NHAI grant treated as shareholders' fund not asset cost reduction for depreciation under section 43

ITAT Hyderabad upheld CIT(A)'s decision allowing NHAI grant to be treated as shareholders' fund rather than reducing asset cost for depreciation purposes, finding the grant was cash support for project viability, not direct cost contribution under section 43. The tribunal allowed assessee's provision for periodic maintenance expenses, agreeing that mercantile accounting requires proportionate annual charging rather than full expense recognition in the fifth year when repair work occurs. However, the tribunal dismissed assessee's appeal as time-barred due to 1271-day delay, finding no reasonable cause justified the inordinate delay despite assessee's participation in revenue's cross-appeal.

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Two principal issues arise for consideration in these appeals and cross appeal: first, the treatment of the grant of Rs. 38.40 crores received from the National Highway Authority of India (NHAI) in relation to the cost of the project and depreciation; and second, the allowance of provisions made by the assessee for periodic maintenance expenses under the concession agreement with NHAI.

Issue 1: Treatment of NHAI Grant in Computation of Depreciation

The core legal question is whether the grant of Rs. 38.40 crores received from NHAI should be deducted from the written down value (WDV) of the capital asset for the purpose of computing depreciation under the Income Tax Act, 1961. The Revenue contends that since the grant is specified in the concession agreement to be applied towards meeting the capital cost of the project and treated as part of shareholders' funds, it must be reduced from the project cost under Explanation 10 to section 43(1) of the Act, thereby reducing the depreciable base. The Assessing Officer (AO) accordingly disallowed depreciation to the extent of Rs. 43.43 crores by reducing the WDV of the asset by the grant amount.

The assessee disputes this, asserting that the grant is in the nature of promoter's contribution or quasi-equity support, not a subsidy or incentive directly linked to acquisition cost of any specific asset. It is contended that the grant does not partake the character of payment intended to meet the cost of an asset as envisaged under Explanation 10 to section 43(1). The assessee relies on authoritative precedents including the Supreme Court decision in CIT vs. P.J. Chemicals Ltd and various High Court and Tribunal rulings, which establish that government subsidies or grants not specifically intended to meet the cost of an asset cannot be deducted from the asset's cost for depreciation purposes.

The Tribunal examined the terms of the concession agreement, particularly Articles 23.1 to 23.4, which describe the grant as cash support by way of an outright grant forming part of shareholders' funds to make the project commercially viable. The grant is to provide financial strength enabling the assessee to secure loans and is not a direct reimbursement or subsidy for acquisition of assets. The Tribunal noted that while the grant is to be applied for meeting capital costs, this does not convert it into a payment for acquisition of a specific asset or a portion thereof.

Applying the legal framework, the Tribunal held that Explanation 10 to section 43(1) applies only where a government subsidy or grant is given directly or indirectly to meet the cost of an asset. Since the grant here is in the nature of equity support and not linked to acquisition cost of any particular asset, it cannot be deducted from the asset's cost. The Tribunal further observed that the CIT(A) had rightly held that the grant is to be treated as part of reserves and surplus and not to be reduced from the project cost for depreciation computation.

The Tribunal also noted that the assessee had computed depreciation in line with CBDT Circular No. 09/2014, which supports the assessee's position. The Revenue's contention that the grant forms part of shareholders' funds to meet capital shortfall was accepted in principle but did not justify treating the grant as a reduction in the cost of the asset for depreciation purposes.

In conclusion, the Tribunal affirmed the CIT(A)'s order deleting the addition made by the AO and held that the grant from NHAI shall not be reduced from the cost of the project before allowing amortization or depreciation.

Issue 2: Allowance of Provisions for Periodic Maintenance Expenses

The second issue concerns the allowability of provisions made by the assessee for periodic maintenance of the highway constructed under the concession agreement. The assessee claimed a provision of Rs. 21.57 crores in the Profit and Loss account for periodic maintenance, apportioned on a five-year basis, although the actual expenditure is incurred only once every five years as per the agreement. The AO disallowed the provision on the ground that it was not an ascertained liability and that expenditure cannot be amortized before it is actually incurred. The AO also questioned the scientific basis of the estimation of the provision.

