Assessee gets 25% depreciation on BOT toll road rights as intangible asset under section 32(1)(ii)

ITAT Delhi allowed assessee's claim for 25% depreciation on rights to build and operate toll road under BOT arrangement, treating it as intangible asset under section 32(1)(ii). Court held that while Government retains ownership of immovable property, assessee's contractual right to operate project and collect tolls constitutes a license qualifying as intangible asset eligible for depreciation. AO's restriction to 7.41% depreciation was overturned. Additionally, ITAT upheld CIT(A)'s deletion of disallowance regarding warranty period expense provisions, recognizing contractual liability for project maintenance during warranty period under matching principle. Revenue's appeal dismissed.

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Issues Involved:
1. Depreciation on rights to build and operate Toll Road.
2. Disallowance of provisions made for warranty period expenses.

Summary:

Issue 1: Depreciation on rights to build and operate Toll Road

The Revenue challenged the deletion of an addition of Rs. 5,11,37,177/- made on account of disallowance of depreciation on rights to build and operate a toll road. The Ld. AO had restricted depreciation to 7.41% instead of the 25% claimed by the assessee, arguing that the rights in the land remained with the Government and thus the assessee could not be treated as an owner of the property for the purposes of depreciation u/s 32(1)(ii) of the Act. The Ld. CIT(A) considered the rights under BOT projects as intangible assets, referencing the judgment of the Hyderabad Bench in DCIT Hyderabad vs. M/s. Progressive Construction Ltd. The Tribunal upheld this view, noting that the right to operate the project facility and collect toll charges is an intangible asset eligible for depreciation. The Tribunal cited previous decisions, including a Special Bench ruling, which supported the assessee's claim. The ground was decided against the Revenue.

Issue 2: Disallowance of provisions made for warranty period expenses

The Revenue contested the deletion of an addition of Rs. 1,68,70,284/- made on account of disallowing provisions for warranty period expenses. The Ld. AO argued that the expenses neither accrued nor crystallized and were dependent on future events. However, the Ld. CIT(A) found that the company had a contractual liability to ensure satisfactory performance during the warranty period, which justified the provision for warranty expenses. The Tribunal agreed, noting that since the company recognized 100% of the contractual receipts as income, it was imperative to account for corresponding liabilities, including warranty period expenses, on a matching principle. The ground was decided against the Revenue.

Conclusion:

The appeal of the Revenue was dismissed, with the Tribunal upholding the findings of the Ld. CIT(A) on both issues. The order was pronounced on 26th July, 2023.

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