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Facts
The assessee, engaged in building infrastructure via BOT projects, claimed depreciation on "right to collect toll" as intangible assets and treated rental income as business income. The AO accepted these claims in the original assessment. The PCIT initiated revision proceedings under Section 263, contending these claims made the assessment order erroneous and prejudicial to the revenue.
Held
The Tribunal ruled that the assessee's claims for depreciation on "right to collect toll" as an intangible asset and treating rental income as business income were based on plausible views or settled legal positions, with judicial precedents supporting both contentions. Consequently, the original assessment order was neither erroneous nor prejudicial, and the PCIT's revision order under Section 263 was unjustified.
Key Issues
1. Whether "right to collect toll" is an "intangible asset" eligible for depreciation under Section 32. 2. Whether rental income from BOT projects should be assessed as "business income".
Sections Cited
263, 115JB, 143(3), 143(3A), 143(3B), 32, 32(1)(ii)
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Income Tax Appellate Tribunal, COCHIN BENCH
Before: SHRI INTURI RAMA RAO, AM
O R D E R Per: Inturi Rama Rao, AM This appeal filed by the assessee-company is directed against the order of the Ld. Principal Commissioner of Income Tax, Trivendurm (in short “PCIT”), dated 28/03/2023 passed U/s. 263 of the Income Tax Act, 1961 (“the Act”) for Assessment Year (AY) 2018-19.
Briefly the facts of the case are that the appellant is a wholly owned company of Government of Kerala. It is engaged in the business of building commercially viable infrastructural facilities for KSRTC. The Return of Income for the AY 2018-19 was filed on 05/10/2018 disclosing an income of Rs. 18,58,61,725/-. However, disclosed book profits U/s. 115JB of the Act at Rs. 1,19,35,132/-. Against the said return of income, the assessment was completed U/s. 143(3) r.w.s 143(3A) & 143(3B) of the Act vide order dated 23/03/2021 accepting the returned income. Subsequently, on review of the assessment record, the Ld. PCIT, Trivendrum, formed an opinion that the assessment order erroneous and prejudicial to the interests of the Revenue for the reasons that the AO accepted the following two claims without any verification ie., (i) The claim for depreciation U/s. 32 of the Act @ 25% on the intangible assets of Rs. 33,50,45,372/-; and (ii) Rental income was treated as a business income and in these circumstances, therefore, the Ld. PCIT issued a show cause notice U/s. 263 of the Act, dated 4/1/2003 proposing to set-aside the assessment order.
In response to the show cause notice, it is submitted that “the right to collect the rent from the building” acquired by the appellant company falls within the definition of “intangible asset” and therefore, the appellant company rightly made a claim for depreciation. With regard to the treating the rental income as business income, it is submitted that the rental income was derived by the appellant company during the ordinary course of its business. Thus, it is submitted that the proposed revision is bad in law.
However, the Ld. PCIT rejecting the above contentions of the appellant, had set-aside the assessment order with a direction to re-do the assessment after affording a reasonable opportunity of being heard to the appellant vide order dated 28/03/2023 passed U/s. 263 of the Act.
Being aggrieved, the appellant is in appeal before us in the present appeal.
It is submitted that the order passed by the Ld. PCIT U/s. 263 of the Act is totally erroneous, inasmuch as, the claim made by the appellant for depreciation on intangible assets U/s. 32 of the Act as well as offering the rental income under the head ‘income from business’ are in consonance with the settled position of law and there cannot be two opinions on the issues.
On the other hand, Ld. CIT-DR vehemently opposed the above submissions of the appellant and submits that the decision of the Hon'ble Delhi High Court in the case of Sharp Business Systems vs. CIT, 254 CTR 0233 wherein it was held that in the absence of ownership of asset on which depreciation is claimed, depreciation cannot be allowed as a deduction.
We heard the rival submissions and perused the material available on record. The Parliament had conferred the power of revision on the Commissioner of Income Tax U/s. 263 of the Act in case the assessment order passed is erroneous and prejudicial to the interests of revenue. In order to invoke the power of revision, the above two conditions are required to be satisfied cumulatively. References in this regard can be made to the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd vs. CIT, 243 ITR 83 (SC) and in the case of CIT vs. Max India Ltd, 295 ITR 282 (SC). The error in the assessment order should be one that it is not debatable or plausible view. In a case where the Assessing Officer examined the claim took one of the plausible views, the assessment order cannot be termed as an “erroneous”.
