2017 (3) TMI 1167 - AT - Income Tax

BOT road spend is s.32(1)(ii) intangible asset; depreciation allowed, s.14A disallowance denied without exempt income

ITAT held that expenditure incurred by assessee on construction of a road under a BOT contract resulted in acquisition of an intangible asset under ... Intangible asset - depreciation under section 32(1)(ii) - license akin to license - build-operate-transfer (BOT) concession - any other business or commercial rights of similar nature (ejusdem generis) - amortization in terms of CBDT Circular No.9 of 2014 - disallowance under section 14AIntangible asset - depreciation under section 32(1)(ii) - build-operate-transfer (BOT) concession - license akin to license - Expenditure incurred by the assessee in construction of road under BOT contract gives rise to an intangible asset and is eligible for depreciation under section 32(1)(ii). - HELD THAT: - The Tribunal found that the Concession Agreement conferred upon the concessionaire exclusive rights to implement, operate and maintain the project and to levy, demand and collect fees during the concession period, while legal title to the project site remained with the Government of India. The assessee expended funds to complete the project and, in consequence, obtained a valuable business/commercial right - the right to operate the project facility and collect tolls to recoup investment and earn profit. That right is integrally connected to completion and use of the project and is not merely a pre-existing right that accrued on execution of the agreement. Applying Explanation 3(b) to section 32(1) and the principle recognised in precedents treating similar entitlements (e.g., exchange memberships, goodwill) as business/commercial rights, the Tribunal held the right to operate and collect tolls is either a license or a business/commercial right of similar nature within section 32(1)(ii), and therefore an intangible asset on which depreciation is allowable at the prescribed rate. The Tribunal rejected the Revenue's contention that the mere creation of physical roads and bridges (owned by Government) precludes the assessee's intangible-rights claim, noting the concessionaire's exclusive operating rights and capitalisation of the expenditure by the assessee in expectation of toll recovery.Assessee's expenditure created an intangible asset (right to operate and collect tolls) and depreciation under section 32(1)(ii) is allowable.Any other business or commercial rights of similar nature (ejusdem generis) - depreciation under section 32(1)(ii) - The expression 'any other business or commercial rights of similar nature' in section 32(1)(ii) covers the right to operate the BOT project and collect tolls. - HELD THAT: - The Tribunal applied the ejusdem generis principle as construed in higher decisions and concluded that the specified intangible items are diverse but share the common character of being tools of trade that facilitate carrying on of business. Rights which are invaluable, facilitate business operations and are acquired for enduring commercial benefit fall within 'any other business or commercial rights of similar nature'. Given that the concessionary right enables the assessee to recoup investment and generate profit, it qualifies under that residual expression and is therefore an intangible asset eligible for depreciation.The concessionary right falls within 'any other business or commercial rights of similar nature' and is depreciable under section 32(1)(ii).Amortization in terms of CBDT Circular No.9 of 2014 - Claim for amortization under CBDT Circular No.9 of 2014 cannot be adjudicated in the appeal because the nature of the expenditure was not in dispute in the impugned year and the assessee had not claimed amortization. - HELD THAT: - The Tribunal observed that the character of the expenditure (capital) had already been accepted in earlier assessment years and the present appeal was confined to the nature of the asset and allowance of depreciation on WDV. The Assessing Officer and Commissioner (Appeals) had not considered the issue of deferred revenue/amortization; the assessee had not made a claim under the CBDT circular in the impugned year. The circular is beneficial and can be applied only if claimed; it cannot be imposed by the Tribunal where it does not arise from the orders under challenge. Consequently, the ground seeking direction for amortization under the circular was held not to arise for adjudication and dismissed.Ground based on CBDT Circular No.9 of 2014 is not maintainable in this appeal and is dismissed.Disallowance under section 14A - Deletion of the section 14A disallowance was sustained where no exempt income arose and the assessee had sufficient interest free funds for the