BOT/DBFOT Concessionaire Rights Qualify as Intangible Assets Under Section 32(1)(ii): ITAT Mumbai Rules in Favour of Depreciation Claim

Case Overview

Case Name: Jorabat Shillong Expressway Vs DCIT

Forum: Income Tax Appellate Tribunal, Mumbai

Assessment Years: 2017-18, 2018-19, 2020-21 and 2022-23

A significant ruling has emerged from the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) in the matter of Jorabat Shillong Expressway Vs DCIT, addressing a long-contested question in infrastructure taxation — whether concessionaire rights acquired under a BOT (Build-Operate-Transfer) or DBFOT (Design, Build, Finance, Operate and Transfer) agreement constitute an intangible asset eligible for depreciation under Section 32(1)(ii) of the Income Tax Act, 1961.

The Tribunal answered this question decisively in favour of the assessee, holding that the right to operate a highway and receive annuity under a concession agreement is indeed an intangible asset, and depreciation thereon is legally permissible.

Background and Factual Matrix

The Concession Agreement

On 16.07.2010, the assessee entered into a formal concession agreement with the National Highway Authority of India (NHAI) for the four-laning of the Jorabat-Shillong (Barapani) Section of National Highway – 40 in the States of Assam and Meghalaya, covering an approximate stretch of 61.92 kilometres, on a DBFOT basis.

Under the terms of this agreement:

  • The assessee was solely responsible for the complete execution of the highway project, deploying its own financial resources
  • The scope of work encompassed investigation, designing, engineering, procurement, fabrication, testing, and all incidental construction activities
  • Upon completion, the assessee was obligated to operate and maintain the highway for a concession period of 20 years, commencing from the appointed date
  • In exchange for the entire investment and operational obligations, the assessee was entitled to receive annuity payments at a specified rate from NHAI
  • The right of way over the project site was granted to the assessee as a licensee under Article 10 of the agreement
  • The assessee could not assign, transfer, or create any encumbrance on the concession rights without prior written approval from NHAI

Financial Details and Capitalization

As on 31.03.2016, the total project cost incurred by the assessee amounted to Rs. 966,64,10,079/-, which was capitalized in the books of accounts as a fixed asset. The assessee commenced claiming depreciation on this capitalized amount beginning from Assessment Year 2016-17, treating the cost as representing an intangible asset — specifically, the right to receive annuity over the concession period.

For Assessment Year 2017-18 (the lead appeal), the assessee filed a return of income on 31.10.2017 declaring a net loss of Rs. 205,14,15,414/-, subsequently revised to a loss of Rs. 193,05,85,288/-. In this return, the assessee claimed depreciation of Rs. 202,58,49,703/- on the opening Written Down Value (WDV) of the intangible asset, applying a rate of 25%.

The Dispute: Assessing Officer's Position

Grounds for Disallowance

The Assessing Officer (AO) rejected the depreciation claim primarily on the following reasoning:

  • The toll road was neither owned by the assessee nor was it used for the assessee's business in the traditional sense
  • Depreciation under Section 32 requires the asset to be owned and used by the assessee
  • Since the highway unquestionably belongs to NHAI, the assessee had no ownership basis to claim depreciation

Alternative Relief Allowed by AO

While denying depreciation, the AO chose to rely upon CBDT Circular No. 9/2014 dated 23.04.2014, which permits amortization of the expenditure incurred in constructing a BOT project over the concession period. Accordingly, the AO allowed amortization of Rs. 58,05,03,505/- in place of the claimed depreciation.