Whether compensation paid for 'Right of Way' to Govt Agencies which owned the land, for laying gas pipelines can be capitalized in cost of pipelines - YES: ITAT

THE issues before the Bench are - Whether reopening of assessment is based on a "change of opinion", even when the AO has not specifically applied his mind during the original assessment proceedings on the depreciation claimed by the assessee; Whether the mere fact that the case of the assessee was accepted as correct in the original assessment for an assessment year, precludes the AO from reopening that assessment u/s 147(a); Whether compensation paid to third parties for crops standing on the land acquired for laying pipelines can be capitalized in the cost of the land for claiming depreciation, even when the same was paid only for avoiding delay in the project; Whether compensation paid for the "Right of Way" to Government agencies which owned the land, for laying gas pipelines underneath their land can be capitalized in the cost of the pipelines; Whether further expenses incurred in security deposit can be capitalized in the cost of such pipelines and Whether acquiring limited right to use a land is an intangible asset. And the verdict partly goes in favour of the assessee.

Facts of the case

A) The assessee incurred certain expenses in acquiring the Right of use / Right of way for laying of pipelines. These expenses have been capitalized towards the cost of these pipelines and consequently depreciation was claimed on such amounts. For AY 2006-07, the AO gave the finding that these expenses were in the nature of acquiring rights in land and therefore not subject to depreciation allowance. Based on that finding, the AO recorded his reasons and issued a notice u/s 148. On appeal before the CIT(A), the assessee challenged the reopening of the assessment by submitting that the assessment was completed u/s 143(3) by the A.O. and entire information in respect of depreciation claimed by the assessee was available to him in the form of notes of accounts in the assessee’s audited account which were filed along with return of income. The assessee argued that since no disallowance on this account was made in the original assessment and in the absence of any tangible material found by the A.O. subsequently, the re-assessment proceedings initiated by the A.O. were invalid as it amounted to change of opinion on the part of the A.O. which is not permissible in law. The assessee also raised an alternative appeal that appellant acquired an intangible asset in form of license to use land for limited purpose of business which was eligible for depreciation.

However, the CIT(A) held that the AO had a definite belief in the form of finding in a subsequent AY about the manner of capitalization of assessee’s expenses with respect to right of way/right of use expenses and the subsequently claim of depreciation, which as per him had not been correctly claimed. Therefore, there was a clear source of information for the AO to form his belief. CIT(A) further held that the AO had gone through this issue and formed his opinion when completing the original assessment, because there was no reference to the issue either in the assessment order or in any communication issued by the AO. CIT(A) referred to the point that it is now an established legal proposition that mere presence of a paper on record does not tantamount to the assessee having brought the relevant facts to the AO’s notice, unless the assessee had the occasion to specifically point that out. Regarding the alternative appeal, the CIT(A) held that acquiring limited right to use the land was a tangible asset and, thus, the assessee had not acquired any intangible asset eligible for depreciation.

Aggrieved, the assessee filed an appeal before the Tribunal.

The AR submitted the same contentions as placed before the CIT(A).

In the counter argument, the DR defended the action of the lower authorities by submitting that the A.O. was justified in initiating reassessment proceedings as during the assessment proceedings for A.Y. 2006- 07 he found that assessee has claimed excessive depreciation and therefore he had material to have reason to believe that income chargeable to tax has escaped assessment. He further submitted that the main argument advanced by counsel of the assessee was that there was change of opinion on the part of the A.O. in initiating the re-assessment proceedings. According to him, in this case no opinion at all was formed in the original assessment as the A.O. had not gone into the issue at all. There was no enquiry made in respect of depreciation claimed by the assessee and no submission was made on behalf of the assessee in this respect. When there was no opinion formed, there is no question of change of opinion in this case.

B) The other issues related to the claim of depreciation by the assessee. The assessee for laying the pipelines on a third party's land incurred three major expenses which were i) crop compensation to those whose lands were used; ii) compensation given for laying the pipelines underneath the lands of certain individuals, whose ownership continued to be with those individuals; and iii) right of way for the compensation to other Government agencies like Irrigation Department who owned the land, for taking the gas pipelines underneath their land. All these costs were capitalized by the assessee and depreciation was claimed on these amounts. However, the AO disallowed the claim of depreciation.

On appeal, the CIT(A) observed that the matter has been considered and all the issues including the assessee's alternative ground stand decided in detail in the appellate order passed for AY 2006-07. Having observed this the CIT(A) held that the cost of crop compensation and land compensation would go to enhance the value of Plant and Machinery and thus eligible for depreciation. He also held that expenditure incurred towards obtaining the right of way to the extent it was not in the form of security deposit and to the extent it has been capitalized by the appellant, shall be included in the value of Plant and Machinery and shall be entitled for depreciation. However, the alternative plea of the assessee with regards to that it had acquired intangible rights on paying such compensation amounts was rejected.

Aggrieved, the Revenue filed an appeal before the Tribunal.

Having heard the parties, the Tribunal held that,

A) ++ we find that there is no dispute about the fact that during the original assessment proceedings the depreciation claimed on capitalized expenses incurred by the assessee in acquiring the ROU/ Right of way for laying on pipeline was allowed in full without making any enquiry about the correctness of this claim of the assessee. During the appellate proceedings counsel of the assessee was specifically asked as to whether during the original assessment proceedings any query in respect of claim of depreciation was raised by the A.O. or not, the assessee’s reply was in negative. We further find that no evidence has been placed on record in support of its claim during the assessment proceedings. It was only during the assessment proceedings for assessment year 2006-07 that legality of this claim was enquired into by the A.O. and he found the claim of the assessee to be not as per law and the same was disallowed by him. On the basis of this finding he initiated re-assessment proceedings for the years under appeal before us. It is thus not a case of “change of opinion” on the part of the A.O. as he has not specifically applied his mind during the original assessment proceedings on the depreciation claimed by the assessee. On these facts the ratio of the case laws relied by counsel of the assessee is not applicable while the ratio in the cases of CIT Vs. N. Kishore Settlement and CIT Vs. United Trading & Construction Co. relied by D.R. is applicable;

++ in view of the above, we feel no need to interfere with the order passed by CIT(A) and the same is hereby upheld;

B) ++ at the time of hearing, both the parties agreed that the issue is covered by the order of the Tribunal in assessee’s own case for the assessment year 2006-07 wherein following was held:- [ “...........We find that crop compensation is payable only to those land owners on whose land there was any standing crop or standing trees. For the purpose of laying of pipeline, the assessee is acquiring the land and not the crop and trees which were standing on the land. But in the process of laying down the pipeline by using the land acquired by the assessee, the crop and trees standing on such land get destroyed and hence, the assessee was required to compensate the land owner in respect of such crop or trees standing on the land in addition to the land compensation. In our considered opinion, compensation for such damage to the land owner cannot be added to the cost of land because even after acquiring land, the assessee could have waited till the crop was harvested by the land owner or by the assessee and in that situation, no compensation would have been required to be paid because there would have been no loss or damage to the crop or the assessee could have realized back by selling the crop but it would have resulted in delay of the project and to avoid this, assessee agreed to pay compensation for damage to the crop etc. in order to avoid the delay in the project and hence, such compensation should be added to the cost of pipeline and not to the cost of land. In this view of the matter, we do not find any infirmity in the order of Ld. CIT(A) on this aspect......”];

++ respectfully following the above order, the grounds taken by the Revenue in respect of deletion of disallowance on depreciation claimed on crop compensation is dismissed and the ground in respect of deletion of disallowance of depreciation claim on RoW other than security and cost of crop is allowed.