DY CIT CIRCLE- 6(3)(2) , MUMBAI vs. M/S KOSI BRIDGE INFRASTRUCTURE COMPANY LTD , MUMBAI

First we take up appeal for AY 2012-13 which arises out of the order of Ld. Commissioner of Income-Tax (Appeals)-12, Mumbai [CIT(A)], dated 22/10/2019 in the matter of assessment framed by Ld. Assessing Officer (AO) u/s 143(3) r.w.s. 147 on 18/12/2017. The grounds read as under:

1. 1. On the facts and circumstances of the case and in law, the Ld CIT(A) erred in deleting the addition of Rs. 64,19,32,720/- u/s 32(1)(ii) of the Act.

The Ld. Sr. DR supported the assessment framed by Ld. AO. The Ld. AR, on the other hand, submitted that impugned order would not require any interference on our part since the issue is squarely covered in assessee’s favor by the decision of Mumbai Tribunal in the case of Rajahmundry Expressway Ltd. (ITA Nos.6487/Mum/2017 & ors. Order dated 04/03/2020) as followed subsequently in Andhra Expressway Pvt. Ltd. (ITA Nos.6508/Mum/2017 & ors. Order dated 16/10/2020). The copies of the orders have been placed on record.

Having heard rival submissions and after due consideration of relevant material including the cited decisions, our adjudication would be as given in succeeding paragraphs. Assessment Proceedings 4.1 The assessee being resident corporate assessee is stated to be engaged in executing construction projects. During the year under consideration, it was engaged in design, construction, finance and maintenance of 4-Lane Bridge across river Kosi including its approaches and guide bund and efflux bund from Km 155 to Km 165 on NH-57 in the state of Bihar on Build, Operate and Transfer (BOT) basis under the annuity scheme. For the said purpose, the assessee entered into a concession agreement (agreement) with National Highway Authority of India (NHAI) on 06/10/2006. In consideration of execution of project work, the assessee was entitled for annuity payment of Rs.31.90 Crores from NHAI. The amount of annuity received by the assessee during the year has been credited to Profit & Loss Account and offered to tax. At the same time, the assessee accumulated the project cost as ‘intangible asset’ in the Balance Sheet and claimed depreciation on the same @25% in the computation of income. The depreciation for this year has been claimed for half year which amount to Rs.6419.32 Lacs. 4.2 The assessment for this year was already completed u/s 143(3) on 18/12/2017. However the case was reopened u/s 147 on the ground that the assessee claimed depreciation on intangible assets despite the fact that it was not the owner of the bridge for which the assessee entered into concession agreement with National Highway Authority of India (NHAI). Relying upon CBDT Circular No.09/2014 dated 23/04/2014, it was held that the assessee would not be eligible for depreciation on the same. It was noted that as per the terms of the agreement, the assessee was entitled to receive annuity for certain period of time which was offered to tax as revenue. Accordingly, the assessee classified the cost of construction and development as intangible asset and claimed depreciation on the same @25% as applicable to an intangible asset. However, the same was contrary to aforesaid CBDT circular. The assessee justified the claim u/s 32(1)(ii), inter-alia, by submitting that the ‘right to receive annuity’ was covered as ‘any other business or commercial rights of similar nature’. The right to collect annuity from NHAI was valuable right having huge commercial value and akin to a license. Though the Circular stated that the assessee do not hold any right in the project except collection of toll to recoup the expenses incurred and it could not be treated as owner of the property for the allowability of deprecation u/s 32(1)(ii) of the Act, however, the Circular would not be binding on the assessee. The assessee would be entitled to claim depreciation on such intangible assets on terms of decision of Mumbai Tribunal in ACIT V/s West Gujarat Expressway Ltd. (2015; 154 ITD 103) which, after considering the CBDT Circular, held that expenses incurred by the assessee for availing an enduring benefit was nothing but an intangible asset and hence eligible for depreciation u/s 32(1)(ii). Similar was stated to be the decision of Pune Tribunal in ACIT V/s Ashoka Infraways (P) Ltd. (2013; 58 SOT 147) and Hyderabad Tribunal Special Bench in ACIT V/s M/s Progressive Construction (92 Taxmann.com 104). Similarities were drawn between these decisions and the facts of the assessee’s case to bolster the depreciation claim. 4.3 However, Ld. AO maintained that the assessee did not hold any right in the project except the collection of toll to recoup the expenses incurred which will be allowed to assessee from subsequent years. Accordingly, the deduction of depreciation was denied. 4.4 The second issue pertains to deduction of provision of periodic maintenance. It transpired that the assessee created a provision for periodic maintenance for Rs.18.23 Lacs. The Ld. AO denied the deduction of the same on the ground that it was unascertained liability which had not actually crystallized during the year. The assessee submitted that period maintenance was ascertained liability which was determined based on a scientific basis and incurred for the purpose of assessee’s business. As per contractual obligation under concession agreement, the assessee was obligated to NHAI to carry out the periodic maintenance and therefore, the provision would be allowable as per the decision of Hon’ble Supreme Court in Rotork Controls India (P.) Ltd. V/s CIT (2009; 180 Taxman 422). 