The CBDT has issued Circular No. 09/2014 dated 23.04.2014 in which it has dealt with the important issue of treatment of expenditure incurred for development of roads & highways in Build-Own-Transfer (BOT) agreements.
The CBDT has expressed the view that as the assessee does not hold any rights in the project except recovery of toll fee to recoup the expenditure incurred, the assessee cannot be treated as the “owner” of the property and cannot be allowed depreciation u/s 32(1)(ii) of the Act.
However, the CBDT has also held, following the law laid down in Madras Industrial Investment Corp 225 ITR 802 (SC), that the entire cost of construction and development of the infrastructure facility has to be amortized evenly over the period of the concessionaire agreement and allowed as business expenditure u/s 37(1) of the Act.
The CBDT’s view with regard to the assessee not being the “owner” runs counter to the law laid down in Noida Toll Bridge213 Taxman 333 and several other judgements. In Swarna Tollway, the ITAT has conducted a thorough analysis of the entire law on the subject and concluded that the assessee has to be treated as the “owner” even though it has limited rights on the structure. The Tribunal relied on several judgements of the Supreme Court including Mysore Minerals 239 ITR 775 (SC) where the concept of “owner” has been considered in great detail.
Unfortunately, the CBDT has not applied its mind these aspects and come to a conclusion in a summary manner.
It is well settled that a Circular which is contrary to the law has no binding effect (see Death of a Circular).
However, the CBDT’s directive that the expenditure should be amortized and allowed as business expenditure is welcome.