Recognition of BOT Project Expenditure as Intangible Assets Eligible for Depreciation

Introduction

The case of Assistant Commissioner Of Income Tax Circle16(2), Aayakar Bhawan, Basheerbagh, Hyderabad v. Progressive Constructions Ltd. adjudicated by the Income Tax Appellate Tribunal on February 14, 2017, addresses a pivotal question in the realm of tax law and capital expenditure. The central issue revolves around whether the expenditure incurred by Progressive Constructions Ltd. (hereinafter referred to as the "assessee") on constructing a road under a Build-Operate-Transfer (BOT) agreement constitutes a capital or revenue expenditure. Furthermore, if deemed capital, whether such expenditure qualifies as a tangible or intangible asset eligible for depreciation under Section 32(1)(ii) of the Income Tax Act, 1961.

Summary of the Judgment

The Income Tax Appellate Tribunal (ITAT) examined the nature of the expenditure incurred by the assessee in executing a BOT road project with the Government of India (GOI). The assessee had claimed depreciation on the constructed road, categorizing it as an intangible asset under Section 32(1)(ii) of the Income Tax Act. The Department contested this claim, arguing that the asset was neither owned by the assessee nor qualified as an intangible asset for depreciation purposes.

After a thorough analysis of the Concession Agreement (C.A.) and relevant provisions, the Tribunal concluded that the expenditure of ₹214 crore incurred by the assessee resulted in the creation of an intangible asset—the right to operate the road and collect toll charges. This intangible asset falls within the ambit of "any other business or commercial rights of similar nature" under Section 32(1)(ii). Consequently, the assessee was deemed eligible for depreciation on this intangible asset at the specified rate.

Analysis

Precedents Cited

The judgment references several key precedents that significantly influenced the court's decision:

• Techno Shares & Stocks Ltd. v. CIT [2010] – Recognized membership cards as intangible assets.
• CIT v. Smifs Securities Ltd. [2012] – Emphasized the inclusiveness of "any other business or commercial rights of similar nature" under Section 32(1)(ii).
• Areva T. & D India Ltd. v. Dy. CIT [2012] – Affirmed that intangible assets facilitating business operations, even if not explicitly listed, are covered under the provision.
• Smifs Securities (Supra) – Applied the principle of ejusdem generis to include assets like goodwill under similar business rights.
• Ashoka Info (P.) Ltd. v. Asstt. CIT [2010] – Acknowledged the right to operate as an intangible asset.

These precedents collectively supported the interpretation that intangible assets extend beyond the specifically listed items, embracing broader business rights essential for operations.

Legal Reasoning

The Tribunal's legal reasoning hinged on the interpretation of Section 32(1)(ii) of the Income Tax Act, which permits depreciation on intangible assets such as licenses, patents, and "any other business or commercial rights of similar nature." The key points in the reasoning were:

• The Concession Agreement granted the assessee the exclusive right to operate the road and collect tolls for a fixed period, establishing a valuable business right.
• The expenditure incurred by the assessee was capital in nature, aimed at creating an asset that would generate income over the concession period.
• Using the principle of ejusdem generis, the Tribunal determined that the right to operate and collect tolls aligns with other recognized intangible assets, as it facilitates business operations.
• The argument that the asset was tangible and owned by GOI was dismissed, as the intangible rights (license-like) granted to the assessee were distinct and eligible for depreciation.

The Tribunal also addressed and dismissed the Department's contention regarding amortization under the CBDT Circular No.9 of 2014, clarifying that the issue of whether the expenditure should be amortized did not arise in the present appeal.

Impact

This judgment has significant implications for entities engaged in BOT and similar projects:

• Tax Planning: Companies can now recognize similar intangible assets arising from BOT projects, allowing for depreciation claims that can offset taxable income.
• Financial Reporting: Clear classification between capital and revenue expenditure ensures accurate representation of assets and liabilities.
• Legal Precedent: Reinforces the broad interpretation of intangible assets under tax laws, encouraging businesses to capitalize on valuable operational rights.
• Government Contracts: Streamlines the financial aspects of public-private partnerships by defining the tax treatment of capital investments.

Overall, the judgment promotes clarity and provides a structured framework for the tax treatment of complex contractual arrangements involving intangible assets.

Complex Concepts Simplified

Build-Operate-Transfer (BOT) Agreement

A BOT agreement is a form of project financing wherein a private entity receives a concession to finance, design, construct, and operate a facility for a specified period. After this period, ownership and operation are transferred back to the government. In this case, Progressive Constructions Ltd. was responsible for constructing and operating a road.

Intangible Asset

Intangible assets are non-physical assets that provide long-term value to a business. Examples include patents, trademarks, and licenses. In this judgment, the right to operate the road and collect tolls is considered an intangible asset.

Section 32(1)(ii) of the Income Tax Act

This section allows for deductions on depreciation for specified intangible assets that are owned and used for business purposes. The provision includes assets like patents and licenses, and extends to "any other business or commercial rights of similar nature."

Ejusdem Generis Principle

A legal principle used in statutory interpretation which states that when general words follow specific ones in a law, the general words are interpreted to include only items of the same type as those listed. The Tribunal applied this principle to include broader intangible assets under Section 32(1)(ii).

CBDT Circular No.9 of 2014

This circular provides guidelines on the amortization of deferred revenue expenditures related to carry-forward losses. However, in this case, the Tribunal found that the applicability of the circular was not pertinent as the primary issue was the classification of the asset for depreciation purposes.

Conclusion

The judgment in Assistant Commissioner Of Income Tax Circle16(2), Aayakar Bhawan, Basheerbagh, Hyderabad v. Progressive Constructions Ltd. serves as a landmark decision in the classification and tax treatment of expenditures incurred under BOT agreements. By recognizing the right to operate and collect tolls as an intangible asset eligible for depreciation, the Tribunal has provided clarity and guidance for similar future cases. This decision not only aids in accurate financial reporting and tax compliance for businesses but also promotes the viability of public-private partnerships by ensuring favorable tax treatment of substantial capital investments.

Businesses engaged in infrastructure projects can leverage this precedent to optimize their tax strategies, ensuring that their significant capital expenditures contribute to long-term financial sustainability through eligible depreciation claims.