Revision under Section 263 denied; depreciation and negative grant inclusion upheld as plausible views

ITAT Delhi held that revision under section 263 was not justified as there were two plausible views regarding depreciation and inclusion of negative grant in asset cost. The AO's allowance of depreciation on the opening WDV plus capital expenditure was supported by precedent, and the Pr. CIT's contrary view did not warrant interference. The CBDT circular No. 09/2014 was held inapplicable retrospectively, thus not affecting the assessment year in question. The negative grant payable to NHAI, though due from the 15th year, was an ascertained liability accrued on project completion and properly included in the asset cost under the mercantile system. The Pr. CIT erred in directing its deletion. The ITAT set aside the revision order and allowed the appeal, affirming the assessee's claim for depreciation and inclusion of the negative grant.

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ISSUES:

Whether the order passed under Section 263 of the Income-Tax Act, 1961 was validly invoked in setting aside the original assessment orders.Whether depreciation on intangible assets (rights under BOT road construction projects) is allowable under Section 32(1)(ii) of the Income-Tax Act.Whether the CBDT Circular No. 09/2014 dated 23.04.2014 has retrospective effect and applies to assessment years prior to 2014-15.Whether the negative grant amounting to Rs. 595 crore payable to the National Highway Authority of India (NHAI) forms part of the cost of the asset for depreciation purposes.Whether the issuance of notice under Section 143(2) and consequential assessments under Sections 143(3)/263 were valid when the assessment order was not set aside under Section 263.Whether penalty proceedings under Section 271(1)(c) can be sustained when no direction under Section 263 was issued for penalty.Whether interest under Sections 234B and 234C of the Income-Tax Act was correctly charged in the reassessment orders.

RULINGS / HOLDINGS:

The order under Section 263 was invalid as the Principal Commissioner of Income Tax (PCIT) did not hold that the assessment order was "erroneous in so far as it is prejudicial to the interest of revenue," a mandatory condition for invoking Section 263. Invocation of Section 263 is impermissible where two views are possible, and the AO's view was supported by a Special Bench judgment.Depreciation on the intangible asset consisting of rights under the BOT road construction project is allowable under Section 32(1)(ii) read with Explanation 3(b), as the assessee is the "deemed owner" of the intangible asset and entitled to claim depreciation @ 25% on written down value.CBDT Circular No. 09/2014 dated 23.04.2014 does not have retrospective effect and applies only from the date of issuance (Assessment Year 2014-15 onwards); it does not apply to earlier years.The negative grant of Rs. 595 crore payable to NHAI is an ascertained liability accruing on completion of the project and forms part of the cost of the asset under the mercantile system of accounting; therefore, it cannot be excluded from the asset cost for depreciation purposes.Notwithstanding the PCIT's directions, the issue of notice under Section 143(2) and consequential assessments under Sections 143(3)/263 without setting aside the assessment order under Section 263 is invalid and without jurisdiction.Penalty under Section 271(1)(c) cannot be sustained where there was no direction under Section 263 for penalty imposition.Interest charged under Sections 234B and 234C in the reassessment orders was not upheld in the impugned orders.

RATIONALE:

The legal framework for invoking Section 263 requires that the PCIT must hold the assessment order to be "erroneous in so far as it is prejudicial to the interest of revenue." The Supreme Court and High Court precedents clarify that where two views are possible, Section 263 cannot be invoked. The AO's view, supported by a Special Bench judgment (ACIT vs. M/s Progressive Constructions Ltd.), was a possible and sustainable view.Section 32(1)(ii) of the Income-Tax Act allows depreciation on intangible assets owned by the assessee. The Special Bench of the ITAT Hyderabad and other coordinate benches have held that rights under BOT contracts constitute intangible assets eligible for depreciation. The Supreme Court's interpretation in Techno Shares and Stocks Ltd. supports this position.CBDT Circular No. 09/2014 clarifies amortization of BOT project costs but is prospective in nature, applicable from its date of issue; it does not override settled law or apply retrospectively to prior assessment years.The mercantile system of accounting requires recognition of liabilities when they accrue, not when payment is made. The negative grant payable to NHAI is an ascertained liability under the concession agreement and thus forms part of the cost of the asset, consistent with accounting principles and judicial precedent (Ratnagiri Gas and Power Pvt. Ltd. vs DCIT).Issuance of notices and assessments beyond the scope of directions under Section 263 violates principles of natural justice and statutory mandate, rendering such actions without jurisdiction.Penalty proceedings require explicit direction under Section 263; absence of such direction invalidates penalty notices.The court relied on various judicial precedents including CIT (Central) vs Max India Ltd., CIT-LTU vs Power Finance Corporation Ltd., and decisions of coordinate benches to uphold these principles and reject retrospective application of circulars or invalid invocation of Section 263.

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