GWALIOR BYPASS PROJECT LTD,NEW DELHI vs. ACIT, CIRCLE-10(2), NEW DELHI

ORDER

PER KUL BHARAT, JM :

2. That having regard to the facts and circumstances of the case, the CIT(A) has erred in law in upholding the assessment order U/s 143(3) disallowing depreciation of Rs. 49,32,87,659/- claimed by appellant on Highway Projects. The claim of depreciation @ 10% on highway project was in accordance with the provisions of the Act. The order so passed is erroneous, bad in law and must be quashed.

3. That the rejection of claim of depreciation on highway project amounting to Rs. 49,32,87,659/- on the basis of ownership issue and instead allowing deduction for amortization cost on highway project developed on BOT basis of Rs. 38,46,29,754/-, on the basis of CBDT circular is misconceived, erroneous and does not sustain in law. Hence, the disallowance sustained by the Ld. CIT(A) are illegal, bad in law and without jurisdiction.

4. The Ld. CIT(A) has grossly erred on facts and in law in sustaining the wrong amount of amortization expenditure taken by Ld. AO in the assessment order without appreciating the facts and submission of the appellant.

5. That on the facts & circumstances of the case, the both the lower Authorities has erred in law in not considering the correct amount of amortization expenditure of Rs. 39,63,46,436/- and allowing wrong amount of amortization cost of Rs. 38,46,29,754/-. The orders so passed by the learned CIT-(A) and Ld. AO are illegal, bad in law & deserves to be quashed.

7. That the appellant craves the leave to add, amend, modify, delete any of the grounds of appeal

before or at the time of hearing and all the above grounds are without prejudice to each other.

2. The only effective ground in this appeal is against the disallowance of depreciation as claimed by the assessee.

FACTS OF THE CASE 3. Facts giving rise to the present appeal are that in this case, the assessee company is a special purpose vehicle engaged in the business of development of highway project, filed return of income declaring loss of Rs.30,30,15,025/- on 30.09.2015. The case was selected for scrutiny and the assessment was framed by the Assessing Officer (“AO”) u/s 143(3) of the Income Tax Act, 1961 (“the Act”) vide order dated 28.12.2017. Thereby, the AO disallowed the depreciation of Rs.49,32,87,659/- and allowed amortized cost of facility amounting to Rs. 38,46,29,754/-. Thereby, the AO allowed claim to be carried forward amounting to Rs.19,43,57,120/- against the loss of Rs.30,30,15,025/-.

6. Ld. Counsel for the assessee submitted that the assessee had claimed depreciation on the intangible assets and the issue is squarely covered by the decision of Special Bench of the Tribunal in in the case of ACIT, Circle-16(2), Hyderabad vs M/s. Progressive Constructions Ltd. Pertaining to AY 2011-12 vide order dated 14.02.2017. Ld. Counsel for the assessee drew our attention to para 20 of the order of the Tribunal to buttress the contention that CBDT Circular No.09/2014 dated 23.04.2014 as relied by Ld.CIT(A) is for the benefit of the assessee and it is upto the assessee whether to avail the benefit under Circular or not, such benefit cannot be thursted upon the assessee if it was not claimed. Ld. Counsel for the assessee further placed reliance in the following case laws:-

[i]. DCIT, Mumbai v. M/s Mumbai Nasik Expressway (ITA No. 848/MUM/2020) A.Y 2012-13; [ii] BSC C&C Kurali Toll Road Ltd. v. DCIT Circle-5(1), Delhi (ITA Nos. 1592 & 1593/Del/2017) A.Y 2012-13 & A.Y 2013-14; [iii] Valecha Badwani Sendhwa Tollways v. PCIT-11, Mumbai (ITA No. 2848/MUM/2018) A.Y. 2013-14;

