Case Law Details
ITO Vs Andhra Pradesh Expressway Limited (ITAT Mumbai)
In a pivotal ruling, the Income Tax Appellate Tribunal (ITAT) Mumbai addressed a critical issue concerning the classification of interest income derived from fixed deposits (FD) linked to business activities. The case of ITO Vs Andhra Pradesh Expressway Limited delves into whether such interest income should be categorized under “Business Income” or “Income from Other Sources.” This decision provides clarity on how income from FDs, tied to business operations, should be treated for tax purposes.
Background of the Case
The controversy arose when the Assessing Officer (AO) scrutinized the Profit and Loss Account of Andhra Pradesh Expressway Limited and observed that the company had reported an interest income of Rs. 49,60,027 as part of its business income. The AO contended that this income, earned from fixed deposits, did not stem directly from the company’s core business activities. Therefore, he classified it under “Income from Other Sources,” a move which led to an appeal by the assessee.
Contention of the Assessee
The assessee, Andhra Pradesh Expressway Limited, argued that the interest income should indeed be considered as business income. They presented a detailed explanation highlighting that the funds deposited in fixed deposits were a result of annuities received as part of the company’s contractual obligations with the National Highways Authority of India (NHAI). The company was mandated to invest these funds in “Permitted Investments” as specified in the agreement with NHAI.
According to the Ld. Sr. Counsel for the assessee, the investments in fixed deposits were not made from surplus funds but were a necessity to manage business obligations. This included repaying significant bank loans and maintaining funds for operational and maintenance needs. The argument emphasized that since the fixed deposits were made out of business receipts and were crucial for business exigencies, the interest earned from these deposits should be categorized as business income.
Ruling by the Ld. CIT(A)
The Ld. Commissioner of Income Tax (Appeals) (CIT(A)) sided with the assessee, ruling that the interest income should be treated as business income. The CIT(A) observed that the fixed deposits were a result of the company’s compliance with terms set by NHAI and lenders, and hence the interest income was closely linked to the company’s business operations.
The CIT(A) noted that the assessee’s fixed deposits were required to manage its large-scale business loans and operational needs. The decision was reinforced by referencing previous Tribunal rulings and high court judgments, particularly the Bombay High Court’s decision in Lok Housing Ltd, which supported the treatment of interest income from business-linked deposits as business income.
Revenue’s Argument and Tribunal’s Analysis
The Revenue contested the CIT(A)’s decision, arguing that interest income from fixed deposits should be classified under “Income from Other Sources” because it was not generated directly from the company’s core business operations. However, the Tribunal evaluated the entire context and found merit in the assessee’s claim.
The Tribunal highlighted that the fixed deposits in question were not surplus funds but were necessary due to business agreements and financial structures. The tribunal took into account the substantial bank loans and the requirement to maintain an escrow account, as mentioned in the loan agreements. The Tribunal’s review of past decisions, including those specific to the assessee’s own cases for previous assessment years, affirmed that interest income linked to business exigencies should be treated as business income.
Precedent and Conclusion
The Tribunal’s decision aligns with judicial precedents that treat interest income from business-related fixed deposits as business income, especially when the investments are made under business compulsion and not from surplus funds. The Tribunal’s ruling in this case reaffirmed the principle that interest income should reflect the nature of the underlying business activities, rather than the mere source of the funds.
In conclusion, the ITAT Mumbai’s decision in ITO Vs Andhra Pradesh Expressway Limited clarifies that interest income from fixed deposits, directly linked to business activities, should be classified under “Business Income.” This ruling emphasizes the need to consider the business context of financial transactions when determining their tax treatment, thereby ensuring that tax assessments accurately reflect the operational realities of businesses.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These are six appeals preferred by the assessee and six appeals by revenue (cross-appeals) against the order of the Ld. CIT(A)/NFAC, Delhi for AY. 2011-12 to AY. 2015-16 and AY. 2018-19. Both sides agree that the issue raised in all the appeals are common and facts are identical in all assessment years; and so were argued together, therefore, disposed off together by passing a common order. Therefore, the appeal of AY. 2011-12 is taken as the lead case and the decision of which will be followed in other assessment years.
For AY. 2011-12 (Assessee’s Appeal ITA. No.1522/Mum/2023) & (Revenue Appeal ITA. No. 1528/Mum/2023).
2. The grounds of appeal of the assessee are as under: –
“2.1 That on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in considering rights in relation to right under service concessionaire arrangement as building and allowing depreciation @ 10 percent where the rights are eligible for depreciation @ 25 percent being intangible asset.
2.2 That on the facts and circumstances of the case as well as in law, Ld. CIT(A) has erred in not following order passed by Hon’ble ITAT in Appellant’s own case for AY. 2010-11 stating that appeal has been filed before jurisdictional High Court by department against said order.
2.3 Without prejudice to ground no. 2.1 and 2.2, the appellant should be allowed depreciation @ 15 percent on toll road (as is also claimed in the return of income) treating the asset as Plant and Machinery.”
3. The grounds of appeal of the revenue are as under: –
“Whether on the facts and in the circumstances of the case and in law, including the judgment of Hon’ble Bombay High Court in the case of M/s. North Karnataka Expressway Limited ITA. No.499 of 2012 dated 14th October, 2014 read with CBDT Circular No.09/2014 dated 23.04.2013 and Hon’ble Supreme Court judgment in the case of M/s. Madras Industrial Investment Corporation [225 ITR 802 (SC)], the assessee is the ‘Owner’ of the road constructed by it on “Build, Operate and Transfer” (BOT) basis under agreement with NHAI.”
4. At the outset, the Ld. Sr. Counsel appearing for the assessee Shri Ajay Vohra submitted that assessee’s ground no. 1 is general and ground no. 3 is pre-mature, therefore not pressed. So therefore, only ground no. 2 survive and notes that Ground no. 2 of the assessee’s appeal and ground no. 1 of revenue appeal are on the same issues i.e. whether on facts and law the assessee is eligible for depreciation on the right to collect annuity on the toll road constructed by it as an intangible asset u/s 32(1)(ii) of the Income Tax Act, 1961 (hereinafter “the Act”).
5. Brief facts on the aforesaid ground is that the assessee filed Return of Income on 26.09.2011 declaring total loss of Rs.88,91,21,522/-. Later, the case of assessee was selected for scrutiny under CASS. During the assessment proceedings, the AO observed that the assessee [Infrastructural Development Company] had claimed depreciation of Rs.111,23,88,310/- @ 15% on opening WDV on toll roads constructed on BOT (Build, Operate, Transfer) basis as per the agreement with NHAI commencing on 15.09.2006, valid for 20 years and later on claimed depreciation @ 25% on right to collect “annuity”(intangible asset). However, the AO rejected the claim of the assessee on the ground that the company had no ownership rights or entitlements in the said Toll road; and therefore according to him, the assessee is not entitled for depreciation as per section 32 of the Act. However, the AO allowed the amortization of expenditure incurred on the said road amounting to Rs.43,66,99,212/-.
6. Aggrieved, by the aforesaid action of the AO, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to partly allow the claim of the assessee by allowing 10% depreciation. Aggrieved by the impugned order of the Ld. CIT(A), the assessee has preferred these appeals before this Tribunal claiming 25% depreciation on the intangible assets u/s 32(1)(ii) of the Act, i.e. in respect of depreciation on the right to collect annuity on the toll road constructed by it pursuant to concessionaire arrangement between the assessee and National Highway Authority of India (NHAI); and the revenue is challenging the action of Ld. CIT(A) allowing 10% depreciation instead of amortization of expenditure (supra) as done by AO.