In the present case, it is undisputed that the item sought to be revised ie., claim for depreciation on intangible assets and the assessment of rental income on business were not examined by the Assessing Officer during the course of the assessment proceedings. Then, the question that crops up is whether the Ld. PCIT took a plausible view that claim for depreciation on intangible assets is not tenable in the eyes of law and also the rental income derived by the appellant company cannot be assessed under the head “business income”. The factual background relating to the claims are as under:
The appellant company had been functioning as a BOT project Manager for the bus terminal cum shopping complexes at different KSRTC stations and a commercial cum office complex called “Trans Towers” for KSRTC. This BOT projects were constructed as a Joint Venture of the assessee with KSRTC. The appellant company deployed its own funds for the construction of the projects and the cost is recovered in the form of collection of the rent from the Shopping Complexes. The cost incurred by the appellant company to construct the BOT projects is treated as a cost of intangible assets and claimed depreciation thereon @ 25% U/s. 32 of the Act. The claim was allowed by the AO in the assessment made U/s. 143(3) of the Act. Now the question that comes up for our consideration is whether the “Right to Collect Toll” falls within the definition of “commercial right” or “intangible asset”?. The ITAT (Special Bench), Hyderabad in the case of ACIT vs. Progressive Constructions Ltd [2018] 92 taxmann.com 104 took a view that “Right to Collect Toll” falls within the definition of “commercial right” to intangible assets as specified under the provisions of section 32(1)(ii) of the Act. Further, the Pune Bench of the Tribunal in the case of DCIT vs Ashoka Dhankuni Kharagpur Tollway Ltd [2022] 145 taxmann.com 97 (Pune – Trib.), which is authored by the one of the Hon'ble Members of this order (AM), took a view after making a reference of its earlier decisions in the case of (i) ACIT vs. Jora Nayagaon toll Road Company (P.) Ltd (ITA Nos. 379 & 380 (PUN) of 2016,dated 29/11/2017); (ii) DCIT vs. Ashoka Highways (Bhandara) Ltd (ITA Nos. 1388 & 1389 (PUN) of 2018), dated 1/11/2021) took a view that the “Right to Collect Toll” falls within the meaning of ‘intangible assets’ as defined U/s. 32(1)(ii) of the Act and accordingly held that the assessee’s right to collect toll qualifies for depreciation @ 25%. We will be failing in our duty if we do not refer to the other judicial pronouncements which laid down that “Right to Collect Toll” falls within the meaning of ‘building’. In this connection, a reference can be made to the decision of the Hon'ble Delhi High Court in the case of (i)Moradabad Toll Road Co. Ltd vs. ACIT [2014] 369 ITR 403; (ii) Hon'ble Allahabad High Court in the case of CIT vs. Noida Toll Bridge Co. Ltd [2013] 213 Taxman 333; (iii) Hon'ble Madras High Court in the case of CIT vs. VGP Housing (P.) Ltd [2016] 368 ITR 565. However, the Hon'ble Bombay High Court in the case of North Karnataka Expressway Ltd vs. CIT [2014] 51 taxmann.com 214 and the Hon'ble Bombay High Court in the case of CIT vs. West Gujarat Expressway ltd [2017] 390 ITR 398 (Bom.) took a view that the assessee is not entitled for depreciation on the assets not owned by the assessee by following its earlier decision of North Karnataka Expressway Ltd vs. CIT [2014] 372 ITR 145 (Bom.).
The above discussion clearly brings out that it is a highly debatable issue, as there is cleavage of judicial opinion amongst various High Courts. Therefore, it cannot be said that the assessment order is erroneous. Therefore, the Ld. PCIT was not justified in exercising the power of revision in respect of the item of allowing depreciation and ‘right to collect toll’ treating it as an intangible asset @ 25%.
The next item that was the subject matter of revision is treatment of rental income as business receipts. The facts on the record clearly brings out that the rental income was derived by the appellant company during the course of the carrying on the business of the appellant ie., BOT Project. There is a direct nexus between the rental income and the business activity of the appellant company and therefore, in view of the decision of the Hon'ble Supreme Court in the case of Chennai Properties & Investments Limited vs. CIT, 373 ITR 673, there cannot be two opinions that the income derived from rental income in the present case is assessable under the business head. In view of the above facts, the Ld. PCIT was not justified in exercising the powers of revision. Accordingly, we set-aside the order passed U/s. 263 of the Act.
In the result, appeal filed by the assessee stands allowed.
Order pronounced in the open court on 15th July, 2025.