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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
IN THE INCOME TAX APPELLATE TRIBUNAL “J” BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI N.K. PRADHAN, ACCOUNTANT MEMBER
ITA No.3415/Mum./2015 (Assessment Year : 2010–11) Dy. Commissioner of Income Tax ……………. Appellant Circle–9(1)(2), Mumbai v/s M/s. Atlanta Limited 101, Shree Amba Shanti Chambers ……………. Respondent Andheri Kurla Road, Andheri (E) Mumbai 400 059 – AAACA8865E
C.O. no.83/Mum./2017 (Arising out of ITA No.3415/Mum./2015) (Assessment Year : 2010–11) M/s. Atlanta Limited 101, Shree Amba Shanti Chambers ……………. Cross Objector Andheri Kurla Road, Andheri (E) (Original Respondent) Mumbai 400 059 – AAACA8865E v/s Dy. Commissioner of Income Tax ……………. Respondent Circle–9(1)(2), Mumbai (Original Appellant)
ITA No.4075/Mum./2015 (Assessment Year : 2011–12) M/s. Atlanta Limited 101, Shree Ambashanti Chambers Opp. Leela Hotel, Andheri Kurla Road ……………. Appellant Andheri (E), Mumbai 400 059 PAN – AAACA8865E v/s Dy. Commissioner of Income Tax ……………. Respondent Circle–8(1), Mumbai
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ITA No.4416/Mum./2015 (Assessment Year : 2011–12) Dy. Commissioner of Income Tax ……………. Appellant Circle–9(1)(2), Mumbai v/s M/s. Atlanta Limited 101, Shree Amba Shanti Chambers Opp. Leela Hotel, Andheri Kurla Road ……………. Respondent Andheri (E), Mumbai 400 059 PAN – AAACA8865E Revenue by : Shri Rajeshwar Yadav Assessee by : Shri Vijay Mehta a/w Shri Anuj Kisnadwala
Date of Hearing – 12.12.2017 Date of Order – 24.01.2018
O R D E R PER SAKTIJIT DEY, J.M.
Aforesaid appeals and cross objection arise out of two separate orders passed by the learned Commissioner (Appeals)–16, Mumbai, for the assessment years 2010–11 and 2011–12.
ITA no.3415/Mum./2015 – Revenue’s Appeal – A.Y. 2010–11 C.O. no.83/Mum./2017 – Assessee’s C.O.
At the outset, it needs to be mentioned that there is a delay of 85 days in filing the cross objection. The assessee has filed an application seeking condonation of delay explaining the cause of delay, the learned Authorised Representative submitted that, though, before the Assessing Officer as well as before the learned Commissioner
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(Appeals), the assessee raised an issue relating to claim of depreciation on Built, Operate, Transfer (BOT) rights for Mumbra Bypass Road, however, due to mistake of the Counsel, the assessee could not challenge the decision of the learned Commissioner (Appeals) on the issue either by way of an appeal or cross objection within the stipulated dates. He submitted, the mistake being a bonafide one, the assessee should not be debarred from raising the issue before the Tribunal by way of Cross Objection. He submitted that the assessee should not suffer due to mistake of the Counsel. In this context, he relied upon the decision of the Hon'ble Jurisdictional High Court in Vijay Vishin Meghani v/s DCIT, [2017] 86 taxmann.com 98 (Bom.). He, therefore, submitted that the delay in filing the cross objection may be condoned.
Learned Departmental Representative strongly opposing the condonation of delay submitted that the assessee has time and again varied its stand with regard to its claim on BOT rights as it has claimed depreciation initially and subsequently has claimed amortization of the expenditure incurred for BOT rights as deferred revenue expenditure over the concession period. He submitted that the assessee being not consistent with its stand before the Departmental Authorities resulting in delay in filing the cross objection, therefore, delay should not be condoned.
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We have heard rival contentions and perused the material available on record. Undisputedly, not only in the return of income filed for the impugned assessment year but during the assessment proceedings also, the assessee had claimed depreciation on the BOT rights of Mumbra bypass road. In fact, a specific ground was also raised before the learned Commissioner (Appeals) on the issue of claim of depreciation on the BOT rights. Only as an alternative ground, the assessee has claimed amortization of expenditure incurred on BOT rights as deferred revenue expenditure relying upon the CBDT circular. Therefore, the allegation of the Department that the assessee is not consistent with its stand is incorrect. Further, after considering the submissions of the parties, we are of the opinion that the delay caused in filing the cross objection was for bonafide reasons, hence, deserves to be condoned. Accordingly, we condone the delay of 85 days and admit the cross objection for hearing on merit.
Grounds no.(i) to (iii) of Revenue’s appeal corresponding to the grounds raised by the assessee in the cross objection relate to the deduction claimed by the assessee on expenditure incurred on construction of Mumbra bypass road on BOT basis.
Brief facts are, the assessee a company is engaged in the business of civil construction, road construction and allied activities.
