No Depreciation on BOT Toll Roads and Bridges: Madras High Court

L&T Infrastructure Development Projects Ltd. Vs ACIT (Madras High Court)

Summary: The Madras High Court, in a common judgment dated 29 December 2022, decided ten connected tax case appeals involving L&T Infrastructure Development Projects Ltd., formerly Narmada Infrastructure Construction Enterprises Ltd., and LTIDPL INDVIT Services Ltd., formerly L&T Western India Toll Bridge Ltd. The principal controversy concerned whether roads and bridges constructed, operated and maintained under Build-Operate-Transfer (BOT) concession agreements with government authorities qualified for depreciation under Section 32 of the Income-tax Act, 1961. The appeals covered assessment years 2001-02 to 2005-06 and involved competing claims for depreciation as plant and machinery, buildings or intangible assets. The assessees maintained that the infrastructure assets and commercial rights arising from the concession arrangements qualified for depreciation, while the Income Tax Department disputed their eligibility, particularly because ownership of the underlying public infrastructure remained with the Government.

The two assessee companies had been incorporated as special purpose vehicles for developing and operating toll infrastructure in Gujarat. L&T Infrastructure Development Projects Ltd. entered into a concession agreement dated 21 November 1997 for constructing and operating a toll bridge across the Narmada River on National Highway 8 for a concession period of fifteen years, including construction. LTIDPL INDVIT Services Ltd. entered into another concession agreement dated 1 March 1999 for a two-lane toll bridge across the Watrak River near Kheda on the Ahmedabad-Vadodara stretch of National Highway 8 for ten years and eight months. Under these arrangements, the concessionaires incurred construction expenditure and recovered their investments, together with a potential commercial return, through toll collections during the stipulated concession periods. Although the expenditure was capitalised and amortised in their books, the companies claimed depreciation under the Income-tax Act at rates applicable to plant and machinery.

The assessment proceedings resulted in different decisions concerning depreciation entitlement and applicable rates. In the appeals concerning L&T Infrastructure Development Projects Ltd. for assessment years 2001-02 to 2003-04, the Assessing Officer treated the bridge as a building and restricted depreciation to 10%, whereas the Commissioner of Income Tax (Appeals) accepted its classification as plant and granted higher depreciation. The Income Tax Appellate Tribunal reversed the appellate decision, observing that a bridge forming an integral part of a national highway could not be treated as plant merely because it was used commercially. In the connected appeals relating to LTIDPL INDVIT Services Ltd., the Tribunal generally treated toll roads and bridges as buildings eligible for depreciation at 10%. Some proceedings also concerned reassessments under Sections 147 and 148 and revisionary jurisdiction exercised by the Commissioner under Section 263. Consequently, both the assessees and the Revenue challenged the Tribunal’s decisions before the High Court.

On behalf of the assessees, it was argued that the toll bridges and roads constituted plant because they represented the principal income-generating apparatus of their infrastructure businesses. Alternatively, the rights acquired under the concession agreements, particularly the exclusive right to develop, operate and collect toll from specified infrastructure facilities, were claimed to be depreciable intangible assets in the nature of licences or business or commercial rights under Section 32(1)(ii), read with Explanation 3. Reliance was placed on decisions including Techno Shares & Stocks Ltd. Vs CIT, Mysore Minerals Ltd. Vs CIT, and decisions relating to depreciation on infrastructure assets. The assessees also challenged reassessment proceedings and revisionary orders by invoking judicial principles concerning change of opinion, ownership, examination of records and the jurisdictional conditions governing Section 263. They contended that where an Assessing Officer had adopted a permissible interpretation after enquiry, the Commissioner could not revise the assessment merely because another interpretation was possible.

The Revenue contended that national highways, public roads and bridges constructed under BOT arrangements remained government-owned infrastructure and could not become depreciable assets of private concessionaires. The Government had merely permitted the companies to recover their construction and maintenance expenditure through toll collections over a contractually specified period. Such contractual permission did not confer ownership of the roads or bridges, nor did it necessarily create an independently depreciable commercial right. The Department relied particularly on North Karnataka Expressway Ltd. Vs CIT and CIT Vs West Gujarat Expressway Ltd., in which the Bombay High Court had rejected depreciation claims involving government-owned BOT infrastructure. It also disputed the classification of such infrastructure as buildings or plant and supported the Commissioner’s revisionary jurisdiction where the assessment had accepted an unsustainable depreciation claim.

