M/S. DEEPAK & COMPANY INFRA PVT. LTD. ,SRI GANGANAGAR vs. ITO, WARD-1, SRIGANAGNAGAR

During the course of hearing, the ld. AR submitted that the assessee company derives income from execution of contract work and is also engaged in the business of construction of roads, highways on BOT agreement. The assessee had filed its return of income on 29/09/2015 and subsequently on 24.06.2016 had filed revised return of income. The case of assessee was selected under limited scrutiny to examine following issues:-

During the assessment proceedings, the AO had raised the queries in respect of issues for which the case of assessee was selected for scrutiny. The assessee had furnished the explanation and documentary evidences as required by the AO and the AO after due verification of issues from the documentary evidences and supporting judgments and CBDT circulars had passed the assessment order in a judicial manner.

It was submitted that the ld PCIT thereafter had issued a notice u/s 263 of the Act on two issues namely, deduction claim u/s 80IA and excess claim of depreciation on construction of road (As per BOT agreement). During the revision proceedings, the assessee had explained that its case was selected for limited scrutiny on the issues as mentioned above. Therefore the issue of deduction claimed u/s 80IA of the Act is beyond the jurisdiction of PCIT u/s 263 of the Act. Further the depreciation (amortization) claimed on road construction as per the CBDT circular No. 9/2014 dated 23/04/2014 and these facts were duly verified by the ld AO during the assessment proceedings. The ld PCIT in the impugned order u/s 263 of the Act however held that the assessment order passed by the ld AO was erroneous and prejudicial to the interest of the Revenue.

As regards claim of depreciation (amortization) on road, it was submitted that the assessee had constructed the roads under BOT agreement and therefore claimed amortization on the basis of remaining period prescribed under such agreement in the return of income. It was submitted that the circular No. 09/2014 issued by CBDT specifically provides the treatment of expenditure incurred for development of roads/ highways in BOT agreements under Income Tax Act. It was submitted that the letter of acceptance for BOT projects and the return of income, audit report etc. wherein the assessee had claimed amortization on the road expenses are available on record. Further the amortization of assets claimed by the assessee was within the purview of circular no. 9/2014 issued by CBDT which specifically provides that the amortization allowable may be computed at the rate which ensures that the whole of the cost incurred in creation of

It was submitted that during the year under consideration, the assessee has claimed amortization for two roads (i.e. Laxmangarh - Salasar Road and Sriganganagar - Padampur Road) and as required by the Bench, the reconciliation statement of the claim of amortization on construction of roads under BOT agreements in the audit report and in the reply filed before ld AO is as follows:

It was submitted that the assessee in response to the notice issued by ld AO u/s 142(1) had brought on record that the assessee company was incorporated on 12/06/2013 i.e. in AY 2014-15 and the assessee has claimed amortization in AY 2014-15 & AY 2015-16 as per the CBDT circular No. 9/2014 dated 23/04/2014. It was submitted that the claim made by the assessee was duly certified by C.A. and was in accordance with the circular and decisions of Honorable Court. It was accordingly submitted that the observations of ld PCIT that "As per CBDT circular No. 09/2014 dated 23.04.2014, depreciation is to be allowed to the assessee engaged in developing of road and highways in BOT agreements on the basis of provisions of section 32(1)(ii) of the Act." is clearly arbitrary and contrary to the CBDT circular.

Per contra, the ld. CIT/DR submitted that during the year under consideration, the assessee has shown gross receipts of Rs.5,73,49,487/- from contractorship business, toll collection of Rs.4,12,69,020/- from Shriganganagar-Padampur Road and Rs.3,72,66,473/- from Laxmangarh-Salasar Road. Apart from these receipts, the assessee has also shown other receipts of Rs.8,73,575/-. On the gross receipts of Rs.13,67,58,558/-, gross profit of Rs.62,15,997/- was shown and after claiming deduction of Rs.35,92,846/- u/s 80IA, the assessee has shown taxable income of Rs.26,23,150/-.

It was submitted that as per provisions of Section 80IA(6) of the Act and Rule 18BBE of the Income-tax Rules, deduction is available on the profit of housing or other activities, which are integral part of a highway project and for claiming deduction, the assessee has to maintain separate accounts for the said activities and submit a report for each undertaking or enterprise accompanied by profit and loss account and balance sheet of the undertaking or enterprise. Further, as per Rule 18BBB of the Income-tax Rules, in case of an enterprise carrying on the business of developing or operating and maintaining or developing,

It was submitted that in the instant case, no separate books of account, profit & loss account, balance sheet as per Rule 18BBB was maintained by the assessee for which separate Form 10CCB was required to be filed. The assessee has filed a single Form 10CCB for its entire business. Apart from this, in column No. 13 of the Form l0CCB, the assessee has claimed to have attached agreement as required under Rule 18BBB, but no such agreement was filed during the course of assessment proceedings or called for by the AO. The AO has failed to verify the claim of the assessee viz-a-viz the conditions laid down in Income-ax Act and in Income-tax Rules as mentioned above. The AO was therefore rightly directed by ld PCIT to examine the claim of the assessee as per the conditions laid down u/s 80IA read with Rule 18BBB and Rule 18BBE of the Income-tax Rules.