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For the assessment year under dispute, the assessee filed its return of income on 27th September 2010, declaring income of ` 36,45,68,482, under the normal provisions of the Act and book profit of ` 51,49,82,757 under section 115JB of the Act. During the assessment proceedings, the Assessing Officer noticing that the assessee has claimed depreciation @ 25% on Mumbra bypass road called upon the assessee to furnish necessary details relating to its claim and also to explain why depreciation should not be restricted to 10% or 15%. In response to the query raised by the Assessing Officer it was submitted by the assessee that it has entered into a contract with the Government of Maharashtra on 12th July 2000, to construct a project involving the work of construction of Mumbra bypass of Mumbai Pune Road of National Highway–4 from kilometer 133.800 in Taluka Thane, on BOT basis. As per the terms of the agreement, assessee has to bear the entire cost of construction of project with a right conferred on it to collect revenue (Toll) from the users of the facilities during the construction period as per the rates specified in Government notification. The agreement further provided that after the end of concession period which was initially for a period of 25 years and subsequently reduced to 15 years, the assessee has to transfer the facility to the Government at zero cost. During the construction period, the assessee capitalized the entire cost for the construction of the facility by transferring to capital work–in–progress. After construction
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of the facility and during the concession period, the entire cost of construction was amortized and charge to Profit & Loss account as per AS–26 in a manner so as to reduce the value of the project in the books of account of the assessee to zero at the end of concession period. It was submitted by the assessee that the expenditure incurred for constructing Mumbra bypass road on BOT basis was on the understanding that by incurring such expenditure, the assessee will acquire the commercial rights to collect the toll from the user of the facility over the concession period. Thus, it was submitted by the assessee that such commercial rights acquired by the assessee is an intangible asset under section 32(1)(ii) and eligible for depreciation @ 25%. The Assessing Officer, however, did not find merit in the submissions of the assessee. Though, the Assessing Officer agreed that the expenditure incurred on the BOT project has been correctly entered by the assessee in the books of account, however, he observed that there is no need to give any different treatment for income tax purpose. He observed that the assessee had constructed the road on behalf of the Government. Therefore, the expenditure incurred on the construction of the road is in the nature of deferred revenue expenditure and has to be amortized over the concession period. The Assessing Officer observed, though, the assessee has correctly computed the amortization of expenditure for the year under consideration, however, it has claimed excess depreciation over the
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amortized expenditure which according to the Assessing Officer was ` 8,45,58,584. Accordingly, he disallowed an amount of ` 14,99,25,475, treating it as excess claim made by the assessee. Without prejudice to the reasoning on the basis of which the aforesaid disallowance was made, the Assessing Officer also held that even if the BOT road constitutes a capital asset, still, it cannot be considered as an intangible asset, hence, depreciation at the normal rate of 10% will be allowable. Being aggrieved of the disallowance made by the Assessing Officer, assessee preferred an appeal before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee and verifying the facts on record was of the view that assessee’s case is covered by the CBDT circular no.9 of 2014. As far as assessee’s claim of depreciation is concerned, the learned Commissioner (Appeals) held that the assessee not being owner of the road constructed by it cannot claim depreciation on the BOT rights. However, he allowed assessee’s revised claim of deferred revenue expenditure amounting to ` 21,18,70,983, relying upon the CBDT circular no.9 of 2014 and the decision of the Hon'ble Jurisdictional High Court in North Karnataka Express Way Ltd. v/s CIT, ITA no.499 of 2012, vide judgment dated 14th October 2014. Being aggrieved of the aforesaid decision of the first appellate authority both
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the Revenue and the assessee are before us. While the Revenue has challenged the decision of the learned Commissioner (Appeals) in accepting assessee’s revised claim of deferred revenue expenditure of ` 21,18,70,983, the assessee is aggrieved with the decision of the learned Commissioner (Appeals) in not allowing assessee’s claim of depreciation on BOT rights.
Learned Departmental Representative submitted that as per the agreement entered with the Government of Maharashtra, the concession period for the BOT facility was for a period of 15 years. Therefore, the expenditure incurred by the assessee in construction of the BOT road was to be amortized and treated as deferred revenue expenditure and allowed over the entire concession period. He submitted, before the first appellate authority, the assessee submitted a revised claim by reducing the concession period of 15 years and considering such revised claim learned Commissioner (Appeals) has allowed the claim of the assessee without giving any opportunity to the Assessing Officer to examine assessee’s claim. Learned Departmental Representative submitted, the first appellate authority while accepting the revised claim of the assessee has not followed the spirit of CBDT circular referred to by him. Therefore, he submitted, the order of the Assessing Officer on the issue should be restored. As far as the assessee’s claim of depreciation on the right to collect toll on
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BOT road, the learned Departmental Representative relying upon the decision of the Hon'ble Jurisdictional High Court in North Karnataka Express Way Ltd. (supra) submitted that the assessee not being the owner of the road is not eligible to claim depreciation.
