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Facts
The assessee claimed depreciation on the project cost of roads treated as an intangible asset. The Assessing Officer (AO) allowed this claim. The Principal Commissioner of Income Tax (PCIT) revised the assessment under section 263, holding that the AO's order was erroneous and prejudicial to the revenue as the ownership of the roads did not vest with the assessee.
Held
The Tribunal held that the AO failed to conduct proper enquiry into the allowability of depreciation on roads constructed under an annuity concession agreement. The reliance on the Supreme Court case of Malabar Industrial Co. Ltd. was considered misplaced due to a subsequent explanation to section 263. The Tribunal found the PCIT's action under section 263 to be justified.
Key Issues
Whether the AO's order allowing depreciation on roads constructed under an annuity concession agreement was erroneous and prejudicial to the interest of the revenue, warranting revision under section 263, due to lack of proper enquiry into ownership and allowability of depreciation.
Sections Cited
263, 143(3), 142(1), 263 Explanation 2, BOT/Annuity arrangements
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘E’ BENCH: MUMBAI
Before: SHRI ANIKESH BANERJEE & SHRI JAGADISH
Assessment Year (AY) 2020-21 against the order dated 4 March 2025 passed by the Learned Principal Commissioner of Income Tax, Mumbai-6 (“Ld. PCIT”) under section 263 of the Income-tax Act, 1961 (“the Act”). By the impugned order, the Ld. PCIT held that the assessment order dated 25 August 2022 passed by the Assessing Officer (“AO”) under section 143(3) of the Act was erroneous insofar Thiruvananthapuram Road Development Company Limited :- 2 -: as it was prejudicial to the interest of the Revenue and accordingly set aside the same with a direction to the AO to conduct fresh enquiries and reassess the income after granting opportunity of being heard to the assessee. Aggrieved with the order, the assessee is in appeal raising following grounds of appeal :
“1. On the facts and circumstances of the case and in law, the order passed by the Principal Commissioner of Income Tax 6, Mumbai ('Pr. CIT') under section 263 of the Act enhancing and modifying the assessment order dated 25 August 2022 passed under section 143(3) of the Act by treating it as erroneous and prejudicial to the interest of the revenue is without jurisdiction, bad in law and void ab-initio.
The Appellant prays that the order dated 4 March 2025 passed under section 263 of the Act be struck down as invalid, null and void ab initio and the original assessment order of the Assessing Officer be restored.
On the facts and circumstances of the case and in law, the Pr. CIT erred in holding that the assessment order is erroneous and prejudicial to interest of revenue on the issue of claim of depreciation even though the claim is allowed in Tribunal decision in appellant's own case for AY 2008-09 (ITA 6798 and 6837/Mum/2011), AY 2010-11 (ΙΤΑ ΝΟ.622 and 636/Mum/2015) and AY 2011-12 (ITA NO.4346/Mum/2015 and C.O. No.25/Mum/2017) which was also submitted during assessment proceedings and noted by the Assessing Officer in detail while framing the assessment order under section 143(3) of the Act dated 25 August 2022.
The Appellant prays that the order dated 4 March 2025 passed under section 263 of the Act, by the Pr. CIT be struck down as invalid, null and void ab initio”
The assessee company is engaged in the business of developing, widening, strengthening, operating, constructing and maintaining the Thiruvananthapuram Road Development Company Limited :- 3 -:
Thiruvananthapuram City Roads Improvement Project (TCRIP) under an Annuity Concession Agreement dated 16 March 2004 entered into with the Government of Kerala. Under the said agreement, the assessee was entitled to recover its investment by way of fixed annuity payments payable semi-annually over the concession period of 17.5 years. For AY 2020-21, the assessee filed its return of income declaring Nil income after claiming depreciation of ₹25,77,02,696/- on the project cost by treating the same as an intangible asset. The AO completed the assessment under section 143(3) of the Act and accepted the returned income. On examination of the assessment records, the Ld. PCIT observed that the AO had allowed depreciation of ₹25.77 crore on the cost of the project treated as an intangible asset at the rate of 25%, without examining whether the assessee was the owner of the underlying road asset. It was further observed that the project cost was not separately reflected in the block of intangible assets in the books of account and neither depreciation nor amortization was claimed in the books of account. The claim of depreciation was made only in the computation of income and tax audit report. The Ld. PCIT relied upon judicial precedents holding that depreciation is not allowable on roads constructed under BOT/annuity arrangements where ownership vests with the Government. He Thiruvananthapuram Road Development Company Limited :- 4 -: therefore concluded that the AO had failed to conduct proper enquiry into the allowability of depreciation, rendering the assessment order erroneous and prejudicial to the interest of the Revenue within the meaning of section 263 read with Explanation 2 thereto.