7. Assailing the action of the Ld. CIT(A), Sr. Counsel appearing for assessee, Shri Ajay Vohra submitted that the issue involved i.e. assessee’s claim of depreciation @ 25% for the intangible asset on its right for annuity is allowable as per law. According to him, the assessee’s right to collect “annuity” is a valuable right stemming from the concessionaire arrangement between assessee and NHAI for the toll road constructed by it ought to have been granted by the Ld. CIT(A) @ 25% because this Tribunal in assessee’s own case for AY. 2010-11 [ITA No.655/Mum/2015 and Cross Objection (CO)/Mum/2016 dated 28.02.2018] was pleased to allow the depreciation on road constructed by it under BOT basis as an “intangible asset”, since its claim falls within the scope of section 32(1)(ii) of the Act, and consequently held the revenue’s cross objection regarding amortization of the cost as academic. According to Ld. Sr. Counsel, despite the Tribunal order in assessee’s own case (supra), the Ld. CIT(A) did not allow the claim of depreciation @ 25% on intangible asset and instead allowed only 10% depreciation following the judicial precedents laid down by Hon’ble Rajasthan High Court in the case of Pr. CIT Vs. GVK Jaipur Expressway Ltd. (2018) 100 taxmann.com 95 ( Revenue’s SLP dismissed by Hon’ble Supreme Court) which ratio was followed by Hon’ble Madras High Court in the case CIT Chennai Vs. Tamilnadu Road Development Co. Ltd. (2021) 130 taxmann.com 63 (Madras). According to him, the Ld. CIT(A) erred in properly appreciating the order of jurisdictional Hon’ble Bombay High Court in two cases (i) CIT-10 Vs. North Karnataka Expressway Ltd. (2014) (51 taxmann.com 214) (Bombay) and (ii) CIT-10 Vs. West Gujarat Expressway Ltd. (2017) (82 taxmann.com 224) and erred in not following the Tribunal order on the issue regarding 25% depreciation on intangible assets in assessee’s own case for AY 2010-11 (supra).
8. Further, according to Shri Ajay Vohra, the Ld. CIT(A) erred in partly allowing the claim of depreciation [i.e. 10%] by following the decision of the Hon’ble Rajasthan High Court in the case of PCIT Vs. GVK Jaipur Expressway Ltd. (2018) 100 taxmann.com 95 (Raj) wherein the Hon’ble High Court held that the developer of roadways was entitled to claim depreciation @ 10% which decision was challenged by the revenue before the Hon’ble Supreme Court by preferring an SLP which was dismissed (2018) 100 taxmann.com 96 (SC). The Ld. CIT(A) has also taken note of the decision of the Hon’ble Madras High Court in the case of Commissioner of Income Tax Corporate Circle-3 Vs. Tamilnadu Road Development Company Ltd. wherein their Lordship has followed the ratio of the decision of the Hon’ble Rajasthan High Court in the case of GVK Jaipur Expressway Ltd. (supra) and on the strength of the decision of the Hon’ble High Courts, the Ld. CIT(A) has allowed the depreciation @ 0% on the road built on BOT basis; and in that process did not allow the claim of the assessee for 25% depreciation on the intangible asset u/s 32(1)(ii) of the Act, which was already allowed by the Tribunal in assessee’s own case for AY 2010-11 without understanding the decision of the Hon’ble Bombay High Court in North Karnataka Expressway (supra). According to Ld. Sr. Counsel, the Ld. CIT(A) has not appreciated the judgment passed by the Hon’ble Bombay High Court in North Karnataka Expressway Ltd., wherein the Hon’ble High Court was testing the validity of Tribunal order, upholding the Commissioners action u/s. 263 of the Act and the claim of depreciation u/s. 32(1)(i) of the Act and the Hon’ble High Court has not dealt with the claim of depreciation on intangible asset u/s. 32(1)(ii) of the Act. Thus according to Ld. Sr. Counsel, the Ld. CIT(A) erred in properly understanding the Hon’ble High Court order in North Karnataka Expressway (supra). And according to Ld. Sr. Counsel, in the case of West Gujarat Expressway, the Hon’ble High Court followed the ratio laid in North Karnataka Expressway (supra). In this context, he drew our attention to the observation made by Hon’ble Supreme Court in the case of Sun Engineering reported in 198 ITR 297 (SC) wherein their Lordship reiterated the observation made in the case of Madhav Rao Jivaji Rao Scindia Bahadur Vs. Union of India (1971) (3 SCR 9; AIR 1971 SC 530) “ It is not proper to regard a word, a clause or a sentence occur-ring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment.” In the light of the aforesaid observation of the Hon’ble Supreme Court, the Ld. Sr. Counsel submitted that depreciation on intangible asset u/s. 32(1)(ii) was not subject matter before Hon’ble High Court and drew our attention to the Hon’ble Bombay High Court decision in the case of North Karnataka Expressway Ltd. (supra) and submitted that the substantial question of law before the Hon’ble High Court was as under: –
“(i) Whether, on the facts and in the circumstances of the case, and in law, the Tribunal was justified in confirming the order passed by the Commissioner of Income Tax under section 263 of the Income Tax Act, 1961 directing the Assessing Officer to examine the allowability of depreciation on toll road?”
