2023 (7) TMI 1417 - AT - Income Tax

Depreciation on rights to build and operate a toll road - assessee had claimed depreciation at the rate of 25% on its right to build and operate in transfer arrangement by treating the same is intangible asset but AO restricted depreciation to 7.41% - as argued rights in the land remain vested with the Government or its agencies and assessee does not hold any rights in the project except recovery of toll fee to recoup the expenditure incurred cannot therefore be treated as an owner of the property either wholly or partly for purpose s of allowability of depreciation under section 32(l)(ii) of the Act. - HELD THAT - On appreciated from the orders of ld. CIT(A) that the fact that rights under BOT projects have been considered to be intangible assets in the light of judgment of M/s. Progressive Construction limited. 2014 (11) TMI 401 - ITAT HYDERABAD and Ld. CIT(A) has also appreciated the fact that the Circular dated 23.04.2014 as relied by Ld. AO would not be applicable to the relevant assessment year 2013-14. As decided in M/S. Gwalior Bypass Project Ltd. 2023 (7) TMI 971 - ITAT NEW DELHI immovable property on which the project / project facility is executed / implemented is owned by the Government of India and it has full power to hold dispose off and deal with the immovable property. By virtue of the C.A. assessee has only been granted a limited right to execute the project and operate the project facility during the concession period on expiry of which the project / project facility will revert back to the Government of India. What the Government of India has granted to the assessee is the right to use the project site during the concession period and in the absence of such right it would have been unlawful on the part of the concessionaire to do or continue to do anything on such property. However the right granted to the concessionaire has not created any right title or interest over the property. The right granted by the Government of India to the assessee under the C.A. has a license permitting the assessee to do certain acts and deeds which otherwise would have been unlawful or not possible to do in the absence of the C.A. Thus right granted to the assessee under the C.A. to operate the project / project facility and collect toll charges is a license or akin to license hence being an intangible asset is eligible for depreciation under section 32(1)(ii) of the Act. - Decided in favour of assessee. Disallowance of Provisions Made for Warranty Period Expenses - AO observed that the expenses neither accrued nor crystallized and it is only dependent on future event which may or may not happen so the liability was clearly to arise - CIT(A) deleted addition - HELD THAT - The company undertakes turnkey projects in the field of telecommunications etc. and company has to ensure satisfactory performance of the projects during the warranty period. The clients withhold retention money for warranty periods. Thus liability to maintain the project during its execution and maintenance is a contractual liability as rightly appreciated by Ld. CIT(A). It is also rightly appreciated by Ld. CIT(A) that since appellant shows 100% of the contractual receipts as income it is imperative that provision has to be made for the corresponding liability including warranty period expenses which can be booked in accounts on matching principle by way of its provision only. As the matter of fact the expenditure was allowed to the assessee in the A.Y. 2011-12 and deleted by ld. CIT(A) in A.Y. 2012-13. The findings of Ld. CIT(A) require no interference. Ground is decided against the Revenue. The appeal of Revenue is dismissed.

Summary

Issues Involved:
1. Depreciation on rights to build and operate Toll Road.
2. Disallowance of provisions made for warranty period expenses.

Summary:

Issue 1: Depreciation on rights to build and operate Toll Road

The Revenue challenged the deletion of an addition of Rs. 5,11,37,177/- made on account of disallowance of depreciation on rights to build and operate a toll road. The Ld. AO had restricted depreciation to 7.41% instead of the 25% claimed by the assessee, arguing that the rights in the land remained with the Government and thus the assessee could not be treated as an owner of the property for the purposes of depreciation u/s 32(1)(ii) of the Act. The Ld. CIT(A) considered the rights under BOT projects as intangible assets, referencing the judgment of the Hyderabad Bench in DCIT Hyderabad vs. M/s. Progressive Construction Ltd. The Tribunal upheld this view, noting that the right to operate the project facility and collect toll charges is an intangible asset eligible for depreciation. The Tribunal cited previous decisions, including a Special Bench ruling, which supported the assessee's claim. The ground was decided against the Revenue.

Issue 2: Disallowance of provisions made for warranty period expenses

The Revenue contested the deletion of an addition of Rs. 1,68,70,284/- made on account of disallowing provisions for warranty period expenses. The Ld. AO argued that the expenses neither accrued nor crystallized and were dependent on future events. However, the Ld. CIT(A) found that the company had a contractual liability to ensure satisfactory performance during the warranty period, which justified the provision for warranty expenses. The Tribunal agreed, noting that since the company recognized 100% of the contractual receipts as income, it was imperative to account for corresponding liabilities, including warranty period expenses, on a matching principle. The ground was decided against the Revenue.

Conclusion:

The appeal of the Revenue was dismissed, with the Tribunal upholding the findings of the Ld. CIT(A) on both issues. The order was pronounced on 26th July, 2023.