ITAT AHMEDABAD BENCH ‘B’
Deputy Commissioner of Income-tax
Gujarat Road and Infrastructure Co. Ltd.
IT APPEAL NOS. 1169, 1730 (AHD.) OF 2010 & 892 (AHD.) OF 2012
C.O. NO. 105 (AHD.) OF 2012
[ASSESSMENT YEARS 2002-03 & 2005-06]
Date of Pronouncement –24.09.2012
A. Mohan Alankamony, Accountant Member
These cross-appeals and the cross-objections are filed by the Revenue and the assessee aggrieved by different orders of the learned Commissioner of Income-tax (Appeals), Gandhinagar in appeal No. CIT(A)GNR/260/2008-09 dated January 12, 2010 for the assessment year 2002-03 and No. CIT(A)/GNR/ 203/2010-11, dated January 9, 2012 for the assessment year 2005-06 and passed under sections 250 and 143(3) read with section 147 of the Income-tax Act. All these cross-appeals along with the cross objections were heard together and the same are being disposed of by this common order for the sake of convenience :
I. T. A. No. 1169/Ahd/2010
(Revenue’s appeal for the assessment year 2002-03)
2. The Revenue has raised two effective grounds of appeal which are reproduced hereinbelow :
“1. The learned Commissioner of Income-tax (Appeals) has erred in law and on facts in deleting the addition of Rs. 5,26,43,488 made on account of interest on deep discount bond.
2. The learned Commissioner of Income-tax (Appeals) has erred in law and on facts in deleting the addition of Rs. 14,67,03,030 made on account of depreciation.”
3. The assessee is a limited company engaged in the business of development, operation and maintenance of toll roads filed its return of income on October 31, 2002 declaring total loss at Rs. 29,52,46,692. The case was initially processed under section 143(1) of the Act and subsequently assessment under section 143(3) was completed on December 23, 2008. It was observed by the learned Assessing Officer that the assessee had claimed depreciation on road at 10 per cent. as applicable to non-residential building amounting to Rs. 14,67,03,030 which appeared to be against the decision of the hon’ble Supreme Court in the case of Indore Municipal Corpn. v. CIT  247 ITR 803. Further, the assessee claimed deduction for accrued interest payable of Rs. 5,26,43,488 for issue of debentures named “deep discount bond”. These debentures were redeemable with interest over a period of sixteen years according to the terms of agreement. The learned Assessing Officer after recording the reasons and obtaining approval from the Additional Commissioner of Income-tax issued notice under section 148 on February 1, 2008 requiring the assessee to explain as to why depreciation claimed on road at 10 per cent. should not be disallowed. After considering the explanations of the assessee, the learned Assessing Officer held that the toll road cannot be considered as an asset as specified in Appendix – I to the Income-tax Rules, 1962 and thereby rejected the claim of depreciation to the assessee. The learned Assessing Officer also relied on the decision of the hon’ble Supreme Court in the case of Indore Municipal Corpn. (supra) wherein it has been held that road cannot be said to constitute a building. Accordingly, the learned Assessing Officer disallowed the assessee’s claim of depreciation for Rs. 14,67,03,030 and added the same to the income of the assessee. With regard to the assessee’s claim of Rs. 5,26,43,488 being interest payable on deep discount bond, the learned Assessing Officer observed that as per the scheme of deep discount bonds, interest was due and payable only on maturity. Since the liability was not accrued and the amount was not paid, the learned Assessing Officer disallowed the claim of the assessee under section 43B of the Act and added the sum of Rs. 5,26,43,488 to the income of the assessee. The assessee carried the matter before the learned Commissioner of Income-tax (Appeals) on both these issues. The learned Commissioner of Income-tax (Appeals) considering the facts of the case and the submissions of the assessee allowed both issues in favour of the assessee by observing as under in paragraphs 3.2, 4.4 and 4.5 of his order :
Deleting the addition of Rs. 5,26,43,488 made on account of interest on deep discount bond.
“3.2 This issue has come up in other years as well, when the additions made by the Assessing Officer has been confirmed by the Commissioner of Income-tax (Appeals). However, the Income-tax Appellate Tribunal, Ahmedabad has meanwhile delivered its decision for the assessment year 2003-04. The appellant has filed a copy of the decision dated May 15, 2009 in I.T.A. No. 2901/Ahd/2006, wherein it has been held that the disallowance is not correct. Since the facts of the case are exactly similar, therefore, the disallowance of Rs. 5,26,43,488 made by the Assessing Officer is deleted.”
Deleting the addition of Rs. 14,67,03,030 made on account of depreciation.