9. Thus, according to Ld. Sr. Counsel, the Hon’ble High Court was testing the validity of Tribunal order upholding the action of Commissioner u/s. 263 of the Act, wherein Commissioner found fault with the action of AO passing the assessment order allowing the depreciation claimed by assessee under section 32(1)(i) of the Act; and pointed out that Hon’ble High Court was not adjudicating the claim of assessee on intangible assets u/s. 32(1)(ii) of the Act; and drew our attention to the order in North Karnataka Expressway Ltd. (supra) wherein their Lordships observed at para no. 17 that “A bare perusal thereof indicates that in respect of the depreciation of buildings, machinery, plant or furniture being tangible assets and with which we concerned, the deduction in sub-section (1) of section 32 shall be allowed provided these assets are owned wholly or partly by the assessee and used for the purpose of his business or profession. Then, there are provisions below clause (ii) of sub-section (1) and it is not necessary to refer to the same and except explanation (3) which is an explanation for the purposes of sub-section (1)”. Thus according to him, the Hon’ble High Court in this order has not dealt with the claim of assessee under clause-(ii) of sub-section (1) of section 32 of the Act. And the Hon’ble High Court took note of the decision given by Tribunal at para no. 25 wherein the Tribunal noted that AO had allowed the depreciation claimed by assessee of Rs.59.92 crores on the toll road which was admittedly not owned by the assessee, and that too without conducting any inquiry on the allowability of the depreciation on the roads owned by the Union of India. Therefore, Tribunal upheld the action of the Ld. CIT exercising his power u/s 263 of the Act since the AO did not conduct any kind of enquiry before allowing depreciation on toll-road and this action of the Tribunal was upheld by the Hon’ble High Court. According to Shri Vohra, in that case the claim of assessee (North Karnataka Expressway) was regarding depreciation of toll roads as plant/machinery as a tangible asset, and not in respect of depreciation on the intangible asset i.e. right to collect toll / annuity on the toll road which it constructed under sub-clause (ii) of sub-section (1) of section 32 of the Act. According to Sr. Counsel the observation of their Lordship at para no. 47 of the Hon’ble High Court order (North Karnataka Expressway) need to be noted, wherein it was held “The assessee can definitely claim depreciation on the investment. He has definitely invested in the project of construction development and maintenance of the National Highway and such of the assets in the form of building and plant and machinery etc. The claim for depreciation can be validly raised and granted. We are here concerned with the claim on the hand or a road itself. Merely, because the road is laid out does not mean that the assessee is the owner thereof. He has lid it out for the purpose of the union and for its ultimate vesting in the public”. And he also drew our attention to para 52 of the same order wherein their Lordship made it clear “For the above reasons and which are in addition to those supplied by the Commissioner and the Tribunal, this appeal fails. The reframed substantial question of law is answered in favour of the Revenue and against the assessee, but by clarifying that the Assessee’s claim for depreciation in respect of the building, plant and machinery and falling within the purview of sub-section (1) of section 32 of the Income Tax Act, 1961 if considered and granted shall not be affected by our judgement”. Thus, according to the Ld. Sr. Counsel, the Hon’ble High Court has clearly observed that the assessee can definitely claim depreciation in accordance to section 32(1) of the Act. Therefore, according to the Ld. Sr. Counsel the issue regarding depreciation on intangible asset ie. right to collect annuity as per the concessionaire agreement has been left open by the Hon’ble Bombay High Court in the case of North Karnataka Expressway Ltd. (supra). And therefore according to him, the Ld. CIT(A) erred in not following the ratio of the Tribunal order in assessee’s own case for AY. 2010-11 wherein the Tribunal allowed the depreciation claim on intangible asset. In this context, the Ld. Sr. Counsel pointed out that this issue is covered in assessee’s favour by the decision of Special Bench (Hyderabad) of this Tribunal, and drew our attention to the decision of the Tribunal- Special Bench (Hyderabad) wherein the question before the Special Bench in the case of ACIT Vs. Progressive Construction Ltd. (2018) (92 taxmann.com 104) (SB), initially was as under: –
“Whether on the facts and in the circumstances of the case, expenditure incurred by the assessee on construction of road on BOT basis is Capital or Revenue? If it is capital expenditure, whether the same is eligible for depreciation at the rate applicable to building or to an intangible asset as per section 32(1(ii)? And, if not, whether the same being Revenue expenditure is liable to be amortized over the period of concession?
10. And thereafter, the Ld. Special Bench re-framed the question in consonance with the fact of the case and framed the question as under: –
“Whether on the facts and in the circumstances of the case, the expenditure incurred by the assessee for construction of a road under BOT contract with GOI gives rise to an asset and if so, whether it is an intangible asset or tangible asset? In case it is held to be tangible asset, whether it is building or plant or machinery?”
11. In that case (Progressive Construction Ltd.) supra, the Ld. Special Bench was also adjudicating similar claim, and in that case the assessee had claimed depreciation u/s 32(1)(ii) of the Act, since it had made investment in constructing the road and thus acquired the right to operate the road and receive toll charged as per the Concession Agreement (hereinafter CA), which right was claimed as valuable commercial or business right in the nature of intangible assets and hence assessee claimed that it was eligible for depreciation u/s 32(1)(ii) of the Act which was also disallowed by the AO on the ground that the assessee was not the owner of the asset [as in the present case and in that case the only difference was that assessee-company after constructing the road as per concessionaire agreement was collecting toll from users of the road whereas in the present case the only difference was that assessee has right to collect “annuity” for construction of toll road]. And the Special Bench of the Tribunal observed at para 11 (relevant portion only) as under: –
“…… Thus, the right to operate the project facility and collect toll charges is integrally connected to the completion of the project facility which cannot be done unless the assessee invests its fund for completing the project. Therefore, keeping in view the aforesaid fact, it cannot be said that the right to collect toll has accrued to the assessee on the date of execution of the agreement. If we accept the aforesaid argument of the learned Senior Standing Counsel, in other words, it would mean that without even executing and completing the project facility, assessee would be collecting toll charges. Therefore, the contention of the learned Senior Standing Counsel that the expenditure incurred by the assessee till execution of the agreement can only be considered as an intangible asset, in our view, is illogical, hence, cannot be accepted. Thus, having held that the expenditure of Rs.214 crore incurred by the assessee has resulted in creation of an intangible asset of enduring nature for the assessee, it is necessary now to examine whether such intangible asset comes within the scope and ambit of section 32(1)(ii) of the Act.”
12. Thereafter, he drew our attention of the para no. 14 wherein the Special Bench observed as under: –
“What the Government of India has granted to the assessee is the right to use the project site during the concession period and in the absence of such right, it would have been unlawful on the part of the concessionaire to do or continue to do anything on such property. However, the right granted to the concessionaire has not created any right, title or interest over the property. The right granted by the Government of India to the assessee under the C.A. has a license permitting the assessee to do certain acts and deeds which otherwise would have been unlawful or not possible to do in the absence of the C.A. Thus, in our view, the right granted to the assessee under the C.A. to operate the project / project facility and collect toll charges is a license or akin to license, hence, being an intangible asset is eligible for depreciation under section 32(1)(ii) of the Act.”
13. Thereafter the Ld. Special Bench after considering the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd. (2012) 24 com 222 and the Hon’ble Supreme Court decision in the case of Techno Shares & Stock Ltd. Vs. CIT (2010) 193 Taxman 248, held as under: –
“In the present case, undisputedly by virtue of C.A. the assessee has acquired the right to operate the toll road / bridge and collect toll charges in lieu of investment made by it in implementing the project. Therefore, the right to operate the toll road / bridge and collect toll charges is a business or commercial right as envisaged under section 32(1)(ii) r/w Explanation 3(b) of the said provisions. Therefore, in our considered opinion, the assessee is eligible to claim depreciation on WDV as an intangible asset. Thus, we answer the question framed by the Special Bench as under:–
The expenditure incurred by the assessee for construction of road under BOT contract by the Government of India has given rise to an intangible asset as defined under Explanation 3(b) r/w section 32(1)(ii) of the Act. Hence, assessee is eligible to claim depreciation on such asset at the specified rate.”
14. And thereafter, Shri Vohra drew our attention to plethora of decisions especially to the decision of the Tribunal in the case DCIT Vs. Rajahmundry Express Ltd. (ITA. No.6487/Mum/2017 and DCIT Vs. Gorakhpur Infrastructure Co Ltd. (ITA. No.574/Mum/2020 wherein the assessee as in the present case had the right collect annuity from the NHAI on the road constructed as per the CA. Therefore, according to the Sr. Counsel, the decision of the Tribunal passed in assessee’s own case for AY. 2010-11 needs to be restored.
15. Per contra, the Ld. DR opposing the submission of Ld. Sr. Counsel, submitted that the Circular No. 09/2014 issued by CBDT on the issue was binding on the AO, and the CBDT has gone into the precise issue which has been raised by assessee i.e. depreciation u/s 32(1)(ii) of the Act in respect of road constructed under BOT. According to the Ld. DR, the Ld. CIT(A) erred in not following the decision of Hon’ble Bombay High Court decision in the case of North Karnataka Expressway Ltd. (supra) as well as West Gujarat Expressway Ltd. (supra) wherein the depreciation claim of assessee was not allowed since the assessee was not the owner of the land on which toll road was constructed. According to him, in the light of the Hon’ble Jurisdictional High Court order (supra), the Ld. CIT(A) erred in following the decision of the Hon’ble Rajasthan High Court in the case of GVK Jaipur Expressway Ltd. (supra) and the Hon’ble Madras High Court in the case of Tamilnadu Road Development Company Ltd. (supra) and therefore he pleaded that the order of Ld. CIT(A) be reversed and order of AO be restored.
