TMI Blog2021 (9) TMI 1536X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in obtaining counter guarantee to assessee business prospects and there exist the nexus of business transactions. We considering all are of the opinion that interest income earned by the assessee take the character of business transaction and to be treated as business income. Accordingly, we direct the Assessing Officer to treat the interest income taxable as business income and allow the grounds of appeal of the assessee. Claim of depreciation u/s 32(1)(ii) - right to set up an infrastructure facility and collect annuity thereon - assessee had constructed the Road and have the right to earn revenue in the form of annuity from the use of such intangible Asset being license or business or commercial right contemplated under the provisions of the Act - HELD THAT:- We considering the factual aspects, circumstances, legal decisions West Gujarat Expressway Ltd [ 2016 (4) TMI 1184 - BOMBAY HIGH COURT] ,Infrastructure Leasing Financial Services ltd [ 2019 (12) TMI 1499 - ITAT MUMBAI] are of the opinion that the assessee is eligible for depreciation on Road on (B.O.T) basis treating it as Intangible Asset under section 32(1)(ii) of the Act. Accordingly, we direct the assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as intangible asset. The appellant craves leave to add, alter, amend or withdrawal of additional ground of appeal herein and to submit such statement documents and papers as may be considered necessary either at or before the appeal hearing. 2. The Brief facts of the case that, the assessee company is engaged in the business of promoting financing infrastructure development projects. The assessee has filed the return of income for the A.Y 2008- 09 on 27.09.2008 declaring a total income(loss) of Rs. 1,10,09,815/- and the return of income was processed u/s 143(1) of the Act. Further, the assessee has filed the revised return of income on 21.09.2009 declaring a total income of Rs. Nil after claiming set off of brought forward business loss of Rs.5,13,20,549/-.Subsequently, the case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act along with questionnaire was issued. In compliance the Ld. AR of the assessee appeared from time to time and submitted the details and the case was discussed. The A.O on perusal of the financial statements found that the assessee has claimed interest expenditure in respect of the interest paid @ 8.5% p.a. on various loans. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and sustained the action of the A.O in treating the interest income on deposits/Loans being out of surplus funds obtained after completion of the business activities and the interest earned on deposits/loans has to be treated as income from other sources. The CIT(A) observed that the interest income was earned from surplus business funds and dismissed this ground of appeal. Whereas the CIT(A) has granted the relief in other grounds of appeal and partly allowed the appeal. Aggrieved by the CIT(A) order, the assessee has filed an appeal with the Hon ble Tribunal. 4. At the time of hearing the Ld. AR submissions on first disputed issue are that the CIT(A) has erred in confirming the action of the A.O in treating the interest income under income from other sources and further erred in observed that the assessee has invested surplus funds in fixed deposits/loans and no business activities are carried out. The Ld. AR submitted that the fixed deposits/loans are mandatory requisite for carryout the business projects and the interest form part of business income. On the additional ground of appeal of allowing the claim of deprecation on roads, the Ld.AR submitted that the assessee has co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the said income was not derived from the business activity of the assessee company and accordingly sought to treat the same as income under the head income from other sources . In response to show-cause notice issued by the ld. AO, the assessee vide letter dated 08/03/2014 submitted that it had earned interest income from fixed deposits amounting to Rs.39,44,157/- and that the said fixed deposits were placed out of business receipts of the assessee company and hence the said receipt would partake the charecter of business receipt and since the project was under construction during the relevant time, the said receipt would only go to reduce capital work in progress and cannot be independently taxed as income under the head income from other sources . It was also specifically pointed out that the said interest income was not earned by the assessee out of idle funds lying in the bank so as to apply the ratio laid down by the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., reported in 227 ITR 172(SC). Apart from this, the assessee also placed reliance on various other decisions of the Hon ble Supreme Court and other High Courts including Juri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) all monies received in relation to the Project from any source, including the Senior Lenders, Lenders of Subordinated Debt and HUDA; (ii) all funds received by the concessionaire from its shareholders in any manner or form; (iii) all its receivables; (iv) all proceeds received pursuant to any insurance claims; and (v) all monies received from any other sources in relation to and in respect of the project; May make other deposits of the Company s other funds into Escrow Accounts at any time. Provided however that the terms of this Agreement shall apply to such other funds deposited in the Escrow Account by the Company. 