Depreciation and provision for maintenance on BOT project allowable – ITAT

Depreciation and provision for maintenance on BOT project allowable. ITAT distinguished decision of Bombay High Court & held in assessee’s favour

ABCAUS Case Law Citation:
ABCAUS 3070 (2019) (07) ITAT

Important Case Laws Cited/relied upon by the parties:
Progressive Constructions Ltd, reported in (2018) 161 DTR 289
Ashoka Infrastructure Ltd vs. ACIT (2018) 163 DTR 321 (Pune Trib.)
Dy. CIT vs. Godavari Toll Bridge (P) Ltd (2018) 163 DTR (Visakha Trib.)
Pr. CIT vs. Tulip Hospitality Service Ltd (2019) 411 ITR 595 (Bom.).
West Gujarat Expressway Ltd, (2017) 82 Taxmann.com 224 (Bom.)
North Karnataka Expressway Ltd reported in 51 Taxmann.com 214
Bharat Earth Movers vs. CIT (2000) 245 ITR 428 (S.C)
Rotork Controls India (P) Ltd vs. CIT (2009) 314 ITR 62 (S.C)

The appellant assessee had challenged the order of the CIT (A) in confirming disallowance on account of depreciation and provision for maintenance in BoT project.

The assessee company, was a Special Purpose Vehicle, formed for construction of Highway awarded by NHAI on Build, Operate and Transfer basis (BOT). The company filed its return of income for the relevant assessment year declaring a loss.

Initially, the return was processed u/s 143(1) of the Income Tax Act, 1961 (the Act) and subsequently, on selection for scrutiny under CASS, notices were issued u/s 143(2) and 142(1). The Assessing Officer (AO) on the perusal of the schedule of fixed assets, observed that the assessee company claimed depreciation on BOT projects @ 5% (at half the rate as being put to use for less than 180 days).

The AO observed that there were several disputes on the allowability of depreciation on the expenditure incurred for development and construction of roads/highways on BOT basis and that to put an end to all the disputes, the CBDT had issued circular No. 9/2014, dated 23.04.2014 clarifying on the issues regarding the allowability of the depreciation on projects developed under BOT.

The AO observed that as per the CBDT circular, the expenditure has to be amortized evenly over the period of concessionaire agreement after excluding the time taken for creation of such facility from the date of commencement etc.

Further, from the information submitted by the assessee, the AO noted that the project has commenced its operation in the relevant financial year only and the agreement period of the project was far stretched. Therefore, the total period of the project from the commencement day (CDD) was 4863 days and during the relevant financial year, the assets were put to use only for 71 days. He therefore, worked out the proportionate expenditure to be amortized for the relevant financial year and the balance of the amount claimed as depreciation was disallowed and brought to tax.

Further, on verification of the P&L A/c, the AO noted that the assessee had debited an amount towards provision for major maintenance. On further verification, he noted that this expenditure was not actually incurred during the year but only a provision was being made for future maintenance of BOT projects.

The assessee had submitted that as per the agreement with NHAI, a BOT project shall be maintained for a period of 5 years and subsequently, if any major repairs occurs, it has to be borne by the assessee company and so a provisions was being created for the expenditure to be incurred towards repair and maintenance of the project after the period of 5 years.

The AO observed that as per the provisions of the Act, only the expenditure incurred during the relevant year was allowable and that expenditure relatable to the other years was not allowable.

Therefore, he disallowed the provision and brought it to tax.

Aggrieved, by the additions made, the assessee preferred an appeal before the CIT (A), who confirmed the order of the Assessing Officer (AO).

The assessee was in second appeal before the Tribunal.

The Tribunal observed that the issue was whether the assessee had got a right over the toll road built by him and being maintained by him and the right to collect toll fees over the same in accordance with the concessionaire agreement was an intangible asset and whether depreciation thereon is allowable u/s 32 of the Act?

The Tribunal noted that Hon’ble the Bombay High Court had held that the assessee was not the owner of the roads and therefore, was not entitled to the claim of depreciation thereon. However, as to whether the assessee was eligible for depreciation on the ‘intangible asset’ had been left open.

