No depreciation under Section 32 on highway infrastructure built under licence; ownership requirement not satisfied, appeal dismissed

ITAT held that the assessee was not entitled to depreciation under s.32 on the highway infrastructure treated as an intangible asset. Under the concession agreement, the immovable property, including land and structures, vested in the Union/NHAI, and the assessee was only a licensee permitted to construct and operate. As ownership, wholly or partly, is a prerequisite for depreciation on tangible or intangible immovable assets, mere licence and construction with the licensor's permission did not confer ownership. Relying on HC precedent in a similar expressway case, ITAT concluded that depreciation was not allowable and dismissed the assessee's appeal.

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The primary issues considered in this appeal pertain to the entitlement of the assessee to claim depreciation on the Build-Operate-Transfer (BOT) project assets under the Income Tax Act, 1961, specifically under section 32. The core legal questions examined include:

1. Whether the assessee, as a concessionaire under a BOT agreement with the National Highways Authority, is the owner of the infrastructure assets for the purpose of claiming depreciation under section 32 of the Income Tax Act.

2. Whether the depreciation claimed on the intangible assets related to the BOT project is allowable or whether only amortization is permissible as per CBDT Circular No. 9/2014.

3. Whether the delay in filing the appeal before the Tribunal should be condoned.

4. The validity of disallowance of Provident Fund (PF) contributions by the Assessing Officer.

Issue-wise Detailed Analysis

1. Delay in Filing Appeal

The Tribunal noted a delay of 537 days in filing the appeal. The assessee submitted an affidavit explaining that the order was not communicated due to reasons related to the consultant's address and email provided in Form 35. The Revenue opposed condonation of delay. Upon hearing both parties and reviewing the affidavit, the Tribunal found reasonable cause for the delay and condoned it in the interest of justice, admitting the appeal for hearing.

2. Entitlement to Depreciation on BOT Project Assets

Legal Framework and Precedents: Section 32 of the Income Tax Act permits depreciation deductions on tangible and intangible assets "owned" by the assessee and used for business purposes. The CBDT Circular No. 9/2014 prescribes amortization of project expenses for infrastructure projects on BOT basis where ownership is not vested with the concessionaire. Several High Court decisions, notably the Bombay High Court in North Karnataka Expressway Ltd. v. Commissioner of Income-tax and Commissioner of Income Tax v. West Gujarat Expressway Ltd., have held that where the National Highways vest in the Union, and the concessionaire is only a licensee, depreciation on the toll road assets cannot be claimed as ownership does not vest with the concessionaire.

Court's Interpretation and Reasoning: The Assessing Officer disallowed depreciation of Rs. 162.48 crores on intangible assets related to the BOT project, allowing only amortization of Rs. 58.16 crores. The CIT(A) upheld this disallowance, relying on the CBDT Circular and the aforementioned High Court decisions. The CIT(A) reasoned that the concessionaire does not own the assets but only has a license to operate and maintain the highway, and therefore depreciation is not allowable.

The assessee contended that the concession agreement explicitly provides, in Clause 47.4.1, that for depreciation purposes, the property representing the capital investment shall be deemed to be acquired and owned by the concessionaire. The assessee argued that it had capitalized the project as an intangible asset and claimed depreciation accordingly. Further, the assessee referred to multiple clauses in the concession agreement demonstrating rights to operate, maintain, insure, and transfer the infrastructure facility, asserting ownership rights during the concession period.

The Revenue disputed this, emphasizing that ownership of the land and infrastructure remains with the National Highways Authority (NHAI), and the concessionaire is merely a licensee. The Revenue highlighted termination clauses allowing NHAI to take possession and control of the project, reinforcing the absence of ownership transfer. It was argued that the concession agreement clauses cannot override statutory provisions governing ownership and that the Transfer of Property Act governs ownership transfer, which did not occur.