It was submitted that as per depreciation and amortization chart of the audit report, the assessee has claimed the value of Padampur Toll road at Rs. 15,32,47,295/- as on 05.09.2012, written down value of which was shown at Rs. 15,20,30,334/- on 31.03.2014. The assessee has claimed depreciation and amortization at the rate of 9.12% on this Toll Road which comes to Rs. 1,39,79,176/- in the P & L account,. Similarly, the assessee has shown the value of Salasar Toll Road at Rs. 10,68,69,665/- as on 09.08.2012, WDV of which as on 31.03.2014 was shown at Rs. 8,58,54,355/-. In the year under reference, the assessee

It was submitted that as per the CBDT Circular No. 09/2014 dated 23.04.2014, depreciation is to be allowed to the assessee engaged in developing of road and highways in BOT agreements on the basis of provisions of Section 32(1)(ii) of the Act. But in the instant case, the assessee has claimed depreciation and amortization at higher rate. In respect of such claim no detail/explanation was offered by the assessee during the course of the assessment proceedings. The AO also did not verify the claim of depreciation as per the provisions of Section 32(1)(ii) and allowed the same as claimed by the assessee. The AO was therefore rightly directed by ld PCIT to verify the claim of depreciation and amortization expenses of the assessee as per provisions of section 32(1)(ii) of the Act after seeking relevant details and documents from the assessee. Further, reliance was placed on explanation (2) to section 263(1) of the Act. It was submitted that the assessment order passed u/s 143(3) has been rightly held to be erroneous in so far as it is prejudicial to the interest of the Revenue. It was accordingly submitted that there is no infirmity in the order so passed by the ld. Pr. CIT and the same should be confirmed and appeal of the assessee be dismissed.

We have heard the rival contentions and purused the material available on record. Broadly, two issues have been raised by the ld. Pr. CIT while issuing the show cause u/s 263 of the Act. The first issue relates to claim of deduction of Rs 35,92,846/- u/s 8OIA of the Act in respect of which no separate books of accounts have been

In the aforesaid decision, we have held that the scope of enquiry in case of limited scrutiny is only to the extent of the issues for which case was selected for scrutiny under CASS. The CBDT has issued instructions from time to time in this respect and has specifically instructed the taxing authorities that scope of enquiry should be limited to verification of all the particulars for which limited scrutiny was taken up under CASS and the AO is duty bound to follow the said instructions. It was further held in the said case that the Pr. CIT u/s 263 cannot be permitted to traverse beyond the jurisdiction that was vested with the

The aforesaid findings applies equally in the instant case where it is an undisputed fact that the case of the assessee was selected for limited scrutiny for examining claim of depreciation at higher rate/higher additional depreciation, mismatch in sales turnover reported in audit report & ITR and mismatch in amount paid to related person u/s 40A(2)(b) reported in audit report & ITR. Thus, the claim of the deduction u/s 80IA was clearly not the subject matter of limited scrutiny and where the AO has failed to examine and verify the said claim of the assessee, the order so passed by the AO cannot be held as erroneous as the same was not within the scope of limited scrutiny at first place and the AO is duty bound to restrict himself to the reasons recorded for which the case was selected for limited scrutiny. We, therefore, agree with the contentions advanced by the ld

Now, coming to the second issue for which the show-cause was issued by the ld PCIT. It relates to claim of depreciation/amortization relating to two roads/highway stretches namely, Sriganganagar – Padampur Road and Laxmangarh – Salasar Road constructed by the assessee company under BOT agreement. As per ld PCIT, the AO has failed to carry out the necessary examination and verification of said claim of depreciation/amortization inspite of the fact that one of the reasons for which the matter was selected for limited scrutiny was to verify the claim of depreciation at higher rates/additional depreciation. As per ld PCIT, as per the CBDT Circular No. 09/2014 dated 23.04.2014, depreciation is to be allowed to the assessee engaged in developing of road and highways in BOT agreements on the basis of provisions of Section 32(1)(ii) of the Act. But in the instant case, the assessee has claimed depreciation and amortization at higher rate. In respect of such claim, no detail/explanation was offered by the assessee during the course of the assessment proceedings and the AO also did not verify the claim of depreciation as per the provisions of Section 32(1)(ii) and allowed the same as claimed by the assessee. Per contra, the contention advanced by the assessee is that it has claimed amortization of the cost incurred in construction/development of these two stretches of the highways evenly over the period of concessionaire agreement in

