2017 (3) TMI 1167 - AT - Income Tax

Expenditure incurred on construction of road on BOT basis - Capital or Revenue expenditure - claim of depreciation on the asset created by investing an amount in construction of Pune Hyderabad section of National Highway no.9, on build, operate and transfer (BOT) basis - Held that - In the case of Techno Shares and Stocks Ltd. v/s CIT, 2010 (9) TMI 6 - SUPREME COURT OF INDIA the Hon ble Supreme Court while examining the assessee s claim of depreciation on BSE Membership Card, after interpreting the provisions of section 32(1)(ii), held that as the membership card allows a member to participate in a trading session on the floor of the exchange, such membership is a business or commercial right, hence, similar to license or franchise, therefore, an intangible asset. In the present case, undisputedly by virtue of C.A. the assessee has acquired the right to operate the toll road / bridge and collect toll charges in lieu of investment made by it in implementing the project. Therefore, the right to operate the toll road / bridge and collect toll charges is a business or commercial right as envisaged under section 32(1)(ii) r/w Explanation 3(b) of the said provisions. Therefore, in our considered opinion, the assessee is eligible to claim depreciation on WDV as an intangible asset. Thus, we answer the question framed by the Special Bench as under The expenditure incurred by the assessee for construction of road under BOT contract by the Government of India has given rise to an intangible asset as defined under Explanation 3(b) r/w section 32(1)(ii) of the Act. Hence, assessee is eligible to claim depreciation on such asset at the specified rate. Amortization of the expenses incurred for construction of BOT road in terms of CBDT Circular no.9 of 2014 dated 23rd April 2014 - Held that - As already discussed in the earlier part of the order the nature of expenses whether capital or revenue is not the subject matter of dispute in the present appeal, as the expenditure incurred has already been considered as capital expenditure in the preceding assessment years and assessee s claim of depreciation have been allowed. Therefore, in the impugned assessment year, the claim is limited to depreciation on the WDV on block of assets only. The issue whether the expenditure incurred is a deferred revenue expenses or not was not the subject matter of consideration either by the Assessing Officer or by the learned Commissioner (Appeals). Taking into consideration the aforesaid fact, the Tribunal had re framed the question by limiting the issue only to the determination of nature of asset, whether tangible or intangible. In fact, the learned Departmental Representative has also accepted the aforesaid factual position. In any case of the matter, the assessee neither in the preceding assessment years nor in the impugned assessment year has claimed it as deferred revenue expenditure, hence, there is no scope to examine whether the expenditure could have been amortized over the concession period in terms of CBDT circular no.9 Addition made under section 14A - Held that - The fact that in the relevant previous year, assessee has not earned any exempt income has not been controverted by the Department. Therefore, in the absence of any exempt income earned by the assessee no disallowance under section 14A can be made

Issues Involved:
1. Whether expenditure incurred by the assessee on the construction of a road under BOT contract with GOI gives rise to an asset and if so, whether it is an intangible asset or tangible asset?
2. If it is a tangible asset, whether it is a building or plant or machinery?
3. Whether the Concessionaire Agreement (C.A) held by the assessee can be regarded as a commercial or business right akin to a license?
4. Whether the expenditure incurred should be amortized over the period of concession?
5. Whether the disallowance under section 14A for earning exempt income is justified?

Detailed Analysis:

1. Nature of Asset Created by Expenditure:
The core issue was whether the expenditure of ?214 crore incurred by the assessee for constructing a road under a BOT contract with the Government of India resulted in the creation of an asset and, if so, whether it was a tangible or intangible asset. The Tribunal found that the right acquired by the assessee to operate the project facility and collect toll charges is an intangible asset created by the expenditure. This right was considered a valuable business/commercial right, eligible for depreciation under section 32(1)(ii) of the Act.

2. Classification of Tangible Asset (if applicable):
The Tribunal did not need to classify the asset as a building or plant/machinery since it concluded that the asset created was intangible in nature. The expenditure incurred resulted in the creation of an intangible asset, not a tangible one.

3. Concessionaire Agreement as a License:
The Tribunal examined whether the Concessionaire Agreement (C.A) could be regarded as a commercial or business right akin to a license. It concluded that the right granted to the assessee under the C.A. to operate the project and collect toll charges is a license or akin to a license. This right was considered an intangible asset eligible for depreciation under section 32(1)(ii) of the Act.

4. Amortization of Expenditure:
Regarding the amortization of the expenditure, the Tribunal noted that the nature of the expenses, whether capital or revenue, was not disputed in the present appeal. The expenditure had already been considered as capital expenditure in the preceding assessment years, and the assessee’s claim of depreciation had been allowed. The Tribunal dismissed the Department's ground for amortization because the issue did not arise from the orders of the Departmental Authorities and was not claimed by the assessee.

5. Disallowance under Section 14A:
The Tribunal upheld the deletion of the addition made by the Assessing Officer under section 14A. It noted that the assessee had not earned any exempt income in the relevant assessment year, and the assessee had sufficient interest-free funds available to make the investment. Therefore, no disallowance under section 14A could be made.

Conclusion:
The Tribunal concluded that the expenditure incurred by the assessee for constructing the road under the BOT contract resulted in the creation of an intangible asset. The assessee was eligible to claim depreciation on such an intangible asset. The Tribunal dismissed the Department's appeal and the assessee's cross-objection. The order was pronounced in the open Court on 14.02.2017.

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