16. The Ld. Sr. Counsel in his rejoinder submitted that in this case, first of all, the AO erred in blindly following the Circular No.09/2014 issued by the CBDT for disallowing the claim of 25% depreciation on intangible asset. According to him, the AO disallowed the claim @ 25% on intangible asset on the ruse that assessee initially claimed before him depreciation @ 15% on plant & machinery and later revised its claim for depreciation @ 25% on the intangible asset. And the AO allowed amortization of the cost incurred by the assessee as revenue expenditure by following the circular no. 09/2014 of the CBDT which according to ld. Sr. Counsel is not binding on the assessee as well as the Appellate Authorities and for such a proposition cited the decision of the Hon’ble Supreme Court in the case of UCO Bank Vs. CIT (237 ITR 889) (SC) wherein the Hon’ble Supreme Court observed at page no. 895 as under: –
“What is the status of these circulars? Section 119(1) of the Income- tax Act, 1961, provides that, “the Central Board of Direct Taxes may, from time to time, issue such orders, instructions and directions to other incomes, authorities as it may deem fit for the proper administration of this Act, and such authorities and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and direction, of the Board. Provided that no such orders, instructions or directions shall be issued (a) so as to require any income-tax authority to make a particularly assessment or to dispose of a particular case in a particular manner; (b) so as to interfere with the discretion of the Appellate Assistant Commissioner in the exercise of his appellate functions”. Under sub-section (of section 119, without prejudice to the generality of the Board’s power set out in sub-section (1), a specific power is given to the Board for the purpose of proper and efficient management of the work of assessment and collection of revenue to issue from time to time general or special order in respect of any class of incomes or class of cases, setting forth directions or instructions, not being prejudicial to assessee, as to the guidelines principles or procedures to be followed in the work relating to assessment Such instructions may be by way of relaxation of any of the provisions of the sections specified there or otherwise. The Board thus has power, inte-alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 119 of the Income-tax Act which are binding on the authorities it the administration of the Act. Under section 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. Thus the authority which wields the power for its own advantage under the AC is given the right to forgo the advantage when required to wield it in* manner it considers just by. relaxing the rigour of the law or in other permissible manners as laid down in section 119. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Hard cases which can be properly categorized as belonging to a class, can thus be given the benefit of relaxation of law by issuing circulars binding on the taxing authorities.”
17. According to the Ld. Sr. Counsel, the Hon’ble Supreme court has clearly held that the CBDT may not pass any directions (circular) so as to require any Income Tax Authority to make a particular assessment or to dispose of a particular case in a particular manner. According to him, in the Circular No.09/2014, the CBDT has directed the AO while processing the claim of an assessee for depreciation of roads built on BOT basis u/s 32(1)(ii) of the Act, first of all not to allow such a claim and instead may allow amortization of the same by treating it as allowable business expenditure. According to the Ld. Sr. Counsel, the foundation/basis on which CBDT issued the circular was misplaced and drew our attention to Para No. 4 of Circular wherein the CBDT refers to the decision of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. Vs. CIT in (225 ITR 802), which decision according to him, have no bearing on the subject matter and pointed out that the Hon’ble Supreme Court decision (Madras Industrial Investment Corporation Ltd. (supra) was in the context of discount written off proportionately each year over period of redemption of debenture; and the Hon’ble Supreme Court held that the liability to pay the discounted amount over and above the amount received for the debentures was a liability incurred by the assessee company for the purpose of its business in order to generate funds for its business activities and it was therefore, expenditure and the Hon’ble Supreme Court upheld the assessee’s claim of deduction only the proportionate part of discount over the relevant accounting period and noted that such a claim was inconformity with the accounting practice of showing the discount in the “discount on debentures account” which was written off over the period of the debentures. According to the Ld. Sr. Counsel thus it can be noted that decision in Madras Industrial Investment Corporation Ltd. (supra) was in the context of expenditure/discount on debentures and not in respect of claim of depreciation which is an allowance and not per-se expenditure/loss. Thus according to Shri Vohras CBDT erred in applying the ratio of the decision in Madras Industrial Investment Corporation (supra) to disallow the claim of depreciation u/s. 32(1)(ii) of the Act as well to allow spreading of cost of construction of road during the tenure of concessionaire agreement. And therefore, according to him AO’s action of blindly following the circular no. 19/2014 for disallowing the assessee’s claim for depreciation @ 25% for the intangible asset claimed u/s 32(1)(ii) of the Act was erroneous.
18. Having heard both the parties and after perusal of the records, we note that assessee had constructed the road/Project Highway [as stated at Page 12 of Concession Agreement (CA) for Design, Construction, Development, Finance, Operation & Maintenance of KM 135, 469 (End of proposed Kolkata Bypass) to KM 211 (Kurnool) on NH-7 in the State of Andhra Pradesh under North-South Corridor (NHDP Phase II) on BOT (Annuity) basis] as per the terms of CA dated 20.03.2006 signed between NHAI and assessee-company. The assessee had filed its return of income on 26.09.2011 declaring loss of Rs. 88,91,21,522/- and the assessee initially claimed depreciation @ 15% on opening WDV on toll roads and thereafter revised the claim of depreciation @ 25% on the right to collect “annuity” on the toll road constructed as an intangible asset u/s. 32(1)(ii) of the Act. But the AO rejected the claim of depreciation but allowed amortization of the expenditure incurred on the construction of the road amounting to Rs. 43,66,99,212/- which action of AO is as per the CBDT Circular No. 09/2014. On appeal, the Ld. CIT(A) took note of the decision of the Hon’ble Rajasthan High Court in the case of Pr.CIT v. GVK Jaipur Expressway Ltd. (supra) wherein their Lordships held that the developer of roadways was entitled to claim depreciation [this decision of Hon’ble Rajasthan High Court was challenged by the revenue before Hon’ble Supreme Court by preferring SLP which was dismissed (supra)]. The Ld. CIT(A) also noted that the Hon’ble Madras High Court has followed the ratio of the decision of Hon’ble Rajasthan High Court in the case of Jaipur Expressway (supra) in the case of CIT Vs. Tamil Nadu Road Development Ltd. (supra) and allowed the claim of depreciation at the rate of 10% on the roadways built and maintained by the assessee on BOT basis. Still not satisfied the assessee has filed the appeal claiming 25% depreciation on the right to claim “annuity” on the roads it built (i.e. 25% on opening WDV) and the revenue has filed cross-appeal against the impugned action of Ld. CIT(A) allowing depreciation @ 10% instead of AO’s action allowing amortization of expenses. It was brought to our notice, that even though assessee brought to the notice of the Ld. CIT(A) that Tribunal in assessee’s own case for AY 2010-11 (supra) had allowed the claim of depreciation @ 25% on the right to collect annuity on the road built and maintained by it as per concessionaire agreement between the NHAI and assessee, but the Ld. CIT(A) has declined to follow the Tribunal’s order by taking note of the decision of the Hon’ble Bombay High Court in the case of CIT Vs. West Gujarat Expressway Ltd. (supra) and North Karnataka Expressway Ltd. (supra) wherein the Hon’ble High Court, had held that an Infrastructure Development Company that had constructed a ‘toll road’ on build, operate and transfer (BOT) basis on the land owned by the Government/UOI, not being the owner of the said road would not be entitled for depreciation on the same. Thereafter the Ld. CIT(A) acknowledged that the Tribunal while upholding the claim of 25% depreciation on intangible asset has distinguished the decision of the Hon’ble Bombay High Court which action of Tribunal according to him, is not supported by the decision of any High Courts. Thereafter, he took note of the decision of Hon’ble Rajasthan High Court in the case of Jaipur Expressway Ltd. (supra) and Hon’ble Madras High Court decision in the case Tamil Nadu Road Development Ltd. (supra) and allowed the claim of depreciation partly by allowing 10% of the depreciation instead of the 25% depreciation on the opening WDV.
