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CBDT clarifies that the cost of construction on development of infrastructure facility like roads and highways under BOT projects may be amortised and claimed as allowable business expenditure
CBDT clarifies that the cost of construction on development of infrastructure facility like roads and highways under BOT projects may be amortised and claimed as allowable business expenditure
CBDT clarifies that the cost of construction on development of infrastructure facility like roads and highways under BOT projects may be amortised and claimed as allowable business expenditure
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CBDT clarifies that the cost of construction on development of infrastructure facility like roads and highways under BOT projects may be amortised and claimed as allowable business expenditure

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Under the Build–Operate–Transfer (BOT) projects, the developer, in terms of concessionaire agreement with Government or its agencies is required to construct, develop and maintain the infrastructural …

Under the Build–Operate–Transfer (BOT) projects, the developer, in terms of concessionaire agreement with Government or its agencies is required to construct, develop and maintain the infrastructural facility like roads, highways, etc. at its own cost and its utilization thereof for a specified period. As a consideration thereof, the taxpayer is accorded a right to collect toll from users of such facility. In such BOT arrangements, as a matter of general practice, possession of land is handed over to the taxpayer by the Government/notified authority for project without any actual transfer of ownership and such taxpayer has only a right to develop and maintain such asset.

The Central Board of Direct Taxes (CBDT) has noticed that disputes have arisen as to whether the expenditure incurred on development and construction of infrastructural facilities like road /highways on BOT basis with right to collect toll is entitled for depreciation under section 32(1)(ii) of the Income-tax Act, 1961 (the Act) or the same can be amortized by treating it as an allowable business expenditure under the relevant provisions of the Act.

The CBDT has clarified that that the cost of construction on development of such infrastructure facility of roads / highways under BOT projects may be amortised and claimed as allowable business expenditure under the Act.

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  • 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA CBDT clarifies that the cost of construction on development of infrastructure facility like roads and highways under BOT projects may be amortised and claimed as allowable business expenditure 25 April 2014 B Background Under the Build–Operate–Transfer (BOT) projects, the developer (taxpayer), in terms of concessionaire agreement with Government or its agencies is required to construct, develop and maintain the infrastructural facility of roads, highways, etc. at its own cost and its utilization thereof for a specified period. As a consideration thereof, the taxpayer is accorded a right to collect toll from users of such facility. In such BOT arrangements, as a matter of general practice, possession of land is handed over to the taxpayer by the Government/notified authority for project without any actual transfer of ownership and such taxpayer has only a right to develop and maintain such asset. The expenditure incurred by such taxpayer on development and construction of such infrastructural facility are capitalised in the accounts. The Central Board of Direct Taxes (the CBDT) has observed that the taxpayers are claiming depreciation on such capitalised expenditure treating it as an ‘intangible asset’ in terms of section 32(1)(ii) of the Income-tax Act, 1961 (the Act). However, in assessments, such claims are being disallowed by the Assessing Officer (AO) 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’ as required under the Act. The CBDT observed that the taxpayer thus does not hold any rights in the project except recovery of toll fee to recoup the expenditure incurred and therefore, it cannot be treated as an owner of the property, either wholly or partly, for purposes of allowability of depreciation under section 32(1)(ii) of the Act. However, the project brings to the taxpayer an enduring benefit and he is entitled to recover cost incurred by him towards development of such facility. The Supreme Court in the case of Madras Industrial Investment Corporation Ltd. 1 , allowed spreading over of liability over a number of years on the ground that there was continuing benefit to the company over a _____________ 1 Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802 (SC)
  • 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. period. In view of the CBDT, such expenditure incurred on the infrastructure project may be treated as having been incurred for the purposes of business of the taxpayer and same may be allowed to be spread during the tenure of concessionaire agreement. CBDT clarification In view of above, the CBDT clarifies 2 that the cost of construction on development of infrastructure facility of roads/highways under BOT projects may be amortised and claimed as allowable business expenditure under the Act. The amortisation 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 amortised evenly over the period of concessionaire agreement after excluding the time taken for creation of such facility. In the case where a taxpayer 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 may be 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. 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. Our comments There has been litigation over the years whether the ‘right to collect toll’ on BOT projects was an ‘intangible asset’ eligible for depreciation under the Act, which has posed a dilemma to a taxpayer for claiming the capital expenditure. The Pune Tribunal in the case of Ashoka Infraways Pvt. Ltd. 3 has held that cost incurred for the development and construction of the infrastructure facility on BOT basis capitalised under the head “License to collect Toll” as an intangible asset which shall be entitled for depreciation under Section 32 of the Act. Further, the Allahabad High Court in the case of Noida Toll Bridge Co. Ltd. 4 held that ____________ 2 Circular 9 of 2014 dated 23 April 2014. 3 ACIT v. Ashoka Infraways Pvt. Ltd. (ITA No. 185&186/PN/12) - Taxsutra.com 4 CIT v. Noida Toll Bridge Co. Ltd. [2013] 40 taxmann.com 251 (All) depreciation was allowable on Noida Toll Bridge and adjoining road as ‘building’ even though the land was not owned by the taxpayer. The Hyderabad Tribunal has however in the case of PVR Industries 5 observed that since the expenditure incurred on BOT project did bring some kind of enduring benefit to the taxpayer, it did not bring into existence any capital asset for the taxpayer. The asset which was created belongs to the Government and the taxpayer derived only an enduring business advantage by spending the amount. The Tribunal thus held that the amortisation of BOT expenditure can be allowed as a deduction. The CBDT through this Circular has clarified that the cost of construction on development of Infrastructure facility of roads/highways under BOT basis may be amortised evenly over the period of the ‘concessionaire agreement’ after excluding the time taken for creation of such facility. _______________ 5 PVR Industries Ltd. (ITA No. 1171/Hyd/07, 1175/Hyd/07, 1176/Hyd/08 and 1196/Hyd/08)
  • 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House,Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

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