[iv] ACIT-l0(l), Mumbai v. M/s West Gujarat Expressway Ltd. (ITA No. 5904/M/2012) A.Y 2009-10 and (ITA No. 6244/M/2012) A.Y. 2009- 10; [v] M/s Mokama Munger Highway Ltd v. ACIT Hyderabad (ITA Nos. 1729, 2145 & 2146/Hyd/2018) A.Y. 2013-14 to 2015-16; [vi] DCIT Circle-16(2), Hyderabad v. M/s Madhurai Tuticorin Expressway Ltd., Hyderabad (ITA Nos. 2119, 2120 & 2121/HYD/2018) A.Y. 2012-13, 2013-14 & 2014-15; [vii] ACIT Corporate Circle 5(2), Chennai v. M/s PNG Tollway Ltd (ITA No. 238/Chny/2019) A.Y. 2014-15; [viii] M/s Kosi Bridge Infrastructure Company v. PCIT-6 (ITA No. 3471 /MUM/2019) A.Y. 2012-13 & (ITA No. 3578 /MUM/2019) A.Y-2014- 15; [ix] M/s Madras Industrial Investment Corp. Ltd. v. Commissioner of Income Tax (Supreme Court of India) dated 04.04.1997; [x] Uco Bank, Calcutta v. CIT, Bengaluru (Civil Appeal No.235 of 1996) A.Y. 1981-82; [xi] CIT v. Mrs Avtar Mohan Singh (1983 6 ITD 465 Delhi); [xii] Catholic Syrian Bank Ltd v. CIT, Thrissur (Civil Appeal No.1143 of 2011) A.Y. 2002-03; [xiii] CIT, Mumbai v. Anjum M.H. Ghaswala & Ors. (Civil Appeal No.4126 of 2000); [xiv] CIT, Calcutta v. M/s Vegetables Products Ltd.(1973 AIR 927, 1973 SCR (3) 448); [xv] CIT v. Natraj Stationery Products (P) Ltd. (ITA No. 1009 & 1012 of 2007) A.Y 2000-2001, 2001-2002 [TS-121-HC-2008(DEL)-0]; [xvi] JCIT v. Hero Honda Finlease Ltd. [TS-5186-ITAT-2008(DELHI)-0]; [xvii] CIT v. Jai Parabolic Springs Ltd. dated 07April, 2008 [TS-5472-HC- 2008(DELHI)-0]; [xviii] CIT v. Rose Services Apartment India P. Ltd. [TS-5186-HC- 2009(DELHI)-0]; [xix] Goetze (India) Ltd. v. CIT on 24.03.2006 [TS-21-SC-2006-0]; [xx] National Thermal Power Co. Ltd. v. CIT [TS-18-SC-1996-0]; and [xxi] DCIT, Mumbai v. M/s Gorakhpur Infrastructure Co. Ltd. (ITA No. 574/Mum/2020) A.Y 2013-14; (ITA No.846/Mum/2020) A.Y 2014-15 and (ITA No.847/Mum/2020) A.Y 2015-16.”