Key Evidence and Findings: The Tribunal examined the concession agreement extensively, noting:

• The Site of the Project Highway remains owned by NHAI, with the concessionaire granted a license/right of way.
• The concessionaire is obligated to design, build, finance, operate, and maintain the infrastructure facility during the concession period.
• The concessionaire must insure the project and name NHAI as co-insured.
• Upon termination, the concessionaire must transfer the project assets to NHAI, implying possession and ownership during the concession period.
• Termination clauses allow NHAI to take possession and control immediately upon termination, underscoring NHAI's ultimate ownership.

Despite the clause deeming ownership for depreciation purposes, the Tribunal reasoned that such a clause cannot override the legal ownership defined under the National Highways Act and related statutes. The Tribunal relied heavily on the Bombay High Court's ruling in North Karnataka Expressway Ltd., which held that ownership vests with the Union and the concessionaire is only a licensee, thus not entitled to depreciation on the toll road assets.

Application of Law to Facts: The Tribunal applied section 32 of the Income Tax Act, which requires ownership of assets for depreciation claims. Since the concessionaire lacked ownership of the land and infrastructure, only a licensee right, depreciation was disallowed. The Tribunal held that the CBDT Circular No. 9/2014 applies, prescribing amortization rather than depreciation for such BOT projects where ownership does not vest with the concessionaire.

Treatment of Competing Arguments: The Tribunal acknowledged the assessee's reliance on the concession agreement clause and the Delhi ITAT decision in Kurukshetra Expressway Pvt Ltd, which allowed depreciation. However, it distinguished those decisions as subordinate to the binding precedent of the Bombay High Court. The Tribunal emphasized that the High Court's interpretation of ownership under the National Highways Act and Income Tax Act prevails over the concession agreement's internal provisions.

Conclusion: The Tribunal concluded that the assessee is not entitled to depreciation under section 32 on the BOT project assets and that the disallowance of Rs. 104.32 crores was justified. The issue was decided against the assessee, affirming the CIT(A) and AO's orders.

3. Disallowance of Provident Fund Contribution

The Assessing Officer disallowed Rs. 5,33,179 on the ground that PF contributions were not remitted within the due date. The assessee contended that the amount was remitted before the due date for filing the return under section 139(1). The Tribunal did not elaborate extensively on this issue but noted the submissions. The final order dismissed the appeal, suggesting that the disallowance was upheld.

Significant Holdings

"Section 32, read with section 263, of the Income-tax Act, 1961 - Depreciation - Allowability/Rates of (Toll road) - Assessment year 2005-06 - Where assessee, engaged in business of infrastructure development, in execution of an agreement with National Highway Authority, constructed a road on Build, Operate and Transfer (BOT) basis on land owned by Government, could not claim depreciation on toll road so constructed and operated."

"Merely because the National Highway is built, maintained, managed and operated by private entities does not mean that the vesting of the National Highway in the Union is effected. That does not dilute the right conferred by section 4 or take away the ownership of this Highway, meaning thereby, its vesting in the union."

"It is necessary that the assessee should be owner of the property and owner of the building machinery, plant or furniture, either wholly owned by it or partially owned by it and is used for business purpose. In the present case the infrastructure is not either owned wholly or partially by the assessee. Merely the assessee has raised some construction with the permission of the licensor as a licensee."

"The term 'owner' as defined in the Income Tax Act cannot be interpreted so as to defeat the absolute rights conferred in the Union of the National Highways. The National Highways Act and the National Highways Authority of India Act are special statutes and when the concept of ownership and vesting therein is of absolute nature that cannot be said to be in any manner restricted or curtailed by a general definition or understanding of the term owner as appearing in the Income Tax Act."

"The CBDT Circular No. 9/2014 is applicable only to those infrastructure projects for development of road/highways on BOT basis where ownership is not vested with the assessee under the concessionaire agreement."

"The disallowance made by the AO amounting to Rs. 1,04,32,12,222/- is hereby confirmed."

"The appeal is dismissed."

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