It was further noted that the decision of the Hon’ble Bombay High Court was followed by the subsequent Bench of the Hon’ble High Court to hold that the assessee therein was not the owner of the roads and therefore, could not claim depreciation u/s 32 of the Act. However, these two cases were considered by the Coordinate Bench of the Tribunal which had observed that the Hon’ble Bombay High Court had not discussed the issue relating to the claim of depreciation on the license for right to collect the toll as intangible asset.

The Tribunal observed that the Hon’ble Bombay High Court was concerned about the issue as to whether the assessee can claim itself as the owner of the toll road and the Hon’ble Bombay High Court had held that in view of the express provisions of the National Highway Act, 1956 and National Highway Authorities of India Act, 1988 the Union is the absolute owner of the National Highways as well as the toll roads built upon the land/National Highways in agreement and through the private parties and such private parties cannot claim themselves to be the owner of the toll road. However, the Hon’ble Bombay High Court had left upon the issue relating to the claim of depreciation, if otherwise eligible under the other provisions of the Income Tax Act.

The Tribunal had further observed that the term owner as appearing in the Income Tax Act, 1961 had been defined widely and broadly for the purpose of the provisions of the Income Tax Act so as not to allow anybody to escape the provisions thereof by urging that he has a limited right or which is not akin to ownership, therefore his income should not be brought to tax; Similarly, if he can claim any deductions from his income which is comprising of profit and gain from his business, then, that deduction can be availed by him. It is for that limited purpose that the term “owner” is defined in this manner in Income Tax Act, 1961. The Coordinate Bench had also considered the CBDT circular No.9/2014.

Thus the Tribunal observed that the Coordinate Bench had not only considered the decision of the Hon’ble Mumbai High Court but has also considered the decision of the Coordinate Bench at Mumbai to allow the alternate claim of the assessee to hold that the asset was an intangible asset and allowed depreciation thereon.

However, it was observed that the decision of the Coordinate Bench Mumbai was reversed by the Hon’ble Bombay High Court. However, the decision of the Coordinate Bench of the Tribunal had brought out the distinction between the claim of depreciation u/s 32 as against the claim of depreciation u/s 32(1)(ii) as on intangible asset

The Tribunal opined that this distinction was not brought to the notice of the Hon’ble High Court and therefore, the Hon’ble High Court was pleased to reverse the judgment of the Coordinate Bench.

Thus the Tribunal opined that the ratio laid down by the Hon’ble Bombay High Court could not be applied to the case of the assessee straightway. It was noted that the Special Bench of the Tribunal had held that the license to operate and collect the toll fee is a commercial right falling within the definition of “intangible asset”, whereas the Hon’ble Bombay High Court was considering whether the assessee be granted depreciation on toll-way which were not owned by it.

The Tribunal opined that the decision of the Coordinate Bench was applicable to the facts of the instant case. There was no decision by the Hon’ble Bombay High Court that the right ‘to collect toll fee over the roads built and operated by the assessee’ was not an “intangible asset”, particularly when it was held that the expenditure incurred by the assessee was not revenue in nature.

On the issue of provision for maintenance, the Tribunal noted that as per the agreement between the assessee and the NHAI, the assessee was required to construct, operate and maintain the project for a period of 15 years commencing from the appointed date. Therefore, there was a liability on the assessee to maintain the roads for the period of the agreement.

The Tribunal opined that in the years in which the assessee was constructing the roads, there would not arise any expenditure towards repairs and maintenance but thereafter major at times. To meet such liability which was certain, but the quantum of the funds that would be required was uncertain, the assessee would have to be prepared and for this purpose it can create a provision from the current income to meet the likely future liability. This necessity had been recognized by the Hon’ble Supreme Court.

The Tribunal observed that the concessionaire agreement itself specified the O&M obligations of the concessionaire and required the assessee to prepare and maintain, a maintenance manual and to carry out the work of repairs and maintenance in accordance with the said manual. Further as per the agreement, if the concessionaire, i.e. the assessee defaults or acts in breach of the maintenance requirements or the safety requirements the agreement is liable to be terminated. Thus, it was clear that the obligation of repairs and maintenance had accrued on the assessee, but only the quantification and execution was to be on a future date. However, the basis of quantification of the fund and that the provision is made on a scientific basis had not been established by the assessee nor has it been looked into by the AO.

Accordingly, the Tribunal allowed the depreciation on BoT project and remitted the issue of provision for maintenance  to the file of the AO with a direction to examine the scientific method followed by the assessee in making the provisions.

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