4.5 However, finding that the provision remained unutilized for first five years and were utilized only to the extent of 25.46% in sixth year, Ld.AO opined that the estimate was not proper, reasonable and not scientifically determined. Accordingly, the deduction of the same was denied. Appellate proceedings 5.1 The Ld. CIT(A) concurred with assessee’s claim of depreciation and adjudicated the issue as under: - 5.1 I have carefully considered the facts of the case, the assessment order and the written submission of the appellant, The assessee company is engaged in the business of the construction and maintenance of bridges on a contractual arrangement for the NHAI. The AO in para 7 of the order had made the disallowance of tile depreciation claimed by the assessee on the ground that the assessee does not hold any rights in the project and hence the assessee company cannot be treated as the "Owner" of the property and cannot be allowed depreciation u/s 32(1)(ii) of the Act. CBDT has issued a circular on the same issue vide circular No. 9/2014. The CBDT has expressed the view that as the assessee does not hold any rights in the project except recovery of toll fee to recoup the expenditure incurred, the assessee cannot be treated as the "owner" of the property and cannot be allowed depreciation u/s 32(1)(ii) of the Act. During the course of the appellate proceedings the assessee submitted that it had entered into an agreement with the NHAI to construct the bridge on Build Operate and Transfer (BOT) basis under the annuity scheme. The appellant submitted that as per the Concessionaire Agreement (CA) it was to receive annuity for a fixed period of time in order to recoup the cost of the project. Thus, the annuity being an intangible commercial right, falls within the purview of section 32(1)(ii) of the Act. Further, the said right has been given to the appellant for a specified period with enduring benefit. It is also not disputed that on the expiry of the time period of the agreement, the said right of the Appellant will cease to have effect which means it slowly will depreciate to the nil value. Appellant argued that as per the provisions of the Income Tax Act, especially under section 32(1)(ii), the Appellant is entitled to claim of depreciation on such type of rights. Appellant placed reliance on number decision in this regard, I have verified the circular issued by the Board and it is issued u/s 119 of the Act. Section 119(l)(b) specifically excludes the CIT(A) from the influence of the Circular issued u/s 119 of the Act. Hon'ble ITAT Amritsar dealing with the circulars issued u/s 119, observed that the circulars issued cannot bound the discretion of the CIT(A) in deciding the appeals before him. 5.2 The issue is now squarely covered by the decision of the Special Bench of Hyderabad Tribunal in the case of ACIT v. Progressive Constructions Ltd [2018] 92 taxmann.com 104 (Hyderabad - Trib.). The Circular was considered by the Special bench of the Hyderabad ITAT and after answering all the issues raised before it, the Tribunal held as under.

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."

It has been the contention of the learned Senior Standing Counsel that as the term "license" has not been defined under the Income Tax Act, 1961, the definition of "license" under the Indian Easements Act, 1882, has to be looked into. Accepting the aforesaid contention of the learned Senior Standing Counsel, let us examine the definition of "license" extracted herein above. A plain reading of section 52 of the Act makes it clear, a right granted to a person to do or continue to do something in the immovable property of the grantor, which, in the absence of such right would be unlawful and such right does not amount to an easement or interest in the property, then such right is called a license. If we examine the facts of the present case, vis-a-vis, the definition of license under the Indian Easements Act, 1882, it would be clear that immovable property on which the project/project facility is executed/implemented is owned by the Government of India and it has full power to hold, dispose off and deal with the immovable property. By virtue of the C.A., assessee has only been granted a limited right to execute the project and operate the project facility during the concession period, on expiry of which the project/project facility will revert back to the Government of India. 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, in our view, 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 under section 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 under section 32(1)(ii) of the Act. In this context, it has been the contention of the learned Senior Standing Counsel that the intangible asset mentioned under section 32(1)(ii) of the Act are specifically identified assets, except, the assets termed as "any other business or commercial rights of similar nature". He had submitted, applying the principle of ejusdem generis the rights referred to in the expression "any other business or commercial rights of similar nature", should be similar to one or more of the specifically identified assets preceding such expression. The aforesaid contention of the learned Departmental Representative is unacceptable for the reasons enumerated hereinafter.

