2021 (9) TMI 1536 - AT - Income Tax

Characterization of receipts - Chargeability of interest on deposits/loans - assessee has been following this system from the earlier years and the interest income has been offered as a business income - only difference of opinion with the CIT(A) that, these surplus funds are not necessary to the assessee and there is no requirement for the assessee to make deposits - HELD THAT - As in the present case, the assessee company has earned interest on bank deposits and on short term call money loan. AR demonstrated working of interest income on bank deposits and interest on term loan - interest income earned on the term loan provided @6% p.a. in the August 2005 was continuing and interest income was offered in earlier financial years. Borrower of loan has provided guarantee to lenders of the assessee company which benefited substantially to the assessee business projects and operations. Since the term loan provided by the assessee to the barrower is linked in obtaining counter guarantee to assessee business prospects and there exist the nexus of business transactions. We considering all are of the opinion that interest income earned by the assessee take the character of business transaction and to be treated as business income. Accordingly, we direct the Assessing Officer to treat the interest income taxable as business income and allow the grounds of appeal of the assessee. Claim of depreciation u/s 32(1)(ii) - right to set up an infrastructure facility and collect annuity thereon - assessee had constructed the Road and have the right to earn revenue in the form of annuity from the use of such intangible Asset being license or business or commercial right contemplated under the provisions of the Act - HELD THAT - We considering the factual aspects, circumstances, legal decisions West Gujarat Expressway Ltd 2016 (4) TMI 1184 - BOMBAY HIGH COURT ,Infrastructure Leasing Financial Services ltd 2019 (12) TMI 1499 - ITAT MUMBAI are of the opinion that the assessee is eligible for depreciation on Road on (B.O.T) basis treating it as Intangible Asset under section 32(1)(ii) of the Act. Accordingly, we direct the assessing officer to grant depreciation as discussed and allow the additional ground of appeal in favour of the assessee.

Summary

Issues Involved:
1. Classification of interest income as "Income from Other Sources" vs. "Income from Business & Profession".
2. Claim of depreciation on roads constructed on a Build-Operate-Transfer (BOT) basis as an intangible asset under Section 32(1)(ii) of the Income Tax Act.

Detailed Analysis:

Issue 1: Classification of Interest Income
The primary issue was whether the interest income of Rs. 2,37,11,860/- should be classified under "Income from Other Sources" or "Income from Business & Profession". The assessee argued that the interest income was part of business income, as the funds were invested in short-term deposits and loans as part of business operations. The Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the interest income should be classified as "Income from Other Sources" since the funds were surplus and not required for business operations.

The Tribunal, however, found that the interest income was inextricably linked to the business operations. The funds were invested in short-term deposits and loans as a business necessity, not as surplus idle funds. The Tribunal referred to the case of M/s East Hyderabad Expressways Ltd, where it was held that interest income earned from business funds should be treated as business income. Accordingly, the Tribunal directed the A.O. to treat the interest income as business income.

Issue 2: Depreciation on Roads Constructed on BOT Basis
The second issue was the claim of depreciation on roads constructed on a BOT basis, treating the right to collect annuity as an intangible asset under Section 32(1)(ii) of the Income Tax Act. The assessee argued that the right to earn revenue from the constructed road is an intangible asset and should be eligible for depreciation at the rate of 25%.

The Tribunal referred to multiple judicial decisions, including the case of North Karnataka Expressway Ltd and the Special Bench decision in ACIT vs. Progressive Construction Ltd., which held that the right to collect toll is an intangible asset eligible for depreciation. The Tribunal noted that the right to operate the project facility and collect toll charges is a commercial right, which falls under the definition of intangible assets as per Section 32(1)(ii). Therefore, the Tribunal directed the A.O. to grant depreciation on the BOT road project, treating it as an intangible asset.

Conclusion
The Tribunal allowed the appeals filed by the assessee for the assessment years 2008-09, 2009-10, and 2010-11. The interest income was directed to be treated as business income, and the claim for depreciation on the BOT road project was accepted, treating it as an intangible asset under Section 32(1)(ii) of the Income Tax Act. The consolidated order addressed identical issues across the three assessment years, applying the same legal principles and judicial precedents.