2017 (3) TMI 1167 - AT - Income Tax

Assessee's Road Construction Costs Qualify as Depreciable Intangible Asset

Asstt. Commissioner of Income Tax Circle–16 (2), Hyderabad Versus M/s. Progressive Constructions Ltd. and Vice-Versa

Asstt. Commissioner of Income Tax Circle–16 (2), Hyderabad Versus M/s. Progressive Constructions Ltd. and Vice-Versa - [2018] 63 ITR (Trib) 516 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.