2008 (10) TMI 275 - AT - Income Tax

Tribunal Allows Depreciation on Roads as Buildings but Upholds Capital Expenditure Classification for Road Costs.

Tamilnadu Road Development Co. Limited. Versus Assistant Commissioner Of Income-tax / Ito (Osd), Company Circle Iii (1), Chennai.

The Tribunal partly allowed the appeals, directing the Assessing Officer to grant depreciation on roads under the category of buildings, aligning with the ... Claim of depreciation on Road - Expenditure incurred on construction and development - Claimed depreciation as plant and machinery @ 25 per cent - Whether the assessee would become entitled to depreciation on the road in the category of building - entered into an agreement of concession with the State of Tamil Nadu for development of project in the roads owned by the Government of Tamil Nadu. HELD THAT:- From the Explanation (1) to section 32 Explanation makes it clear that in case, the assessee incurs expenditure for the purpose of business operation on the construction of any structure or by way of renovation or extension of a building, etc., which is owned by the assessee on leasehold basis, then the assessee is entitled to depreciation as if such building was owned by him. This means even if the expenditure is incurred on construction of any structure on leasehold property such expenditure will also be treated as capital expenditure and the assessee becomes entitled to depreciation. It is not disputed before us that the road has been constructed and developed on the Government land as well as existing road which is owned by the Government of Tamil Nadu. Therefore, there is no question of claiming such expenditure as revenue expenditure. In any case, the ld counsel for the assessee had mentioned during the hearing that he was only serious about the claim of depreciation and such depreciation should be allowed on the basis as if the road constitutes a plant. Merely because some Optical Fibre lines or connection lines have been laid, the road cannot get converted into a plant. As per agreement entered into Government of Tamil Nadu, the assessee-company became entitled to collect fixed amount of toll per vehicle for which it could have created any kind of barrier for collection of such toll. If the assessee has chosen to install automated toll plaza then the same was done for its own convenience and mere construction of one toll plaza will not change the nature of the asset which remains the road. In the case of Scientific Engg. House (P.) Ltd.[1985 (11) TMI 1 - SUPREME COURT], the Hon'ble Supreme Court was concerned with the issue as to whether the expenditure incurred on documentation services consisting of specification for manufacture of certain instruments constitute plant. SC held that sanitary and pipeline fittings fill within the definition of plant. It is absolutely clear that the Hon'ble Supreme Court has held in the case of Indore Municipal Corpn.[1997 (3) TMI 92 - SUPREME COURT] that the buildings would not include roads because Appendix I did not clarify that roads would be included in the building. As pointed out, after the AY 1988-89, all the Appendices have the note that building would include roads. Therefore, in our view, the assessee would become entitled to depreciation on the road in the category of building. In these circumstances, we set aside the order of the CIT (A) on this issue and direct the AO to allow depreciation on the road at the rate applicable to the buildings. This appeal is partly allowed. Issues Involved:1. Claim of depreciation on roads as plant and machinery.2. Classification of expenditure on road construction as revenue expenditure.3. Provision for doubtful debts as an ascertained liability.Detailed Analysis:1. Claim of Depreciation on Roads as Plant and MachineryThe primary issue was whether the roads constructed by the assessee could be classified as plant and machinery for depreciation purposes. The assessee argued that the roads should be considered as plant, citing various judicial precedents. The Assessing Officer denied this claim, referencing the Supreme Court's decision in Indore Municipal Corpn. v. CIT, which held that roads are not buildings. The CIT (Appeals) upheld this view, stating that the roads were neither owned by the assessee nor used for its business purposes but were constructed on government land for public use, and thus, did not qualify for depreciation under section 32 of the Act.The Tribunal examined the concession agreement and the project details, noting that the project primarily involved widening, strengthening, and resurfacing existing roads. The Tribunal concluded that the roads did not qualify as plant and machinery, as the installation of automated toll plazas for toll collection did not alter the nature of the asset. However, the Tribunal recognized that roads could be classified under the category of buildings for depreciation purposes, referencing the updated depreciation schedule which included roads under buildings. Consequently, the Tribunal directed the Assessing Officer to allow depreciation on roads at the rate applicable to buildings.2. Classification of Expenditure on Road Construction as Revenue ExpenditureThe assessee alternatively contended that the expenditure on road construction should be treated as revenue expenditure since the roads were built on government land. The CIT (Appeals) rejected this claim, distinguishing the facts from those in the Supreme Court's decision in Madras Auto Service (P.) Ltd., where the expenditure was allowed as revenue because the land was leased for 99 years at a nominal rent.The Tribunal noted that the relevant legal provision, Explanation (1) to section 32, which was inserted with effect from 1-4-1988, clarified that capital expenditure on leased properties should be treated as capital expenditure, entitling the assessee to depreciation. Given that the roads were constructed on government land, the Tribunal upheld the classification of the expenditure as capital and not revenue.3. Provision for Doubtful Debts as an Ascertained LiabilityThe assessee claimed that the provision for doubtful debts should be considered an ascertained liability and thus deductible. The CIT (Appeals) rejected this claim, relying on the jurisdictional High Court's decision in Dy. CIT v. Beardsell Ltd., which held that a debt recovery that is doubtful does not constitute an ascertained liability under section 115J of the Act and thus cannot be excluded from book profits.The Tribunal upheld the CIT (Appeals)'s decision, affirming that the provision for doubtful debts does not qualify as an ascertained liability and thus cannot be excluded from book profits.ConclusionThe Tribunal partly allowed the appeals, directing the Assessing Officer to allow depreciation on roads under the category of buildings, but upheld the denial of the claim for classifying the road construction expenditure as revenue expenditure and the provision for doubtful debts as an ascertained liability.