Circular No.
09/2014, F.No. 225/182/2013/ITA.II, dated 23rd April, 2014
Clarification
regarding treatment of expenditure incurred for development of roads/highways
in BOT agreements under Income Tax Act, 1961-regarding.
1. It has come to
the notice of the Board that disputes have arisen as to whether the expenditure
incurred on development and construction of infrastructural facilities like
roads/highways on Build-Operate-Transfer (‘BOT’) basis with right to collect
toll is entitled for depreciation under Section 32(1)(ii) of the Act or the
same can be amortized by treating it as an allowable business expenditure under
the relevant provision of the Income Tax Act, 1961 (‘Act’).
2. In such
project, the developer (hereinafter referred to as ‘assessee’), in terms of
concessionaire agreement with the Government or its agencies is required to
construct, develop and maintain the infrastructural facility of roads/highways
which, inter-alia, includes laying of roads bridges, highways, approach roads, culverts,
public amenities etc. at its own cost and its utilization thereof for a
specified period. In lieu of consideration of the expenditure incurred on
construction, operation and maintenance of the infrastructure facility covered
by the period of agreement, the assessee is accorded a right to collect toll
from user of such facility. The expenditure incurred by such assessee on development
and construction of such infrastructural facility are capitalized in the
accounts. It is seen that in returns-of-income, assessee are generally claiming
depreciation on such capitalized expenditure treating it as an ‘intangible
asset’ in terms of section 32(1)(ii) of the Act while in assessments, such
claims are being disallowed by the Assessing Officer on the grounds that such
infrastructural facility is not owned, wholly or partly, by the taxpayer which
is an essential condition for claiming depreciation and further right to
collect toll does not fall in any of the categories of ‘intangible assets’
specified in sub clause(ii) of sub-section (1) of Section 32 of the Act.
3. In BOT
arrangement for development of roads/highways, as a matter of general practice,
possession of land is handed over to the assessee by the Government/notified
authority for the purposes of construction of the project without any actual
transfer of ownership and such assessee has only a right to develop and
maintain such asset. It also enjoys the benefits arising from use of asset
through collection of toll for a specified period without having actual
ownership over such asset. Therefore, the rights in the land remain vested with
the Government or its agencies. Thus, as assessee does not hold any rights in
the project except recovery of toll fee to recoup the expenditure incurred, it
cannot therefore be treated as an owner of the property, either wholly or
partly, for purposes of allowability of depreciation under section 32(1)(ii) of
the Act. Thus present provisions of the Act do not allow claim of depreciation
on Toll ways due to non fulfillment of ownership criteria in such cases.
4.
There
is no doubt that where the assessee incurs expenditure on a project for
development of roads/highways, he is entitled to recover cost incurred by him
towards development of such facility (comprising of construction cost and other
pre-operative expenses) during the construction period. Further, expenditure
incurred by the assessee on such BOT projects brings to it an enduring benefit
in the form of right to collect the toll during the period of the agreement.
Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation
Ltd. vs. CIT in 225 ITR 802 allowed spreading over of liability over a number
of years on the ground that there was continuing benefit to the company over a
period. Therefore, analogously, expenditure incurred on an infrastructure
project for development of roads/highways under BOT agreement may be treated as
having been made/incurred for the purposes of business or profession of the
assessee and same may be allowed to be spread during the tenure of
concessionaire agreement.
5. In view of
above, Central Board of Direct Taxes, in exercise of the powers conferred under
Section 119 of the Act hereby clarifies that the cost of construction on
development of infrastructure facility of roads/highways under BOT projects may
be amortized and claimed as
allowable business expenditure under the Act.
6. The
amortization allowable may be computed at the rate which ensures that the whole
of the cost incurred in creation of infrastructural facility of road/highway is
amortized evenly over the period of concessionaire agreement after excluding
the time taken for creation of such facility.
7. In the case
where an assessee has claimed any deduction out of initial cost of development
of infrastructure facility of roads/highways under BOT projects in earlier
year, the total deduction so claimed for the Assessment Years prior to the
Assessment Year under consideration maybe deducted from the initial cost of
infrastructure facility of roads/highways and the cost ‘so reduced’ shall be
amortized equally over the remaining period of toll concessionaire agreement.
8. It is hereby
clarified that this circular is applicable only to those infrastructure
projects for development of road/highways on BOT basis where ownership is not
vested with the assessee under the concessionaire agreement.
9. This may be
brought to the notice of all concerned.
10. Hindi version
to follow.
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