19. We do not countenance the action of Ld CIT(A) of not appreciating/understanding the Tribunal order in assessee’s own case for AY 2010-11 wherein the Tribunal has clearly distinguished the ratio of the Hon’ble Jurisdictional High Court in the case of North Karnataka Expressway Ltd. (supra) & West Gujarat Expressway Ltd. (supra) and in these two cases, the Hon’ble High Court did not dealt with assessee’s claim of depreciation on right to annuity [Intangible Asset u/s 32(1)(ii) of the Act]. It is further noted that Hon’ble High Court while deciding the case of North Karnataka Expressway Ltd. (supra) has observed that as the assessee had invested in the project of construction, development and maintenance of the National Highway, therefore, claim for depreciation on the assets in the form of building and plant & machinery etc. can be validly raised and granted. Also, their Lordship had referred to the observation recorded by the CIT in his order passed under Sec.263 of the Act, wherein he had while declining the assesses claim for depreciation on ‘toll road’ had categorically stated that it was not the case of the assessee that the claim of depreciation was being raised in respect of its intangible rights i.e. right to use the asset without being the actual owner of the same.
20. We further note that in both the cases i.e. of North Karnataka Expressway Ltd. as well as of West Gujarat Expressway Ltd., (supra) the decision was rendered by the Hon’ble Jurisdictional High Court order in the context of the issue that as to whether or not an Infrastructure Development Company which had constructed a “toll road” on BOT basis on the land owned by Central Government would be entitled for depreciation on such ‘toll road’. We find that the Hon‟ble High Court had observed that in the absence of ownership of the ‘toll road’ which belonged to the Central Government, the assessee would not be entitled to claim depreciation on the same. However, the issue as to whether or not an Infrastructure Development Company that had constructed a ‘toll road’ on BOT basis on the land owned by Central Government would be entitled to claim depreciation under Sec.32(1)(ii) in respect of its “right to collect annuity/toll “i.e. an intangible asset” was not raised in both of the aforesaid cases. Our aforesaid view stands fortified from perusal of the order of the Hon‟ble High Court in the case of North Karnataka Expressway Ltd. (supra) wherein the Hon’ble High Court had observed that the question before their Lordship was as to when a person who is in the business of Infrastructure Development constructs a road on build, operate and transfer (BOT) basis on the land owned by the Government, then, can it claim depreciation on such ‘toll road’. We find that the Hon‟ble High Court had observed that though an Infrastructure Development company that had constructed a road on BOT basis on the land owned by the Central Government was not entitled to claim depreciation on the ‟toll roads” as it was not owner of the same, however, it could definitely claim depreciation on its investments made in the project and such other assets. Accordingly, it was observed by the Hon’ble High Court of its order that the claim for depreciation could be validly raised and granted to the extent stated hereinabove. Also, it was clarified by the Hon‟ble High Court that their Lordships was concerned only with the claim of the assessee as regards depreciation on the road itself. It is noted that the Hon’ble High Court in its aforesaid judgments had confined its adjudication to the issue that as to whether or not an Infrastructure Development Company that had constructed a road on BOT basis on land owned by the Central Government would be eligible to claim depreciation on such ‘toll road’ so constructed and operated by it. Accordingly, we are of the considered view, that the issue as to whether an Infrastructure Development company that had constructed a road on build, operate and transfer (BOT) basis on the land owned by the Central Government would be entitled to claim depreciation under Sec. 32(1)(ii) in respect of its intangible rights i.e. “right to collect annuity / toll” had not been adjudicated by the Hon’ble High Court in its aforesaid order in the case of North Karnataka Expressway Ltd. (supra). We further find that the Hon’ble Jurisdictional High Court had thereafter once again reiterated its aforesaid view while disposing off the appeal of the revenue in the case of M/s West Gujarat Expressway Ltd. (supra). As is discernible from the order, the only two issues which were raised by the revenue in its aforesaid appeal before the High Court were, viz. (i). Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in directing the A.O to grant depreciation on assets not owned by the Respondent that goes against provisions of Section 32 of the I.T Act?; and (ii). Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in its decision of treating toll roads as plant and machinery, when this is not as per rule 5 of New Appendix of the I.T Rules?. As such, we find that the revenue had only sought the adjudication of the issue as to whether the Tribunal was right in allowing depreciation to the assessee on “toll roads” by treating the same as plant and machinery. It is in the backdrop of the aforesaid issues which were raised by the revenue that the Hon‟ble High Court by relying on its earlier order in the case of North Karnataka Expressway (supra) had concluded, that the issue therein involved was squarely covered by the said decision. Accordingly, the Hon‟ble High Court by drawing support from the observations recorded in its earlier order in the case of North Karnataka Expressway Ltd. (supra) had therein answered the aforesaid two substantial questions of law in the negative i.e. in favour of the appellant-revenue and against the respondent-assessee. Thus in our considered view, the Hon‟ble High Court in its aforesaid order M/s West Gujarat Expressway Ltd. (supra) had confined its adjudication to the aforesaid two substantial questions of law which were raised by the revenue before it.