The Learned Authorised Representative (“Ld. AR”) submitted that the AO had issued notice under section 142(1) dated 12 February 2022 specifically calling for details relating to the addition of intangible assets and their valuation. The assessee furnished a detailed reply dated 28 February 2022, referring to clause 18 of the tax audit report and relevant annexures. It was contended that this clearly established that the AO had applied his mind and taken a possible view, and therefore section 263 could not be invoked merely because the Ld.
PCIT held a different opinion. The Ld. AR further relied upon CBDT Circular No. 9/2014 dated 23 April 2014, which clarifies that expenditure incurred on development of roads/highways under BOT arrangements may be amortized over the concession period. It was argued that the allowable amortization for the year worked out to ₹26.91 crore, which was higher than the depreciation claimed, and therefore no prejudice was caused to the Revenue.
The Ld. AR placed strong reliance on the judgment of the Hon’ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT (243 ITR 83), wherein it was held that for invoking section 263, both conditions—(i) the order being erroneous and (ii) the order being prejudicial to the interest of the Revenue—must coexist, and that where the AO has adopted one of the possible views, the order cannot be revised merely because the Commissioner does not agree with such view.
Reliance was also placed on the judgment of the Hon’ble Bombay High Court in CIT v. Thana Electricity Supply Ltd. (206 ITR 727) to contend that the A.O was duty bound to allow the depreciation, following the decision of Hon’ble ITAT in assessee’s own case in earlier years and therefore there was no error in the order passed by the A.O.
The Learned Departmental Representative (“Ld. DR”), on the other hand, submitted that the AO had failed to examine the fundamental issue of allowability of depreciation, despite the case being selected for scrutiny due to business losses. Mere calling for details of intangible assets, without examining the ownership condition and the binding judicial precedents, could not be equated with proper enquiry.
The Ld. DR relied on the judgment of the Hon’ble Bombay High Court in North Karnataka Expressway Ltd. v. CIT (372 ITR 145), wherein it was held that depreciation is not allowable on toll roads constructed under BOT arrangements as the assessee does not acquire ownership of the road, and the right to collect toll is only a contractual right.
Further reliance was placed on the decision of the Mumbai Bench of the Tribunal in Hazaribagh Ranchi Expressway Ltd. v. ACIT (209 ITD 522), wherein it was held that depreciation on roads constructed under concession agreements is not allowable, and that failure of the AO to examine this issue renders the assessment order erroneous and prejudicial to the interest of the Revenue.
The Ld. DR further submitted that the issue of amortization under CBDT Circular No. 9/2014 was neither examined nor allowed by the AO, and therefore could not be used to justify an otherwise erroneous assessment order.
We have carefully considered the rival submissions and perused the material on record. It is evident that although the AO issued notice under section 142(1) calling for details of intangible assets, there is no discussion or finding in the assessment order on the critical issue of allowability of depreciation, particularly in the light of binding Thiruvananthapuram Road Development Company Limited :- 7 -: jurisdictional High Court decisions. The reliance placed by the assessee on Malabar Industrial Co. Ltd. is misplaced in the present facts as the decision was rendered prior to the insertion of Explanation 2 to section 263 with effect from 1 June 2016. Explanation 2 expressly deems an order to be erroneous and prejudicial to the interest of the Revenue if it is passed without making enquiries or verification which should have been made, or if relief is allowed without proper examination of the claim.
In the present case, the AO failed to examine whether depreciation was allowable on roads constructed under an annuity concession agreement, despite the existence of binding judicial precedents such as North Karnataka Expressway Ltd. The failure to conduct such enquiry squarely attracts clause (a) and (b) of Explanation 2 to section 263.
The argument relating to amortization under CBDT Circular No.
9/2014 also does not assist the assessee, as no such claim was examined or allowed in the assessment order, nor was amortization claimed consistently in earlier years in substitution of depreciation.
In view of the above, we hold that the assessment order was passed without proper enquiry on a material issue and was therefore rightly held to be erroneous and prejudicial to the interest of the Revenue. The Ld. PCIT was fully justified in invoking the provisions of section 263 of the Act.
Accordingly, the order passed by the Ld. PCIT under section 263 is upheld and the appeal filed by the assessee is dismissed.
In result the appeal filled by the assessee is dismissed.
Sd/- Sd/-
(ANIKESH BANERJEE) (JAGADISH) Judicial Member Accountant Member Mumbai, Dated: 06th January, 2026. Poonam Mirashi (Stenographer)
Copy of the order forwarded to: 1. Appellant 2. Respondent 3. The CIT 4. The CIT (Appeals) 5. The DR, I.T.A.T.
By order
(Asstt. Registrar) ITAT, Mumbai