Learned Authorised Representative submitted, as per terms of the agreement, the assessee has to bear the entire cost of the Mumbra bypass road to be constructed BOT basis. He submitted, as per the terms of the agreement the cost incurred by the assessee was not to be reimbursed by the Government and in exchange what the assessee received was a right to collect toll from the persons using the road over the concession period. He submitted, after completion of the BOT facility the assessee started recognizing revenue from collection of toll in the assessment year 2008–09 and claimed depreciation for the first time on the commercial right acquired by it on incurring the expenditure by treating it as an intangible asset. In this context, he drew our attention to the audited financial statement for assessment year 2008–09 showing claim of depreciation. He submitted, assessee’s claim of depreciation for the assessment year 2008–09 was examined by the Assessing Officer in scrutiny assessment proceedings and the claim was allowed. He submitted, in the assessment year 2009–10 also, the Assessing Officer accepted assessee’s claim of depreciation on BOT rights as an intangible asset in an assessment completed
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under section 143(3) of the Act. He submitted, in the impugned assessment year, the assessee has claimed depreciation on the opening written down value (WDV) of the intangible asset, hence, there is no question of denying assessee’s claim of depreciation as such claim has already been allowed by the Department in the preceding assessment years. Learned Authorised Representative submitted, in case of North Karnataka Express Way Ltd. (supra), the Hon'ble Jurisdictional High Court never decided the issue whether the assessee can claim depreciation on the right to collect toll on the BOT road as in that case, the assessee has claimed depreciation at the normal rate by treating the road as its own asset. He submitted, on the contrary, the issue is squarely covered by the Special Bench decision of the Tribunal, Hyderabad Bench, in ACIT v/s Progressive Construction Ltd., ITA no.1845/Hyd./2014 dated 14th February 2017. He also relied upon the decision of the Tribunal, Mumbai Bench, in ACIT v/s West Gujarat Express Way Ltd., ITA no.5904/Mum./2012 dated 15th April 2015. Thus, he submitted that assessee’s claim of depreciation has to be allowed.
We have patiently and carefully considered the rival submissions, perused the material on record and have also applied our mind to the decisions relied upon. Undisputed facts are, the assessee entered into an agreement with Maharashtra Government for construction of
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Mumbra Bypass road on BOT basis. As per the terms of the agreement, the assessee was required to incur the entire cost of construction without it being reimbursed by the Government. However, the Government under the agreement conferred the rights on the assessee to collect revenue (toll) from persons utilizing the BOT facility at the rate prescribed through notification issued by the Government. Thus, from the terms of the agreement, it is very much clear that by investing money in construction of BOT facility the assessee obtained a commercial right to collect toll which is no doubt a valuable business right. The issue which, therefore, arises for consideration is, whether such valuable commercial right obtained by the assessee by investing in construction of BOT facility is an intangible asset as defined under section 32(1)(ii) of the Act. To answer this issue, we do not have to detain ourselves for far too long as the Special Bench of the Tribunal, Hyderabad Bench, in Progressive Construction Ltd. (supra) while dealing with identical issue has held that the right to collect toll is a valuable commercial or business right, hence, in the nature of intangible asset, as defined under section 32(1)(ii) of the Act. The observation of the Special Bench of the Tribunal in this regard is reproduced in extenso hereinafter as a matter of convenience.
―9. The core issue arising for consideration in this appeal is in relation to assessee‘s claim of depreciation on the asset created by investing an amount of Rs.214 crore in construction of Pune
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Hyderabad section of National Highway no.9, on build, operate and transfer (BOT) basis with a right to collect toll charges from the user of road by vehicles over the concession period of 11 years and 7 month. It is a fact on record that the assessee completed the construction of the project in the financial year 2008–09 and had started operating the same. It is also evident, in the assessment year 2009–10, the assessee had claimed depreciation @ 10% by treating the asset as building. However, from the assessment year 2010–11, the assessee had started claiming depreciation by treating the asset created as an intangible asset in terms of section 32(1)(ii) of the Act. We have also been informed that assessee‘s claim of depreciation in assessment year 2009–10 and 2010– 11, were disallowed by the Assessing Officer. However, the learned Commissioner (Appeals) allowed assessee‘s claim of depreciation as building in assessment year 2009–10 and as intangible asset in assessment year 2010–11. The aforesaid orders of the learned Commissioner (Appeals) were also upheld by the Tribunal while dismissing Department‘s appeals on the issue. It is stated that the Department has challenged the decisions of the Tribunal in assessment year 2009–10 and 2010–11 in further appeal before the High Court of Andhra Pradesh and Telangana and the matters are still pending. Be that as it may, the aforesaid facts clearly indicate that the impugned assessment year is not the first year of claim of depreciation on the BOT road / bridge. Rather, in the impugned assessment year, depreciation has been claimed on the opening WDV which has also been accepted by the learned Departmental Representative in the written submissions filed by him. Therefore, the nature of expenditure, whether capital or revenue, is not a subject matter of dispute arising in the present appeal. Bearing this in mind, we have to examine the validity of assessee‘s claim of depreciation qua the asset created. The learned Departmental Representative has opposed assessee‘s claim of depreciation on the following propositions:– i) Whether the expenditure claim of the assessee brings into being an asset which is owned and used by the assessee in its business; ii) What is the nature of the asset that has come into being on account of the expenditure incurred by the assessee and what is the nature of such expenditure; iii) If an asset is created, whether it is a tangible asset or an intangible asset; iv) Whether the Concessionaire Agreement (C.A) held by the assessee can be regarded as a commercial or business right akin to a license;
