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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
Date of hearing : 20.12.2018 Date of Pronouncement : 04.01.2019 O R D E R Per N V Vasudevan, Vice President
This is an appeal by the Assessee against the order dated 15.12.2010 of CIT(Appeals), Bangalore, relating to assessment year 2005- 06.
There is a delay of about 2 days in filing this appeal. The delay in filing the appeal is not inordinate and has been explained as due to change in the counsel who handled the tax matters of the Assessee and due to delay in placing facts of the case before the present counsel and getting advice from the present counsel. The delay in filing the appeal is therefore condoned.
The first two grounds of appeal and Ground Nos.6 & 7 are general grounds of appeal and need no specific adjudication.
4. Ground No.3 raised by the Assessee is with regard to the disallowance of depreciation on bridges by the Revenue authorities. The Assessee is a statutory corporation established and incorporated under the Companies Act, 1956 on 26.7.1999 by the Karnataka State Government. The objects of the corporation so set up will be to take up development program for roads, bridges and other related infrastructure developments works connected with surface transport. The Assessee claimed depreciation of Rs.10,35,34,009/- on bridges. The Assessee claimed that the bridges on which depreciation were claimed by the Assessee were owned by them and they had complete dominion over the bridges. The Assessee claimed that depreciation was claimed on the cost of bridges completed during the relevant previous year that was put to use (open to traffic). The AO noticed that in the notes to accounts, Schedule-L, it has been stated that the Government of Karnataka has not finalized any scheme on toll/revenue collection by the Assessee and therefore the Assessee has not identified/recognized any revenue on the bridges completed and put to use during the previous year. The AO also noticed that the Government order authorizing the Assessee to take up construction did not authorize the Assessee to collect any toll or service charges for use of the bridge. The transfer of land on which bridges were built was only for the limited purpose of enabling the Assessee to carry out construction of bridges. In other words, the bridges that were built by the Assessee were not under any scheme of BOT (Build Operate Transfer), BOOT or BOLT. The AO also noticed that in the notes to accounts, the Assessee has stated that the title deed in respect of the bridges is yet to be transferred to the Assessee. The Assessee’s role was merely to construct bridges and not to generate revenue from bridges after construction. The AO therefore held that the claim for depreciation by the Assessee cannot be allowed.
Before the first appellate authority, the Assessee contended that ownership of bridges is not a sine quo non for claiming depreciation and in this regard relied on decisions of Hon’ble Supreme Court in the case of Mysore Minerals Ltd. Vs. CIT 239 ITR 775 (SC) wherein it was held that depreciation can be allowed even in the absence of legal title (Ownership) so long as the person claiming depreciation has dominion over the assets and is entitled to use it in his own rights and has in fact used it for the purpose of his business. The Assessee relied on decision of Hon’ble Supreme Court in the case of CIT Vs. Poddar Cements Ltd. 226 ITR 625 (SC) wherein in the context of head of income under from income on letting out property was to be assessed took the view that ownership in the strict sense is not necessary to claim that income from letting out property is income from house property so long as the person who received rent is entitled to such rent in his own right to the rental income.
The CIT(A) however upheld the order of the AO by following order of his predecessor for AY 2002-03 to 2004-05 wherein it was held that the role of the Assessee was only to build bridges and had to hand over the same to the State Government after completion of construction and therefore was not entitled to claim depreciation on bridges as it was not owner of the bridges.
Aggrieved by the order of the CIT(A), the Assessee has raised Gr.No.3 before the Tribunal. We have heard the submission of the learned counsel for the Assessee who reiterated submissions that were made before the revenue authorities. The learned DR relied on the order of the CIT(A).
We have carefully considered the rival submissions. As per section 32 of Income Tax Act, 1961, an assessee is entitled to claim depreciation on fixed assets only if the following conditions are satisfied:
Assessee must be owner of the asset (though registered ownership is not necessary).
2. The asset must be used for the purposes of business or profession. 3. The asset must be used during the previous year. The use of the asset during the previous year may be active use or passive [i.e., kept ready for use].
The Assessee does derive income from allowing right to use the bridges on which he had claimed depreciation during the previous year. The Assessee is not owner of the bridges and only constructs bridges out of funds provided by the State Government. Therefore, the conditions for allowing depreciation both on the ownership aspect as well as use for business is not satisfied so as to allow depreciation on bridges claimed by the Assessee. The position is different where bridges are built under Build Operate & Transfer (BOT), where the cost of construction is reimbursed by allowing the person constructing bridges to recover his cost and profits by collecting toll. This aspect is made very clear in the CBDT Circular No.9/2014 dated 23.4.2014. Admittedly the Assessee has not constructed bridges on which depreciation has been claimed by it under BOT. In the given circumstances, we find no merits in Gr.No.3 raised by the Assessee and the same is dismissed.
