Intangible asset: right to manage toll roads and collect toll fees
Fact and issue of the case
This Special Bench is constituted by the Hon’ble President to dispose of the appeal filed by the Department assailing the order passed by the learned Commissioner (Appeals)–V, Hyderabad, and to decide the following important questions involved therein
Whether on the facts and in the circumstances of the case, expenditure incurred by the assessee on construction of road on BOT basis is Capital or Revenue? If it is capital expenditure, whether the same is eligible for depreciation at the rate applicable to building or to an intangible asset as per section 32(1(ii)? And, if not, whether the same being Revenue expenditure is liable to be amortized over the period of concession?
The special bench finding that the aforesaid question does not arise out of the facts involved in the impugned assessment year proposed to reframe the question in consonance with the facts obtaining in the impugned assessment year, heard both the parties at length and after addressing the objections of the Department (discussed in detail in the order dated 4th April 2016, in M.A. no.96/Hyd./2015, and the interim order, hence, we do not consider it necessary to reiterate them again in this order) reframed the question as under
Whether on the facts and in the circumstances of the case, the expenditure incurred by the assessee for 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? In case it is held to be tangible asset, whether it is building or plant or machinery?
Facts necessary for deciding the issue as culled out from record are stated hereinafter briefly, assessee a company is engaged in executing civil contract work. For the assessment year in dispute, assessee filed its return of income on 30th September 2011, declaring income at nil under normal provisions of the act. Subsequently assessee on 26th March 2012, filed a revised return of income declaring total income of Rs.19,74,02,080 under the normal provisions and book profit of Rs.25,24,58,222, under section 115JB of the Act. In course of the assessment proceedings, the assessing officer noticing that assessee has claimed depreciation of Rs.40,07,94,526 at the rate of 25% on the opening written down value (WDV) of built, operate and transfer (BOT) bridge at Rs.160,31,78,103 examined the matter further. He found that on 22nd December 2005, assessee had entered into a Concession Agreement (hereinafter called “C.A”) with the Government of India for four laning of National Highway no.9 between KM 493/1000 to KM 524/1000 in Pune–Hyderabad section in the State of Andhra Pradesh on BOT basis. The assessee completed the construction of the road and commenced operation of the road from 28th December 2008. The assessing officer on verifying the concession agreement found that as per the terms of the agreement, assessee was to complete the work at its own cost and maintain the same for a period of 11 years and after conclusion of the said period the road was to be handed over on “as is where is” basis to NHAI. As per the terms of agreement assessee is entitled to collect toll from vehicles using the road as mentioned in National Highways (Rate of Fee) Rules, 1997, during the concession period. Referring to different clauses of the concession agreement the assessing officer formed an opinion that as the assessee has no right on the road, except, for maintaining the road and receiving toll collections during the concession period as per the rates specified by the Government and entire rights over the road are with National Highway Authority of India, including collection of toll, the asset on which the assessee had claimed depreciation is neither a building nor a plant and machinery. He, therefore, called upon the assessee to justify the claim of depreciation. In response to the query raised by the assessing officer, assessee submitted, investment made by the assessee in constructing the road and acquiring the right to operate the road and receive toll charges is a valuable commercial or business right in the nature of intangible asset, hence, is eligible for depreciation under section 32(1)(ii) of the Act. The assessing officer, however, rejected assessee’s claim on the reasoning that assessee is not the owner of the asset and secondly, only roads within a factory premises linking various buildings and approach roads is eligible for depreciation. While coming to such a conclusion the assessing officer also noted, assessee has no consistency in its claim as in assessment year 2010–2011 assessee had claimed depreciation on the BOT–bridge by treating it as intangible asset. Accordingly, assessing officer disallowed assessee’s claim of depreciation. Being aggrieved of disallowance of depreciation assessee preferred appeal before the learned Commissioner (Appeals).
Learned Commissioner (Appeals) after considering the submissions of the assessee in the context of facts and materials on record having noted that in assessment year 2010–2011 assessee’s claim of depreciation by treating the asset as an intangible asset was allowed by him and the said decision was confirmed by the tribunal, followed the same and allowed assessee’s claim of depreciation. Being aggrieved of the aforesaid decision of the learned Commissioner (Appeals), the Department is before us.
Shri J.V. Prasad, learned Senior Standing Counsel appearing for the Department apart from making his submissions orally at the time of hearing had also filed a written submission on 21st July 2016. At the outset he submitted, assessee is not consistent as far as its claim of depreciation on BOT-bridge is concerned. He submitted, in assessment year 2009–10 assessee had claimed depreciation by treating it as building. Whereas, in assessment year 2010–11 and 2011–12 assessee had claimed depreciation on BOT-bridge at a higher rate by treating it as intangible asset. He submitted, assessee had incurred expenditure of Rs.214 crore over a period in pursuance to the concession agreement which has brought into existence a tangible asset in the form of widened roads, widened bridges, toll plaza etc. However, as per the terms of concession agreement such tangible assets are not only owned but are also used by the government of India. Therefore, assessee not being the owner of the tangible asset created, is not entitled to claim depreciation under section 32 of the Act.