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v) If such C.A. is akin to a license, what intangible asset has been created for the assessee and what is the expenditure incurred by the assessee for acquiring such intangible asset. 10. Before dealing with the issue, it is necessary to reiterate that the Government of India being desirous of implementing a project involving, construction, operation and maintenance of four lane Pune Hyderabad section of N.H. no.9, with private sector participation of BOT invited tender from interested parties. The assessee being successful in the tender, the Government of India entered into a Concession Agreement (C.A) with the assessee on 22nd December 2005. At this stage, it is necessary to look into some of the relevant clauses of C.A., which in our opinion, will have a crucial bearing in deciding the issue. As per clause 2.1 of the C.A., the Government of India grants and authorises the concessionaire i.e., the assessee to investigate, study, design, engineer, procure, finance, construct, operate and maintain the project and to exercise and/or enjoy the rights, powers, privileges, authorizations and entitlements in terms of the agreement including the right to levy demand, collect and appropriate fee from vehicle and persons for using the project / project facilities or any part thereof. As per clause 2.2 of the C.A., the assessee is granted concession for a period of 11 years 7 months from the commencement date. As per clause 2.4, the Government of India was obliged to hand over to the assessee physical possession of the project site free from encumbrances within 30 days from the date of the agreement. It further provides, once the project site is handed over to the concessionaire, it shall have exclusive right to enter upon, occupy and use the project site and to make at its costs, charges and expenses such development and improvement in the project site as may be necessary or appropriate to implement the project and to provide project facility in terms of the agreement. Clause– 2.5 of the agreement provides that the concessionaire without prior written consent or approval of the Government of India cannot use the project site for any purpose, other than, for the purpose of the project / project facilities as permitted under the C.A. Clause 2.7 of the C.A. makes it clear that the project site belongs to and has vested in Government of India and the Government of India has full power to hold, dispose off and deal with the same consistent with the provisions of the C.A. However, it also makes it clear that the concessionaire, subject to complying with the terms / conditions of the agreement remains in peaceful possession and enjoyment of the project site during the concession period. It further provides, in the event the concessionaire is obstructed by any person claiming any right, title or interest over the project site or any part thereof or in the event of any enforceable action including any attachment, distraint, appointment of receiver or liquidator being initiated by any person claiming interest over the project sites. Government of India not
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only will defend such claims or proceedings but also keep the concessionaire indemnified against any direct or consequential loss or damage which it may suffer on account of any such right, title, interest or charge. As per clause 2.8 of the C.A., though, the concessionaire shall have exclusive right to use of the project site in accordance with the provisions of the agreement and for this purpose, it may regulate the entry and use of the same by the third parties, however, it shall not part with or create any encumbrance on the whole or any part of the project site save and except, as set forth and permitted under the agreement. Clause 4.1 of the C.A. entitles the concessionaire to levy, demand and collect fee for user of the roads by vehicles and persons in accordance with the fee notification to be issued by the Government of India. However, concessionaire cannot levy and collect any fee until it has received completion certificate. Clause 5.1 and 5.2 of the C.A. lays down the obligation of the concessionaire for execution and implementation of the project / project facility during the concession period. From the reading of the aforesaid clauses of the contract, following facts emerge:– i) The right, title and ownership of the project site vests absolutely with the Government of India and it has full powers to hold, dispose off and deal with the same; ii) The Government of India has handed over physical possession of the project site to the concessionaire for executing / implementing the project and operating the same during the concession period; iii) Concessionaire shall have exclusive right to use the project site for executing / implementing the project in terms of C.A; iv) Concessionaire shall, at its own costs and expenses, execute / implement the entire project and operate and maintain the same during the concession period; and v) The concessionaire shall have the right to levy / demand and collect fee as approved by the Government of India towards user of the project facilities by vehicles and persons. 11. Undisputedly, for executing the project, assessee has incurred expenses of Rs.214 crore. It is also not disputed that as per the terms of the C.A., the Government of India is not obliged / required to reimburse the cost incurred by the assessee to execute / implement the project facilities. The only right / benefit allowed to the assessee by the Government of India is to operate the project / project facilities during the concession period of 11 years 7 months and to collect toll charges from vehicles / persons using the project / project facilities. Thus, as could be seen, the only manner in which the assessee can recoup the cost incurred by it in implementing the project / project facility is to operate the road during the concession period and collect the toll charges from user