21. Thus, we find that the Hon’ble High Court’s decision in North Karnataka Expressway Ltd. as well as West Gujarat Expressway Ltd. (supra) does not put any fetter on the claim made by the assessee regarding its claim of depreciation on the right to collect “annuity” on the road constructed by it u/s. 32(1)(ii) of the Act. This view has been reiterated by the Tribunal in assessee’s own case for AY 2010-11 decided on 28.02.2018. Further, we find that the Special Bench of the Tribunal in the case of Progressive Construction Ltd. (supra) had concluded, that where an Infrastructure Development company that had constructed a road on build, operate and transfer (BOT) basis on the land owned by the Central Government gets vested with a right to an intangible asset under Explanation 3(b) r.w. Sec.32(1)(ii) of the Act, and the assessee would be eligible to claim depreciation on such asset as per the specified rate. Apart from that, it was observed by the Special Bench, that where the assessee had never claimed expenditure incurred for construction of the road on build, operate and transfer (BOT) basis, as a deferred revenue expenditure, the same could not have been amortized in terms of CBDT Circular No. 9 of 2014, dated, 23.04.2014. The observations of the Ld. “Special bench” of the Tribunal which on the issue under consideration before us are as under:
“11. Undisputedly, for executing the project, assessee has incurred expenses of Rs.214 crore. It is also not disputed that as per the terms of the C.A., the Government of India is not obliged / required to reimburse the cost incurred by the assessee to execute / implement the project facilities. The only right / benefit allowed to the assessee by the Government of India is to operate the project / project facilities during the concession period of 11 years 7 months and to collect toll charges from vehicles / persons using the project / project facilities. Thus, as could be seen, the only manner in which the assessee can recoup the cost incurred by it in implementing the project / project facility is to operate the road during the concession period and collect the toll charges from user of the project facility by third parties. Admittedly, the assessee has taken up the project as a business venture with a profit motive and certainly not as a work of charity. Further, by investing huge some of Rs.214 crore, the assessee has obtained a valuable business / commercial right to operate the project facility and collect toll charges. Therefore, in our considered opinion, right acquired by the assessee for operating the project facility and collecting toll charges is an intangible asset created by the assessee by incurring the expenses of Rs.214 crore. The contention of the learned Senior Standing Counsel that expenditure of Rs.214 crore has brought into existence a tangible asset in the form of roads and bridges of which the assessee is not the owner but it is the Government of India is nobody’s case. Further, the learned Senior Standing Counsel’s apprehension that it will lead to a situation where both Government of India and the concessionaire will claim depreciation on the asset created with the very same expenditure, in our view, is not borne out from facts on record. At the cost of repetition we must observe, as per the terms of agreement the expenses incurred by the assessee towards construction of the roads, bridges, etc., were not going to be reimbursed by the Government of India. This fact was known to both the parties before the execution of the agreement as the tender itself has made it clear that the project is to be executed with private sector participation on BOT basis. Thus, from the very inception of the project, assessee was aware of the fact, it has to recoup the cost incurred in implementing the project along with the profit from operating the road and collecting toll charges during the concession period. Therefore, assessee has capitalized the cost incurred on the BOT project on which it has claimed depreciation. Thus, in our view, the expenditure incurred by the assessee of Rs.214 crore for creating the project or project facilities has created an intangible asset in the form of right to operate the project facility and collect toll charges. Further, it is the contention of the learned Senior Standing Counsel that if at all any right is created under the C.A. for collecting toll, such right accrued to the assessee on the date of execution of agreement i.e., 22nd December 2005, therefore, the expenditure incurred by such date should be the value of intangible asset which can alone be considered for depreciation under section 32(1)(ii) of the Act. We are afraid, we cannot accept the above argument of the learned Senior Standing Counsel. When the C.A. confers a right on the assessee to operate the project facility and collect toll charges over the concession period of 11 years and 7 months, the assessee can start operating and collecting toll charges only when the project facility is ready for use. Therefore, until the project is completed and ready for use by vehicles or persons assessee cannot collect toll charges for user of the project facilities. Thus, the right to operate the project facility and collect toll charges is integrally connected to the completion of the project facility which cannot be done unless the assessee invests its fund for completing the project. Therefore, keeping in view the aforesaid fact, it cannot be said that the right to collect toll has accrued to the assessee on the date of execution of the agreement. If we accept the aforesaid argument of the learned Senior Standing Counsel, in other words, it would mean that without even executing and completing the project facility, assessee would be collecting toll charges. Therefore, the contention of the learned Senior Standing Counsel that the expenditure incurred by the assessee till execution of the agreement can only be considered as an intangible asset, in our view, is illogical, hence, cannot be accepted. Thus, having held that the expenditure of Rs.214 crore incurred by the assessee has resulted in creation of an intangible asset of enduring nature for the assessee, it is necessary now to examine whether such intangible asset comes within the scope and ambit of section 32(1)(ii) of the Act. For this purpose, it is necessary to look into the said provision which is reproduced hereunder for the sake of convenience.
Depreciation.
32(1)(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature67, being intangible assets acquired on or after the 1st day of April, 1998, owned67, wholly or partly, by the assessee67 and used for the purposes of the business67 or profession, the following deductions shall be allowed—]
12. Explanation 3 to section 32(1) defines intangible asset as under:-
[Explanation 3.—For the purposes of this sub-section, [the expression “assets”] shall mean—
(a) tangible assets, being buildings, machinery, plant or furniture;
(b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature.
13. A plain reading of the aforesaid provisions would indicate that certain kind of assets being knowhow, patents, copyrights, trademarks, license, franchise, or any other businesses or commercial rights of similar nature are to be treated as intangible asset and would be eligible for depreciation at the specified rate. It is the claim of the assessee that the right acquired under C.A. to operate the project facility and collect toll charges is in the nature of license. However, the learned Senior Standing Counsel has strongly countered the aforesaid claim of the assessee by referring to the definition of license as provided under the Indian Easements Act, 1882. For better appreciation, we intend to reproduce herein below the definition of “license” as provided under section 52 of the Indian Easements Act, 1882: –
“License” defined:- Where on person grants to another, or to a definite number of other persons, a right to do, or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful and such right does not amount to an easement or an interest in the property, the right is called a license.”
14. It has been the contention of the learned Senior Standing Counsel that as the term “license” has not been defined under the Income Tax Act, 1961, the definition of “license” under the Indian Easements Act, 1882, has to be looked into. Accepting the aforesaid contention of the learned Senior Standing Counsel, let us examine the definition of “license” extracted herein above. A plain reading of section 52 of the Act makes it clear, a right granted to a person to do or continue to do something in the immovable property of the grantor, which, in the absence of such right would be unlawful and such right does not amount to an easement or interest in the property, then such right is called a license. If we examine the facts of the present case, vis-a-vis, the definition of license under the Indian Easements Act, 1882, it would be clear that immovable property on which the project / project facility is executed / implemented is owned by the Government of India and it has full power to hold, dispose off and deal with the immovable property. By virtue of the C.A., assessee has only been granted a limited right to execute the project and operate the project facility during the concession period, on expiry of which the project / project facility will revert back to the Government of India. What the Government of India has granted to the assessee is the right to use the project site during the concession period and in the absence of such right, it would have been unlawful on the part of the concessionaire to do or continue to do anything on such property. However, the right granted to the concessionaire has not created any right, title or interest over the property. The right granted by the Government of India to the assessee under the C.A. has a license permitting the assessee to do certain acts and deeds which otherwise would have been unlawful or not possible to do in the absence of the C.A. Thus, in our view, the right granted to the assessee under the C.A. to operate the project / project facility and collect toll charges is a license or akin to license, hence, being an intangible asset is eligible for depreciation under section 32(1)(ii) of the Act.
15. Even assuming that the right granted under the C.A. is not a license or akin to license, it requires examination whether it can still be considered as an intangible asset as described under section 32(1)(ii) of the Act. In this context, it has been the contention of the learned Senior Standing Counsel that the intangible asset mentioned under section 32(1)(ii) of the Act are specifically identified assets, except, the assets termed as “any other business or commercial rights of similar nature”. He had submitted, applying the principle of ejusdem generis the rights referred to in the expression “any other business or commercial rights of similar nature”, should be similar to one or more of the specifically identified assets preceding such expression. The aforesaid contention of the learned Departmental Representative is unacceptable for the reasons enumerated hereinafter.