The High Court examined the statutory requirement of ownership under Section 32 and the legal character of BOT concession agreements. It held that roads and bridges forming part of national or state highways were public infrastructure and were never intended to be transferred to the concessionaires. The contractual right to collect toll represented a mechanism for recovering construction and maintenance costs, with the possibility of earning profit, rather than ownership of the infrastructure. The Court distinguished CIT Vs Podar Cement Pvt. Ltd., observing that the principles concerning beneficial ownership of property under arrangements contemplating eventual transfer could not be applied to BOT infrastructure that was never intended to become the private property of the concessionaire. The Court consequently concluded that the toll roads and bridges did not constitute tangible assets owned by the respective assessees for the purposes of depreciation. It expressly preferred the approach adopted by the Bombay High Court in North Karnataka Expressway Ltd. and West Gujarat Expressway Ltd. over the Delhi High Court’s contrary reasoning in Moradabad Toll Road Co. Ltd. Vs ACIT.

Addressing the alternative claim concerning intangible assets, the High Court held that the rights granted under the concession agreements did not amount to depreciable licences or business or commercial rights contemplated by Explanation 3(b) to Section 32. The Court considered the nature of the concession arrangements and concluded that the toll collection privilege constituted consideration for developing and maintaining public infrastructure, rather than an independently acquired intangible asset qualifying for statutory depreciation. The assessees therefore could not claim depreciation on the infrastructure as plant and machinery, as buildings, or on the concession rights as intangible assets. The Court also rejected the Tribunal’s approach of allowing 10% depreciation by treating the relevant roads and bridges as buildings. Regarding revision under Section 263, it observed that the Commissioner had remitted the question of depreciation for fresh determination without finally deciding the merits, and that the Tribunal had erred in treating the original depreciation allowance as a legally plausible view.

In its operative order, the Madras High Court dismissed all five appeals filed by the assessees and allowed all five appeals filed by the Income Tax Department. T.C.A. Nos. 868 to 870 of 2009, involving L&T Infrastructure Development Projects Ltd. for assessment years 2001-02 to 2003-04, were dismissed. The assessee’s appeals in T.C.A. Nos. 253 of 2013 and 206 of 2014 were also dismissed. Conversely, the Revenue’s appeals in T.C.A. Nos. 756 and 1201 of 2010, 339 of 2013, and 358 and 841 of 2014 were allowed, with the corresponding Tribunal orders set aside. No costs were awarded. The decision establishes, on the concession arrangements examined by the Court, that construction expenditure and the contractual entitlement to collect toll do not by themselves establish ownership of depreciable infrastructure or acquisition of qualifying intangible assets under Section 32. The ruling is particularly significant for infrastructure concessionaires claiming tax depreciation on public road and bridge projects developed under BOT arrangements.