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of the project facility by third parties. Admittedly, the assessee has taken up the project as a business venture with a profit motive and certainly not as a work of charity. Further, by investing huge some of Rs.214 crore, the assessee has obtained a valuable business / commercial right to operate the project facility and collect toll charges. Therefore, in our considered opinion, right acquired by the assessee for operating the project facility and collecting toll charges is an intangible asset created by the assessee by incurring the expenses of Rs.214 crore. The contention of the learned Senior Standing Counsel that expenditure of Rs.214 crore has brought into existence a tangible asset in the form of roads and bridges of which the assessee is not the owner but it is the Government of India is nobody‘s case. Further, the learned Senior Standing Counsel‘s apprehension that it will lead to a situation where both Government of India and the concessionaire will claim depreciation on the asset created with the very same expenditure, in our view, is not borne out from facts on record. At the cost of repetition we must observe, as per the terms of agreement the expenses incurred by the assessee towards construction of the roads, bridges, etc., were not going to be reimbursed by the Government of India. This fact was known to both the parties before the execution of the agreement as the tender itself has made it clear that the project is to be executed with private sector participation on BOT basis. Thus, from the very inception of the project, assessee was aware of the fact, it has to recoup the cost incurred in implementing the project along with the profit from operating the road and collecting toll charges during the concession period. Therefore, assessee has capitalized the cost incurred on the BOT project on which it has claimed depreciation. Thus, in our view, the expenditure incurred by the assessee of Rs.214 crore for creating the project or project facilities has created an intangible asset in the form of right to operate the project facility and collect toll charges. Further, it is the contention of the learned Senior Standing Counsel that if at all any right is created under the C.A. for collecting toll, such right accrued to the assessee on the date of execution of agreement i.e., 22nd December 2005, therefore, the expenditure incurred by such date should be the value of intangible asset which can alone be considered for depreciation under section 32(1)(ii) of the Act. We are afraid, we cannot accept the above argument of the learned Senior Standing Counsel. When the C.A. confers a right on the assessee to operate the project facility and collect toll charges over the concession period of 11 years and 7 months, the assessee can start operating and collecting toll charges only when the project facility is ready for use. Therefore, until the project is completed and ready for use by vehicles or persons assessee cannot collect toll charges for user of the project facilities. Thus, the right to operate the project facility and collect toll charges is integrally connected to the completion of the project facility which cannot be done unless the assessee invests its fund for completing the
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project. Therefore, keeping in view the aforesaid fact, it cannot be said that the right to collect toll has accrued to the assessee on the date of execution of the agreement. If we accept the aforesaid argument of the learned Senior Standing Counsel, in other words, it would mean that without even executing and completing the project facility, assessee would be collecting toll charges. Therefore, the contention of the learned Senior Standing Counsel that the expenditure incurred by the assessee till execution of the agreement can only be considered as an intangible asset, in our view, is illogical, hence, cannot be accepted. Thus, having held that the expenditure of Rs.214 crore incurred by the assessee has resulted in creation of an intangible asset of enduring nature for the assessee, it is necessary now to examine whether such intangible asset comes within the scope and ambit of section 32(1)(ii) of the Act. For this purpose, it is necessary to look into the said provision which is reproduced hereunder for the sake of convenience. Depreciation. 32(1)(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature67, being intangible assets acquired on or after the 1st day of April, 1998, owned67, wholly or partly, by the assessee67 and used for the purposes of the business67 or profession, the following deductions shall be allowed—] 12. Explanation 3 to section 32(1) defines intangible asset as under:– [Explanation 3.—For the purposes of this sub-section, 86[the expression ―assets‖ ] shall mean— (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature . 13. 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:–
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―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.‖ 14. 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. 15. 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
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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. 16. 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 CIT v/s 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.
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(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‖. 17. In the case of Techno Shares and Stocks Ltd. v/s CIT, [2010] 327 ITR 323 (SC), 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.‖
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The ratio laid down in the aforesaid decision of the Special Bench squarely applies to the facts of the present case. Therefore, in our considered opinion, the assessee is entitled to claim depreciation on the cost incurred on construction of the BOT facility, since, by incurring such investment the assessee has acquired a valuable commercial or business right in the nature described under section 32(1)(ii) r/w Explanation 32(1), Explanation–3(b) of the Act.