16. We have already held earlier in the order that by incurring the expenditure of ‘Rs.214 crore assessee has acquired the right to operate the project and collect toll charges. Therefore, such right acquired by the assessee is a valuable business or commercial right because through such means, the assessee is going to recoup not only the cost incurred in executing the project but also with some amount of profit. Therefore, there cannot be any dispute that the right to operate the project facility and collect toll charges therefrom in lieu of the expenditure incurred in executing the project is an intangible asset created for the enduring benefit of the assessee. Now, it has to be seen whether such intangible asset comes within the expression “any other business or commercial rights of similar nature”. As could be seen from the definition of intangible asset, specifically identified items like knowhow, patents, copyrights, trademarks, licenses, franchises are not of the same category, but, distinct from each other. However, one thing common amongst these assets is, they all are part of the tool of the trade and facilitate smooth carrying on of business. Therefore, any other intangible asset which may not be identifiable with the specified items, but, is of similar nature would come within the expression “any other business or commercial rights of similar nature”. The Hon’ble Supreme Court in CIT v/s Smifs Securities (supra) after interpreting the definition of intangible asset as provided in Explanation 3 to section 32(1), while opining that principle of ejusdem generis would strictly apply in interpreting the definition of intangible asset as provided by Explanation 3(b) of section 32, at the same time, held that even applying the said principle „goodwill’ would fall under the expression “any other business or commercial rights of similar nature”. Thus, as could be seen, even though, „goodwill’ is not one of the specifically identifiable assets preceding the expressing “any other business or commercial rights of similar nature”, however, the Hon’ble Supreme Court held that „goodwill’ will come within the expression “any other business or commercial rights of similar nature”. Therefore, the contention of the learned Senior Standing Counsel that to come within the expression “any other business or commercial rights of similar nature” the intangible asset should be akin to any one of the specifically identifiable assets is not a correct interpretation of the statutory provisions. Had it been the case, then „goodwill’ would not have been treated as an intangible asset. The Hon’ble Delhi High Court in case of Areva T and D India Ltd. (supra), while interpreting the aforesaid expression by applying the principles of ejusdem generis observed, the right as finds place in the expression “business or commercial rights of similar nature” need not answer the description of knowhow, patents, trademarks, license or franchises, but must be of similar nature as the specified asset. The Court observed, looking at the meaning of categories of specified intangible assets referred to in section 32(1)(ii) of the Act preceding the term “businessor commercial right of similar nature”, it could be seen that the said intangible assets are not of the same line and are clearly distinct from one another. The Court observed, the use of words “business or commercial rights of similar nature”, after the specified intangible assets clearly demonstrates that the legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets which were neither visible nor possible to exhaustively enumerate. The Hon’ble Court, therefore observed, in the circumstances the nature of business or commercial right cannot be restricted only to knowhow, patents, trademarks, copyrights, licence or franchise. The Court observed, any intangible assets which are invaluable and result in smoothly carrying on the business as part of the tool of the trade of the assessee would come within the expression “any other business or commercial right of similar nature”.
17. In the case of Techno Shares and Stocks Ltd. v/s CIT, [2010] 327 ITR 323 (SC), the Hon’ble Supreme Court while examining the assessee’s claim of depreciation on BSE Membership Card, after interpreting the provisions of section 32(1)(ii), held that as the membership card allows a member to participate in a trading session on the floor of the exchange, such membership is a business or commercial right, hence, similar to license or franchise, therefore, an intangible asset. In the present case, undisputedly by virtue of C.A. the assessee has acquired the right to operate the toll road / bridge and collect toll charges in lieu of investment made by it in implementing the project. Therefore, the right to operate the toll road / bridge and collect toll charges is a business or commercial right as envisaged under section 32(1)(ii) r/w Explanation 3(b) of the said provisions. Therefore, in our considered opinion, the assessee is eligible to claim depreciation on WDV as an intangible asset. Thus, we answer the question framed by the Special Bench as under:-
The expenditure incurred by the assessee for construction of road under BOT contract by the Government of India has given rise to an intangible asset as defined under Explanation 3(b) r/w section 32(1)(ii) of the Act. Hence, assessee is eligible to claim depreciation on such asset at the specified rate.
18. In view of our aforesaid conclusion, there is no need to answer the second part of the question framed. This disposes of grounds no.2, 3, 5 and 6.”
22. In the light of the Ld. Special Bench decision, we are of the considered view that assessee an Infra Development Company that has constructed road on BOT basis on the land owned by the Central Government would be eligible for claim of depreciation in respect of its intangible right i.e. right to collect annuity u/s. 32(1)(ii) which is squarely covered by the Special Bench decision of the Tribunal in the case of Progressive Construction Ltd. (supra) and also the decision of the Tribunal in assessee’s own case for AY 2010-11 wherein the Tribunal held that the assessee is eligible for depreciation on intangible assets which falls within the scope of section 32(1)(ii) of the Act and allowed ground no.2 of Cross Objection wherein assessee prayed for grant of depreciation of Rs. 215,72,80,138/- for AY 2010-11. In the light of the aforesaid discussion, we direct AO to grant the assessee claim of depreciation @ 25% on the opening WDV on toll roads constructed as per the agreement with NHAI commencing on 15.09.2006.
23. Thus, the ground no. 2.1 & 2.2 of the assessee are allowed, therefore ground no. 2.3 has become infructuous and consequently revenue’s ground no. 1 & 2 stands dismissed.
24. Next ground of the Revenue is against the action of the Ld. CIT(A) allowing the Interest Income as “Income from Business” and not from “Income from Other Sources” as held by the AO.
25. Brief facts of the case is that the AO noticed on perusal of the P & L A/c that “Interest Income” of Rs. 49,60,027/- has been included by the assessee in the Business Income. According to the AO, the said income is not derived from the business activity of the assessee- company, therefore, he held that the Interest Income need to be taxed as “Income from other Sources”.
26. On appeal the Ld. CIT(A) noted that the assessee had put the annuity received as Fixed Deposit (FD) in view of the terms of the “permitted investment” listed in the agreement with NHAI. According to the Ld. CIT(A), the “Interest Income” from FD is directly linked with the business activity of the assessee and hence the same has to be considered as “Income from Business”. The Ld. CIT(A) further noted that the other activities for which the sums are deposited relates to operation and maintenance of the Roadways and hence, the income earned therein also was generated out of business activity. Therefore, the Ld. CIT(A) has allowed the action of assessee treating Interest Income under the head “Business Income”. Aggrieved, the revenue is before us.