6.3. From the aforesaid clause, it could be safely concluded that assessee company had no other choice but to deposit all the receipts only in the aforesaid designated Escrow Account maintained pursuant to Escrow Agreement dated 01/02/2008. Since the funds were not fetching any interest to the assessee in the Escrow Account, the assessee chose to invest the said monies in fixed deposit for a temporary period in order to reduce the project cost. This interest income clearly establishes a business nexus and gets inextricably link ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ratio of the Supreme Court judgment in Bokaro Steel Ltd. (supra) to our mind is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise inextricably linked‟ to the setting up of the plant, such income is required to be capitalized to be set off against preoperative expenses. 5.1 The test, therefore, to our mind is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps available in Section 3 of the Act which states that for newly set up business the previous year shall be the period beginning with the date of setting up of the business. Therefore, as per the provision of Section 4 of the Act which is the charging Section income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or capital receipt. The income of a newly set up business, post the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under Section 14 in Chapter IV of the Act. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from other sources‟. On the other hand in Bokaro Steel Ltd (supra) where the assessee had earned interest on advance paid to contractors during pre-commencement period was found to be inextricably linked‟ to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre-operative expenses . 6. There is another perspective from which the present issue can be examined. Under Section 208 of the Companies Act, 1956 a company can pay interest on share capital which is issued for a specific purpose to defray expenses for construction of any work and which cannot be made profitable for a long period subject to certain restrictions contained in Section (2) to (7) of Section 208. This section was specifically noted by the Supreme Court in Challapalli Sugars Ltd vs CIT (1975) 98 ITR 167. The Supreme Court went on to observe at page 175 as follows: We have already referred to section 208 of the Companies Act which makes provision for payment of interest on share capital in certain contingencies. Clause (b) of subSection (1) of that section provides that in case interest is paid on share capital issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttention to the Co-ordinate Bench decision of this Tribunal in the case of Hazaribag Ranchi Expressway Ltd., vs ITO in ITA No.3669/Mum/2016 for A.Y.2011-12 dated 28/11/2018 wherein similar view was taken under same facts and circumstances by placing reliance on the decision of the Hon ble Delhi High Court referred to supra, among others. Respectfully following the same, we hold that the interest income of Rs.39,44,157/- on fixed deposits earned by the assessee would only go to reduce unallocated preoperative expenses of the project and cannot be taxed as income from other sources. Accordingly, the ground Nos. v vi raised by the assessee are allowed. 7. Whereas, in the present case, the assessee company has earned interest on bank deposits and on short term call money loan. The Ld.AR demonstrated in paper book page 36 37 working of interest income on bank deposits and interest on term loan. Further the interest income earned on the term loan provided @6% p.a. in the August 2005 was continuing and interest income was offered in earlier financial years. Further the Barrower of loan has provided guarantee to lenders of the assessee company which benefited substantially to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) on 3rd August 2007 and the appointed date was 10th December 2007. The Concession was for a period of 15 years commencing from 10th December 2007 ; that this project was awarded on Build, Operate and Transfer (BOT) annuity basis. Under the said agreement, HGCL had granted the right to investigate, study, design, engineer, produce, finance, construct, operate and maintain the project facilities. Assessee accordingly treated the right to acquire annuity pursuant to the project awarded to it on Build, Operate and Transfer (BOT) basis, as a commercial right and thereby it constitutes an intangible asset and accordingly eligible for depreciation u/s.32(1)(ii) of the Act. 3.4. We find that the very same issue in dispute has been considered by the Co-ordinate Bench of this Tribunal in the case of North America Expressway Ltd., vs. ACIT in ITA Nos. 4372 and 4373/Mum/2012 for A.Y.2005-06 dated 24/05/2021 wherein it was held as under:- 2. