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Madras HC denies depreciation on toll road or toll bridge but allows amortization as per the CBDT Circular
This Tax Alert summarizes a recent Madras High Court (HC) ruling in the case of L&T Infrastructure Development Projects Ltd. and LTIDPL INDVIT Services Ltd.[1] (Taxpayers) on allowability of tax depreciation under the Indian Tax Laws (ITL) on cost incurred for development of toll road and toll bridge (infrastructure facility) under a Build-Operate-Transfer (BOT) arrangement with a statutory authority.
The Taxpayers claimed tax depreciation on such cost by classifying the asset as “tangible asset” in the nature of “plant”. However, there is divergence of judicial view on the issue. The Bombay HC [2] denied depreciation on such asset by holding that toll road does not belong to a concessionaire. However, the Delhi HC [3] and Allahabad HC[4] allowed depreciation, but by holding such asset to be “tangible asset” in the nature of “building”. On the other hand, several Tribunals allowed depreciation by holding the right to collect toll as “intangible asset”. Earlier, the CBDT[5] had issued a Circular no. 9/2014 dated 23 April 2014 (Circular) expressing the view that although a taxpayer cannot claim depreciation on such asset since toll road does not belong to the taxpayer, the cost can be amortized evenly over the concession period (excluding the construction period).
Amidst the judicial conflict, the Madras HC, in the present case, held that to claim tax depreciation, condition of ownership should be satisfied. In case of BOT arrangement, the ownership of underlying land or the infrastructure facility always remains with the Government and is never transferred to the concessionaire. Absent ownership of the infrastructure facility with the Taxpayers, the Taxpayers cannot claim depreciation on the cost incurred. Furthermore, toll road and toll bridge do not fall within the definitions of “plant” or “building” in the ITL. Although the definition of “building” includes roads and bridges, in the absence of ownership, the toll road/bridge does not fall within the scope of “building”. Thus, it dissented from the view adopted by Delhi and Allahabad HCs.
The Madras HC also rejected the alternative claim of depreciation as intangible asset, as according to HC, meaning of the term “licenses” and “other business or commercial rights of similar nature” used in the definition of “intangible assets” should be inferred from the meaning of the words along with which they have been used (namely, know-how, patents, copyrights, trademarks, franchises), by applying the interpretation principle of noscitur a sociis. The Madras HC concluded that the CBDT Circular enunciated the correct legal position by denying depreciation but allowing amortization.