Operate and Transfer (BOT) basis from National Highway Authority of India (NHAI). 6.3 The company in the books of accounts treated the expenditure made on execution/ construction of such highway as fixed asset and amortized the said expenses incurred on the project over the life of the tender, i.e. over the period when the appellant company would be allowed to operate such highway and earn income from toll charges. The amortization expenses debited by the company in the books of accounts for the said project amounted to Rs.39,63,46,436/-. Further, while making the computation of income, the appellant company added the said amortization expense back to the net profit and instead treated the same as 'fixed asset being the road project' as 'building' and claimed depreciation at the rate of 10% amounting to Rs. 49,32,87,659/-. 6.4 The AO after considering the facts of the case and after placing reliance on the Circular Number 09/2014 issued by CBDT on 23/04/2014, has given a finding that depreciation at the rate of 10% cannot be claimed by the appellant company by treating the road project as building. The AO further stated that instead, as per circular, the expenditure incurred on the project should be allowed as expenditure over the period of the tender. Thereby the AO disallowed the depreciation amounting to Rs. 49,32,87,659/- and provided the allowance of , amortization of Rs. 38,46,29,754/-. The AO considered the total cost incurred by the appellant company being Rs. 5,48,09,73,988 and divided the same by the number of years of the tender i.e. 14 years and 3 months and arrived at the amortization cost of Rs. 38,46,29,754/-. In nutshell the AO made the net adjustment of Rs.10,86,57,905/- to the business loss reported by the appellant. 6.5 I have considered the facts of the case .The primary objection raised by the appellant company before me vide the grounds of appeal is the disallowance of depreciation. As per the appellant company, the AO erred in disallowing the depreciation and allowing the amortization cost. Further, before me, vide grounds of appeal, the appellant also raised another objection that the AO erred in treating the amortization expense at Rs. 38,46,29,754/- instead of Rs. 39,63,46,436/-. 6.6 I have considered the submission of the appellant. The appellant company has placed reliance on many judgments of which some are not relatable to the facts of the case. Appellant company placed reliance on the decision of the Hon'ble Bench of Income Tax Appellate Tribunal in the case of DCIT, Circle 3(3), Hyderabad vs. Swarna Tollway (P.) Ltd. [2014] 43 taxmann.com 252 (Hyderabad Trib.), wherein, the Hon'ble tribunal, held the matter in favour of the assessee. Hon'ble Tribunal held that road constructed by assessee on BOT basis is eligible for depreciation even though he is not legal owner of the road. Reliance has also been placed on the decision of Special Bench of Hyderabad Tribunal in the case of ACIT vs. Progressive Construction Ltd. [2018] 92 taxmann.com 104 (Hyderabad Trib.). 6.7 I have considered the judgment passed by the Hon'ble Bench. However, I humbly disagree with the same because of the presence of the decision of the Higher judicial Authority against the assessee on the same facts, which has not been discussed by the Hon'ble Tribunal in its above mentioned order. Hon'ble High Court of Bombay in the case of North Karnataka Expressway Ltd. v. CIT [2014] 51 taxmann.com 214 (Bom), wherein, Hon'ble Court held that where assessee, an infrastructure development company, constructed a road on Build, Operate and Transfer (BOT) basis on land owned by Government, assessee could not claim depreciation on toll road so constructed and operated. 6.8 After considering the decision of the Hon'ble High Court, I am of the view that the AO was correct in making the adjustment and disallowing the depreciation and allowing the amortization expenses for the reasons discussed in the assessment order. 6.9 Furthermore, the amount of amortization allowed by the AO is different from the amortization amount claimed by the appellant company in the financial statement. The appellant though raised objection with regard to the same, however, failed to justify the said error. The appellant company failed to rebut the computation of amortization expense made by the AO in Page | 7 the order and only submitted that the AO mistakenly erred in treating an amount of Rs. 38,46,29,754/-instead of the amount of Rs. 39,63,46,436/-. The AO at Para 3.5 placed reliance on the previous year order for the computation of amortization expense amount and made the said adjustment. The appellant company failed to rebut the same. 6.10 Thus, in view of my aforesaid findings, the order of the AO is sustained and the appeal of the assessee is dismissed.”

10. We find the identical issue was before the Hon’ble Special Bench of this Tribunal in the case of ACIT, Circle-16(2), Hyderabad vs M/s. Progressive Constructions Ltd. (supra) and the Hon’ble Tribunal answered the questions in favour of the assessee after elaborately dealing the rival contentions. For the sake of clarity, the relevant contents are reproduced as under:-