Even otherwise also, the assessee’s claim of depreciation could not have been denied in the impugned assessment year. This is for the reason that in assessment year 2008–09, assessee had claimed depreciation on the investment made on BOT facility by treating it as a capital asset in the nature of intangible asset. The Assessing Officer after examining the claim of the assessee allowed the claim of depreciation. This fact is evident from the depreciation schedule forming part of financial statement as well as the assessment order passed under section 143(3) of the Act for the said assessment year. Again, in the assessment year 2009–10 also, the assessee claimed depreciation on the investment in BOT facility as an intangible asset and the Assessing Officer allowed assessee’s claim of depreciation in an assessment order passed under section 143(3) of the Act. Thus, as could be seen from the facts on record, in the preceding assessment years the Assessing Officer after examining assessee’s claim has not
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only accepted the expenditure incurred on BOT facility as capital in nature but has allowed depreciation by treating it as an intangible asset. In the impugned assessment year, the assessee has claimed depreciation on the opening WDV only. As far as the nature and character of the expenditure, whether capital or revenue, has attained finality in the preceding assessment years wherein, the Assessing Officer has allowed assessee’s claim of deprecation. Therefore, it is not open to the Department to re–examine the nature of expenditure again in the impugned assessment year. The Assessing Officer having allowed assessee’s claim of depreciation on the BOT facility by treating it as an intangible asset in the preceding assessment years, it cannot be denied in the impugned assessment year. Therefore, allowing assessee’s claim we direct the Assessing Officer to allow depreciation as claimed by the assessee. The decision of the first appellate authority on this issue is reversed. Since, we have allowed assessee’s claim of depreciation, the issue raised by the Department relating to allowance of deduction by learned Commissioner (Appeals) as revenue expenditure has become redundant, hence, no adjudication is required. The grounds raised by the assessee in the cross objection are allowed. Grounds raised by the Department are dismissed.
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In grounds no.(iv) to (vi), the Department has challenged the decision of the learned Commissioner (Appeals) in allowing foreign exchange loss of ` 2,79,66,192.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that an amount of ` 2,79,66,192 was debited by the assessee to the Profit & Loss account on account of loss on foreign exchange difference called upon the assessee to furnish necessary details and explain why such loss should not be treated as speculative. In response to the query raised by the Assessing Officer, the assessee furnished necessary details and submitted that it has entered into an ISDI Master Agreement on 11th April 2007 with ICICI Bank Ltd. for entering into derivative transaction from time to time. Subsequently, the assessee entered into option transaction with ICICI Bank Ltd. involving swapping debt of ` 35 crore into Japanese Yen for a period of five years. By entering into such arrangement, the assessee received 9.50% per annum interest on the debt of ` 35 crore, whereas, it pays interest @ 7.5% per annum on Japanese Yen. On the basis of the said transaction, the assessee paid annual settlement amount to ICICI Bank Ltd. which was debited to the Profit & Loss account as loss on foreign exchange difference. The Assessing Officer after verifying the details submitted by the assessee found that as per the swap agreement with ICICI Bank Ltd., the Bank would pay specified amount
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in Indian rupee to the assessee between November 2008 and November 2012 at specified intervals and the assessee would pay the specified amount in Japanese Yen over such period. The Assessing Officer alleged that the assessee failed to submit the debit note showing calculation of loss on the transaction and further failed to explain the business exigencies of entering into such swap transaction. Therefore, he held that the assessee having failed to prove the fact that the loss due to foreign exchange difference was for genuine business purposes, treated it as speculation loss and accordingly disallowed assessee’s claim without allowing set–off against business income. Being aggrieved of such disallowance, assessee preferred appeal before the first appellate authority.
Learned Departmental Representative referring to the observations of the Assessing Officer in Para–6 of the assessment order submitted that the assessee failed to prove that the swap transaction was for the genuine business purpose of the assessee. He submitted, when the assessee has not entered into any foreign currency transaction what is the necessity of obtaining the foreign currency loan as there is no transaction which requires hedging. Learned Departmental Representative submitted, since, the transaction is not a delivery based, none of the exceptions provided
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under section 43(5) applies, therefore, the learned Commissioner (Appeals) was wrong in allowing the assessee’s claim.
Learned Authorised Representative strongly supporting the decision of the first appellate authority submitted that the amount of ` 35 crore which was swapped to Japanese Yen was a notional amount and never intended to be disbursed to the assessee. He submitted, there is no restriction on the assessee to hedge against interest liability and hedging can take place in several ways. Learned Authorised Representative submitted, even otherwise also, the loss cannot be treated as speculative loss under section 43(5) of the Act as the said provision pre–supposes purchase and sale of commodity which requires delivery. He submitted that neither the transaction entered into by the assessee involved any purchase and sale of commodities as nothing has been contracted to be delivered. He submitted that the assessee has interest liability connected to the loan taken for the BOT facility, therefore, the assessee can hedge interest liability by choosing any currency. He submitted, it is simply a hedging of interest of one currency against another currency, therefore, the provisions of section 43(5) of the Act would not apply. Finally, the learned Authorised Representative submitted that the assessee has followed the aforesaid method of accounting consistently and in assessment year 2008–09 it has offered gain from such transaction
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whereas, in assessment year 2009–10, the assessee has claimed loss on account of foreign exchange difference arising out of similar transaction which has been allowed by the Assessing Officer. He, therefore, submitted that the order of the learned Commissioner (Appeals) on this issue deserves to be upheld.
