2021 (2) TMI 548 - HC - Income Tax

Depreciation on roads developed and maintained by the assessee by agreement with the Government on the State/National Highway - whether roads so developed eligible for depreciation as 'building'? - HELD THAT - While considering the issue as to whether the national highway was a road or not, one had to go by the common parlance of road where public at large had an access. As in the case on hand, the assessee therein was granted licence for construction, against which, they had a right to use and collect licence fee to use the land, that in that view of the matter, they had a right to restrict the people without non payment of toll tax and that if the definition, which was given under the Act was looked into, even a development made while occupying the premises and development of a road was the main agreement between the parties and that therefore, the argument of the Revenue that it would not qualify for depreciation was not sustainable. Accordingly, the view taken by the Tribunal was confirmed.Tribunal were right in holding that the development done by the assessee by forming the road would qualify as a plant so as to be entitled to depreciation under Section 32 - Substantial question of law No.1 is also answered against the Revenue and in favour of the assessee and it is held that the assessee is entitled for depreciation at the rate of 10%. Disallowance u/s 14A - Revenue has contended that the Tribunal committed an error in holding that the provisions of Section 14A of the Act read with 8D Would have no applicability if there was no exempt income received though the disallowance was linked to expenditure incurred on investment fetching exempt income - HELD THAT - As decided in own case 2021 (2) TMI 340 - MADRAS HIGH COURT to apply the provisions of Section 14A AO should have recorded a finding as to how Sub-Section (1) of Section 14A would stand attracted. In the absence of any such finding, the disallowance made was not justifiable. AO straightaway proceeded to the second limb of Section 14(2) which is impermissible - provisions of Section 14A r.w.r 8D cannot be made applicable in vacuum i.e in the absence of exempt income. Decided in favour of assessee. Eligibility for depreciation u/s 32(1)(ii) on the lease hold rights obtained by the assessee for a period of 99 years pursuant to an agreement entered into between themselves and the SIPCOT - HELD THAT - Tribunal need not have taken the matter thus far to render a verdict in favour of the assessee especially when the Lower Authorities did not know the factual position. Thus, we are of the firm opinion that the matter has to be re-adjudicated by the Assessing Officer, for which purpose, the Assessing Officer has to threadbare analyse the agreement dated 21.9.2005 entered into between the assessee and the SIPCOT and not go merely by the nomenclature or the title of the document. But, the Assessing Officer should examine the contents. It would also be well open to the assessee to raise the alternate plea, which they raised before the Assessing Officer stating that the expenditure incurred for operational purposes ought to have been allowed as a revenue expenditure. The finding rendered by the Tribunal, the CIT(A) and the Assessing Officer with regard to the disallowance of depreciation on lease hold rights for the assessment years 2007-08 and 2008-09 is set aside and the matter is remanded to the Tribunal to take a fresh decision on merits and in accordance with law, after due opportunity to the assessee.

Issues Involved:
1. Eligibility of roads developed and maintained by the assessee for depreciation as 'building'.
2. Eligibility of the assessee for depreciation under Section 32(1)(ii) on leasehold rights obtained for 99 years.
3. Allowability of depreciation on leasehold rights on land under Section 32(1)(ii) under the head 'intangible asset'.
4. Applicability of Section 14A read with Rule 8D if there is no exempt income received.

Detailed Analysis:

Issue 1: Depreciation on Roads as 'Building'
The tribunal held that roads developed and maintained by the assessee under an agreement with the government on the State/National Highway are eligible for depreciation as 'building'. The assessee claimed depreciation at 15%, treating roads as 'plant and machinery'. The Assessing Officer allowed depreciation at 10%, treating roads as 'building'. The Tribunal followed its earlier decision in the assessee's own case for the assessment years 2003-04 and 2004-05, which was not reversed or modified by the High Court. The High Court upheld the Tribunal's decision, noting that the decision of the Bombay High Court in North Karnataka Expressway Ltd. supported the assessee's case. The Rajasthan High Court's decision in GVK Jaipur Expressway Ltd. also supported the Tribunal's view. Hence, the substantial question of law was answered against the Revenue, confirming the assessee's entitlement to depreciation at 10%.

Issue 2 & 3: Depreciation on Leasehold Rights as 'Intangible Asset'
The Tribunal held that the assessee is eligible for depreciation under Section 32(1)(ii) on leasehold rights obtained for 99 years. The Assessing Officer and CIT(A) did not examine the terms and conditions of the lease agreement thoroughly. For assessment years 2007-08 and 2008-09, the Assessing Officer reopened the assessment, questioning the claim for depreciation on leasehold rights. The assessee argued that they were entitled to depreciation as they had acquired leasehold rights, which qualified as an allowable revenue expenditure. The Tribunal, relying on various judicial precedents, concluded that transfer of leasehold rights amounted to a transfer of capital asset, thus eligible for depreciation. However, the High Court noted that the factual aspects were not adequately examined and remanded the matter to the Assessing Officer for a fresh decision on merits, directing a thorough analysis of the lease agreement.

Issue 4: Applicability of Section 14A read with Rule 8D
The Tribunal held that the provisions of Section 14A read with Rule 8D have no applicability if there is no exempt income received. The Revenue argued that disallowance under Section 14A did not depend on exempt income. The High Court referred to its earlier decision in the assessee's own case and other precedents, including the decision in CIT Vs. Chettinad Logistics Pvt. Ltd., which supported the Tribunal's view. The High Court upheld the Tribunal's decision, answering the substantial question of law against the Revenue.

Conclusion:
1. Depreciation on Roads: The High Court confirmed the Tribunal's decision that roads developed and maintained by the assessee are eligible for depreciation at 10%.
2. Depreciation on Leasehold Rights: The matter was remanded to the Assessing Officer for a fresh decision after thorough examination of the lease agreement.
3. Applicability of Section 14A: The High Court upheld the Tribunal's decision that Section 14A read with Rule 8D does not apply if no exempt income is received.

The appeals were thus partly allowed, with specific directions for fresh consideration on the issue of leasehold rights and depreciation.

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