ITAT allows depreciation under Section 32 on Right to Collect Toll, treating DBFOT concession as intangible asset ownership

ITAT held that the assessee is entitled to depreciation on the "Right to Collect Toll" as an intangible asset. It found that under the DBFOT arrangement the assessee had deemed ownership, acquisition, and possession of the underlying project assets, which satisfies the ownership requirement for depreciation. The Tribunal rejected the Revenue's contention that physical ownership was necessary, noting that such a condition is impossible for intangible assets and that law does not require the impossible. Distinguishing earlier BOT-based HC decisions relied on by Revenue, ITAT held that the assessee's claim of depreciation, in preference to amortization, was lawful and dismissed the Revenue's appeal.

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ISSUES PRESENTED AND CONSIDERED

1. Whether "Right to Collect Toll" arising under a DBFOT concession agreement qualifies as an intangible asset within the meaning of section 32(1)(ii) of the Income-tax Act and is eligible for depreciation at the prescribed rate.

2. Whether deemed acquisition/ownership and possession of the project (under the concession agreement) satisfies the statutory ownership requirement in section 32(1)(ii) for claiming depreciation on the intangible right, notwithstanding absence of physical title.

3. Whether CBDT Circular No. 9/2014 (clarifying amortisation for BOT projects where ownership is not vested in the concessionaire) applies to a DBFOT project and, if applicable, whether the circular precludes a claim for depreciation.

4. Whether the Assessing Officer's issuance of notice under section 143(2) (post selection for scrutiny and in the context of a search on related parties) and related compliance (time limits, approval under section 148B) rendered the assessment void or liable to be quashed.

5. Ancillary: consequences of allowing depreciation (withdrawal of amortisation allowance; treatment of brought-forward losses and unabsorbed depreciation).

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Characterisation of "Right to Collect Toll" as an intangible asset (s.32(1)(ii))

Legal framework: Section 32(1)(ii) allows depreciation on specified intangible assets - "know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature" - owned, wholly or partly, and used for business.

Precedent treatment: Multiple coordinate bench and special bench ITAT decisions hold that rights arising from BOT/DBFOT concession agreements (license to collect toll or operate a road/bridge) constitute commercial/intangible rights under s.32(1)(ii) and are eligible for depreciation (cited benches and decisions adopt this ratio). Some High Court decisions on distinguishable facts denied depreciation when the asset remained with government and the concessionaire had only limited licence; those authorities were considered factually distinguishable.

Interpretation and reasoning: The Tribunal applied ejusdem generis to the list in s.32(1)(ii), treating "any other business or commercial rights of similar nature" as inclusive - thereby encompassing a license/right to collect toll created by capital expenditure on construction/operation. The Tribunal emphasised (i) capital expenditure was incurred by the concessionaire to obtain the right, (ii) the right gives enduring benefit for a specified period and depreciates to nil over time, and (iii) the right is exploited in business and thus matches the statutory description.

Ratio vs. Obiter: Ratio - concessionary right to collect toll arising from capital investment is an intangible asset within s.32(1)(ii) and attracts depreciation at the applicable rate for intangible assets. Obiter - discussion comparing building/plant characterisation in different cases and wider doctrinal remarks on ejusdem generis where not strictly necessary for the result.

Conclusions: The Court affirmed that the "Right to Collect Toll" is an intangible commercial right under s.32(1)(ii) where it is acquired after incurring capital expenditure and used in the assessee's business, and therefore depreciation is allowable (to be computed at the prescribed rate for intangible assets, subject to applicable rules).

Issue 2 - Sufficiency of deemed ownership/possession for s.32(1)(ii)

Legal framework: s.32(1)(ii) requires assets to be "owned, wholly or partly, by the assessee". Case law recognises that legal title is not the sole test; possession, dominion and economic ownership arising from contractual provisions may satisfy the ownership requirement.

Precedent treatment: Decisions (including Supreme Court authority cited by Tribunal) hold that beneficial/actual ownership or exclusive possession and exercise of rights to exclude others can constitute "ownership" for tax purposes even without formal conveyance.

Interpretation and reasoning: The concession agreement expressly provided that the property representing capital investment shall be deemed to be acquired and owned by the concessionaire for depreciation purposes. The Tribunal treated deemed acquisition plus actual possession/exercise of exclusive right to collect toll as meeting the statutory requirement; it rejected a narrow, literalist insistence on physical/legal title when contractually the state acknowledged the concessionaire's ownership for tax purposes. The Tribunal held that law should not require performance of the impossible and reasonable compliance (deemed ownership plus possession) suffices.