Cases Discussed

• Cognizant Technology Solutions India Private Limited Vs Assistant Commissioner of Income Tax and Another, W.A. No. 2521 of 2021, decided on 05.10.2021 (Madras High Court). Cited by the assessees in the context of reassessment and the legal requirements governing income-tax proceedings.
• Commissioner of Income Tax Vs Tamil Nadu Road Development Company Ltd., [2021] 130 taxmann.com 63 (Madras High Court). Discussed in connection with depreciation claims relating to infrastructure projects.
• Commissioner of Income Tax Vs Tamil Nadu Road Development Company Ltd., [2021] 126 taxmann.com 84 (Madras High Court), T.C.A. Nos. 220 to 225 of 2018, decided on 19.01.2021. Relied upon in the arguments concerning depreciation on roads and infrastructure assets.
• Principal Commissioner of Income Tax Vs GVK Jaipur Expressway Ltd., [2018] 100 taxmann.com 96 (Supreme Court). Cited by the assessees in support of their submissions regarding infrastructure assets and depreciation.
• Assistant Commissioner of Income Tax Vs Progressive Constructions Ltd., [2018] 92 taxmann.com 104; [2018] 63 ITR 516 (Hyderabad ITAT Special Bench). Cited in relation to the treatment of rights arising from infrastructure concession arrangements.
• Income Tax Officer Vs TechSpan India (P.) Ltd., [2018] 92 taxmann.com 361 (Supreme Court). Referred to in the submissions concerning reassessment and change of opinion.
• Principal Commissioner of Income Tax Vs Santech Solutions (P.) Ltd., [2018] 409 ITR 301 (Madras High Court). Cited on the validity of reassessment proceedings.
• Commissioner of Income Tax-10 Vs West Gujarat Expressway Ltd., [2017] 82 taxmann.com 224 (Bombay High Court). Followed by the Madras High Court in rejecting depreciation on government-owned infrastructure developed under BOT arrangements.
• TANMAC India Vs Deputy Commissioner of Income Tax, [2017] 78 taxmann.com 155 (Madras High Court). Cited in connection with the conditions governing reassessment.
• Commissioner of Income Tax Vs VGP Housing (P.) Ltd., [2016] 66 taxmann.com 354 (Madras High Court). Referred to in the Revenue’s submissions concerning depreciation entitlement.
• North Karnataka Expressway Ltd. Vs Commissioner of Income Tax, [2015] 372 ITR 145 (Bombay High Court). Followed as an important authority for denying depreciation where toll roads constructed under BOT arrangements were not owned by the assessee.
• Moradabad Toll Road Co. Ltd. Vs Assistant Commissioner of Income Tax, 2014 SCC OnLine Del 2286; [2014] 52 taxmann.com 21 (Delhi High Court). The Madras High Court expressly disagreed with the reasoning allowing depreciation on toll roads as buildings.
• Commissioner of Income Tax Vs Ansal Housing & Construction Ltd., [2014] 45 taxmann.com 223 (Delhi High Court). Cited in support of the assessees’ submissions.
• Assistant Commissioner of Income Tax Vs Ashoka Infraways (P.) Ltd., [2013] 33 taxmann.com 499 (Pune ITAT). Referred to in the arguments concerning depreciation on concession rights.
• Commissioner of Income Tax Vs Jain Construction Co. Ltd., [2013] 34 taxmann.com 84; [2013] 257 CTR 336 (Rajasthan High Court). Cited on issues relevant to the assessees’ claims.
• Commissioner of Income Tax Vs Noida Toll Bridge Company Ltd., [2013] 213 Taxman 333 (Allahabad High Court). Considered in the discussion of depreciation on toll infrastructure and distinguished through the reasoning adopted in the Bombay High Court authorities.
• Commissioner of Income Tax-V Vs Orient Craft Ltd., [2013] 354 ITR 536 (Delhi High Court). Cited on the statutory requirements for reopening assessments.
• Techno Shares & Stocks Ltd. Vs Commissioner of Income Tax, [2010] 327 ITR 323 (Supreme Court). Invoked by the assessees to support the proposition that qualifying commercial rights may constitute depreciable intangible assets.
• Commissioner of Income Tax Vs Shivalik Hatcheries (P.) Ltd., [2010] 329 ITR 432 (Himachal Pradesh High Court). Cited in the submissions relating to depreciation.
• Maharashtra State Road Development Corporation Ltd. Vs Assistant Commissioner of Income Tax, [2010] 126 ITD 279 (Mumbai ITAT). Referred to in relation to taxation of infrastructure assets.
• Ashoka Info (P.) Ltd. Vs Assistant Commissioner of Income Tax, [2010] 35 SOT 50 (Pune ITAT) (URO). Cited by the assessees concerning commercial rights and depreciation.
