Tribunal allows toll fee depreciation for highway project special purpose vehicle

The Tribunal allowed depreciation on the right to collect toll fees as an intangible asset for a Special Purpose Vehicle involved in highway construction under a BOT agreement. The Tribunal directed the Assessing Officer to re-examine the provision for major maintenance expenses based on scientific criteria. The appeals for the relevant assessment years were partly allowed for statistical purposes.

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Issues Involved:
1. Allowability of depreciation on BOT projects.
2. Disallowance of provision for major maintenance expenses.

Issue-wise Detailed Analysis:

1. Allowability of Depreciation on BOT Projects:
The assessee, a Special Purpose Vehicle formed for the construction of a highway awarded by NHAI on a Build, Operate, and Transfer (BOT) basis, claimed depreciation on BOT projects. The Assessing Officer (AO) disallowed a major portion of this claim based on CBDT Circular No. 9/2014, which mandates that such expenditure be amortized evenly over the concession period. The AO observed that the project commenced operations in the financial year 2012-13, with the concession period lasting until 14.05.2026. Consequently, the AO allowed only a proportionate amount of depreciation for the relevant financial year and disallowed the remaining Rs. 12,78,47,171.

The assessee argued that the expenditure incurred for constructing roads under a BOT contract gives rise to an intangible asset as per Explanation 3(b) read with Section 32(1)(ii) of the Act, thus eligible for depreciation at the specified rate. The assessee cited various judicial precedents, including the Special Bench decision in Progressive Constructions Ltd and decisions from the Pune and Visakhapatnam Tribunals, supporting the claim that such rights constitute intangible assets eligible for depreciation.

The Tribunal examined the applicability of these decisions and found that the Hon'ble Bombay High Court's decisions in North Karnataka Expressway Ltd and West Gujarat Expressway Ltd, which denied depreciation on the basis that the assessee was not the owner of the roads, did not address whether the right to collect toll fees could be considered an intangible asset. The Tribunal noted that the Pune Tribunal in Ashoka Infrastructure Ltd had distinguished between ownership of roads and the right to collect tolls, recognizing the latter as an intangible asset eligible for depreciation.

The Tribunal concluded that the right to collect toll fees over the roads built and maintained by the assessee under the concessionaire agreement is an intangible asset. Therefore, the assessee is entitled to claim depreciation under Section 32(1)(ii) of the Act. This decision was applied to the appeals for A.Ys 2014-15 and 2015-16 as well.

2. Disallowance of Provision for Major Maintenance Expenses:
The AO disallowed the provision for major maintenance expenses amounting to Rs. 1,11,47,486, arguing that the expenditure was not actually incurred during the year but was merely a provision for future maintenance. The AO held that only expenses incurred during the relevant financial year are allowable under the Income Tax Act.

The assessee contended that the provision was made as per the concessionaire agreement with NHAI, which mandates the maintenance of the project for five years and covers major repairs thereafter. The assessee relied on judicial precedents, including Bharat Earth Movers vs. CIT and Rotork Controls India (P) Ltd vs. CIT, which allow provisions for future liabilities if made on a reasonable and scientific basis.

The Tribunal acknowledged the obligation under the concessionaire agreement for the assessee to maintain the roads, which creates a present liability to be discharged in the future. The Tribunal cited the Supreme Court's rulings in Bharat Earth Movers and Rotork Controls India (P) Ltd, which support the recognition of such liabilities if they can be estimated with reasonable certainty.

However, the Tribunal found that the assessee had not established the scientific basis for quantifying the provision. Therefore, the issue was remitted to the AO to examine the method used by the assessee in making the provision. If found reasonable and based on scientific criteria, the AO should allow the provision. This decision was also applied to the appeals for A.Ys 2014-15 and 2015-16.

Conclusion:
The appeals for A.Ys 2013-14, 2014-15, and 2015-16 were partly allowed for statistical purposes. The Tribunal directed the AO to allow depreciation on the right to collect toll fees as an intangible asset and to re-examine the provision for major maintenance expenses based on scientific criteria.

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