from the commencement date. As per clause 2.4, the Government of India was obliged to hand over to the assessee physical possession of the project site free from encumbrances within 30 days from the date of the agreement. It further provides, once the project site is handed over to the concessionaire, it shall have exclusive right to enter upon, occupy and use the project site and to make at its costs, charges and expenses such development and improvement in the project site as may be necessary or appropriate to implement the project and to provide project facility in terms of the agreement. Clause–2.5 of the agreement provides that the concessionaire without prior written consent or approval of the Government of India cannot use the project site for any purpose, other than, for the purpose of the project / project facilities as permitted under the C.A. Clause 2.7 of the C.A. makes it clear that the project site belongs to and has vested in Government of India and the Government of India has full power to hold, dispose off and deal with the same consistent with the provisions of the C.A. However, it also makes it clear that the concessionaire, subject to complying with the terms / conditions of the agreement remains in peaceful possession and enjoyment of the project site during the concession period. It further provides, in the event the concessionaire is obstructed by any person claiming any right, title or interest over the project site or any part thereof or in the event of any enforceable action including any attachment, distraint, appointment of receiver or liquidator being initiated by any person claiming interest over the project sites. Government of India not only will defend such claims or proceedings but also keep the concessionaire indemnified against any direct or consequential loss or damage which it may suffer on account of any such right, title, interest or charge. As per clause 2.8 of the C.A., though, the concessionaire shall have exclusive right to use of the project site in accordance with the provisions of the agreement and for this purpose, it may regulate the entry and use of the same by the third parties, however, it shall not part with or create any encumbrance on the whole or any part of the project site save and except, as set forth and Page | 9 permitted under the agreement. Clause 4.1 of the C.A. entitles the concessionaire to levy, demand and collect fee for user of the roads by vehicles and persons in accordance with the fee notification to be issued by the Government of India. However, concessionaire cannot levy and collect any fee until it has received completion certificate. Clause 5.1 and 5.2 of the C.A. lays down the obligation of the concessionaire for execution and implementation of the project / project facility during the concession period. From the reading of the aforesaid clauses of the contract, following facts emerge:– i) The right, title and ownership of the project site vests absolutely with the Government of India and it has full powers to hold, dispose off and deal with the same; ii) The Government of India has handed over physical possession of the project site to the concessionaire for executing / implementing the project and operating the same during the concession period; iii) Concessionaire shall have exclusive right to use the project site for executing / implementing the project in terms of C.A; iv) Concessionaire shall, at its own costs and expenses, execute / implement the entire project and operate and maintain the same during the concession period; and v) The concessionaire shall have the right to levy / demand and collect fee as approved by the Government of India towards user of the project facilities by vehicles and persons.

11. Undisputedly, for executing the project, assessee has incurred expenses of Rs.214 crore. It is also not disputed that as per the terms of the C.A., the Government of India is not obliged / required to reimburse the cost incurred by the assessee to execute / implement the project facilities. The only right / benefit allowed to the assessee by the Government of India is to operate the project / project facilities during the concession period of 11 years 7 months and to collect toll charges from vehicles / persons using the project / project facilities.

Thus, as could be seen, the only manner in which the assessee can recoup the cost incurred by it in implementing the project / project facility is to operate the road during the concession period and collect the toll charges from user of the project facility by third parties. Admittedly, the assessee has taken up the project as a business venture with a profit motive and certainly not as a work of charity. Further, by investing huge some of Rs.214 crore, the assessee has obtained a valuable business / commercial right to operate the project facility and collect toll charges. Therefore, in our considered opinion, right acquired by the assessee for operating the project facility and collecting toll charges is an intangible asset created by the assessee by incurring the expenses of Rs.214 crore. The contention of the learned Senior Standing Counsel that expenditure of Rs.214 crore has brought into existence a tangible asset in the form of roads and bridges of which the assessee is not the owner but it is the Government of India is nobody’s case. Further, the learned Senior Standing Counsel’s apprehension that it will lead to a situation where both Government of India and the concessionaire will claim depreciation on the asset created with the very same expenditure, in our view, is not borne out from facts on record. At the cost of repetition we must observe, as per the terms of agreement the expenses incurred by the assessee towards construction of the roads, bridges, etc., were not going to be reimbursed by the Government of India. This fact was known to both the parties before the execution of the agreement as the tender itself has made it clear that the project is to be executed with private sector participation on BOT basis. Thus, from the very inception of the project, assessee was aware of the fact, it has to recoup the cost incurred in implementing the project along with the profit from operating the road and collecting toll charges during the concession period. Therefore, assessee has capitalized the cost incurred on the BOT project on which it has claimed depreciation. Thus, in our view, the expenditure incurred by the assessee of Rs.214 crore for creating the project or project facilities has created an intangible asset in the form of right to operate the project facility and Page | 11 collect toll charges. Further, it is the contention of the learned Senior Standing Counsel that if at all any right is created under the C.A. for collecting toll, such right accrued to the assessee on the date of execution of agreement i.e., 22nd December 2005, therefore, the expenditure incurred by such date should be the value of intangible asset which can alone be considered for depreciation under section 32(1)(ii) of the Act. We are afraid, we cannot accept the above argument of the learned Senior Standing Counsel. When the C.A. confers a right on the assessee to operate the project facility and collect toll charges over the concession period of 11 years and 7 months, the assessee can start operating and collecting toll charges only when the project facility is ready for use. Therefore, until the project is completed and ready for use by vehicles or persons assessee cannot collect toll charges for user of the project facilities. Thus, the right to operate the project facility and collect toll charges is integrally connected to the completion of the project facility which cannot be done unless the assessee invests its fund for completing the project. Therefore, keeping in view the aforesaid fact, it cannot be said that the right to collect toll has accrued to the assessee on the date of execution of the agreement. If we accept the aforesaid argument of the learned Senior Standing Counsel, in other words, it would mean that without even executing and completing the project facility, assessee would be collecting toll charges. Therefore, the contention of the learned Senior Standing Counsel that the expenditure incurred by the assessee till execution of the agreement can only be considered as an intangible asset, in our view, is illogical, hence, cannot be accepted. Thus, having held that the expenditure of Rs.214 crore incurred by the assessee has resulted in creation of an intangible asset of enduring nature for the assessee, it is necessary now to examine whether such intangible asset comes within the scope and ambit of section 32(1)(ii) of the Act. For this purpose, it is necessary to look into the said provision which is reproduced hereunder for the sake of convenience. Depreciation.

