17 Section 32 read with Explanation 3 – Expenditure incurred on construction of road on Built, Operate and Transfer (“BOT”) basis gives rise to an intangible asset in the form of right to operate the road and collect toll charges, which is in the nature of licence or akin to licence as well as a business or commercial right as envisaged u/s. 32(1) read with Explanation 3 and hence assessee is eligible to claim depreciation on said intangible asset.

ACIT vs. Progressive Constructions Ltd.
(2018) 161 DTR (Hyd)(SB) 289 
ITA No:1845/Hyd/2014
A.Y.:2011-12
Date of Order: 14th February, 2017

FACTS

The assessee
had entered into a Concession Agreement (“C.A.”) with the Government of India
for four laning of National Highway No. 9 on BOT basis. As per this agreement
the assessee was to complete the work at its own cost and maintain the same for
a period of 11 years and seven months. The assessee had incurred a sum of
Rs.214 crores for the said project. The only right allowed to the assessee was
to operate the highway for the concession period of 11 years and 7 months and
to collect toll charges from the vehicles using the highway.

During the
assessment proceedings, it was noticed that depreciation at the rate of 25% was
claimed by the assessee on opening written down value of built, operate and
transfer (BOT) highway of Rs 40,07,94,526. The assessee had completed the
construction in financial year 2008-09 and had claimed depreciation @ 10% on
the said asset treating it as building. However from assessment year 2010-11,
assessee had started treating the asset as an intangible asset in terms of
section 32(1)(ii) of the Act. However, the AO disallowed the claim of
depreciation on the basis that assessee is not the owner of the asset and also
assessee has not maintained consistency in its claim of depreciation.

Thus, being
aggrieved by the disallowance of depreciation, an appeal was preferred before
CIT(A). The CIT(A) noting that the claim of depreciation being allowed by the
Tribunal in case of said assessee in preceding previous year, allowed the claim
of depreciation in the impugned assessment year. Aggrieved by the CIT(A)’s
order, the Department preferred an appeal before ITAT. A Special Bench was
constituted to dispose the appeal filed by the Department against the order of
CIT(A). The only point under consideration before Special Bench was whether the
expenditure incurred for construction of road under BOT contract with
Government gives rise to an asset and if so, whether it is an intangible asset
or tangible asset.

HELD

The assessee
had incurred expenses of Rs 214 crores and Government of India was not obliged
to reimburse the cost incurred. Thus, the only way in which the assessee can
recoup the cost incurred was to operate the bridge during the concession period
of 11 years and seven months and collect toll thereon. Thus, by investing such
huge sum of Rs 214 crores, the assessee had obtained a valuable business right
to operate the project facility and collect toll charges.This right in form of operating the project and collecting the toll is an intangible asset created by
the assessee by incurring expenses of Rs 214 crores.

It is necessary
now to examine whether such intangible asset comes within the scope and ambit
of section 32(1)(ii).It is the claim of assessee that the right acquired under
C.A to operate the project facility and collect toll charges is in the nature
of licence. Since licence is not defined under the Income-tax Act 1961, the
definition of licence under the Indian Easements Act, 1882 has to be seen. If
the facts of the present case are examined vis-a-vis the definition of licence
under the Indian Easements Act, 1882, it is clear that assessee has only been
granted a limited right by virtue of C.A. to execute and operate the project
during the concession period, on expiry of which the project/ project facility
will revert back to the Government. What the Government of India has granted to
the assessee is the right to use the project site during the concession period
and in the absence of such right, it would have been unlawful on the part of
the concessionaire to do or continue to do anything on such property. However,
the right granted to the concessionaire has not created any right, title or
interest over the property. The right granted by the Government of India to the
assessee under the C.A. has a license permitting the assessee to do certain
acts and deeds which otherwise would have been unlawful or not possible to do
in the absence of the C.A. Thus, the right granted to the assessee under the
C.A. to operate the project / project facility and collect toll charges is a
license or akin to license, hence, being an intangible asset is eligible for
depreciation u/s. 32(1)(ii) of the Act.

Even assuming
that the right granted under the C.A. is not a license or akin to license, it
requires examination whether it can still be considered as an intangible asset
as described u/s. 32(1)(ii) of the Act. The Hon’ble Supreme Court in CIT vs.
Smifs Securities (2012) 348 ITR 302 after interpreting the definition of
intangible asset as provided in Explanation 3 to section 32(1), while opining
that principle of ejusdem generis would strictly apply in interpreting
the definition of intangible asset as provided by Explanation 3(b) of section
32, at the same time, held that even applying the said principle ‘goodwill’
would fall under the expression “any other business or commercial rights
of similar nature”. Thus, as could be seen, even though, ‘goodwill’ is not
one of the specifically identifiable assets preceding the expressing “any
other business or commercial rights of similar nature”, however, the
Hon’ble Supreme Court held that ‘goodwill’ will come within the expression
“any other business or commercial rights of similar nature”.
Therefore, the contention of the learned Senior Standing Counsel that to come
within the expression “any other business or commercial rights of similar
nature” the intangible asset should be akin to any one of the specifically
identifiable assets is not a correct interpretation of the statutory
provisions. It has been held by the Hon’ble Delhi High Court in case of Areva
T&D India Ltd. that the legislature did not intend to provide for
depreciation only in respect of specified intangible assets but also to other
categories of intangible assets which were neither visible nor possible to
exhaustively enumerate. It also observed that any intangible assets which are
invaluable and result in smoothly carrying on the business of the assessee
would come within the expression “any other business or commercial rights of
similar nature”. Thus, the right to operate the toll road and collect toll
charges is a business or commercial right as envisaged u/s. 32(1)(ii) read with
Explanation 3(b).

Further the
assessee neither in the preceding assessment years nor in the impugned
assessment year has claimed the expenditure (amount invested/ expenses
incurred) 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 of 2014 dated 23rd April, 2014. The aforesaid CBDT
circular is for the benefit of the assessee and such benefits shall be granted
only if the assessee claims it. The benefit of the circular cannot be thrust
upon the assessee if it is not claimed.

Thus the right
granted to the assessee to operate the road and collect toll is a licence or
akin to licence as well as a business or commercial right as envisaged u/s.
32(1) read with Explanation 3 and hence, assessee is eligible to claim
depreciation on said intangible asset.