DY. COMMISSIONER OF INCOME TAX , CIRCLE-16(2), HYDERABAD vs. MADHUCON AGRA JAIPUR EXPRESSWAYS LIMITED, HYDERABAD

Before the Tribunal, the learned DR has submitted that article 23.1 of the concessional agreement clearly states that NHAI had agreed to provide cash support by way of an outright grant equivalent to the sum as set forth in the bids of consortium. Further, article 23.2 of the agreement provides year-wise details of grant during the construction period and the operation period. The grant during the construction period is Rs.38.40 crores which was required to be utilized/applied by the concessionaire for meeting the capital cost of the project provided in article 23.1 of the agreement. Thus, the learned DR has submitted that when the utilization of the grant given by NHAI is specified in the agreement, then the treatment of the said grant in the books of account of the assessee as shareholders fund was intended only to facilitate the assessee to avail the fund. Such grants can be up to 40% of the project cost to make the project commercially viable and therefore, the quantum of the grant is decided on a case to case basis and constitute the bid parameter in BOT Project which are not viable based on the total revenue. The learned DR has thus, contended that a co-joint reading of articles 23.1, 23.2 and 23.3 makes it clear that the grants given by NHAI can be utilized to meet the capital shortfall and the same shall be treated as shareholders fund in the books of account. He has relied upon the order of the Assessing Officer.

On the other hand, the learned AR of the assessee has submitted that as per the agreement between the assessee and Page 4 of 27 286 of 2018 and of 2021 Madhucon Agra Jaipur Expressways Ltd NHAI, a grant of Rs.96 crores was paid to the company out of which an amount of Rs.57.06 crores is related to operation & maintenance expenses and balance amount of Rs.38.40 crores relates to the shareholders fund of the assessee which has nothing to do with the depreciation/amortization arising from the fixed asset. It is clear from the terms & conditions of the agreement that the grant of Rs.38.40 crores are in the nature of promotors contribution as provided under article/clause 23.3 of the concessional agreement. He has also referred to the clause/article 23.4 of the said agreement and submitted that the equity support shall be in the nature of quasi equity and both paid in cash by the shareholders for meeting the total project cost as set forth in the financial package. Hence the cash support by way of an outright grant of Rs.38.40 crores provided by NHAI is that of capital reserve only and it is only for meeting the promoter’s contribution by way of equity support. It cannot be reduced from the capital asset for the purpose of computation of depreciation and the assessee has rightly computed the eligible depreciation in accordance with the CBDT Circular No.09/2014dated 23/04/2014. The grant given by the NHAI is not for meeting of the cost of a portion of plant and machinery but it is for smooth functioning of the contract with NHAI. He has further submitted that when this grant was not given for any specific purpose and not for acquisition of any asset, then it has no nexus with the cost of asset or acquisition of any particular asset and therefore, it cannot be reduced from the cost of fixed 286 of 2018 and of 2021 Madhucon Agra Jaipur Expressways Ltd asset for the purpose of depreciation. The learned AR has further submitted that this grant in the form of equity support was received over a period of time from financial year 2006-07 to 2009-10 and therefore, the same cannot be reduced from the WDV of the fixed asset for the year under consideration. He has relied upon the following decisions as well as the impugned order of the learned CIT (A): i) Hon'ble Supreme Court in the case of CIT vs. P.J. Chemicals Ltd (210 ITR 830) ii) Hon'ble AP High Court in the case of CIT vs. Godavari Plywoods (168 ITR 632) iii) Hon'ble Karnataka High Court in the case of CIT vs. Diamond Dies Mfg. Corp (40 Taxman 34) iv) ITAT Kolkata in the case of Gloster Ltd v CIT in ITA No.828/Kol/2020

We have considered the rival submission as well as relevant material available on record. The Assessing Officer has made an addition by disallowing the part of depreciation as a result of reduction of WDV to the extent of NHAI grant of Rs.38.40 crores from the cost of the project. The relevant findings of the Assessing Officer on this issue in para 3.2 to 3.3 as under:

Thus, the Assessing Officer has treated the grant given by NHAI to be utilized to meet the capital cost of the project and accordingly reduced the same from the WDV of the project for the purpose of allowing the depreciation. It is clear from clause 23.1 to 23.3 that this grant was given by the NHAI as a cash support by way of outright grant as a shareholders fund. Naturally the assessee cannot use the said grant given by the NHAI other than meeting the cost of the project but that does not lead to the conclusion that the grant was given by NHAI as a portion of cost of asset acquired by the assessee met directly or indirectly as provided in Explanation (10) to section 43 of the I.T. Act, 1961. It is the cash support in the nature of shareholders fund to make the project viable and to provide financial strength to the assessee to avail further financial support from the financial institutions in the shape of loan. The learned CIT (A) has considered this issue in para 5.3 to 5.3.2 as under:

Thus, it is clear that the learned CIT (A) has given the finding based on the analysis of facts and law which is also Page 8 of 27 286 of 2018 and of 2021 Madhucon Agra Jaipur Expressways Ltd supported by various decisions as relied upon by the assessee. Therefore, we do not find any error or illegality in the order of the learned CIT (A), qua this issue.

