Income Tax - expenditure incurred for development of roads/highways in BOT agreements - CBDT clarifies
HOW to treat the expenditure incurred on development and construction of infrastructural facilities like roads/highways on Build-Operate-Transfer ('BOT') basis with right to collect toll?
This is an issue which is leading to mega disputes, what with several such BOT projects with the attendant toll collections springing up all over the place in the recent past.
Now, the question is whether under Income Tax, such expenditure:
1. is entitled for depreciation under section 32(1)(ii) of the Act or
2. the same can be amortized by treating it as an allowable business expenditure under the relevant provisions of the Income-tax Act.
In such projects, the developer ('assessee'), in terms of concessionaire agreement with Government or its agencies is required to construct, develop and maintain the infrastructural facility of roads/highways which, inter-alia, includes laying of roads, bridges, highways, approach roads, culverts, public amenities etc. at its own cost and its utilization for a specified period. In lieu of consideration of the expenditure incurred on construction, operation and maintenance of the infrastructure facility covered by the period of the agreement, the assessee is accorded a right to collect toll from users of such facility. The expenditure incurred by such assessee on development and construction of such infrastructural facility are capitalized in the accounts. In returns-of- income, assessees are generally claiming depreciation on such capitalized expenditure treating it as an 'intangible asset' in terms of section 32(1)(ii) of the Act while in assessments, such claims are being disallowed by the Assessing Officer on the grounds that such infrastructural facility is not owned, wholly or partly, by the taxpayer which is an essential condition for claiming depreciation and further right to collect toll does not fall in any of the categories of 'intangible assets' specified in sub-clause(ii) of sub-section (1) of section 32 of the Act.
Board feels that the present provisions of the Act do not allow claim of depreciation on Toll ways due to non-fulfilment of ownership criteria in such cases.
The Supreme Court had in Madras Industrial Investment Corporation Ltd. vs. CIT reported in allowed spreading over of liability over a number of years on the ground that there was continuing benefit to the company over a period.
So, the Board clarifies that:-
1. The cost of construction on development of infrastructure facility of roads/highways under BOT projects may be amortized and claimed as allowable business expenditure under the Act.
2. The amortization allowable may be computed at the rate which ensures that the whole of the cost incurred in creation of infrastructural facility of road/highway is amortized evenly over the period of concessionaire agreement after excluding the time take for creation of such facility.
3. In the case where an assessee has claimed any deduction out of initial cost of development of infrastructure facility of roads/highways under BOT projects in earlier year, the total deduction so claimed for the Assessment Years prior to the Assessment Year under consideration maybe deducted from the initial cost of infrastructure facility of roads /highways and the cost 'so reduced' shall be amortized equally over the remaining period of toll concessionaire agreement.
Board also clarifies that this Circular is applicable only to those infrastructure projects for development of road/highways on BOT basis where ownership is not vested with the assessee under the concessionaire agreement.
CBDT Circular No. 09 /2014, Dated: April 23 2014