The assessee argued that the provision is made in accordance with the mercantile system of accounting and the matching principle, which requires expenses to be recognized in the period in which the liability arises rather than when payment is made. The maintenance obligation is contractual and recurring every five years, making the liability certain though the exact amount is estimated. The provision was based on detailed financial models, project information memoranda, and agreements with contractors, demonstrating a reasonable basis for estimation. The assessee relied on judicial precedents including decisions of the Tribunal and High Courts that support the allowance of provisions for foreseeable liabilities and expenses under mercantile accounting principles.

The CIT(A) allowed the provision to the extent of Rs. 14.42 crores (one-fifth of the total estimated maintenance cost), directing the AO to amortize the total amount and allow depreciation accordingly over the relevant years. The CIT(A) also observed that the provision had been allowed in earlier years and consistency in accounting treatment must be maintained.

The Tribunal analyzed the concession agreement, particularly Clause 3.3.7, which mandates overlaying the entire project expenditure at least once every five years. The Tribunal found that the provision made by the assessee was based on contractual obligation and reasonable estimation supported by financial data and agreements with contractors. The Tribunal noted that the actual expenditure incurred over the five years exceeded the total provision made, indicating no excess provisioning.

The Tribunal also considered the principle established in the group concern's case, where it was held that under the mercantile system, provisions for foreseeable losses or expenses can be made and allowed even if the expenditure is incurred in a later year. The Tribunal rejected the Revenue's argument that the provision lacked scientific basis, observing that the assessee's estimation was based on financial models and project information memoranda, which constitute a reasonable methodology.

Accordingly, the Tribunal upheld the CIT(A)'s order allowing the provision to the extent of one-fifth of the total estimated maintenance cost for the assessment year under consideration, directing the AO to verify and adjust any excess in subsequent years. The identical issue raised by the Revenue for the subsequent assessment year was also dismissed on the same reasoning.

Issue 3: Condonation of Delay in Filing Assessee's Cross Appeal

The assessee filed a cross appeal for the assessment year 2013-14 with a delay of 1271 days. The Tribunal considered the petition for condonation of delay supported by an affidavit explaining that the impugned order was misplaced by a staff member and not brought to the attention of the concerned person in time.

The Tribunal found the explanation vague, unsupported by particulars, and contradicted by the record showing the assessee's regular appearances in related proceedings well before the appeal was filed. The Tribunal held that the assessee failed to demonstrate sufficient cause or bonafide action to justify the inordinate delay. The principle of liberal interpretation of "sufficient cause" was held inapplicable in the circumstances. Consequently, the Tribunal declined to condone the delay and held the cross appeal not maintainable as barred by limitation.

Significant Holdings and Core Principles

On the treatment of the NHAI grant, the Tribunal held: "It is clear from clause 23.1 to 23.3 that this grant was given by the NHAI as a cash support by way of outright grant as a shareholders fund... that does not lead to the conclusion that the grant was given by NHAI as a portion of cost of asset acquired by the assessee met directly or indirectly as provided in Explanation (10) to section 43 of the I.T. Act, 1961." The principle established is that government grants or subsidies characterized as equity support or promoter's contribution, and not directly linked to acquisition cost of specific assets, cannot be deducted from the cost of assets for depreciation computation.

Regarding provisions for periodic maintenance, the Tribunal emphasized the mercantile system of accounting and the matching principle: "The foreseeable expenditure was liable to be considered while determining the income of the assessee for the period under consideration... The expenditure was ascertained expenditure on the maintenance portion of the contract though it was an estimation made in the light of the available information." The Tribunal recognized that provisions for contractual, recurring expenses can be allowed on a reasonable estimation basis, even if the actual expenditure is incurred in a later year.

On delay in filing appeals, the Tribunal reaffirmed the necessity of demonstrating reasonable cause and bonafide action to justify condonation, rejecting vague or unsupported excuses: "The reasons explained by the assessee are not only vague but contrary to the facts emerging from the record... the concept of liberal interpretation of expression of the term 'sufficient cause' cannot be applied."

In final determinations, the Tribunal dismissed the Revenue's appeals for both assessment years on the issues of grant treatment and maintenance provisions, upheld the CIT(A)'s orders allowing depreciation without reducing the grant and permitting the maintenance provision on a proportionate basis, and declined to admit the assessee's delayed cross appeal.

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