27. Assailing the action of Ld. CIT(A), the Ld. DR contended that “interest income” was not derived from business activity of assessee as it is earned from Fixed Deposit. Therefore, AO rightly held that “interest income” need to be assessed under the head “income from other sources” and the Ld. CIT(A) erred in allowing the claim of assessee that interest income was from business. Therefore, he prayed that the action of Ld. CIT(A) be reversed and the action of AO be restored. Per contra, the Ld. Sr. Counsel for assessee brought to our notice that during A.Y. 2011-12, the assessee earned the revenue by receipt of “annuity” from NHAI and the income which was earned by the assessee was invested in the bank by way of fixed deposit and the assessee earned interest income, the details which are found placed at page 65 of paper book which shows the details of interest income received during the period 31 august 2010 to 20 March 2011. According to Ld. Sr. Counsel, the assessee has borrowed money from banks and the total amount outstanding as on 31 March 2011 was to the tune of Rs. 461.34 Crores and the loan outstanding as on 31 March 2010 was of Rs. 503.29 Crores. According to him, the assessee was obliged to maintain Escrow account with Bank of India, New Delhi Branch; and all the funds which the assessee receives have to be routed through the Escrow account. It was pointed out by the Ld. Sr. Counsel that the investment in fixed deposit was also from this Escrow account and he referred to common loan agreement entered into with the lenders which is found placed at page 148 to 233 of PB. In this agreement, according to him, there is reference to Escrow account to be opened with Escrow agent being Bank of India and referred to page 178 of paper book. The Ld. Counsel pointed out from page 185 of PB that there is a clause for repayment of principal amount and specified dates are mentioned on which dates the principal amount needs to be repaid to banks. The Ld. Sr. Counsel referred to page 186 of paper book wherein clause 4.1.7.2 it is stated that the borrower will deposit all amount, instruments, proceeds, claims, monies and cash flow in the Escrow account. According to him, assessee is permitted to make investments only in “Permitted Investments” ; and the “Permitted Investments” are defined on page 167 of the paper book. Accordingly, the assessee was obliged to make investments in the “Permitted investments” and one of the mode was to deposit with scheduled commercial banks or financial institutions. According to him, these facts have been explained to the Assessing officer during the assessment proceedings that loans have to be repaid in fixed installments and hence the assessee was constrained to keep the funds in fixed deposits to earn interest, which would partly meet the interest burden of bank loans Further, it was also explained to AO that, having the complicated business structure and geographical location, the assessee had to keep some surplus funds in hand in order to meet the immediate requirements of the roads. In the aforesaid set of facts according to Ld. Sr. Counsel, since there were business exigencies in keeping the funds in fixed deposits, the assessee had earned interest income earned on those fixed deposits and is assessable as income from head “business”. Accordingly, he submitted that the fixed deposits have been made out of business exigencies and hence the interest income should have been assessed under the head “Income from Business” and the Ld. CIT(A) having appreciated the facts have reversed the action of AO and upheld the treatment given by assessee. Thus, according to him, it can be seen that the interest income is earned from the fixed deposits which was placed out of the income earned by the assessee during the year and there is a direct link between the interest incomes with the main business activity of the assessee.
28. The assessee further submit that once the source of the investment in fixed deposit is out of the business income chargeable to tax, then the interest should be taxed under the head “Income from business and profession”. And for this proposition the assessee relied on the decision of Hon’ble Bombay High Court in the case of Lok Housing Ltd reported in 308 ITR pg.356. The Ld. Sr. Counsel, also relied upon the decision of the Mumbai Tribunal in the case of West Gujarat Expressway Ltd for AY 2009-10, wherein the Tribunal has held that if the assessee was required to deposit the funds with the bank as per the loan agreement, the interest income earned on these investments need to be taxed under the head “Income from Business & Profession”.
29. The Ld. Sr. Counsel further pointed out that the investment in fixed deposit is not out of surplus funds available with the assessee and in fact assessee does not have any surplus funds, as the assessee has huge bank liability which is to be repaid as and when the assessee earn the income. According to assessee, instead of keeping the money in current account, the assessee as per the arrangement with the lenders, have deposited in Escrow account and from this account, the amount is invested in the fixed deposit; and relied on the Tribunal decision in assessee’s own case for AY 2010-11 (ITA NO 663/Mum/2015); and also on the decision of Jaipur ITAT in the case of Road Infrastructure Development Company of Rajasthan Ltd Vs DCIT (ITA No 628/JP/2014). Further according to Ld. Sr. Counsel, the revenue’s reliance made on the decision Hon’ble Bombay High Court in the case of M/s. Swami Spices Ltd. passed on 19th April, 2010 is distinguishable and in that case, the assessee company had deposited the surplus found in FD and therefore not applicable in the facts of the case. Therefore, he does not want us to disturb the impugned action of Ld CIT(A).
30. We have heard both the parties and perused the records. We note that the AO on perusal of the profit and loss accounts of the assessee company noted that “interest income” of Rs.49,60,027/- has been shown under the head “business income”. However, according to the AO, the interest income was not derived from the business activity of the assessee company. Therefore, he held that interest income need to be treated under the head “income from other sources”. On appeal, the Ld. CIT(A), accepting the contention of the assessee that in the facts of the case, the assessee by virtue of agreement between the NHAI/lender banks had to deposit the receipts/annuity in the Escrow account and not in the current account and had to invest the amount only in “Permitted Investments”. Accordingly, the interest income have nexus with the business receipts/annuity. And therefore, the Ld. CIT(A) has allowed the claim of the assessee by holding as under: –
“6.3 DECISION
It is seen that the appellant put the annuity received as fixed deposit in view of the terms of the ‘permitted investments’ listed in the agreement with the NHAI. In respect of interest income on the same, it is directly linked with the business activity of the appellant and hence, the same is to be considered as “Income from Business. The other activities for which the sums are deposited relate to operation and maintenance of the roadway and hence, the income earned therein is also generated out of business activity. Further, in appellant’s own case in AY. 201011 in ITA No. 663/Mum/2015 has allowed the appeal of the appellant that the said interest income is income from business. In view of all the above, the interest income earned is treated as Income from Business of the appellant and not Income from Other Sources. The AQ is hereby directed to do the same.”
31. We find that the Ld. CIT(A) have found that the assessee has deposited the “annuity” received from NHAI as fixed deposit in view of the “Permitted Investments” as per the agreement with NHAI/lenders. According to the Ld. CIT(A), the interest income has direct link with the business activity of the assessee. And therefore, according to him, the same need to be treated as “Income from business” ; and the Ld. CIT(A) also noted that the other activities for which the sums are deposited relate to operation and maintenance of the roadway and hence, the income earned was generated out of business activity. And the Ld. CIT(A) also took note of the Tribunal order in assessee’s own case on this issue for AY. 2010-11 (ITA. No.663/Mum/2015) wherein, it was held as under: –
“5. Having heard rival submissions, we are of the view that there is merit in the later submissions made by Ld A.R. From the financial statements, we notice that the assessee has borrowed loans for executing the project and the amount of loan outstanding as on 31.3.2010 stand at Rs.824.73 crores. The loan taken from banks alone stands at Rs.503.29 crores. It is an admitted fact that the term loans have to be repaid in fixed installments and hence there is merit in the contentions of the assessee that it was constrained to keep the funds in fixed deposits to earn interest, which will meet a portion of interest burden of bank loans. Further, we find merit in the contentions of the assessee that it had to keep some surplus funds in hand in order to meet the maintenance requirements of the roads. In these set of facts, we are of the view that there were business exigencies in keeping the funds in fixed deposits and hence there is merit in the contentions of the assessee that interest income earned on those fixed deposits is assessable as income from business. In the case of Lok Holdings (supra), the assessee therein collected advances from the customers who intended to purchase the flats in the properties as developed by the assessee. Since the construction was going on, the surplus funds available with the assessee out of the advances so received was deposited in Fixed deposits. The Hon’ble jurisdictional Bombay High Court, after considering the decision of Hon’ble Supreme Court rendered in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd (supra), held that the interest income is assessable under the head Income from business.
6. In view of the foregoing discussions, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to assess the interest income earned on fixed deposits during the year under consideration as business income of the assessee.”
32. Respectfully following the Tribunal decision in assesse’s own case (supra), we confirm the action of Ld CIT(A) and dismiss the ground of appeal of the revenue.
33. In the result, appeals of the assessee are partly allowed and appeals of the revenue are dismissed.
Order pronounced in the open court on this 25/08/2023
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