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, and also the judicial pronouncements relied upon by them. Our indulgence in the present appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sec. 8-A of the National Highway Act, 1956 is empowered to enter into an agreement with any person in relation to the development and maintenance of the whole or any part of a National Highway, but that in no way would affect the vesting of the National Highways in the Union. It was observed by the Hon ble High Court that the ownership of the National Highway as stands vested with the Central Government under Sec.4 of the National Highway Act, 1956 would not be diluted, for the reason, that the Central Government as per Sec.8-A (supra) had entered into an agreement with any person for development and maintenance of the whole or any part of the National Highway. To sum up, the Hon ble High Court had concluded 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, not being the owner of the said road would thus not be entitled for depreciation on the same. At this stage, we may herein observe, that the Hon ble High Court while concluding as hereinabove had also observed, that as the assessee had invested in the project of construction, development and maintenance of the Natio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in the form of building and plant and machinery etc. Accordingly, it was observed by the Hon ble High Court at Para 47 of its order that the claim for depreciation could be validly raised and granted to the extent stated hereinabove. Also, it was observed by the Hon ble High Court that it was concerned only with the claim of the assessee as regards depreciation on the road itself. To sum up, the Hon ble High Court in its aforesaid judgment 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) bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal, Mumbai in the case of Thiruvanthapuram Road Development Company Ltd. Vs. DCIT-14(3)(1), Mumbai [ITA NO. 622/Mum/2015, dated 23.05.2018]. In the aforesaid case involving facts identical to those as in the case of the assessee before us, we find that the assessee had claimed that it was entitled for depreciation on right to collect toll u/s 32(1)(ii) of the Act. Relying on the judgment of the Hon ble High Court of Bombay in the case of CIT-10, Vs. M/s West Gujarat Expressway Ltd. (ITA No. 2357 of 2013, dated 05.04.2016), it was the claim of the revenue that the issue was covered against the assessee. We find, that the Tribunal rejected the aforesaid claim of the revenue, for the reason, that the issue as regards the entitlement of an Infrastructure Development company that had constructed a road on build, operate and transfer (BOT) basis on the land owned by the Central Government towards claim depreciation under Sec. 32(1)(ii) in respect of its intangible rights i.e right to collect toll had not been adjudicated by the Hon ble High Court in its aforesaid order. In fact, it was observed by the Tribunal that the Hon ble High Court in the aforesaid case had adjudicated that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Special bench‟ of the Tribunal which seizes 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roject 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lled 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, visa-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject facility and collect toll charges there from 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date of law is found to be in order. We thus not finding favour with the view taken by the CIT(A) therein set-aside the same. The Ground of appeal No. 1 is dismissed in terms of our aforesaid observations. The Ground of appeal No. 2 r.w additional ground of appeal no. 1 are allowed in terms of our aforesaid observations. 3.5. In view of the aforesaid facts and respectfully following the Co-ordinate Bench decision of this Tribunal referred to supra, we hold that assessee would be entitled for depreciation on the cost incurred on the toll roads treating the same as intangible asset and claim the depreciation in terms of Section 32(1)(ii) of the Act. The ld. AO is directed accordingly. Accordingly, ground Nos. i and ii raised by the assessee are allowed. 9. We find the Ld. AR has substantiated the submissions with the facts and relied on the judicial decisions as under: 1. West Gujarat Expressway Ltd Vs. ACIT, ITA No. 5904 6244/Mum/2012. 2. West Gujarat Expressway Ltd Vs. DCIT, ITA No. 634 664/Mum/2015. 3. Andhra Prades Expressway Ltd Vs. ACIT, ITA No. 655 146/Mum/2015. 4. Thiruvananthpuram Road Dvpmt Co. Ltd Vs. ACIT, ITA 6798 6837/Mum/2011. 5. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
