BOT projects are Intangible Assets: ITAT allows 25% Depreciation on Road Construction [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT), consisting of M. Balaganesh (Accountant Member) and Vimal Kumar (Judicial Member), has ruled that Built Operate and Transfer (BOT) projects are considered intangible assets, highlighting that the assessee is entitled to claim depreciation at 25% on road construction as admissible on intangible assets.

The assessee Kurukshetra Expressway Pvt. Ltd is a special purpose vehicle incorporated for carrying out construction, operation and transfer of a stretch of the Rohtak Bawal Highway Project on Built Operate and Transfer (BOT) basis. The assessee was a concessionaire for the Rohtak- Bawal Section of NH-71 Project of National Highways Authority of India (NHAI) and had, pursuant to Concession Agreement dated 13.09.2010, developed the aforesaid project under Design, Build, Finance, Operate and Transfer Basis (DBFOT). The assessee had been granted commercial right concession to operate the project for a period 28 years.

The assessee e-filed return of income for AY 2014-15 on 29.11.2014 declaring loss of Rs. 46,23,33,692/-. In return of income, the assessee claimed amortization of expenditure of Rs. 18, 51,12,122/- on the BOT project. The return of income filed by the appellant was selected for scrutiny proceedings under section 143(2) of the Income Tax Act.

During assessment proceedings, the appellant vide application dated 08.11.2016 filed revision of computation of income, declaring total loss of Rs. 2,32,00,58,863/-. In the revised computation, the appellant withdrew the claim of amortization of expenditure of Rs. 18,51,12,122/- and instead, on the basis of the judicial precedents, claimed depreciation of Rs. 2,04,32,08,982/- viz. @25% on the right to collect toll granted to the appellant due to its capital investment in the BOT project-by treating the "right to collect toll" as intangible assets. 

Assessment proceedings culminated in order dated 28.12.2016 under section 143(3) of the Income tax Act, 1961 at an assessed loss of Rs. 46,00,81,683/-, whereby the Assessing Officer (AO) made addition of Rs. 22,52,009/- on account of interest income. The claim of depreciation raised by the appellant vide revised computation of income amounting to Rs. 2,04,32,08,982/- was not allowed. 

Mr Neeraj Jain, assessee submitted that the assessee was entitled to claim depreciation @ 25% on the ‘right to collect toll’ acquired by way of capital investment made in the BOT project.  CIT (A) and AO erred in not allowing the claim of depreciation is not in tandem with section 32(1)(ii) and the reliance on circular no. 9/2014 is wrongly placed.

Further submitted that the "Right to collect toll" is a business/commercial right in terms of section 32(1)(ii) and depreciation @25% is allowable on the same. The assessee entered into a Concession Agreement ('the Agreement') with NHAI on 13.07.2010 for development, operation, management, and maintenance of the Rohtak Bawal section of NH-71 [including 4-laning the highway) on Design, Build, Finance, Operate and Transfer Basis (DBFOT). Total cost of the project was Rs. 8, 17, 13,77,974/-.

The assessee was, under the Agreement, granted license to collect toll for a period of 28 years such commercial right/ license was treated as 'intangible' and depreciation was claimed thereon @ 25% u/s 32(1)(ii) of the Income Tax Act amounting to Rs. 204,3,08,982/-. The project became operational from 01.09.2013. 

It was submitted that in terms of the Concession Agreement, the essence thereof is that in lieu of design, construction, development, operation and maintenance of the highway at its own cost, the appellant acquired the right to receive the toll fee from users over the operation period. The right/ license to collect Toll is clearly in the nature of license/ commercial right eligible for depreciation @25% under section 32(1)(ii) of the Income Tax Act. Section 32(1)(ii) of the Income Tax  Act permits allowance of depreciation on "know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets" owned by an assessee and used for purposes of business.

Accordingly, submitted that the commercial and business rights in the nature of license, franchise, membership have been held to be intangible assets eligible for depreciation under Section 32(1)(ii) of the Income Tax Act.

Ms. Anu Krishna Aggarwal, representing the department  submitted that the AO disallowed the impugned claim of depreciation following the CBDT circular no. 9/2014 dated 23/04/2014 Bombay High Court, in the case of North Karnataka Expressway Ltd., while considering the case of an assessee who had claimed to be the owner of the roads constructed by it and has claimed depreciation thereon under Section  32 of the Income Tax Act held that the assessee is not the owner of the roads and therefore, is not entitled to the claim of depreciation thereon.

It was also pertinent to mention here that the 'intangible assets' eligible for depreciation in section 32(1)(ii) of the Income Tax Act, are only those which are owned by the assessee and have been acquired after spending money. In the case of the assessee, by way of an agreement, assessee was awarded a work to construct a road by using own funds and the expenditure incurred was allowed to be reimbursed by permitting the assessee a concession to collect toll/fees from the motorists using the road. Therefore, it could not be said that such a right was within the purview of section 32(1)(ii) of the Income Tax Act.

In a significant ruling, the special Bench of the Income Tax Appellate Tribunal (ITAT) in Hyderabad has set a precedent by recognizing rights under Build-Operate-Transfer (BOT) projects as intangible assets. This decision was rendered in the case of ACIT Hyderabad versus M/s. Progressive Construction Limited.

The tribunal's judgment revolved around the interpretation of Section 32(1)(ii) of the Income Tax Act, which pertains to the depreciation of intangible assets. Drawing from the precedent set by the Supreme Court in the case of Techno Shares and Stocks Ltd., the ITAT concluded that the right to operate toll roads and collect toll charges under BOT contracts qualifies as a business or commercial right. Consequently, this right is categorized as an intangible asset under the law, making it eligible for depreciation.

In view of the above material facts and well-settled principles of law, the bench highlighted that the assessee is entitled to claim depreciation at 25% on road construction as admissible on intangible assets. Therefore, the impugned orders are not legal and deserve to be set aside. Hence, the appeal of the assessee was allowed for statistical purposes.

To Read the full text of the Order CLICK HERE

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