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

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 intangible assets, specifically the right to collect annuity under section 32(1)(ii). The AO's rejection based on lack of ownership rights was overruled, following the Progressive Construction Ltd precedent. Additionally, the tribunal confirmed that interest income from permitted investments made from escrow account deposits should be treated as business income rather than income from other sources, given its direct nexus with business activities. Both issues were decided in favor of the assessee.

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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.

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