2025 (11) TMI 151 - AT - Income Tax

Grants for road projects treated as capital promoter contributions under AS-12; not taxable, toll receipts adjusted after maintenance costs recomputed

ITAT MUMBAI - AT held that grants received from the State for road projects are capital in nature as promoter's contributions under AS-12 where the ... Nature of receipt - addition of receipts of Government Grants / Support - whether the said Grants are in the nature of 'Capital Contributions' in compliance of Accounting Standard AS-12 as the same was contributed by the Government Authorities for development of road infrastructure in the State of Maharashtra? - assessee submitted before the AO that the grants received are capital in nature and is a contribution made by the promoters through various government agencies for the development of cities, districts or locations as decided by the government - HELD THAT:- The assessee is a wholly owned undertaking of the government of Maharashtra and this engaged in the business of infrastructure development for general public. The assessee undertakes the infrastructure projects under BOT basis which means that the assessee is not owner of the projects undertaken by it. The government of Maharashtra hands over certain incomplete road projects to the assessee vide GR and provides grants/contributions for the assessee to complete the projects. The assessee as per AS-12 treats the incomplete projects by debiting the capital WIP and by crediting the capital reserve. Assessee credits the subsequently grants received towards completion of project the capital reserve account. Assessee reverses the depreciation on completed project to the capital reserve account since the assessee is not the owner of the projects. It is also relevant to notice that on the completion of the stipulated period in the GR the assessee hands over the completed project back to the state government. AS-12 deals with accounting for Government Grants and the same provides that Grants which have the characteristics similar to those of promoters' contribution should be treated as part of shareholders' funds. In the given case, the assessee is a wholly owned undertaking of Government of Maharashtra and accordingly there cannot be any dispute that the grants/contributions of the government are in the nature of promoter's contribution. Grants/contributions by the state government are in the nature of investments made by the promoter i.e. the state government for infrastructure development and the assessee's role is that of contractor to carry out the projects given through GR. Since the assessee is carrying out the activity on BOT basis the grants/ contributions by the state government cannot be considered as a support extended for the day today business activities of the assessee, but is a capital contribution by the state government towards cost of the projects to be incurred by the assessee. Accordingly, we hold that the treatment of the grants/contributions received by the assessee is capital in nature being a promoter's contribution and, therefore, cannot be treated as the income of the assessee. Grants/contributions accrued but not received from government - accrual of income - AO made the addition towards the grants receivable for the reason that the assessee is following the mercantile system of accounting and since the grants/contributions is revenue in nature the income should be accrued to the assessee - HELD THAT:- We have while considering the issue of treatment of grants/ contributions received as income, already held that the receipts are in the nature of promoter's contributions and accordingly capital receipt. In our considered view the said ratio should be applicable to the addition made by the AO on accrual basis towards the grants/contributions receivable from the government. Accordingly we hold that the grants /contributions receivable cannot also be treated as the income of the assessee. Accordingly we direct the AO to delete the addition made in this regard. Toll Operation – Mumbai-Pune NH4 and Thane Ghodbandar Road - HELD THAT:- AO while completing the assessment has considered only the income grossed by the assessee but has failed to consider the cost estimated to be incurred towards maintenance and improvement. In view of this factual findings there is merit in the submission of the assessee that the addition made by the AO cannot be sustained and the alternate plea that if the income is to be recognised on gross basis then the reduction towards the estimated expenditure also to be allowed. Accordingly, we direct the AO to delete the addition made in this regard. Addition made by the AO towards toll operation of Thane Ghodbandar Road are identical to the addition made towards toll operation of Mumbai-Pune NH-4. Accordingly, we direct the AO to delete the addition made towards toll operation of Thane Ghodbandar Road also. ISSUES PRESENTED AND CONSIDERED 1. Whether government grants/contributions received and credited to capital reserve by an undertaking wholly owned by the State are taxable as revenue receipts or are capital (promoter's) contributions under AS-12. 2. Whether government grants/contributions shown as accrued but not received and not recognised in books are taxable on accrual basis where the enterprise follows mercantile system of accounting. 3. Whether consideration received for long-term toll-operation contracts under BOT concession agreements should be recognised for tax purposes on the net contract value (as claimed) or on the grossed-up advances with corresponding allowance for estimated future expenditure. 