Ground No.2 is regarding the disallowance of provisions for periodic maintenance which was allowed by the learned CIT (A).

The assessee has claimed an amount of Rs.21,57,00,000/- for periodic maintenance and debited to the P&L Account. The Assessing Officer observed that this is not an allowable expenditure as per the provisions of the Act. The Assessing Officer issued a show cause notice to the assessee. In reply, the assessee submitted that as per the concessionaire agreement with NHAI, the assessee has to do periodic maintenance of carriageway once in every 5 year. The company has to recover the expenditure from toll revenue only but there will be no additional income in the 5th year. It is claimed that the expenditure towards the repair or damaged occurred to the road due to the traffic during the period of 5 years and not because of the traffic of the 5th year in which the assessee has to carry out the repair work. Thus, the assessee contended that it has apportioned the expenditure for the 5 years and made a provision for periodic maintenance of Rs.21,57,00,000/-. The Assessing Officer did not accept the contention of the assessee and disallowed this claim.

On appeal, the learned CIT (A) has allowed the claim of the assessee to the extent of Rs.14.42 crores on the ground that the Assessing Officer has already allowed the said claim of the assessee for the A.Y 2011-12 and consequently, sustained the addition to the extent of Rs.7.15 crores.

Before us, the learned DR has submitted that the depreciation u/s 32(1)(ii) of the Act is not allowable as the assessee is not the owner of the project. Further, the expenditure cannot be amortized prior to it is incurred. He has relied upon the judgment of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd vs. CIT (314 ITR 12) as well as in the case of Bharat Earthmovers Ltd vs. CIT (245 ITER 428) and submitted that the provisions must be based on some scientific methodology. As per the details of the provisions, it is clear that the estimation is not based on a scientific and systematic studies/ methodologies. The learned CIT (A) has allowed the claim without any basis and without examining the scientific methodology for quantifying the provisions made by the assessee. He has supported the order of the Assessing Officer.

On the other hand, the learned AR of the assessee has submitted that this issue is now covered by the decision of the Tribunal in case of assessee’s own group concern for the A.Y 2011-12. As it is obligatory on the part of the assessee company to execute regular periodic maintenance as detailed in the Page 10 of 27 286 of 2018 and of 2021 Madhucon Agra Jaipur Expressways Ltd agreement, the assessee company will carry out the said maintenance work by itself and through outside Contractor, for which huge expenditure is required to be incurred. Though this expenditure will be incurred subsequently, the wear and tear is there throughout the year. Further, it is submitted that this expenditure has to be incurred as part and parcel of the business of the assesee and the amount to be incurred can easily be ascertained. Therefore, this is an ascertained liability. As the expenditure in question is certain, the assessee has allocated them to meet periodic maintenance. Therefore, the assessee company has created provision to meet this expenditure on proportionate basis as per the accrual system of accounting. Under the matching principle concept, though the assessee may be actually incurring expenditure at a later date it has created the above provision as a need for incurring such expenditure which arises over a period of time. Further, claiming such periodic expenditure in the year in which it is actually paid is against the method of mercantile system of accounting as it would give incorrect picture of the financial results of a particular financial year. The expenditure in question was not a contingent liability but it has to be considered while determining the total income of the assessee company for the period under consideration. As such, the provision made towards of periodic maintenance is an ascertained liability, though estimated on the basis of available information. In support of his contentions, he has relied upon the following decisions: 286 of 2018 and of 2021 Madhucon Agra Jaipur Expressways Ltd i) ACIT vs. Ashoka Buildcom Ltd (61 Taxmann.com 330) ii) CIT vs. Om Metals & Minerals (P) Ltd (60 Taxmann.com 448) iii) Rotork Controls India (P) Ltd vs. CIT(180 Taxman 422) iv) Bharat Earth Movers vs. CIT (112 Taxman 61).