We have heard rival contentions and perused material on record. It is evident from the facts on record that the Assessing Officer has treated the loss on foreign exchange difference as speculative primarily for the reason that the assessee has failed to submit the debit note showing calculation of loss on the transactions and further has failed to explain the business exigencies of entering into such swap transaction. However, the first appellate authority after examining the facts on record has found that the total cost of BOT facility developed by the assessee was ` 113.30 crore which was to be financed by ` 38.30 crore of internal accruals and balance amount of ` 75 crore by debt. Further, he has found that as per the financial convenience of the specific terms and conditions the assessee has to maintain prescribed minimum exposure risk as measured by financial ratios stated therein. In order to hedge the financial exposure of high debt and high interest outcome the assessee entered into currency swap derivative option agreement with ICICI Bank on 11th April 2007 to hedge the high interest outcome relating to Mumbra project debt of
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` 75 crore by swapping debt of ` 35 crore into Japanese Yen for a period of five years. As per the swap arrangement, the assessee receives 9.50% interest per annum and pays interest @ 7.50% per annum on the Yen amount. Thus, from the aforesaid facts, it is clear that the hedging transaction with ICICI Bank was for the purpose of reducing the high interest outcome on the debt incurred for the Mumbra project. The aforesaid facts indicate not only that the hedging transaction is for the business requirement of the assessee but it was in the regular course of business. Moreover, as brought to our notice by the learned Authorised Representative, the assessee consistently following this method of accounting has shown foreign exchange gain / loss in the preceding assessment years which have been accepted by the Department. Therefore, in view of the aforesaid, we do not find any reason to interfere with the finding of the learned Commissioner (Appeals) on this issue. These grounds are dismissed.
Grounds no.(viii) to (x), the Department has challenged deletion of addition made on account of disallowance under section 14A.
Brief facts are, during the assessment proceeding, the Assessing Officer on examining the Balance Sheet of the assessee found that the assessee has made investment of ` 125.41 crore in equity shares, share application money, capital account with partnership firm residential flat, government securities, etc. He further found that the
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assessee has debited interest expenditure of ` 2,68,95,525 to its Profit & Loss account. Since, the investments made by the assessee yielded exempt income, the Assessing Officer called upon the assessee explain why disallowance under section 14A r/w rule 8D should not be made. In response, the assessee submitted that since the investments made were out of its own earning and that too were made in partnership firm and with associates and joint venture only for business purpose, no disallowance should be made. The Assessing Officer, however, did not find merit in the submissions of the assessee and proceeded to disallow an amount of ` 5,99,45,801. Being aggrieved of disallowance so made, assessee preferred appeal before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee in the context of facts and material on record held that as far as interest expenditure is concerned, no disallowance under rule 8D(2)(ii) can be made since as per the audited financial statements of the assessee it has own interest free surplus fund aggregating to ` 211.64 crore as against investment of ` 124.55 crore. Therefore, he deleted the disallowance of interest expenditure of ` 5,45,45,801. As far as the disallowance of administrative expenditure of ` 53,98,214 under rule 8D(20)(iii) is concerned, the learned Commissioner (Appeals) found that during the year assessee has
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earned exempt income by way of shares in the profit of partnership firm Atlanta Thakural amounting to ` 13,51,210 and dividend income of ` 22,500 from the equity shares of Shyamrao Vitthal Co–operative Bank Ltd. and the Janata Janakalyan Sahakari Bank Ltd. The learned Commissioner (Appeals) held that since subsidiaries which were formed as special purpose vehicle for carrying out the development of the national highway, the investments made therein it cannot be said to be not for the business purpose and only for earning dividend income. Further, he found that during the relevant previous year, the assessee has not earned any dividend income on the investments made with the subsidiary companies. He, therefore, directed the Assessing Officer to exclude the investment made in subsidiary and also the investments which have not given rise to any exempt income during the relevant previous year for computing disallowance under section 14A r/w rule 8D(2)(iii).
We have heard rival contentions and perused material on record. As could be seen, the first appellate authority after examining the financial statements of the assessee has given a categorical finding of fact that interest free surplus fund available with the assessee far exceeds the investments made during the year. That being the case, no disallowance of interest expenditure under section 8D(2)(ii) can be made in view of the decision of the Hon'ble Bombay High Court in CIT
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v/s HDFC Bank Ltd., 366 ITR 505 (Bom.). As far as disallowance of administrative expenditure under rule 8D(2)(iii) is concerned, we do not find any infirmity in the order of the learned Commissioner (Appeals) in directing the Assessing Officer to exclude the strategic investment and investment which have not resulted in any exempt income during the year for computing disallowance under the said provisions, as such the findings of the learned Commissioner (Appeals) are in conformity with well settled principles of law. Grounds raised are, therefore, dismissed.
In the result, Revenue’s appeal is dismissed and assessee’s cross objection is allowed.
ITA no.4075/Mum./2015 Assessee’s Appeal – A.Y. 2011–12
In grounds no.1 and 2 of the main ground, the assessee has challenged the decision of the learned Commissioner (Appeals) with regard to confirmation of disallowance made under section 14A r/w rule 8D.