• Asian Paints Ltd. Vs Deputy Commissioner of Income Tax, [2009] 308 ITR 195 (Bombay High Court). Cited in relation to reopening of assessments.
• Commissioner of Income Tax Vs Sak Soft Ltd., [2008] 298 ITR 63 (Madras High Court). Included among the decisions relied upon by the assessees.
• Commissioner of Income Tax Vs Max India Ltd., [2007] 295 ITR 282 (Supreme Court). Relied upon in the arguments concerning revisionary jurisdiction under Section 263 where two legally permissible views exist.
• Commissioner of Income Tax Vs Vikram Aditya & Associates (P.) Ltd., [2006] 287 ITR 268 (Delhi High Court). Cited among the authorities concerning income-tax proceedings.
• Simplex Concrete Piles (India) (P.) Ltd. Vs Commissioner of Income Tax, [2006] 286 ITR 470 (Madras High Court). Relied upon by the assessees.
• Berger Paints India Ltd. Vs Commissioner of Income Tax, [2004] 266 ITR 99; (2004) 12 SCC 42 (Supreme Court). Cited by the assessees in support of consistency in the Revenue’s treatment of comparable depreciation claims.
• Commissioner of Income Tax Vs G.M. Mittal Stainless Steel (P.) Ltd., [2003] 263 ITR 255 (Supreme Court). Cited concerning the permissible exercise of revisionary powers.
• Indore Municipal Corporation Vs Commissioner of Income Tax, [2002] 124 Taxman 128 (Supreme Court). Relied upon in the Revenue’s submissions regarding depreciation and asset classification.
• Commissioner of Income Tax Vs Madras Fertilizers Ltd., [2002] 124 Taxman 349 (Madras High Court). Cited in the Revenue’s submissions.
• Malabar Industrial Co. Ltd. Vs Commissioner of Income Tax, [2000] 109 Taxman 66; 243 ITR 83 (Supreme Court). Cited on the twin requirements of an erroneous assessment order and prejudice to Revenue for invoking Section 263.
• Commissioner of Income Tax Vs Dr. B. Venkata Rao, [2000] 243 ITR 81 (Supreme Court). Referred to in support of the assessees’ depreciation arguments.
• Commissioner of Income Tax Vs Anand Theatres, [2000] 244 ITR 192 (Supreme Court). Considered in the discussion distinguishing buildings from plant for depreciation purposes.
• Mysore Minerals Ltd. Vs Commissioner of Income Tax, [1999] 239 ITR 775 (Supreme Court). Cited concerning the meaning of ownership under Section 32.
• Commissioner of Income Tax Vs Madras Fertilizers Ltd., [1999] 238 ITR 672 (Madras High Court). Included among the authorities relied upon by the Revenue.
• Commissioner of Income Tax Vs Podar Cement Pvt. Ltd., [1997] 226 ITR 625; (1997) 5 SCC 482 (Supreme Court). Distinguished because the beneficial-ownership principles applied to property arrangements contemplating eventual ownership, unlike the BOT concession agreements examined in the present case.
• Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs Commissioner of Income Tax, [1997] 227 ITR 172 (Supreme Court). Cited for the principle that accounting treatment cannot override the requirements of income-tax law.
• Commissioner of Income Tax Vs Gwalior Rayon Silk Mfg. Co. Ltd., [1992] 62 Taxman 471 (Supreme Court). Referred to in the Revenue’s submissions.
• Commissioner of Income Tax Vs Periyar Chemicals Ltd., [1987] 33 Taxman 331 (Kerala High Court). Cited regarding classification of assets for depreciation.
• Scientific Engineering House (Pvt.) Ltd. Vs Commissioner of Income Tax, [1986] 157 ITR 86; (1986) 1 SCC 11 (Supreme Court). Cited regarding the meaning of plant and depreciable business assets.
• Commissioner of Income Tax Vs Bangalore Turf Club Ltd., [1983] 15 Taxman 221 (Karnataka High Court). Relied upon by the Revenue on asset classification.
• Commissioner of Income Tax Vs Warner Hindustan Ltd., [1979] 117 ITR 15 (Andhra Pradesh High Court). Included in the authorities relied upon by the assessees.
• Income Tax Officer Vs Lakhmani Mewal Das, [1976] 103 ITR 437 (Supreme Court). Cited in connection with the requirements for valid reassessment.
• B.S.C. Footwear Ltd. Vs Ridgway (Inspector of Taxes), [1972] 83 ITR 269 (House of Lords). Referred to through the Supreme Court’s discussion in Tuticorin Alkali Chemicals concerning the distinction between tax law and accountancy practice.
• Commissioner of Income Tax Vs P.K. Badiani, 1970 SCC OnLine Bom 188 (Bombay High Court). Referred to in the judgment’s discussion of depreciation and statutory interpretation.
• Skinner & Co. Vs Shew & Co., (1893) 1 Ch 413 (Chancery Division). Considered in the discussion of statutory interpretation and the scope of expressions describing qualifying intangible rights.