The learned Counsel for the Assessee made a prayer for allowing the expenditure incurred on construction of roads should be allowed as revenue expenditure and in this regard placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT Vs. Madras Auto Service (P) Ltd. 233 ITR 468(SC) wherein it was held that a tenant incurring expenditure of capital nature to the building of which he is a tenant is entitled to claim such expenditure as capital expenditure. This argument in the present case cannot be allowed as neither the books of accounts of the Assessee are maintained as such by showing the grant received from the Government as income and the sum expended for the projects as expenditure. The further claim of writing off the expenses on building bridges on a pro rata basis as revenue expenditure is also rejected for the same reason.
Gr.No.4 raised by the Assessee is with regard to treating interest income of Rs.2,62,48,955/- which was earned on investment of surplus HUDCO loan for building bridges temporary parked in investments to yield income, as income from other sources. The Assessee availed loans from HUDCO for the purpose of construction of bridges. The amount of loan disbursed by HUDCO till utilization for the purpose of construction of bridges were temporarily invested in fixed deposits. The interest paid on loans availed from HUDCO was capitalized as cost of the asset and the interest income earned on temporary parking of funds was reduced from the cost of assets. The CIT(A) confirmed the order of the AO. Aggrieved by the order of the CIT(A), the Assessee has raised Gr.No.4 before the Tribunal.
We have heard the rival submissions. Before the CIT(Appeals), the Appellant took the plea that the interest earned ought not to be taxed under the head Income from Other Sources and that it should actually be set off against interest paid on loans from HUDCO as these deposits had a cost to it and were not made out of interest free funds. The assessee, without prejudice to this contention, also took an alternate plea that the entire interest paid on loans availed from HUDCO should actually be permitted to be written off as Revenue Expenditure. The CIT(A) in his common order passed for the AYs 2002-03, 2003-04 & 2004-05 rejected the plea of set off against interest payments and upheld the order of the AO on this count. He however allowed the alternate plea of the Appellant that the entire interest payment made to HUDCO on the loans availed from them ought to be allowed as Revenue Expenses.
It may be noted that the Revenue has accepted the order of the CIT(A) and is not agitating the same. It is the assessee’s submission that the ITAT decide this issue based on the given set of facts for the AYs 2002-03, 2003-04 & 2004-05. In respect of AY 2005-06, however, the CIT(A) has dismissed the plea that the interest ought not to be taxed under the head Income from Other Sources by following the order of his predecessor for the AYs 2002-03 to 2004-05. The CIT(A) has followed the order of his predecessor in this regard. The CIT(A) however is silent on the plea that interest paid on loans from HUDCO needs to be allowed as revenue expenditure. Since he states that he agrees with the reasoning of his predecessor while dismissing the ground the order of the predecessor on treating the entire interest paid on loans from HUDCO as Revenue expenses is to be allowed.
The assessee has also pleaded before us that the Tribunal in-the event it does affirm the treatment of interest earned as Income from Other Sources, should allow the alternate plea that the interest paid on loans from HUDCO should be allowed as revenue expenditure as done so by the CIT(Appeals) in the order for the AYs 2002-03 to 2004-05 and which has been accepted by the Revenue.
We are of the view the prayer made in the alternative by the Assessee deserves to be allowed as was done in AYs 2002-03 to 2004-05 by the CIT(A) in the orders for those AYs. We direct the claim of the Assessee, to this extent, should be allowed. Gr.No.4 is thus treated as partly accepted.
Ground No.5 raised by the Assessee is with regard to disallowance of prior period expenses of Rs.35,52,281/- out of which a sum of Rs.33,45,787/- relates to interest paid to Krishna Bhagya Jala Nigam Limited- a public sector undertaking towards interest. Since the Assessee was following mercantile system of accounting and since no reasons were given for allowing prior period expenses as deduction in the present AY, the revenue authorities disallowed the claim for deduction of prior period expenses.
Before us the learned counsel for the Assessee submitted that the expenses claimed as deduction that was disallowed as prior period expenses crystalized during the relevant previous year as expenditure of the Assessee. No details whatsoever were furnished in this regard. In the circumstances, we confirm the order of the CIT(A) in this regard.
In the result, appeal of the Assessee is partly allowed.
Pronounced in the open court on this 04th day of January, 2019.