In ground no.2, the assessee has challenged the applicability of section 14A to the computation of book profit under section 115JB of the Act.
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Brief facts are, during the assessment proceeding, the Assessing Officer noticing that in the relevant previous year, the assessee has earned substantial exempt income called upon the assessee to explain why disallowance under section 14A should not be made. Though, the assessee objected to the proposed disallowance, the Assessing Officer rejecting the objection of the assessee proceeded to disallow an amount of ` 6,87,64,384 under section 14A r/w rule 8D which comprised of interest expenditure under rule 8D(2)(ii) of ` 6,16,14,082 and administrative expenditure under rule 8D(2)(iii) of ` 71,50,302. The assessee challenged the disallowance before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee and examining the facts on record having found that in the relevant financial year the assessee was having interest free surplus fund of ` 264.15 crore as against investment of ` 162.45 crore deleted the disallowance of interest expenditure amounting to ` 6,16,14,082. Further, he directed the Assessing Officer to exclude the investment made in subsidiary and investments which have not yielded any exempt income in the relevant previous year for computing disallowance under section 8D(2)(iii). However, as far as the assessee’s claim that no disallowance under section 14A can be made in relation to the investment made in the partnership firm, the
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first appellate authority relying upon the Special Bench decision of the Tribunal, Ahmedabad Bench, in Vishnu Anant Mahajan v/s ACIT, [2012] 22 taxmann.com 88, rejected claim of the assessee. Of– course, while doing so, he directed the Assessing Officer not to consider such investments in partnership firm which has not yielded any exempt income during the relevant previous year. Further, he also rejected assessee’s claim that the provisions of section 14A cannot be applied for computing book profit under section 115JB of the Act.
We have heard rival contentions and perused the material available on record. As far as the applicability of section 14A to the exempt income earned from partnership firm is concerned, we agree with the first appellate authority that in view of the Special Bench decision of the Tribunal, Ahmedabad Bench, in Vishnu Anant Mahajan (supra), assessee’s argument has to be rejected. However, assessee’s contention that the investment made in the partnership firm is a strategic investment and for the purpose of assessee’s business requires consideration. Similarly, the applicability of section 14A for making adjustment to book profit under section 115JB of the Act also requires consideration in view of the Special Bench decision of the Tribunal, Delhi Bench, in ACIT v/s Vireet Investment, 162 ITD 25. In view of the aforesaid, we restore these issues to the file of the Assessing Officer for fresh adjudication after due opportunity of being
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heard to the assessee. The assessee has also raised the following additional grounds:–
Disallowance of Depreciation on BOT Rights as intangible assets u/s 32. 1.1 On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in not appreciating that BOT rights for Mumbra By–pass Road is an asset within the ambit of section 32. 1.2 Accordingly, on the facts and circumstances of the case and in law, the learned CIT(A) erred in not appreciating that depreciation on the BOT Rights for Mumbra By–pass Road of ` 19,39,30,422 claimed by eth appellant is allowable u/s 32.
Since the additional grounds raised by the assessee are on legal issues and can be decided on the basis of facts already available on record, we admit the additional ground for adjudication on merit. As far as the merits of the additional grounds are concerned, while deciding identical issue in C.O. no.83/Mum./2017, in the earlier part of the order, we have allowed assessee’s claim of depreciation. Following our decision therein, we allow the grounds raised by the assessee. 29. In the result, assessee’s appeal is partly allowed.
ITA no.4416/Mum./2015 Revenue’s Appeal – A.Y. 2011–12
In grounds no.(i) to (iii), the Revenue has challenged allowance of assessee’s claim with regard to the deduction claimed of expenditure incurred on BOT Mumbra Bypass road. This issue is identical to the issue raised in grounds no.(i) (ii) and (iii) in ITA
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no.3415/Mum./2015 and grounds raised in C.O. no.83/Mum./2017 as well as additional grounds no.1 and 2 of ITA no.4075/Mum./2015. In view of our decision therein these grounds of the Revenue have become redundant, hence, dismissed.
Grounds no.(iv) to (vi) are identical to grounds no.(iv) to (vi) raised in ITA no.3415/Mum./2015. Following our decision in Para–16 of this order, we uphold the order of the learned Commissioner (Appeals) by dismissing the grounds raised by the Revenue.
Grounds no.(vii) to (x) are on the issue of deletion of disallowance made under section 14A of the Act.
These grounds are identical to grounds no.(vii) to (x) of ITA no. 3415/Mum./2015. Following our decision in Para–21 of this order, we uphold the order of the first appellate authority by dismissing the grounds raised by the Revenue.
In the result, Revenue’s appeal is dismissed. Order pronounced in the open Court on 24.01.2018
Sd/- Sd/- SAKTIJIT DEY N.K. PRADHAN ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 24.01.2018
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Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary
(Dy./Asstt. Registrar) ITAT, Mumbai