2025 (7) TMI 1497 - AT - Income Tax

Revision u/s 263 - depreciation @ 25% on the opening WDV plus capital expenditure incurred during the year on built operate and transfer road project - HELD THAT - Section 263 cannot be invoked if there are two views in the matter one held by the Ld. AO and the other by the Ld. Pr. CIT. As regards depreciation one view is that which was taken by Ld. AO and duly supported by Hon ble ITAT special bench Hyd and the other is the one taken by the Ld. Pr. CIT. The other issue u/s 263 is that the appellant has included the negative grant of Rs. 595 crore which is to be paid to NHAI (from 15th year) to the cost of the asset which the Ld. Pr. CIT has asked the AO to delete inspite of the fact that the appellant is following mercantile system of accounting. Similarly as regards negative grant one view is that taken by the Ld. AO in view of clause 23.1 of the concession agreement between NHAI and the appellant and the second view is as taken by the Ld. Pr. CIT. CIT has invoked sec 263 on the ground that the Ld. AO has not considered CBDT circular No. 09/2014 dated 23/04/2014. This circular does not mention the date from which it will be made applicable. Therefore the only inference which can be drawn is that it will be applicable from the date of issue of the circular i.e. 23/04/2014 which means A. Y. 2014-15. It is nowhere mentioned in the circular that it will apply from the date when expl. 3 to section 32(1)(ii) was inserted in the Act. Expl. 3 was inserted by the Finance (No. 2) Act 1998 w.e.f. 01/04/1999. Accordingly even if it is presumed for a moment but not admitted that the circular is applicable it can only be applicable from A.Y. 2014-15. Hence circular no. 9/2014 is not applicable to the assessee in this year at least. In fact In para 7 of CBDT circular no. 9/2014 it is clearly mentioned that in earlier years depreciation allowed is not to be withdrawn. Further by now it is judicially settled that CBDT circular does not have retrospective effect. The assessee has included the negative grant of Rs. 595 crore which is to be paid to NHAI (from 15th year) to the cost of the asset which the Ld. Pr. CIT has asked the ITO to delete. The assessee is following mercantile system of accounting and therefore has to account for all the liabilities which have accrued. The liability is duly ascertained and clearly mentioned in the concession agreement vide para 23.1. Therefore negative grant is the part of cost of project because the cost of project is total expenditure incurred or to be incurred by the assessee. The liability has accrued in the year of completion of project i.e. A. Y. 2012-13 subject to payment in subsequent years. The appellant/assessee is entitled to claim depreciation on road construction as admissible on intangible assets. Assessee has included the negative grant of Rs. 595 crore which is to be paid to NHAI (from 15th year) to the cost of the asset which the Ld. Pr. CIT has asked the ITO to delete. The assessee is following mercantile system of accounting and therefore has to account for all the liabilities which have accrued. The liability is duly ascertained and clearly mentioned in the concession agreement vide para 23.1. Therefore negative grant is the part of cost of project because the cost of project is total expenditure incurred or to be incurred by the assessee. There is no stipulation in the agreement for any change in this amount therefore this is an ascertained liability which in fact accrues as soon as the project is completed and becomes fully operational. CIT has mentioned that the payment has not been made and it will accrue from 15th year. He has not appreciated the fact that it is the payment which will become due from 15th year. The liability has already accrued as per clause23.1 of the Concession Agreement when the project was completed in AY 2012-13. Therefore the Pr. CIT was not justified in rejecting the claim of the assessee. Accordingly impugned order is set aside. The grounds of appeal are allowed.

Summary

ISSUES:

Whether the order passed under Section 263 of the Income-Tax Act, 1961 was validly invoked in setting aside the original assessment orders.Whether depreciation on intangible assets (rights under BOT road construction projects) is allowable under Section 32(1)(ii) of the Income-Tax Act.Whether the CBDT Circular No. 09/2014 dated 23.04.2014 has retrospective effect and applies to assessment years prior to 2014-15.Whether the negative grant amounting to Rs. 595 crore payable to the National Highway Authority of India (NHAI) forms part of the cost of the asset for depreciation purposes.Whether the issuance of notice under Section 143(2) and consequential assessments under Sections 143(3)/263 were valid when the assessment order was not set aside under Section 263.Whether penalty proceedings under Section 271(1)(c) can be sustained when no direction under Section 263 was issued for penalty.Whether interest under Sections 234B and 234C of the Income-Tax Act was correctly charged in the reassessment orders.

RULINGS / HOLDINGS:

The order under Section 263 was invalid as the Principal Commissioner of Income Tax (PCIT) did not hold that the assessment order was "erroneous in so far as it is prejudicial to the interest of revenue," a mandatory condition for invoking Section 263. Invocation of Section 263 is impermissible where two views are possible, and the AO's view was supported by a Special Bench judgment.Depreciation on the intangible asset consisting of rights under the BOT road construction project is allowable under Section 32(1)(ii) read with Explanation 3(b), as the assessee is the "deemed owner" of the intangible asset and entitled to claim depreciation @ 25% on written down value.CBDT Circular No. 09/2014 dated 23.04.2014 does not have retrospective effect and applies only from the date of issuance (Assessment Year 2014-15 onwards); it does not apply to earlier years.The negative grant of Rs. 595 crore payable to NHAI is an ascertained liability accruing on completion of the project and forms part of the cost of the asset under the mercantile system of accounting; therefore, it cannot be excluded from the asset cost for depreciation purposes.Notwithstanding the PCIT's directions, the issue of notice under Section 143(2) and consequential assessments under Sections 143(3)/263 without setting aside the assessment order under Section 263 is invalid and without jurisdiction.Penalty under Section 271(1)(c) cannot be sustained where there was no direction under Section 263 for penalty imposition.Interest charged under Sections 234B and 234C in the reassessment orders was not upheld in the impugned orders.

RATIONALE:

The legal framework for invoking Section 263 requires that the PCIT must hold the assessment order to be "erroneous in so far as it is prejudicial to the interest of revenue." The Supreme Court and High Court precedents clarify that where two views are possible, Section 263 cannot be invoked. The AO's view, supported by a Special Bench judgment (ACIT vs. M/s Progressive Constructions Ltd.), was a possible and sustainable view.Section 32(1)(ii) of the Income-Tax Act allows depreciation on intangible assets owned by the assessee. The Special Bench of the ITAT Hyderabad and other coordinate benches have held that rights under BOT contracts constitute intangible assets eligible for depreciation. The Supreme Court's interpretation in Techno Shares and Stocks Ltd. supports this position.CBDT Circular No. 09/2014 clarifies amortization of BOT project costs but is prospective in nature, applicable from its date of issue; it does not override settled law or apply retrospectively to prior assessment years.The mercantile system of accounting requires recognition of liabilities when they accrue, not when payment is made. The negative grant payable to NHAI is an ascertained liability under the concession agreement and thus forms part of the cost of the asset, consistent with accounting principles and judicial precedent (Ratnagiri Gas and Power Pvt. Ltd. vs DCIT).Issuance of notices and assessments beyond the scope of directions under Section 263 violates principles of natural justice and statutory mandate, rendering such actions without jurisdiction.Penalty proceedings require explicit direction under Section 263; absence of such direction invalidates penalty notices.The court relied on various judicial precedents including CIT (Central) vs Max India Ltd., CIT-LTU vs Power Finance Corporation Ltd., and decisions of coordinate benches to uphold these principles and reject retrospective application of circulars or invalid invocation of Section 263.