We have already held earlier in the order that by incurring the expenditure of Rs. 214 crore assessee has acquired the right to operate the project and collect toll charges. Therefore, such right acquired by the assessee is a valuable business or commercial right because through such means, the assessee is going to recoup not only the cost incurred in executing the project but also with some amount of profit. Therefore, there cannot be any dispute that the right to operate the project facility and collect toll charges therefrom in lieu of the expenditure incurred in executing the project is an intangible asset created for the enduring benefit of the assessee. Now, it has to be seen whether such intangible asset comes within the expression "any other business or commercial rights of similar nature". As could be seen from the definition of intangible asset, specifically identified items like knowhow, patents, copyrights, trademarks, licenses, franchises are not of the same category, but, distinct from each other. However, one thing common amongst these assets is, they all are part of the tool of the trade and facilitate smooth carrying on of business. Therefore, any other intangible asset which may not be identifiable with the specified items, but, is of similar nature would come within the expression "any other business or commercial rights of similar nature". The Hon'ble Supreme Court in Smifs Securities (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 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".

In the case of Techno Shares and Stocks Ltd. (supra), the Hon'ble Supreme Court while examining the assessee's claim of depreciation on BSE Membership Card, after interpreting the provisions of section 32(1)(ii), held that as the membership card allows a member to participate in a trading session on the floor of the exchange, such membership is a business or commercial right, hence, similar to license or franchise, therefore, an intangible asset. In the present case, undisputedly by virtue of C.A. the assessee has acquired the right to operate the toll road/bridge and collect toll charges in lieu of investment made by it in implementing the project. Therefore, the right to operate the toll road/bridge and collect toll charges is a business or commercial right as envisaged under section 32(1)(ii) r/w Explanation 3(b) of the said provisions. Therefore, in our considered opinion, the assessee is eligible to claim depreciation on WDV as an intangible asset. Thus, we answer the question framed by the Special Bench as under:- The expenditure incurred by the assessee for construction of road under BOT contract by the Government of India has given rise to an intangible asset as defined under Explanation 3(b) r/w section 32(1)(ii) of the Act. Hence, assessee is eligible to claim depreciation on such asset at the specified rate. 5.3 The Tribunal held that the only manner in which the assessee could recoup the cost incurred by it in implementing the project/project facility was to operate the road during the concession period, and collect the toll charges from user of the project facility. By investing huge cost, the assessee had obtained a valuable business/commercial right to operate the project facility and collect toll charges. Therefore, there cannot be any dispute that the right to operate the project facility and collect toll charges therefrom in lieu of the expenditure incurred in executing the project is an intangible asset created for the enduring benefit of the assessee. Then the bench examined the issue whether such intangible asset comes within the expression "any other business or commercial rights of similar nature". After detailed analysis of the Apex Court decision in the case of Smifs Securities, Hon'ble Delhi High Court decision in the case of Areva T and D India Ltd and decision of Supreme Court in the case of Techno Shares and Stocks Ltd, the bench came to a conclusion that the right to operate the toll road/bridge and collect toll charges is a business or commercial right as envisaged under section 32(1)(ii) r/w Explanation 3(b) of the said provisions. The CBDT's view with regard to the assessee not being the "owner" runs counter to the law laid down in Noida Toll Bridge 213 Taxman 333 and several other judgments. In Swarna Tollway Pvt Ltd, [2014] 43 taxmann.com 252 (Hyderabad - Trib.), the ITAT has conducted a thorough analysis of the entire law on the subject and concluded that the assessee has to be treated as the "owner" even though it has limited rights on the structure. The Tribunal relied on several judgements of the Supreme Court including Mysore Minerals 239 ITR 775 (SC) where the concept of ‘owner’ has been considered in great detail. 5.4 Further, similar view has been taken by the Hon'ble Mumbai Tribunal in the case of DCIT-9(1)(2), Mumbai vs Atlanta Ltd, Mumbai (ITA No, 3415/M/2015), Since, the facts of the appellant's case are similar to the aforesaid case laws, following the judicial precedence on the issue, I am of the considered opinion that the disallowance made u/s. 32(1)(ii) of the Act amounting to Rs.64,19,32,720/- is deleted. Appellant gets relief and the ground is allowed.