‘4.4 The matter has been considered. The Income-tax Appellate Tribunal’s decision in the case of Noida Toll Bridge Co. Ltd. (copy of which has been filed in the paper book), has been pursued. The facts of the cases are identical. In that case also the concerned Assessing Officer had relied on the hon’ble Supreme Court’s decision in the case of Indore Municipal Corpn. v. CIT reported in  247 ITR 803 (SC), rejecting the claim of roads being buildings. The Tribunal, however, held that the Assessing Officer’s action in following the depreciation was not justified. The operative portion of the decision reads as follows :
“7. We have duly considered the rival contentions and gone through the records carefully. The only objection of the Assessing Officer for denying the depreciation to the assessee is that road in isolation does not constitute building. This road is not within the factory premises which can be considered as a part of the plant or of building. We find that expression ‘building’ has been given an extended meaning in the Appendix-I of the Income-tax Rules. Now the building includes roads, bridges, culverts, well and tube wells. Thus, the judgment relied upon by the Assessing Officer is not applicable on the facts of the present case. There is a change in the position of law. The learned first Appellate Authority has considered this issue elaborately in the findings extracted supra, and we do not find any error in this finding. Therefore, both the appeals are dismissed.”
4.5 Following the same, for the appellant also it is held that the toll road is entitled to deduction at the rates applicable to building. The appellant’s ground of appeal is accepted.’ “
4. The learned Departmental representative supported the order of the learned Assessing Officer and prayed that the same may be confirmed. On the other hand, the learned authorised representative supported the order of the learned Commissioner of Income-tax (Appeals).
5. We have heard the rival submissions and carefully perused the materials on record. On both these issues, the learned Commissioner of Income-tax (Appeals) has followed the decision of the Income-tax Appellate Tribunal based on which he deleted the addition made by the learned Assessing Officer and thereby allowed the assessee’s appeal. In I.T.A. No. 2901/Ahd/ 2006 in the case Gujarat Toll Road Investment Co. Ltd. v. Asstt. CIT  125 ITD 159 (Ahd.) for the assessment year 2003-04 the Tribunal vide its order dated May 15, 2009 had examined the matter with regard to deep discount bonds and arrived at the following conclusion in page 155 of the order :
“In the instant case, the interest is payable in respect of amounts deposited by financial institutions with the assessee by subscribing to the bonds issued by the assessee. The interest is payable in respect of certain deposits received by the assessee and not in respect of any loans, advances or borrowings made by the assessee. For the same reason, clause (e) of section 43B relating to loans and advances from a scheduled bank is also not applicable in the instant case. In the above circumstances, in our considered view, neither was the Assessing Officer justified in disallowing the deduction claimed for the provision made in respect of interest accrued but not due on the deep discount bonds issued by the assessee nor was the learned Commissioner of Income-tax (Appeals) justified in confirming such disallowance. It is observed that the amount of the provision made by the assessee in respect of interest accrued on bonds is not in dispute as excessive or not relating to the year under consideration. We, therefore, delete the disallowance of Rs. 6,08,03,230 in respect of the provisions made for interest in respect of deep discount bonds. Hence, these grounds of appeal of the assessee are allowed.”
6. On the issue with regard to allowability of depreciation on toll roads, the Tribunal in the assessee’s own case in Gujarat Road & Infrastructure Co. Ltd. v. CIT  48 SOT/145 (URO) for assessment year 2004-05, vide order dated February 12, 2010 held as under on page 744 of the order :
“We find that the assessee is engaged in business of setting up of infrastructure facility by way of construction of toll roads and particularly this road known as ‘Vadodara-Halol toll road’, as per the policy of the Government of India in a public-private partnership. The Government of Gujarat has formed a SPV in joint venture with the assessee, i.e., between Gujarat Government and IL & FS group. As per the changed business scenario after economic liberalisation as per the policy of the Government of India, the assessee has constructed this toll road on B.O.O.T basis. The assessee raised funds for the construction, maintain and to operate this toll road and is entitled to collect toll from the vehicles passing through this road. This road is constructed by the assessee in the course of carrying out its business activity and therefore the toll road is an asset owned by the assessee on B.O.O.T basis, with which business is carried on and exploited this asset for generating income, which is offered as revenue receipt for the purposes of taxation. The Assessing Officer during the course of assessment proceedings allowed the claim of depreciation after considering the revised return filed by the assessee. The Assessing Officer has allowed the claim of depreciation in the computation of income after considering that the assessee has constructed the toll road and it is operated and managed by the assessee. We find the toll road is an integral part of the business activity of the assessee and without which the assessee could not carry on its business activity. We further find that the assessee owned a capital asset and the same is used for the purposes of business. It is also a fact that in the course of construction of toll road, the assessee has constructed buildings, which are administrative building, toll plazas on both ends of road, from whereby the toll is collected by the staff from the passing vehicles. We further find from the facts that the road constructed by the assessee forms the most important source of its revenue and the basic objective is to construct the toll road under the B.O.O.T scheme. Thus, the assessee has fulfilled the basic criteria for claiming depreciation, i.e., existence of a capital asset, ownership of such asset and most important that the assessee were put to use for its business purpose. We find that learned counsel for the assessee has made a fine distinction in the facts of the present case with that of Indore Municipal Corporation  247 ITR 803 by stating the fact that IMC was a local body which derived income from sale of manure prepared out of waste and night soil dumped in the trenching grounds outside the municipal limits and it constructed a metal road over the trenching ground and claimed that the said expenditure should be treated as road and claimed depreciation. The hon’ble Madhya Pradesh High Court held that the metal road for hauling compost could not be considered as expenditure and the assessee was not entitled to depreciation. The hon’ble Supreme Court also held that the said metal roads cannot be treated as buildings as there was no other construction on the open ground except roads and the roads by themselves cannot constitute building. We find that the facts before us, the toll road is constructed and there are toll plazas and administrative buildings and the roads are connected to these buildings on both ends having toll plazas as well as buildings.