We have considered the rival contentions as well as the relevant material available on record. There is no dispute that the assessee is under a contractual obligation to carry out the periodic maintenance of the road constructed under the concessionaire agreement with NHAI. The assessee has to meet the expenses from the toll collection. However, the repair work is carried out only on the 5th year and therefore, it is an accumulated repair & maintenance expenditure for a span of 5 years for which the assessee has made the provision of 1/5th of the estimated cost of the repair work each year. The learned CIT (A) has considered this issue in para 6 to 6.3 as under:

We further note that in the case TN(DK) Express Ways Ltd vs. ACIT in which is a group concern of the assessee, the Tribunal vide order dated 16/10/2018 has considered an identical issue as under: “7. Considered the rival submissions and perused the material on record. The provision created by the assessee was disallowed by the AO on the ground that no expenditure was incurred during the year under consideration, therefore, such provision cannot be allowed. In the case of Ashok Buildcon Ltd. (supra), the Pune Bench of ITAT held that "it is not in dispute that the assessee is executing fixed price 286 of 2018 and of 2021 Madhucon Agra Jaipur Expressways Ltd contract which means that the contractor has agreed to a fixed contract price or rate in some cases subject to cost escalation prices. As per AS-7, the assessee is entitled to make provision for foreseeable losses." In the case of Om Metals & Minerals (P) Ltd. (supra), the Hon'ble High Court of Rajasthan upheld the findings of the Tribunal that assessee made pro vision of supplies for possible loss due to deduction made by Govt for not keeping supplies to satisfaction of department and further entire amount was included by the assessee in total receipts and once entire receipts had been shown, expenditure ought to have been allowed. 7.1 In view of the ratios laid down as above, we are in agreement with the assessee that in the mercantile accounting system the expenditure to be absorbed on periodic basis. In the given case, the expenditure to be incurred after 5 years and assessee cannot charge to P&L account whole 5 years expenditure on year 5. Rather, it has to charge to P&L A/c every year proportionate to the year of liability. Therefore, we set aside the order of CIT(A) and allow the provision made by the Assessee towards periodic maintenance.”

Accordingly, in the facts and circumstances as discussed above, we do not find any reason to interfere with the impugned order of the learned CIT (A), qua this issue.

For the A.Y 2014-15, the Revenue has raised the following grounds:

The solitary issue raised by the Revenue for the A.Y 2014-15 is regarding disallowance of provisions made for periodic maintenance was allowed by the learned CIT (A). This issue is common and identical to the issue raised by the Revenue in Ground No.2 for the A.Y 2013-14. Accordingly, in view of our findings on this issue for the A.Y 2013-14, we do not find any error or illegality in the order of the learned CIT (A) qua this issue.

For the A.Y 2013-14, the assessee has also filed a cross appeal. There is a delay of 1271 days in filing the appeal by the assessee. The assessee has filed a petition for condonation of delay which is supported by an affidavit of the Director of the assessee company.

We have heard the learned AR as well as the learned DR and carefully perused the contends of the petition for condonation of delay as well as the affidavit filed by the assessee. The impugned order was passed by the learned CIT (A) on 27/11/2017 and the assessee filed the present appeal on 28th July, 2021. The assessee has explained the cause of delay in the petition for condonation of delay as well as the affidavit which read as under:

Thus, the assessee has stated that the impugned order was served on the assessee on 5/12/2017, however, it was served on the staff member who received the above order and misplaced the same and has not brought to the notice of the person concerned. These reasons explained by the assessee for an inordinate delay of 1271 days are not only vague to the extend of not giving any particulars of the person to whom the notice was served rather the same are patently contrary to the record. It is pertinent to note that in the appeal filed by the Revenue in & 286/Hyd/2018 for the A.Y 2013-14 & 2014-15 respectively, the assessee has been regularly appearing right from 27/04/2018. Therefore, the assessee was very much aware about the impugned order well before 27/04/2018 when the assessee made the first appearance before the Tribunal in the cross appeal filed by the Revenue against the impugned order of the learned CIT(A). Even thereafter, the assessee has been regularly appearing during the year 2018 to 2020 but the appeal was finally filed only on 28/07/2021. Therefore, the reasons explained by the assessee are not only vague but contrary to the facts emerging from the record. Accordingly, we find that when the assessee has failed to explain some reasonable cause to justify such an inordinate delay, the concept of liberal interpretation of expression of the term “sufficient cause” cannot be applied in the case of the assessee. The reasons are apparently unacceptable and unsatisfactory as the assessee has failed to explain the justification for such an inordinate delay in filing the appeal. On Page 25 of 27 286 of 2018 and of 2021 Madhucon Agra Jaipur Expressways Ltd the one hand the assessee has been appearing in the cross appeal filed by the Revenue but chosen not to file the appeal against the impugned order. Therefore, the assessee has failed to make out a case that it has acted bonafidely and had taken all possible steps within its power and control to file the appeal without unnecessary delay. Except giving some vague excuse of no knowledge of the impugned order which is absolutely contrary to the record and unacceptable, the assessee has not brought any material to show that the assessee was prevented by some circumstances or events which were beyond the control of the assessee to file the appeal within the period of limitation. Accordingly, in the facts and circumstances as discussed above, we decline to condone the delay of 1271 days in filing the appeal and hence, the appeal of the assessee is not maintainable being barred by limitation.

In the result, Revenue appeals for the A.Ys 2013-14 and 2014-15 as well as the assessee’s cross appeal for the A.Y 2013-14 are dismissed.