Depreciation On Toll Roads Not allowable

Q: Is depreciation on toll roads allowable as per Income Tax Act?

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that the depreciation is not allowable on toll roads by considering it as tangible assets.

Q: Case Law on depreciation on toll roads allowable?

The ITAT in Hazaribagh Ranchi Expressway Ltd v/s ACIT has held that the depreciation is not allowable on toll roads by considering it as tangible assets.

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that the depreciation is not allowable on toll roads by considering it as tangible assets.

The bench of Sandeep Singh Karhail (Judicial Member) and Amarjit Singh (Accountant Member) has relied on the decision of Madras High Court in the case of L & T Infrastructure Development Projects Limited v/s ACIT in which it was held that the toll road is also not an intangible asset.

Background

The appellant/assessee is the Special Purpose Vehicle promoted by IL and FS Transportation Networks Ltd. and Punj Llyod Ltd. The assessee filed its return of income declaring a total loss and book profit under section 115JB.

The National Highway Authority of India awarded the assessee the bid for four-laning of the Hazaribagh – Ranchi section on NH-33 in the State of Jharkhand on a Build, Operate and Transfer (BOT) basis.

The assessee constructed the Expressway toll road as per the agreement with the principal being a State Authority. The assessee capitalised the cost of the project during the year and as per the Concession Agreement, it maintained an escrow account for depositing the receipts. During the assessment proceedings, from the perusal of the record, it was found that the assessee claimed depreciation on roads and bridges.

The assessee was asked to furnish the details and explanation. In response thereto, the assessee submitted that it claimed depreciation treating the road as “plant and machinery” and 15% depreciation of the total cost of construction of the project facility.

The assessee submitted that any asset that helps an assessee to earnrevenue should be treated as a “plant”. In the alternative, the assessee submitted that if the road is treated as a “building” then 10% depreciation be allowed, and if, in the alternative, it is treated as an intangible asset, then the 25% depreciation may be allowed.

The Assessing Officer passed under section 143(3) r/w section 92CA(4) of the Income Tax Act disagreed with the submission of the assessee and held that the ownership of the asset is on a lease basis for a period of 18 years, therefore the assessee is not entitled to claim depreciation under section 32 of the Act.

By referring to the terms of the agreement, the AO held that after the lease term of 18 years, the cost of the asset will stand recovered by the assessee and assets will be transferred to the State Government. Therefore, the AO held that the depreciation claimed by the assessee is not admissible under section 32 of the Act.

The AO disallowed the depreciation claim made by the assessee during the assessment year 2013-14. The AO held that once the ownership itself is held to be not available with the assessee, the alternative claim regarding the treatment of the toll roads as “plant and machinery” becomes infructuous.

However, the AO allowed the benefit of amortisation for the period of the concession agreement and allowed 1/18th portion of the cost to be deferred revenue expenditure.

The CIT(A) dismissed the appeal filed by the assessee and held that since the assessee is constructing a road on BOT basis on the government land, it is not the “owner” of the road and cannot claim depreciation on it. Further, by relying on the decision of the Madras High Court in L & T Infrastructure Development Projects Limited v/s ACIT, the CIT(A) held that the toll road is also not an intangible asset. However, referring to the CBDT Circular No. 9 of 2014, the CIT(A) held that the cost is to be amortised evenly over the concession period.

Conclusion – Depreciation On Toll Roads

The tribunal held that the CIT(A) correctly denied the claim of depreciation by the assessee on the right to collect toll on the roads developed by it on a BOT basis by following the decision of the Madras High Court in L & T Infrastructure Development Projects Limited.

The tribunal while dismissing the appeal held that claim of depreciation by treating the road as a tangible asset, has already been found to be covered against the assessee by the decisions of the Jurisdictional High Court.

FAQs

On which assets depreciation is not allowed?

The the depreciation is not allowable on toll roads by considering it as tangible assets.

Is depreciation on toll roads allowable as per Income Tax Act?

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that the depreciation is not allowable on toll roads by considering it as tangible assets.

Case Law on depreciation on toll roads allowable?

The ITAT in Hazaribagh Ranchi Expressway Ltd v/s ACIT has held that the depreciation is not allowable on toll roads by considering it as tangible assets.