2014 (2) TMI 1027 - AT - Income Tax

Tax Tribunal Decision: Depreciation, Expenses, Payments, and Capital Work in Progress

The case involved issues regarding depreciation on upfront fees, classification of expenses, payments to group concerns, maintenance expenditure, ... Revenue or capital expenditure - Operate, Maintain, Develop, Design, Construct, Develop, Modernize and Maintain the Airport - nature upfront fees and various other expenses – Held that:- the CIT(A) has rightly held that the payment of upfront fee of Rs.150 crores paid by assessee to “AAI” has created capital assets in the form of license to develop and modernize the Airport and collect charges as per terms and conditions as prescribed under the agreement entered into which is an “intangible assets” to the assessee - Thus assessee is entitled for depreciation – Decided against revenue. Deletion of Operating and Administrative expenses – Expenses treated as capital expenditure – Held that:- the CIT(A) examined the chart and the details of the expenses item-wise and after considering the same he has held that no disallowance is called for – Revenue has not been able to point out any infirmity in the findings of CIT(A), the order is upheld – Decided against Revenue. Deletion of disallowance of payments – Payment made to group concerns and sister concern – Held that:- CIT(A) after considering the said details has stated that over all expenditures were reimbursed to GVK and/or the assessee filed the copies of invoices and the details of the transactions with sister concern of the payment made by assessee to substantiate the expenditure – the contention of the assessee is allowed that the disallowance have been made by AO merely on assumptions and without controverting the facts furnished by assessee before the authorities – thus, there is no reason to interfere in the findings of the CIT(A) – Decided against Revenue. Nature of expenses – Disallowance on expenses incurred on resurfacing of runway, replacement of floors tiles and regularizing storm water drains – Held that:- the assessee is to redesign, upgrade, modernize and also to operate and maintain Airport but the expenditure under consideration has been incurred only to ensure that the existing assets continued to be used for use safely and as per norms to enable assessee to run its activity - the expenditure is incurred to facilitate of carrying on by the assessee its main business for which the assessee has been engaged and pending the expansion of the Airport etc. – thus, expenditure is a revenue in nature and cannot be said to be capital in nature irrespective of the fact that the assessee in its books of account has given treatment of it as capital in nature - the assessee will not be entitled for depreciation as it is held to be revenue in nature – Decided in favour of Assessee. Restriction of depreciation allowance – Held that:- The decision in The Hon’ble Bombay High Court in the case of CIT V/s Mazagaon Dock Ltd [1991 (3) TMI 114 - BOMBAY High Court] and Commissioner Of Income-Tax Versus Karnataka Power Corporation [2000 (7) TMI 72 - SUPREME Court] followed - dry dock and wet dock created for ships are to be treated as plant and not building - power generating station building is not a simply concrete structure but a specially designed building and is to be treated as part of plant – thus, taxiways and aprons, parking bays cannot be said to be merely concrete structures but are necessary tools for operating/using the Airport –the same are to be considered as part of plant and machinery – thus, assessee is entitled for depreciation at the rate as applicable on plant and machinery in respect of taxiways, aprons, parking bays etc. – Decided in favour of Assessee. Reduction in amount debited to capital work in progress – Confirmation from the vendor not furnished – Held that:- The CIT(A) itself has mentioned that the assessee filed during the course of appellate proceedings before him forwarding note of running bill for reduced amount and also interalia submitted account for the period 1.4.2006 to 31.3.2007 - the execution of the work by L&T has not been accepted merely because M/s L&T had not sent its reply to the notice issued u/s 133(6) of the Act by AO – thus, the execution of work by L&T for an amount cannot be considered as not genuine merely because there was no reply from M/s L&T in response to notice issued u/s 133(6) of the Act - in the absence of any other evidence on record, the enhancement of the CWIP is directed in respect of the work executed by M/s L&T – Decided in favour of Assessee. Issues Involved:1. Depreciation on upfront fees.2. Classification of operating and administrative expenses.3. Payments to group concerns.4. Expenditure on resurfacing of runway and other maintenance.5. Depreciation rate on taxiways, aprons, parking bays, and bridges.6. Confirmation of capital work in progress from vendor.Detailed Analysis:1. Depreciation on upfront fees:Issue: Whether the upfront fee of Rs.150 crores paid to AAI for operating Mumbai Airport constitutes a capital asset eligible for depreciation.Analysis:- The assessee treated the upfront fee as an intangible asset and claimed depreciation.