2013 (4) TMI 796 - AT - Income Tax

ITAT affirms CIT(A)'s decision on depreciation for intangible assets, including toll collection rights.

ACIT Versus Viva Heights Pvt. Ltd.

The ITAT upheld the CIT(A)'s decision regarding the disallowance of depreciation on intangible assets, including the right to collect toll under a BOT ... - ISSUES PRESENTED AND CONSIDERED 1. Whether the right to collect toll acquired under a Build-Operate-Transfer (BOT) concession constitutes an 'intangible asset' eligible for depreciation under the Income-tax provisions applicable to intangible assets. 2. Whether supervision charges of Rs. 33,21,000 constitute an allowable expense in the relevant assessment year where a letter from the grantor, received during that year, purportedly crystallised the liability that related to earlier financial years, given that the assessee follows mercantile accounting. ISSUE-WISE DETAILED ANALYSIS - 1. Intangibility and Depreciation of Toll-Collection Right Legal framework: The Tribunal considered the scope of depreciation as applicable to intangible assets under the Income-tax Rules and principles governing depreciation where an asset is a right having commercial value and can be capitalized and amortized/depreciated under tax law; reference was made to sectional provisions relating to depreciation (s.32) and the Income-tax Rules classification of intangible assets. Precedent treatment: The Court relied on earlier decisions treating similar concessionary/licence rights as intangible assets eligible for tax depreciation, specifically prior Tribunal decisions including a sister-concern decision and decisions in the matter of port/terminal licences. Those precedents were followed to the extent they treated a statutory grant of a right to levy charges as an asset having commercial value. Interpretation and reasoning: The Court examined the contract/concession under which the right to collect toll was granted by a statutory authority for a specified period. The Tribunal found that (i) the right was acquired in law, (ii) it had commercial value (evidenced by the assessee raising loans by assigning the right), and (iii) it operated independently of mere recoupment of construction expenditure. The Court rejected the Revenue's characterisation that the receipts merely represented recovery of construction costs and not acquisition of an asset. The fact that the right could be assigned and monetised (used as security for borrowing) indicated it was an intangible asset within the statutory scheme for depreciation. Ratio vs. Obiter: Ratio - Where a concession grants an enforceable, transferable right to collect tolls for a specified period and that right has commercial value (including being assignable/used to secure borrowing), it constitutes an intangible asset eligible for depreciation under the tax statute. Obiter - Observations distinguishing particular factual permutations (e.g., where the right merely amounts to reimbursement of construction cost without separate commercial value) are ancillary and fact-specific. Conclusion: The Tribunal upheld the allowance of depreciation at the prescribed rate on the cost of the toll-collection licence acquired under the BOT concession. Reliance on earlier Tribunal decisions treating similar concessionary rights as intangible assets was affirmed and applied to the facts. ISSUE-WISE DETAILED ANALYSIS - 2. Allowability of Supervision Charges and Accrual/Crystallisation Legal framework: The Court applied accrual principles under income-tax law and the mercantile system of accounting: an expense is allowable in the year it accrues or crystallises, subject to evidence showing liability having become certain within the relevant previous year. The Tribunal evaluated documentary evidence showing demand/crystallisation by the grantor authority. Precedent treatment: The assessing authority had relied on audit observations and prior-period characterisation; the first appellate authority and the Tribunal treated documentary communication from the statutory authority as determinative on the question of accrual. No higher-court precedent was overruled or distinguished; the Tribunal followed established accrual principles and a factual approach to crystallisation. Interpretation and reasoning: The Tribunal analysed the concession agreement, audit report, correspondence and a specific letter dated 11.10.2005 from the grantor stating the demand for supervision charges for the earlier financial years and confirming continuity of supervision. The Court found that (i) the grantor's letter, received in the year under appeal, expressly demanded the supervision charges, (ii) the liability had been a continuing subject and the quantum was not disputed, and (iii) the circumstances justified recognising the liability in the year the letter crystallised it, notwithstanding that services related to prior financial years. The Tribunal held that the Assessing Officer could not ignore the contemporaneous correspondence evidencing crystallisation of liability and that, on the facts, the liability accrued in the relevant previous year for assessment purposes. Ratio vs. Obiter: Ratio - Where a grantor/statutory authority issues a formal demand or communication received in the relevant previous year that unequivocally crystallises a previously contingent or continuing liability (with no dispute on quantum), the liability is to be treated as accrued in that year for tax purposes even if the underlying services relate to earlier accounting periods. Obiter - Remarks about alternative accounting treatment or hypothetical disputes over quantum given different factual matrices are incidental. Conclusion: The Tribunal sustained the first appellate authority's deletion of the disallowance and held the supervision charges allowable in the assessment year because the liability crystallised by virtue of the letter received in that year; no interference with the CIT(A)'s reasoned finding was warranted. INTERRELATION AND FINAL CONCLUSIONS Cross-reference: The two issues were treated independently though both turned on documentary and transactional substance rather than mere form. The finding of asset status for the toll-collection right relied on evidence of commercial value and assignability (relevant to capitalization and depreciation), whereas the supervision fees issue turned on accrual/crystallisation evidence supplied by the grantor. Overall conclusion: The Tribunal dismissed the Revenue's appeal, upholding the allowance of depreciation on the BOT licence as an intangible asset and the allowance of supervision charges on the basis that the liability had crystallised in the year under appeal.