his own right would be the owner. All of these conditions in our view is satisfied in the present case and thus the assessee is entitled to depreciation under section 32(1)(ii) of the Act on such intangible assets. Circular also does not dispute that the expense incurred by the assessee brings to it an enduring benefit in the form of right to collect toll during the period of the agreement. In the present case as mentioned earlier and at the cost of repetition we reiterate that the Company has incurred huge costs with an intention to avail an enduring benefit for the purposes of its business which is to collect toll as per the facts stated above. Separately we would like to refer a recent decision of ACIT v. West Gujarat Expressway Ltd. 2015 (5) TMI 305 - ITAT MUMBAI wherein after considering the Circular has held that the expense incurred by the assessee for availing an enduring benefit is nothing but an intangible asset and that the assessee is entitled to depreciation on the same under section 32(1)(ii) We noted that this issue is again decided in the case of ACIT vs. Progressive Construction Ltd. 2017 (3) TMI 1167 - ITAT HYDERABAD wherein it is held that the expenditure incurred by the assessee for construction of road under BOT contract by Govt. of India have given rise to an intangible asset as defined under explanation 3(b) read with section 32(1)(iii) of the Act assessee would be eligible to claim depreciation on such asset at specified rates. The Special Bench has finally held that although the assessee is not the owner of the land but the right granted by the Govt. of India under the Concession Agreement (CA) has a license permitting the assessee to do certain acts and deeds which otherwise would have unlawful or not possible to do in the absence of CA. Thus the right granted by the assessee under CA to operate the project/ project facility and collect toll charges is a lisence or akin to licence hence being an intangible asset eligible for depreciation under section 32(1)(ii) As the issue is highly debatable in the given facts of the case revision under section 263 of the Act is not permissible. Hence the revision order is quashed and the appeal of assessee is allowed.

Summary

Issues Involved:

1. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) to revise the assessment order under section 263 of the Income Tax Act, 1961.
2. Merits of the depreciation claim on "right to collect toll" as an intangible asset under section 32(1)(ii) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Jurisdiction of PCIT under Section 263

The assessee contested the jurisdiction of the PCIT to revise the assessment order under section 263 of the Act. The PCIT had revised the assessment order on the grounds that the Assessing Officer (AO) had not considered CBDT Circular No. 9 of 2014 while allowing depreciation at the rate of 25% on the cost of infrastructure facility, treating it as an intangible asset. The PCIT deemed the assessment order erroneous and prejudicial to the interest of the Revenue. The PCIT issued a show cause notice under section 263, stating that the AO failed to disallow the depreciation claim in accordance with the CBDT Circular, rendering the assessment order erroneous and prejudicial to the Revenue. The Tribunal noted that the amendment to section 263 by the Finance Act, 2015, which inserted Explanation 2, was declaratory and clarificatory in nature, providing clarity on which orders passed by the AO would be considered erroneous and prejudicial to the Revenue.

Issue 2: Merits of the Depreciation Claim on "Right to Collect Toll"

The assessee argued that the cost incurred on the construction and development of the project, classified as "Intangible Assets" in the financial statements, should be eligible for depreciation under section 32(1)(ii) of the Act. The right to collect toll was considered a valuable commercial right akin to a license, falling within the purview of "Intangible Assets." The Tribunal referred to several judicial precedents, including the Supreme Court's decision in Mysore Minerals Ltd. v. CIT, which held that legal ownership is not a prerequisite for claiming depreciation. The Tribunal also cited the case of ACIT v. West Gujarat Expressway Ltd., where it was held that the right to collect toll is an intangible asset eligible for depreciation. The Tribunal further noted that the CBDT Circular did not dispute the enduring benefit derived from the right to collect toll. The Special Bench of ITAT Hyderabad in ACIT vs. Progressive Construction Ltd. also supported the view that the right to operate a toll road and collect toll charges is an intangible asset eligible for depreciation.

Conclusion:

The Tribunal concluded that the issue of depreciation on the right to collect toll is highly debatable. Consequently, the revision under section 263 of the Act was deemed impermissible. The revision order was quashed, and the appeal of the assessee was allowed.

Order Pronouncement:

The appeal of the assessee was allowed, and the order was pronounced in the open court on 15-04-2019.