The learned Senior Standing Counsel submitted, what the assessee has done is to make an investment for creation of an asset for the government of India, while, simultaneously acquiring certain rights in the property enabling it to earn income by way of collection of toll fee for a certain period. Thus, in the process recovering its cost of investment with certain amount of profit. In a way, for the assessee BOT roads, bridges et cetera are stock in trade being equipment or tools in its trade. He submitted, undoubtedly Government of India is the owner and user of the tangible asset created with the expenditure of Rs.214 crore. Whereas, the assessee is claiming depreciation on the very same asset created with the very same expenditure by treating it as intangible asset. He submitted, right to claim depreciation by two different persons on an asset created out of the very same expenditure is incomprehensible land incongruous in law. The learned Senior Standing Counsel submitted, for an asset to be considered as an intangible asset under section 32(1)(ii) of the Act, it should be know how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature. He submitted, while six items of intangible assets are specifically identified, the unidentified ones are “any other business or commercial rights of similar nature”. Therefore, applying the principle of ejusdem generis, any other intangible asset to come within the expression “other business or commercial rights” should be similar to any one of the six identified items. He submitted, assessee’s claim that C.A. is akin to a license is not acceptable as neither C.A. is an intangible asset nor it is similar to license. He submitted, as license is not defined under the Income Tax Act, meaning of license is to be looked into under the Indian Easements Acts, 1882. Referring to the definition of license under section 52 of the Indian easements act 1882, learned Departmental Representative submitted, as per the said definition in a license the right given should not amount to an easement or an interest in the property. He submitted, the terms of the concession agreement would clearly establish that the rights given thereunder are neither a license nor akin to the same. Therefore, C.A. has not given rise to any intangible asset for the assessee. Learned Departmental Representative submitted, even assuming that C.A. is a license or akin to license, the question still remains as to what intangible asset has been created for the assessee and what is the expenditure incurred by the assessee for creating such intangible asset. He submitted, Government of India had initiated a process for construction of a four lane highway. The assessee being the successful bidder was awarded the contract which gave rise to execution of C.A. on 22nd December 2005. He submitted, the right created under the C.A. for the assessee is a right to collect toll. Such right arose to the assessee on the date of execution of the agreement on 22nd December 2005. He submitted, as per the terms of the C.A. assessee was given right to collect toll fees for a period of 11 years seven months from commencement date i.e., the date on which the physical possession of the project site is delivered to the assessee. Therefore, he submitted, the intangible asset, if at all has been acquired by the assessee is the C.A. dated 22nd December 2005. Thus, any expenditure which might have been incurred by the assessee by that date for acquisition of such intangible asset can alone be considered for depreciation under section 32(1)(ii) of the act. Therefore, the claim of the assessee that investment of Rs.214 crore made by it has created an intangible asset for them is untenable. The learned Senior Standing Counsel submitted, at best, the assessee could have made a claim in terms of CBDT circular no.9 of 2014, for consideration by the assessing officer. In support of his contention, though, the learned Departmental Representative has relied upon a number of decisions, as referred to in Page–18 of the written submissions, however, at the time of hearing he had specifically relied upon the following decisions:-
Techno Shares & Stocks v/s CIT, [2010] 327 ITR 323 (SC);
CIT v/s Smifs Securities Ltd., [2012] 348 ITR 302 (SC), and
Areva T. and D India Ltd. v/s DCIT, [2012] 345 ITR 421 (Del.)
Observation of the court
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. 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 as held by the Hon’ble Allahabad High Court and Hon’ble Gujarat High Court as referred to by the learned Commissioner (Appeals). Moreover, the assessee’s claim that it has sufficient surplus interest free funds to make investment in exempt income yielding assets has also not been controverted by the Department. Therefore, applying the ratio laid down by the Hon’ble Bombay High Court in Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom.), CIT v/s HDFC Bank Ltd. [2014] 366 ITR 505 (Bom.) and Hon’ble Delhi High Court in the case of Cheminvest Limited vs. CIT (2015) 378 ITR 33, we hold that no disallowance in terms of section 14A can be made. We, therefore, uphold the order of the learned Commissioner (Appeals) on this issue. These grounds are dismissed.
In the result, Department’s appeal is dismissed.
C.O. no.36/Hyd./2015 – By Assessee
There is a delay of 138 days in filing the cross objection. Explaining the reason for delay, assessee has stated that, due to oversight the assessee overlooked the CBDT circular on amortization. However, after due consideration of facts and materials on record, we are not convinced with the explanation of the assessee. As could be seen, in ground No.(iv) of its appeal, the department has specifically raised the plea of amortization as per the subject CBDT circular. Therefore, it cannot be said that assessee lost sight of the CBDT circular. In view of the aforesaid, the assessee having failed to explain the delay satisfactorily, we decline to condone the delay in filing the cross objection. The cross objection is, therefore, dismissed.
To sum up, Revenue’s appeal and assessee’s C.O. are dismissed.
Order pronounced in the open Court on 14.02.2017
Conclusion
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
Read the full order from here
ACIT-Vs-Progressive-Constructions-Ltd.-ITAT-Hyderabad
