NHAI Grant Not Deductible from Project Cost: ITAT Upholds Deletion of ₹43.43 Crore Depreciation Disallowance [Read Order]

The Hyderabad Bench of the Income Tax Appellate Tribunal ( ITAT ) has upheld deletion of the disallowance of Rs. 43.43 crore as depreciation and confirmed that the Rs. 38.40 crore grant received from the National Highways Authority of India (NHAI) cannot be reduced from the project cost for computing depreciation under the Income Tax Act, 1961.

Madhucon Agra Jaipur Expressways Ltd, (assessee) engaged in constructing highways on a Build-Operate-Transfer (BOT) basis, faced scrutiny for AYs 2013-14 and 2014-15. The Assessing Officer (AO) observed that the assessee had shown a Rs. 38.40 crore grant from NHAI as part of reserves and surplus.

The AO citing the concession agreement reduced the Written Down Value (WDV) of the project by this amount, which resulted in a depreciation disallowance of Rs. 43.43 crore. Aggrieved by the AO’s order, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)].

The assessee argued that the grant constituted a promoter’s contribution in the nature of shareholder’s funds, as per Articles 23.1 to 23.3 of the concession agreement, and not a payment to meet the cost of specific assets. The CIT(A) accepted the assessee’s contention and deleted the disallowance.

Aggrieved by the CIT(A)’s order, the Revenue appealed to the ITAT. The counsel for the Revenue contended that the grant was explicitly meant to meet the capital cost, as per the concession agreement, and should reduce the project’s WDV.

The counsel for the Revenue also argued that the treatment of the grant as shareholder’s funds was merely to facilitate fund availability, and the grant’s purpose was clear from the agreement’s terms.

On the other hand, the assessee’s counsel submitted that the Rs. 38.40 crore grant was part of a Rs. 96 crore NHAI grant, with Rs. 57.06 crore allocated for operation and maintenance and the balance as equity support. The counsel emphasized that the grant was not for acquiring specific assets but for ensuring the project’s financial viability.

The counsel further relied on the decisions including CIT vs. Godavari Plywoods and CIT vs. Diamond Dies Mfg. Corp, to support the claim that such grants do not reduce the cost of assets for depreciation purposes.

The two-member bench, comprising Vijay Pal Rao (Vice-President) and Manjunatha G. (Accountant Member), observed that the grant was provided as cash support in the nature of shareholder’s funds to enhance the project’s commercial viability and facilitate additional financing.

The Tribunal noted that Explanation 10 to Section 43(1) of the Income Tax Act, which allows reducing the cost of an asset by subsidies intended to meet its cost, did not apply to the present case, as the NHAI grant was not for acquiring specific assets. It upheld the CIT(A)’s findings.

The appeal of the Revenue and the cross appeals of the assessee was dismissed.

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