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2021 (12) TMI 304 - AT - Income TaxDisallowance on account of depreciation on the right to collect annuity on toll roads - assessee is engaged in the business of executing the project for design, construction, finance and maintenance of Gorakhpur By-pass on NH-28(Project Highway) in the state of Uttar Pradesh on Build, Operate and Transfer (BOT) basis under the annuity scheme - assessee entered into concession agreement with National Highway Authority of India (NHAI) and as per concession agreement, NHAI had granted exclusive right, license and authority during the subsistence of the concession agreement to implement the project - assessee classified such cost incurred and right to receive annuity on the toll road as an intangible asset eligible for depreciation u/s.32(1)(ii) - HELD THAT - We find that the ld. CIT(A) had placed reliance on the Special Bench decision of Hyderabad Tribunal in the case of Progressive Construction 2017 (3) TMI 1167 - ITAT HYDERABAD and had granted relief to the assessee. We also find that the similar issue had come up before this Tribunal in the case of DCIT.Cent.Cir-7(2), Mumbai vs. Rajahmundry Expressway Ltd 2020 (3) TMI 632 - ITAT MUMBAI as held entire investment/finance for developing the infrastructure facility was borne by the assessee. By making such investment what the assessee received in return was a right to collect annuity over the period of concession. Thus, the investment made by the assessee for acquiring such right certainly is an intangible asset coming within the purview of section 32(1)(ii) - Decided in favour of assessee. Disallowance on account of provision for periodic maintenance charges both under normal provisions of the Act as well as in the computation of book profits u/s.115JB - only argument advanced by the ld. DR before us was that the liability to incur periodic maintenance cost would arise to the assessee only in A.Y.2017-18 and the entire expenditure would get liable to be incurred only in A.Y.2017-18 - HELD THAT - As pursuant to the concession agreement, the assessee is entitled to receive annuity income every year. It is not in dispute that as per the concession agreement, assessee is obliged to carry out the periodic maintenance cost on road pavement every five years and to address the strengthening course of the roads as and when required. For this purpose, it has to incur periodic maintenance cost once in five years and assessee has chosen to apportion the expenses over a period of five years. We find that assessee has made provision for periodic maintenance cost based on technical valuation report. The said document was duly placed on record before the lower authorities. Since the provision for periodic maintenance cost on year to year basis has been made based on technical valuation report on a scientific basis by the assessee and in view of the fact that annuity income has been derived by the assessee year on year basis, in view of the matching concept of income and expenditure, we hold that assessee had merely discharged its contractual obligation by making provision for periodic maintenance cost and since accounts are maintained by the assessee on a mercantile basis, the said provision needs to be made by the assessee in its books and accordingly, the same become an allowable expenditure u/s.37(1) under the normal provisions of the Act. We also find that the said provision has been made on a scientific basis by the assessee. This categorical finding recorded by the ld. CIT(A) has not been controverted by the ld. DR before us. Periodic maintenance cost is an integral part of the concession agreement and assessee is under a contractual obligation to incur the same and provision has been made by it on a scientific basis. Accordingly, the expenditure attributable to each year has been claimed as deduction both under normal provisions of the Act as well as in the computation of book profits u/s.115JB - Hence, it would not fall under the category of provision made for contingent liability or unascertained liability. We find that the ld. CIT(A) had rightly appreciated these contentions of the assessee and had rightly placed reliance on the decision in the case of Rotork Controls India Pvt. Ltd. 2009 (5) TMI 16 - SUPREME COURT and ASHOKA BUILDCON LTD 2015 (10) TMI 181 - ITAT PUNE - Decided against revenue.
Issues Involved:
1. Deletion of disallowance made on account of depreciation on the right to collect annuity on toll roads. 2. Deletion of disallowance made on account of provision for periodic maintenance charges under normal provisions of the Income Tax Act and in the computation of book profits under section 115JB. Detailed Analysis: 1. Depreciation on Right to Collect Annuity on Toll Roads: The first issue addressed was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in deleting the disallowance made on account of depreciation on the right to collect annuity on toll roads. The assessee was engaged in the construction and maintenance of a highway on a Build, Operate, and Transfer (BOT) basis under an annuity scheme. The cost incurred on the project was classified as an intangible asset eligible for depreciation under section 32(1)(ii) of the Income Tax Act, 1961. The Assessing Officer (AO) denied this depreciation, arguing the assessee did not hold ownership rights in the project. However, the CIT(A) allowed the depreciation, citing that the annuity right was an intangible commercial right with enduring benefit, and thus eligible for depreciation under section 32(1)(ii). The CIT(A) relied on the Special Bench decision of the Hyderabad Tribunal in the case of Progressive Constructions Ltd., which recognized the right to collect toll charges as an intangible asset. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground. 2. Provision for Periodic Maintenance Charges: The second issue involved the deletion of disallowance made on account of provision for periodic maintenance charges, both under normal provisions of the Act and in the computation of book profits under section 115JB. The assessee was contractually obligated to incur maintenance expenses periodically as per the concession agreement. The provision for these expenses was made based on a technical report and amortized over five years, claimed as a deduction under section 37(1). The AO disallowed the provision, treating it as an estimated future cost and an unascertained liability. The CIT(A) deleted the disallowance, noting that the provision was based on a scientific method and constituted an ascertained liability. The Tribunal found that the provision was made on a scientific basis, aligned with the matching principle of income and expenditure, and upheld the CIT(A)'s decision. The Tribunal also referenced the Supreme Court decision in Rotork Controls India Pvt. Ltd., which allowed for provisions based on reasonable scientific methods, and the Pune Tribunal decision in ACIT vs. Ashoka Buildcon Ltd., which recognized foreseeable losses as allowable deductions. Consequently, the Tribunal dismissed the Revenue's grounds on this issue as well. Conclusion: The Tribunal upheld the CIT(A)'s decisions on both issues, confirming that the depreciation on the right to collect annuity on toll roads and the provision for periodic maintenance charges were correctly allowed. The appeals of the Revenue were dismissed in their entirety.
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