Ratio vs. Obiter: Ratio - deemed/acquired ownership under the concession agreement together with possession and exclusive exploitation rights suffice for ownership requirement under s.32(1)(ii). Obiter - general policy remarks on interpretation where legal title is not conveyed.

Conclusions: Deemed ownership under the DBFOT concession agreement, coupled with possession and exclusive right to collect toll, satisfies the ownership condition in s.32(1)(ii) and permits depreciation.

Issue 3 - Applicability and effect of CBDT Circular No. 9/2014

Legal framework: CBDT Circulars clarify administrative treatment (amortisation vs depreciation) for infrastructure projects; circulars are binding on revenue authorities but not when adverse to the assessee and, in any event, limited to their factual scope.

Precedent treatment: Tribunals have interpreted Circular No.9/2014 as applicable to BOT projects where ownership is not vested with the concessionaire; several decisions nevertheless allow depreciation where the factual matrix shows ownership or an intangible right acquired by the concessionaire. The Circular was not treated as a substantive bar where facts differ (e.g., DBFOT vs BOT) or where circular would be adverse to the assessee.

Interpretation and reasoning: The Tribunal found the circular addresses BOT projects where ownership is not vested in the concessionaire. The present project was DBFOT (broader, including Design and Finance) and the concession agreement contained an express deemed-ownership clause; hence the circular's restrictive para did not apply. The Tribunal also noted that administrative instructions adverse to the assessee are not binding on the assessee and cannot unsettle settled legal claims where facts establish entitlement to depreciation.

Ratio vs. Obiter: Ratio - Circular No.9/2014 does not automatically preclude depreciation claims in DBFOT projects where the concession agreement vests deemed ownership/acquisition in the concessionaire; circular's scope is BOT projects without vesting of ownership. Obiter - commentary on non-binding nature of adverse administrative circulars vis-à-vis assessee rights.

Conclusions: CBDT Circular No.9/2014 is inapplicable on these facts; it does not bar the concessionaire from electing depreciation where the agreement and facts support treatment as an intangible asset owned by the concessionaire.

Issue 4 - Validity of assessment procedure (notice under s.143(2), time limits and approvals)

Legal framework: Statutory provisions prescribe modes for scrutiny, special rules for search assessments (amended provisions, approval requirements) and time limits; Board guidelines may direct selection and transfer for scrutiny.

Precedent treatment and reasoning: The Tribunal examined factual matrix: the case was selected for scrutiny before the related search operation and notices issued under Board guidelines. The assessee raised procedural objections (wrong notice, failure to follow extended time regime, absence of Range Head approval under s.148B). The Tribunal found that the AO followed Board guidelines for selection and that the assessee had complied with notices and did not raise these objections during assessment proceedings; therefore procedural non-compliance contentions lacked force.

Ratio vs. Obiter: Ratio - where selection/notice for scrutiny predates search and is made under Board guidelines and the assessee participated without contemporaneous objection, the assessment is not vitiated on the grounds advanced. Obiter - remarks on interplay of amended search provisions and administrative circulars in other fact patterns.

Conclusions: Procedural grounds raised by the assessee regarding notice validity, extended time limits and approval requirements were dismissed; the assessment was held to be valid on the stated facts.

Issue 5 - Consequences and ancillary directions

Legal framework: Allowance of depreciation precludes concurrent amortisation of the same capital expenditure; carried forward losses and unabsorbed depreciation are to be allowed in accordance with law.

Interpretation and reasoning: The Tribunal directed that allowing depreciation requires reversal of any amortisation allowed by the AO in respect of the same investment; the AO must recompute income accordingly. The Tribunal also directed verification of records for earlier years and allowance of brought-forward losses and unabsorbed depreciation as per law after affording opportunity to the assessee.

Ratio vs. Obiter: Ratio - acceptance of depreciation necessitates withdrawal of amortisation deduction for the same capitalised cost; also, revenue computation must be adjusted and carry-forward relief examined per statutory provisions. Obiter - none.

Conclusions: The AO is directed to allow depreciation as held, to reverse amortisation allowances already made relative to the same capitalised cost, recompute income, and verify/allow brought-forward losses and unabsorbed depreciation in accordance with law after giving the assessee reasonable opportunity.

Overall Conclusion

The Tribunal dismissed the Revenue's appeal and confirmed the first appellate authority's allowance of depreciation on the "Right to Collect Toll" as an intangible asset under section 32(1)(ii), held deemed ownership/possession under the DBFOT concession sufficient for the ownership requirement, found CBDT Circular No.9/2014 inapplicable on these facts, rejected procedural attacks on the assessment, and directed consequential adjustments (withdrawal of amortisation, recomputation and verification of carry-forward relief).

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