32(1)(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business67 or profession, the following deductions shall be allowed—] 12. Explanation 3 to section 32(1) defines intangible asset as under:– [Explanation 3.—For the purposes of this sub-section, [the expression “assets” ] shall mean— (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature87 13. A plain reading of the aforesaid provisions would indicate that certain kind of assets being knowhow, patents, copyrights, trademarks, license, franchise, or any other businesses or commercial rights of similar nature are to be treated as intangible asset and would be eligible for depreciation at the specified rate. It is the claim of the assessee that the right acquired under C.A. to operate the project facility and collect toll charges is in the nature of license. However, the learned Senior Standing Counsel has strongly countered the aforesaid claim of the assessee by referring to the definition of license as provided under the Indian Easements Act, 1882. For better appreciation, we intend to reproduce herein below the definition of “license” as provided under section 52 of the Indian Easements Act, 1882:– “License” defined:– Where on person grants to another, or to a definite number of other persons, a right to do, or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful and such right does not amount to an easement or an interest in the property, the right is called a license.”

(supra) 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. Had it been the case, then ‘goodwill’ would not have been treated as an intangible asset. The Hon'ble Delhi High Court in case of Areva T and D India Ltd. (supra), while interpreting the aforesaid expression by applying the principles of ejusdem generis observed, the right as finds place in the expression “business or commercial rights of similar nature” need not answer the description of knowhow, patents, trademarks, license or franchises, but must be of similar nature as the specified asset. The Court observed, looking at the meaning of categories of specified intangible assets referred to in section 32(1)(ii) of the Act preceding the term “business or commercial right of similar nature”, it could be seen that the said intangible assets are not of the same line and are clearly distinct from one another. The Court observed, the use of words “business or commercial rights of similar nature”, after the specified intangible assets clearly demonstrates 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. The Hon'ble Court, therefore observed, in the circumstances the nature Page | 16 of business or commercial right cannot be restricted only to knowhow, patents, trademarks, copyrights, licence or franchise. The Court observed, any intangible assets which are invaluable and result in smoothly carrying on the business as part of the tool of the trade of the assessee would come within the expression “any other business or commercial right of similar nature”.

10.1. Therefore, in view of the above-mentioned binding precedent, we are of the considered view that the assessee is entitled for depreciation as admissible on intangible assets. Thus, grounds raised by the assessee are allowed. Page | 18

Order pronounced in the open Court on 26th July, 2022.