Depreciation under sec 32(1)(ii) allowed on intangible assets granted in a contract of BOT

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Depreciation under sec 32(1)(ii) allowed on intangible assets granted in a contract of BOT

Depreciation under sec 32(1)(ii) allowed on intangible assets granted in a contract of BOT [Build, Operate & Transfer]

ITAT, Mumbai: The assessee is entitled to depreciation under section 32(1)(ii) of the Act on  intangible assets like Concession Rights granted in a contract Build, Operate and Transfer (BOT) basis.

Deputy Commissioner of Income vs. M/S Mumbai Nasik Expressway; ITAT Mumbai; ITA No.848/MUM/2020;01.09.2021

Issue:

That the Ld. ITAT, Mumbai in this appeal dealt with the issue that whether on the facts and circumstances of the case and in the law, the Ld. CIT (A) erred in deleting the disallowance made by the Assessing Officer without considering the fact that the matter is sub-judice and the department has not accepted the decision of the Hon’ble lTAT w.r.t order u/s 263 of the Act passed by the CIT.

Facts:

The assessee company, is engaged in the business of improvement, operation and maintenance, rehabilitation and strengthening of existing two lane road and widening to four lane divided carriageway from Km. 539.5 to Km. 440 (Vadape-Gonde Section) of NH-3 on Build, Operate and Transfer (BOT) basis in the State of Maharashtra.

The assessee company had filed its return of income for A.Y. 2012-13 on 27.09.2010, declaring a total loss of Rs.153,87,93,284/- and “book profit” u/s 115JB of Rs.7,56,60,340/-. Original assessment was framed by the A.O u/s 143(3) of the Act, dated 30.03.2015 and the loss returned by the assessee company was accepted as such. After culmination of the assessment proceedings, the Pr.CIT (Central)-4, Mumbai, called for the assessment records of the assessee company. The A.O. after considering the annual accounts of the assessee, observed that as per “Annexure 2‟ to Form 3CD (as per Form 3CB to 3CD) in Block VIII pertaining to Concession Rights an amount of Rs.334,40,25,560/- had been added during the year in question to the opening W.D.V of Rs.415,29,22,175/-; and depreciation was claimed @ 25% on the total amount of Rs.731,17,57,434/- therein amounting to Rs.182,79,39,359/- and issued a show cause notice as to why its claim for depreciation on roads @ 25% amounting to Rs.182,79,39,359/- may not be disallowed u/s 32(1)(ii) of the Act. It was further noticed by the A.O that the CBDT vide its Circular No. 9 of 2014 dated 23.4.2014, had clarified that the cost of construction on development of infrastructure facility of roads/highways under BOT projects was to be amortized and claimed as allowable business expenditure under the Act.

Backed by his aforesaid observation, the A.O disallowed the assesse’s claim of depreciation of Rs.182,79,39,359/-. Accordingly, the A.O vide his order passed u/s 143(3) r.w.s 263, dated 31.08.2017 assessed the income of the assessee company at Rs. 28,91,46,080/-. Aggrieved, the assessee carried the matter in appeal before the CIT(A). Observing, that as the order passed by the Pr. CIT- 4, Mumbai u/s 263 of the Act had been set-aside by the Tribunal, therefore, as a consequence thereto the assessment framed by the A.O vide his order passed u/s 143(3) r.w.s 263, dated 31.08.2017 could not be survive on standalone basis, the CIT(A) deleted the disallowance of the assessee’s claim for depreciation of Rs.182.79 crores that was made by the A.O.

Revenue being aggrieved with the order passed by the CIT(A) filed the present appeal.

Observations:

  • It was observed that it was clear that an assessee need not be a legal owner of an asset to claim depreciation. In case where an assessee is entitled to hold the property to the exclusion of all others and exercise dominion over the property and have the right to use and occupy the property and/or to enjoy its usufruct in his own right would be the owner. All of these conditions in our view is satisfied in the present case and thus the assessee is entitled to depreciation under section 32(1)(ii) of the Act on such intangible assets.
  • The expense incurred by the assessee for availing an enduring benefit is nothing but an intangible asset and that the assessee is entitled to depreciation on the same under section 32(1)(ii) of the Act.
  • Further, it was noted that the Circular states that the assessee does not hold any right in the project except the recovery of toll fee to recoup the expense incurred.
  • The expenditure incurred by the assessee for construction of road under BOT contract by Govt. of India have given rise to an intangible asset as defined under explanation 3(b) read with section 32(1)(iii) of the Act, assessee would be eligible to claim depreciation on such asset at specified rates.
  • Although the assessee is not the owner of the land but the right granted by the Govt. of India under the Concession Agreement (CA) has a license permitting the assessee to do certain acts and deeds which otherwise would have unlawful or not possible to do in the absence of CA. Thus, the right granted by the assessee under CA to operate the project/ project facility and collect toll charges is a license or akin to license, hence, being an intangible asset eligible for depreciation under section 32(1)(ii) of the Act.

Held:

  • On a thoughtful consideration to the issue before the bench it did not find any infirmity in the view taken by the CIT (A) that now when the order passed by the Pr. CIT-4, Mumbai u/s 263 of the Act, dated 22.03.2017 had been quashed by the Tribunal, therefore, as a consequence thereto the assessment order passed by the A.O u/s 143(3) r.w.s 263, dated 31.03.2017 cannot survive on a standalone basis and had to meet the same fate.

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