Another fact in the present case is that the definition of ‘building’ as applicable to section 32 of the Act has been substituted in rule 5 of the Income-tax Rules, 1962 by the Income-tax (Third Amendment) Rules, 1987, with effect from April 2, 1987, whereby Note 1 below the table of rates at which depreciation is admissible, constituting part of Appendix I to the Income-tax Rules, 1962 operative for and from the assessment year 1988-89, by virtue of which buildings includes roads, buildings culverts, wells and tube-wells. We find that Note 1 in the depreciation schedule clarifies that ‘buildings include roads, bridges, culverts, wells and tube-wells’. The hon’ble Supreme Court in the case of Gwalior Rayon Silk Manufacturing Co. Ltd.  196 ITR 149 has also held that roads laid within the factory premises as links or which provides approach to the buildings are necessary adjuncts to the factory buildings to carry on the business activities of the assessee, and would be ‘building’ within the meaning of section 32 of the Act. Similarly, the Delhi Bench of this Tribunal in I.T.A. Nos. 3211 and 1983/Del/2006 in the case of Deputy CIT v. Noida Toll Bridge Co. Ltd. has also allowed the claim of the assessee on toll road.
Another argument made by the learned Commissioner of Income-tax-Departmental representative was that the assessee is not the owner of the asset, i.e., toll road. Now the question arises whether legal title is necessary or not, and this has been answered by the hon’ble apex court in the case of Mysore Minerals Ltd. v. CIT  239 ITR 775, wherein it was held that the terms ‘own’, ‘ownership’ and ‘owned’ are generic and relative terms. They have a wide and also a narrow connotation. The meaning would depend on the context in which the terms are used. The term ‘owned’ as occurring in section 32(1) must be assigned a wider meaning. Anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded therefrom and having the right to use and occupy the property and/or to enjoy its usufruct in his own right would be the owner of the building though a formal deed of title may not have been executed and registered as contemplated by the Transfer of Property Act, 1882, the Registration Act, etc. In the present case neither the Commissioner of Income-tax in the revision order under section 263 of the Act or by the Assessing Officer while framing original assessment has raised this issue, but learned counsel for the assessee categorically stated that this toll road was constructed on B.O.O.T basis, i.e., means ‘build’, ‘own’, ‘operate’ and ‘transfer’. According to him, the entire responsibility for maintaining and operating this toll road for 31 years is on the assessee as he has to collect toll-fee. Once this concept of B.O.O.T has been accepted by the Government of India under infrastructure policy and the Government of Gujarat also entered in a joint venture with the assessee and formed the SPV, the question of ownership rest with the assessee for the purposes of claim of depreciation. Accordingly, this issue on merits is allowed in favour of the assessee.”
7. Considering the above decision of the Tribunal, the learned Commissioner of Income-tax (Appeals) has allowed the appeal of the assessee in its favour. In these circumstances, we do not find it necessary to interfere with his order. Therefore, we confirm the order of the learned Commissioner of Income-tax (Appeals) for both the issues, i.e., (a) allowability of interest on deep discount bonds as deduction and (b) allowability of depreciation on toll road. Accordingly, the appeal of the Revenue on both these issues is dismissed.