4. Whether the reopening of assessment under section 147 (alleged change of opinion) is invalid where the material relied upon was part of the record at the original assessment (issue rendered academic in view of substantive disposal). ISSUE-WISE DETAILED ANALYSIS - 1. Characterisation of Grants/Contributions Received and Credited to Capital Reserve Legal framework: AS-12 (Government Grants) sets out the 'capital approach' whereby grants having characteristics similar to promoters' contribution are to be credited to shareholders' funds and not recognised in profit and loss. Tax law distinguishes capital receipts from revenue receipts for computation of total income. Precedent treatment: Revenue relied on Supreme Court authorities holding that certain government grants given after commencement of business to support business operations may be revenue in nature; the AO and lower authority followed those precedents to treat the receipts as taxable revenue. Interpretation and reasoning: The Tribunal examined the factual matrix: the appellant is a wholly owned State undertaking; incomplete road projects were handed over by the State under Government Resolutions with specific terms; grants/contributions were credited to capital reserve as promoter's contribution and depreciation on completed projects was reversed to capital reserve because the undertaking was not owner of the projects and would hand them back on expiry. These facts demonstrate that grants were made by the State in its capacity as promoter to meet capital outlay for projects, not as recurrent support for day-to-day business. Ratio vs. Obiter: Ratio - where grants originate from the promoter (State) as contribution towards capital cost of projects undertaken on BOT terms and no repayment is expected, such grants are capital in nature and properly credited to capital reserve under AS-12; they are not taxable as income. Obiter - general observations on AS-12's unsuitability for tax purposes in other factual situations remain non-decisive here. Conclusions: The grants/contributions received and credited to capital reserve are capital receipts (promoter's contribution) and not taxable income; addition on this ground is deleted. ISSUE-WISE DETAILED ANALYSIS - 2. Grants/Contributions Accrued but Not Received (Recognition on Accrual Basis) Legal framework: Under mercantile accounting, income is generally recognised on accrual when reasonably assured and conditions satisfied; AS-12 requires that grants be recognised only when reasonably assured of realisation and conditions complied with. Tax assessment on accrual basis requires that income be chargeable in the year in which it accrues. Precedent treatment: Lower authorities treated accrued grants as taxable on the basis that the assessee follows mercantile system and grants were revenue in nature. Interpretation and reasoning: Having determined (Issue 1) that grants are promoter's capital contributions, the same characterisation applies to amounts shown as receivable. The factual position showed uncertainty and that the assessee had not recognised such amounts in its books (consistent with AS-12 requirements). Given the capital character and the promoter relationship, accrual treatment for tax cannot convert these receivables into taxable revenue. Ratio vs. Obiter: Ratio - grants/contributions receivable from promoter-State, where the underlying character is capital and recognition in books is withheld until reasonably assured, are not taxable as income on accrual. Obiter - general rules about accrual recognition in different contexts are ancillary. Conclusions: Addition in respect of grants/accrued contributions not received is unsustainable and is deleted; accrual basis does not make such promoter capital contributions taxable in the facts before the Tribunal. ISSUE-WISE DETAILED ANALYSIS - 3. Recognition of Toll-Operation Receipts under BOT Contracts (Net v. Gross Treatment) Legal framework: Income recognition for long-term contracts examines the substance of the contractual consideration and matching of related expenses; where contract documents fix a net consideration after estimated future capital expenditure, tax computation must reflect the true economic substance, allowing deduction/adjustment for attributable future costs over the contract period. Precedent treatment: Revenue posited that grossing up the contract value and taxing pro-rata the gross amount is the appropriate method for BOT/toll contracts to reflect real income; lower authorities followed this approach and made additions by treating only the grossed-up figure as income without allowing corresponding estimated costs. Interpretation and reasoning: The Tribunal analysed the bidder agreement, which fixed the contract consideration at Rs. 918 crores for a 15-year concession. Notes to accounts showed grossed figures (advance toll receipts and expected cost of improvement) where the higher gross numbers reflect the present value and estimated future outlays. The assessee recognised 1/15th of the net consideration in profit and loss, while AO recognised 1/15th of the gross without reducing estimated future expenditures. The Tribunal found the AO failed to account for the estimated maintenance/improvement costs included in the gross figures; tax recognition must mirror the contractual net consideration unless the revenue insists on gross recognition, in which case corresponding estimated costs must be allowed. On facts, recognising net contract consideration was correct and, alternatively, gross recognition requires allowance of the estimated costs. Ratio vs. Obiter: Ratio - where contractual consideration is a net sum after provision for future capital expenditure and the assessee recognises income on that net basis under the agreement, the tax assessment must either accept that net recognition or, if treating gross receipts as income, permit appropriate reduction for the corresponding future expenditure; failure to allow such matching is erroneous. Obiter - broader policy preference for gross taxation in long-term projects is noted but not determinative in the present factual matrix. Conclusions: Addition made by AO for toll operations (both projects) is unsustainable; AO must delete the additions or, if adopting gross income approach, must allow corresponding estimated expenditure-accordingly directed to delete the impugned additions. ISSUE-WISE DETAILED ANALYSIS - 4. Validity of Reopening under Section 147 (Change of Opinion Allegation) Legal framework: Reopening of assessment under section 147 is impermissible where it is based on mere change of opinion and where no fresh material indicating escapement of income is available beyond the record considered at original assessment. Precedent treatment: Assessee contended reopening was change of opinion since AO had earlier raised queries and accepted submissions; lower proceedings proceeded on merits after reopening. Interpretation and reasoning: The Tribunal noted the procedural contention but observed that since all substantive additions that formed the basis of reopening were deleted on merits, the legal contention regarding validity of reopening became academic. Ratio vs. Obiter: Obiter - the Tribunal did not decide the legality of the reopening on the merits and left the question open as academic. No ratio establishing a rule on reopening was laid down in this order. Conclusions: Ground challenging reopening left open as academic in view of deletion of substantive additions; no adjudication of validity of reopening in this decision.