BOT highway project accounting: capitalised construction costs and work-in-progress cannot support estimated profit additions or related disallowances.

In a BOT highway project, amounts reflecting construction cost and work-in-progress were treated as capitalised entries rather than accrued income, so an estimated 8% profit addition on gross receipts under the Income-tax Act was held unjustified. Disallowance under section 40(a)(ia) was also found inapplicable because the relevant expenditure had been capitalised and no revenue deduction was claimed in the profit and loss account. For the same reason, disallowance under section 43B could not be made where the expenditure was carried to work-in-progress and not claimed as a deductible expense. The result was that the additions were deleted and the assessee's position was accepted.

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Issues: (i) whether the addition made by estimating business income at 8% of gross receipts under section 28 of the Income-tax Act, 1961 was sustainable where the amounts reflected only construction cost and work-in-progress in a BOT highway project; (ii) whether disallowance under section 40(a)(ia) could be made when the relevant expenditure was capitalised and not claimed in the profit and loss account; (iii) whether disallowance under section 43B could be made when the expenditure was not debited as a claim in the profit and loss account.

Issue (i): Whether the addition made by estimating business income at 8% of gross receipts under section 28 of the Income-tax Act, 1961 was sustainable where the amounts reflected only construction cost and work-in-progress in a BOT highway project.

Analysis: The receipts in question represented matching entries relating to ongoing road construction and not income actually earned during the relevant years. The project was undertaken under a BOT concession, the infrastructure belonged to the public authority, and the assessee had not created an asset owned by it. The Board circular governing BOT road projects was treated as supporting the treatment of such costs as amortisable business expenditure rather than taxable receipts. In the absence of accrued income, estimation of profit at 8% of gross receipts was found unjustified.

Conclusion: The addition based on estimated income was held unsustainable and was deleted in favour of the assessee.

Issue (ii): Whether disallowance under section 40(a)(ia) could be made when the relevant expenditure was capitalised and not claimed in the profit and loss account.

Analysis: The expenditure had been capitalised and transferred to work-in-progress, and no revenue expenditure was claimed against business income. A disallowance under section 40(a)(ia) presupposes a claim of deductible expenditure in the computation of income. Where no such claim is made in the profit and loss account, the provision was held inapplicable.

Conclusion: The disallowance under section 40(a)(ia) was held not to survive and was deleted in favour of the assessee.

Issue (iii): Whether disallowance under section 43B could be made when the expenditure was not debited as a claim in the profit and loss account.

Analysis: The relevant expenditure, though incurred, had been carried to work-in-progress and was not claimed as a deduction in the profit and loss account. Disallowance under section 43B is attracted only where the expenditure is claimed in the computation of income. Since no deduction had been claimed, the provision could not be invoked.

Conclusion: The disallowance under section 43B was held unsustainable and was deleted in favour of the assessee.

Final Conclusion: The Revenue's appeals failed on all substantive grounds, and the deletion of the additions by the first appellate authority was affirmed.

Ratio Decidendi: Where a BOT infrastructure project reflects only capitalised construction cost and work-in-progress without accrued income or a claim of revenue expenditure, estimated profit additions and disallowances under provisions that presuppose claimed deductible expenditure cannot be sustained.

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