I.T.A. No. 1730/Ahd/2010
(Assessee’s appeal for the assessment year 2002-03)
8. The assessee has raised four grounds in its appeal wherein ground No. 4 is general in nature and does not survive for adjudication. In grounds Nos.1 and 2 of the appeal, the assessee has challenged the validity of reassessment order passed by the learned Assessing Officer and in ground No.3, the assessee states that the learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of Rs. 1,61,37,960 being the expenditure incurred in road over lay and renewal expenses.
9. At the outset of the hearing the learned authorised representative pointed out that with regard to grounds Nos. 1 and 2 of the appeal the issue remains to be adjudicated by the learned Commissioner of Income-tax (Appeals) and therefore the matter should be remitted back to the file of the learned Commissioner of Income-tax (Appeals) for adjudication. The learned Departmental representative conceded that this matter with respect to reopening of the assessment under section 147 of the Income-tax Act was not adjudicated by the learned Commissioner of Income-tax (Appeals) as he had opined, the issue to be academic. On perusing the facts of the case, we are of the considered view that this issue ought to have been considered by the learned Commissioner of Income-tax (Appeals) and disposed of by passing a speaking order. Therefore, in the interest of justice we hereby remit the matter back to the file of the learned Commissioner of Income-tax (Appeals) with direction to pass appropriate order as per merit and law after affording both parties of being heard. Accordingly, grounds Nos. 1 and 2 raised by the assessee are allowed for statistical purposes.
10. Ground No. 3 : Disallowance of Rs. 1,61,37,960 being expenditure on road overlay/renewal : It was observed by the learned Assessing Officer that a sum of Rs. 1,61,37,960 was debited to the profit and loss account. When the details were called for the assessee explained it to be provision made on a scientific basis for expenditure to be incurred in due course. Therefore, the learned Assessing Officer disallowed this claim of provision for expenditure made by the assessee. The learned Commissioner of Income-tax (Appeals) also arrived at fair conclusion that the entire expense of Rs. 1,61,37,960 claimed by the assessee is not an expenditure incurred by the assessee but a provision made in the books of account and accordingly confirmed the order of the learned Assessing Officer. After hearing both the sides and perusing the materials on record, it is evident that the entire expenses of Rs. 1,61,37,960 claimed by the assessee is only a provision made in the books of account and do not pertain to actual expenses incurred by the assessee during the year. Therefore, we also do not have any hesitation to confirm the orders of the Revenue authorities. This ground of appeal of the assessee is accordingly dismissed.
I.T.A. No. 892/Ahd/2012
(Revenue’s appeal for the assessment year : 2005-06)
11. The only effective ground of appeal raised by the Revenue in its appeal read as under :
“1. The learned Commissioner of Income-tax (Appeals) has erred in law and on facts in allowing the claim of depreciation amounting to Rs. 37,36,34,380 on toll roads even though toll road is not covered under ‘assets’, as enumerated in Appendix -I to the Income-tax Rules and also ownership of the same does not vest with the assessee, hence not eligible for depreciation.”
12. We have decided this issue against the Revenue and in favour of the assessee while disposing of ground No. 2 raised by the Revenue in its appeal in I.T.A. No. 1169/Ahd/2010 for the assessment year 2002-03 supra. Following the same decision on the identical issue, we hereby dismiss ground No. 1 of the appeal raised by the Revenue in the assessment year 2005-06.
C.O. No. 105/Ahd/2012 (In I.T.A. No. 892/Ahd/2012)
(Assessee’s cross-objection for the assessment year : 2005-06)
13. In this cross-objection the assessee has raised three grounds wherein grounds Nos. 2 and 3 are general in nature and the only surviving ground is relating to challenging the initiation of proceedings under sections 147 and 148 of the Income-tax Act. On perusing the appeal of the assessee before the learned Commissioner of Income-tax (Appeals) in Commissioner of Income-tax (Appeals)/GNR/203/2010-11 for the assessment year 2005-06, we find that the assessee has not challenged this issue before the learned Commissioner of Income-tax (Appeals). However, in the interest of justice we remit this issue back to the learned Commissioner of Income-tax (Appeals) to consider the same on merit. Accordingly, the cross objection filed by the assessee is allowed for statistical purpose.
14. In the result, both the Revenue’s appeal for the assessment year 2002-03 in I.T.A. No. 1169/Ahd/2010 and I.T.A. No. 892/Ahd/2012 for the assessment year 2005-06 are dismissed. The assessee’s appeal for the assessment year 2002-03 in I.T.A. No. 1730/Ahd/2010 is partly allowed for statistical purpose and the assessee’s cross-objection for the assessment year 2005-06 is allowed for statistical purposes.