Depreciation on Highway Projects: ITAT Delhi Ruling in Gwalior Bypass Case

The taxation of infrastructure projects, particularly those operating under the Build-Operate-Transfer (BOT) or Design-Build-Operate-Transfer (DBOT) models, has long been a subject of litigation in India. A central point of contention involves the characterization of the massive capital expenditure incurred by the concessionaire. The core question often debated is whether these expenses should be treated as the cost of constructing a tangible asset (the road) or an intangible asset (the right to operate and collect revenue), and consequently, how the deduction for such expenditure should be claimed—via depreciation under Section 32 of the Income Tax Act 1961 or through amortization.

In a significant order, the Delhi Bench "B" of the Income Tax Appellate Tribunal (ITAT) addressed this precise issue in the case of JCIT (OSD) Vs Gwalior Bypass Project Ltd. The Tribunal ruled in favor of the assessee, upholding the claim of depreciation on highway projects treated as intangible assets, thereby dismissing the Revenue's reliance on CBDT Circular No. 9/2014.

This article provides an in-depth analysis of the judgment, the factual matrix, the legal arguments presented, and the broader implications for the infrastructure sector.

To understand the gravity of this ruling, one must first appreciate the statutory framework governing capital allowances in infrastructure projects.

Section 32 and Intangible Assets

Under Section 32 of the Income Tax Act 1961, depreciation is allowed on tangible assets (building, machinery, plant, or furniture) and intangible assets (know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature) owned, wholly or partly, by the assessee and used for the purposes of business or profession.

Infrastructure companies typically argue that while they may not hold the legal title to the land or the road (which usually vests with the government or authorities like the NHAI), the "right" granted to them to operate the project and collect tolls or annuities constitutes a "license" or a "business or commercial right." Therefore, this right qualifies as an intangible asset eligible for depreciation at the applicable rates.

The Revenue’s Stance and CBDT Circular No. 9/2014

Conversely, the Revenue Department often challenges this classification. The argument posits that since the assessee is not the legal owner of the physical road, they cannot claim depreciation on it. Instead, the Revenue frequently directs assessees to amortize the expenditure over the concession period. This approach was formalized to an extent by CBDT Circular No. 9/2014, which suggested that the cost of construction should be amortized over the period of the concessionaire agreement.