investment. - HELD THAT: - The Assessing Officer disallowed interest under section 14A as attributable to exempt income yielding investments. The Commissioner (Appeals) deleted the disallowance on the uncontroverted facts that the assessee had not earned any exempt income in the relevant year and had sufficient interest free funds for the investment. The Tribunal, applying authoritative ratios, held that in the absence of exempt income and where the assessee's contention of adequate interest free funds was not controverted, no disallowance under section 14A could be sustained.Deletion of the section 14A addition is upheld.Condonation of delay - Condonation of delay in filing the assessee's cross objection was refused and the cross objection dismissed. - HELD THAT: - The assessee sought condonation for a 138 day delay, explaining oversight regarding the CBDT circular. The Tribunal found the explanation unsatisfactory, noting that the Department had specifically raised the amortization issue earlier; therefore the assessee could not claim ignorance. In consequence, the Tribunal declined to condone the delay and dismissed the cross objection.Delay not condoned; cross objection dismissed.Final Conclusion: The Department's appeal is dismissed; the Tribunal holds that the expenditure on the BOT road created an intangible asset (the concessionary right to operate and collect tolls) eligible for depreciation under section 32(1)(ii), upholds deletion of the section 14A disallowance, and dismisses the assessee's delayed cross objection. Issues Involved:1. Whether expenditure incurred by the assessee on the construction of a road under BOT contract with GOI gives rise to an asset and if so, whether it is an intangible asset or tangible assetRs.2. If it is a tangible asset, whether it is a building or plant or machineryRs.3. Whether the Concessionaire Agreement (C.A) held by the assessee can be regarded as a commercial or business right akin to a licenseRs.4. Whether the expenditure incurred should be amortized over the period of concessionRs.5. Whether the disallowance under section 14A for earning exempt income is justifiedRs.Detailed Analysis:1. Nature of Asset Created by Expenditure:The core issue was whether the expenditure of Rs. 214 crore incurred by the assessee for constructing a road under a BOT contract with the Government of India resulted in the creation of an asset and, if so, whether it was a tangible or intangible asset. The Tribunal found that the right acquired by the assessee to operate the project facility and collect toll charges is an intangible asset created by the expenditure. This right was considered a valuable business/commercial right, eligible for depreciation under section 32(1)(ii) of the Act.2. Classification of Tangible Asset (if applicable):The Tribunal did not need to classify the asset as a building or plant/machinery since it concluded that the asset created was intangible in nature. The expenditure incurred resulted in the creation of an intangible asset, not a tangible one.3. Concessionaire Agreement as a License:The Tribunal examined whether the Concessionaire Agreement (C.A) could be regarded as a commercial or business right akin to a license. It concluded that the right granted to the assessee under the C.A. to operate the project and collect toll charges is a license or akin to a license. This right was considered an intangible asset eligible for depreciation under section 32(1)(ii) of the Act.4. Amortization of Expenditure:Regarding the amortization of the expenditure, the Tribunal noted that the nature of the expenses, whether capital or revenue, was not disputed in the present appeal. The expenditure had already been considered as capital expenditure in the preceding assessment years, and the assessee’s claim of depreciation had been allowed. The Tribunal dismissed the Department's ground for amortization because the issue did not arise from the orders of the Departmental Authorities and was not claimed by the assessee.5. Disallowance under Section 14A:The Tribunal upheld the deletion of the addition made by the Assessing Officer under section 14A. It noted that the assessee had not earned any exempt income in the relevant assessment year, and the assessee had sufficient interest-free funds available to make the investment. Therefore, no disallowance under section 14A could be made.Conclusion:The Tribunal concluded that the expenditure incurred by the assessee for constructing the road under the BOT contract resulted in the creation of an intangible asset. The assessee was eligible to claim depreciation on such an intangible asset. The Tribunal dismissed the Department's appeal and the assessee's cross-objection. The order was pronounced in the open Court on 14.02.2017.