- The AO disallowed the depreciation, treating the payment as a non-refundable fee for a 30-year lease.- The CIT(A) upheld the assessee's claim, citing that the upfront fee created a capital asset in the form of a license, which is an intangible asset eligible for depreciation under section 32(1)(ii).- The Tribunal agreed with the CIT(A), noting that the payment granted the assessee exclusive rights to operate and collect fees at the airport, akin to a license.Conclusion: The upfront fee is a capital asset in the form of a license, eligible for depreciation.2. Classification of operating and administrative expenses:Issue: Whether the operating and administrative expenses should be treated as capital or revenue expenditure.Analysis:- The AO capitalized a portion of the expenses, disallowing Rs.64.77 crores as revenue expenditure.- The CIT(A) admitted additional evidence under Rule 46A and reviewed the revised allocation chart submitted by the assessee.- The CIT(A) found that most expenses were correctly allocated to revenue and deleted the disallowance.- The Tribunal upheld the CIT(A)'s findings, noting that the AO did not dispute the revised allocation and that the expenses were substantiated.Conclusion: The operating and administrative expenses were correctly treated as revenue expenditure.3. Payments to group concerns:Issue: Whether payments to group concerns should be treated as revenue expenditure or capital work-in-progress.Analysis:- The AO disallowed Rs.7.18 crores as revenue expenditure and reduced CWIP by Rs.6.25 crores, questioning the justification and substantiation of payments.- The CIT(A) found that the assessee provided sufficient evidence, including invoices and confirmation of accounts, to substantiate the payments.- The Tribunal agreed with the CIT(A), noting that the AO's disallowance was based on assumptions without contrary evidence.Conclusion: The payments to group concerns were justified and should be treated as revenue expenditure and CWIP as claimed.4. Expenditure on resurfacing of runway and other maintenance:Issue: Whether the expenditure on resurfacing the runway and other maintenance should be treated as capital or revenue expenditure.Analysis:- The AO and CIT(A) treated the expenditure as capital, citing that it was capitalized in the books and provided enduring benefits.- The Tribunal found that the expenditure was incurred to maintain existing assets and did not create new assets, thus qualifying as revenue expenditure.- The Tribunal referenced the Delhi High Court's decision in Hi Line Pens Pvt Ltd, emphasizing that maintenance expenses by a tenant should be allowed as revenue expenditure.Conclusion: The expenditure on resurfacing the runway and other maintenance is revenue expenditure.5. Depreciation rate on taxiways, aprons, parking bays, and bridges:Issue: Whether the depreciation rate for taxiways, aprons, parking bays, and bridges should be 10% (building) or 15% (plant and machinery).Analysis:- The AO and CIT(A) treated these assets as buildings, allowing depreciation at 10%.- The Tribunal found that these structures are integral to airport operations and should be treated as plant and machinery, eligible for 15% depreciation.- The Tribunal referenced the Supreme Court's decisions in Dr. B. Venkata Rao and Karnataka Power Corpn., which classified specific-purpose structures as plant.Conclusion: Taxiways, aprons, parking bays, and bridges should be depreciated at 15% as plant and machinery.6. Confirmation of capital work in progress from vendor:Issue: Whether the capital work in progress (CWIP) amount of Rs.31,95,765 should be disallowed due to lack of confirmation from the vendor (L&T).Analysis:- The AO disallowed the amount, citing the absence of confirmation from L&T.- The CIT(A) noted that the assessee provided additional evidence, including confirmation of accounts, but upheld the disallowance due to the lack of response to the AO's notice.- The Tribunal found the disallowance unjustified, given the additional evidence provided by the assessee, and directed to enhance the CWIP by the amount.Conclusion: The CWIP amount should be allowed based on the additional evidence provided.Final Judgments:- Department's appeal dismissed.- Assessee's appeal allowed.