2023 (8) TMI 1473 - AT - Income Tax

Infrastructure company gets 25% depreciation on toll road annuity rights despite no land ownership under section 32(1)(ii)

ITO-1 (1) (1), Mumbai Versus Andhra Pradesh Expressway Limited And (Vice-Versa)

ITAT Mumbai held that an infrastructure development company constructing a toll road on BOT basis on government land is entitled to depreciation at 25% on ... Eligibility of depreciation on the right to collect annuity on the toll road constructed by it as an intangible asset u/s 32(1)(ii) - AO rejected the claim of the assessee on the ground that the company had no ownership rights or entitlements in the said Toll road; and therefore according to him, the assessee is not entitled for depreciation as per section 32. however allowed the amortization of expenditure incurred on the said road - HELD THAT:- Assessee an Infra Development Company that has constructed road on BOT basis on the land owned by the Central Government would be eligible for claim of depreciation in respect of its intangible right i.e. right to collect annuity u/s. 32(1)(ii) which is squarely covered by the Special Bench decision of Progressive Construction Ltd. [2017 (3) TMI 1167 - ITAT HYDERABAD] and also the decision of the Tribunal in assessee’s own case for AY 2010-11 wherein the Tribunal held that the assessee is eligible for depreciation on intangible assets which falls within the scope of section 32(1)(ii) of the Act - we direct AO to grant the assessee claim of depreciation @ 25% on the opening WDV on toll roads constructed as per the agreement with NHAI commencing on 15.09.2006. Decided in favour of assessee. Correct head of income - Interest Income as “Income from Business” or “Income from Other Sources” - HELD THAT:- CIT(A), accepting the contention of the assessee that in the facts of the case, the assessee by virtue of agreement between the NHAI/lender banks had to deposit the receipts/annuity in the Escrow account and not in the current account and had to invest the amount only in “Permitted Investments”. Accordingly, the interest income have nexus with the business receipts/annuity. And therefore, the Ld. CIT(A) has allowed the claim of the assessee We find that the Ld. CIT(A) have found that the assessee has deposited the “annuity” received from NHAI as fixed deposit in view of the “Permitted Investments” as per the agreement with NHAI/lenders. According to the Ld. CIT(A), the interest income has direct link with the business activity of the assessee. And therefore, according to him, the same need to be treated as “Income from business” ; and the Ld. CIT(A) also noted that the other activities for which the sums are deposited relate to operation and maintenance of the roadway and hence, the income earned was generated out of business activity. Respectfully following the Tribunal decision in assesse’s own case for AY. 2010-11 [2016 (7) TMI 1539 - ITAT MUMBAI] we confirm the action of Ld CIT(A) and dismiss the ground of appeal of the revenue. Issues Involved:1. Depreciation on the right to collect annuity as an intangible asset u/s 32(1)(ii) of the Income Tax Act, 1961.2. Classification of interest income as 'Income from Business' or 'Income from Other Sources'.Summary:Depreciation on Intangible Assets:The primary issue was whether the assessee is eligible for depreciation on the right to collect annuity on the toll road constructed under a concessionaire arrangement with NHAI as an intangible asset u/s 32(1)(ii) of the Income Tax Act, 1961. The assessee claimed depreciation at 25%, which was disallowed by the AO, who allowed amortization of expenditure instead. The Ld. CIT(A) allowed 10% depreciation, following judicial precedents. The Tribunal, referencing its own decision in the assessee's case for AY 2010-11 and the Special Bench decision in ACIT Vs. Progressive Construction Ltd., concluded that the right to collect annuity is an intangible asset eligible for 25% depreciation u/s 32(1)(ii). The Tribunal directed the AO to grant the claim of depreciation at 25% on the opening WDV of the toll roads.Classification of Interest Income:The second issue was whether the interest income earned from fixed deposits should be classified as 'Income from Business' or 'Income from Other Sources'. The AO treated the interest income as 'Income from Other Sources', while the Ld. CIT(A) classified it as 'Income from Business', noting that the interest income was directly linked with the business activity of the assessee and the terms of the permitted investments listed in the agreement with NHAI. The Tribunal upheld the Ld. CIT(A)'s decision, referencing its own decision in the assessee's case for AY 2010-11 and the decision of the Hon'ble Bombay High Court in Lok Housing Ltd., confirming that the interest income should be assessed under the head 'Income from Business'.Conclusion:1. The Tribunal allowed the assessee's claim for 25% depreciation on the right to collect annuity as an intangible asset u/s 32(1)(ii).2. The Tribunal upheld the classification of interest income as 'Income from Business'. The appeals of the assessee were partly allowed, and the appeals of the revenue were dismissed.