We therefore find that contentions advanced by both the parties as to the claim of amortization is guided by CBDT circular no. 9/2014 dated 23.04.2014 and it would therefore be appropriate to refer to the contents of the said circular as under: “It has come to the notice of the Board that disputes have arisen as to whether the expenditure incurred on development and construction of infrastructural facilities like roads/highways on Build-Operate-Transfer (`BOT`) basis with right to collect toll is entitled for depreciation under section 32(1)(ii) of the Act or the same can be amortized by treating it as an allowable business expenditure under the relevant provisions of the Income-tax Act, 1961 ('Act').

In such projects, the developer (hereinafter referred to as`assessee'), in terms of concessionaire agreement with Government or its agencies is required to construct, develop and maintain the infrastructural facility of roads/highways which, inter-alia, includes laying of road, bridges, highways, approach roads, culverts, public amenities etc. at its own cost and its utilization thereof for a specified period. In lieu of consideration of the expenditure incurred on construction, operation and maintenance of the infrastructure facility covered by the period of the agreement, the assessee is accorded a right to collect toll from users of such facility. The expenditure incurred by such assessee on development and construction of such infrastructural facility are capitalized in the accounts. It is seen that in returns-of-income, assessees are generally claiming depreciation on such capitalized expenditure treating it as an 'intangible asset' in terms

In BOT arrangements for development of roads/highways, as a matter of general practice, possession of land is handed over to the assessee by the Government/notified authority for the purposes of construction of the project without any actual transfer of ownership and such assessee has only a right to develop and maintain such asset. It also enjoys the benefits arising from use of asset through collection of Toll for a specified period without having actual ownership over such asset. Therefore, the rights in the land remain vested with the Government or its agencies. Thus, as assessee does not hold any rights in the project except recovery of toll free to recoup the expenditure incurred, it cannot therefore be treated as an owner of the property, either wholly or partly, for purposes of allowability of depreciation under section 32(1)(ii) of the Act. Thus present provisions of the Act do not allow claim of depreciation on Toll ways due to non fulfillment of ownership criteria in such cases.

There is no doubt that where the assessee incurs expenditure on a project for development of roads/highways, he is entitled to recover cost incurred by him towards development of such facility (comprising of construction cost and other pre-operative expenses) during the construction period. Further, expenditure incurred by the assessee on such BOT projects brings to it an enduring benefit in the form of right to collect the toll during the period of the agreement. Hon'ble Supreme

In view of above, Central Board of Direct Taxes, in exercise of the powers conferred under section 119 of the Act hereby clarifies that the cost of construction on development of infrastructure facility of roads/highways under BOT projects may be amortized and claimed as allowable business expenditure under the Act.

The amortization allowable may be computed at the rate which ensures that the whole of the cost incurred in creation of infrastructural facility of road/highway is amortized evenly over the period of concessionaire agreement after excluding the time take for creation of such facility."

On perusal of the aforesaid CBDT Circular, we find that the CBDT appreciating the disputes and controversies around claim of depreciation under section 32(1)(ii) vis-à-vis amortization has come out with a clarification regarding treatment of expenditure incurred for development of roads/highways in BOT agreements and has held that the cost of construction on development of infrastructure facility of roads/highways under BOT projects may be amortized and claimed as allowable business expenditure under the Act and such amortization may be computed at the rate which ensures that the whole of the cost

During the course of assessment proceedings, it is noted that on enquiry by the Assessing officer, the assessee has submitted that this is the second year of claim of amortization wherein it has claimed amortization of Rs 4,01,84,929 for a period of 365 days as against amortization of Rs 3,22,32,261 for a period of 293 days claimed in the previous assessment year 2014-15 and detail statement as part of the audit report was also submitted in respect of both the road/highway stretches disclosing respective cost of construction/development, the period of concessionaire agreement and the amount of amortization determined for the year under consideration. The same was duly examined by the Assessing officer and no adverse finding has been recorded by him. We therefore find that where the assessee is eligible for claim of amortization as per CBDT circular no. 9/2014 dated 23.04.2014 and the same has accordingly been claimed and allowed by the Assessing officer after due verification and examination, the order so passed by the Assessing officer cannot be held as erroneous in so far as prejudicial to the interest of the Revenue.