ITAT Mumbai on Section 263 Revision & Depreciation Claim for Toll Collection Rights under NHAI Concession

1. Background of the Dispute

The Income Tax Appellate Tribunal, Mumbai Bench, in the case of Diwantham Tollway Private Limited Vs PCIT-6 (ITAT Mumbai), dealt with the validity of a Section 263 revision order and the allowability of depreciation on toll collection rights claimed as an “intangible asset” under Section 32.

The assessee-company had entered into a concession arrangement with National Highways Authority of India (NHAI) in respect of a specified stretch of National Highway No. 16 in Andhra Pradesh under the Toll-Operate-Transfer (TOT) model for a tenure of 30 years. Under this framework:

  • The assessee was responsible for tolling, operation, maintenance and transfer of the project highway for the concession period.
  • In return, the assessee was granted the contractual right to collect, retain and appropriate toll from users, in accordance with the concession agreement.

For AY 2020-21, the assessee treated these concession rights as an intangible asset and claimed depreciation at 25% under Section 32(1)(ii). The original assessment under Section 143(3) read with Section 144B accepted this claim.

Subsequently, the Principal Commissioner of Income Tax (PCIT) exercised revisional jurisdiction under Section 263, holding that the depreciation allowed was erroneous and prejudicial to the interests of Revenue. The assessee challenged this order before the Tribunal.

2. Essential Facts and Assessment Proceedings

2.1 Incorporation and Concession Agreement

  • The assessee-company was incorporated on 28.03.2018.
  • It entered into a Concession Agreement dated 26.04.2018 with NHAI for a 30-year period, covering a section of NH-16 from Diwancheruvu to Siddhartham in Andhra Pradesh, under the TOT model.
  • Under this agreement:
    • The assessee paid a one-time upfront concession fee of Rs. 454.83 crores.
    • It obtained contractual rights including:
      • Right of way and access to the project site;
      • Right to manage, operate and maintain the project highway;
      • Right to regulate usage by third parties;
      • Right to demand, collect and appropriate toll from vehicles and users.

2.2 Return and Scrutiny Selection

  • The return of income for AY 2020-21 was filed on 14.02.2021, declaring nil income after set-off of current year profits against brought forward business losses.
  • Book profit under Section 115JB was declared at Rs. 9.84 crores.
  • The case was selected for scrutiny on, inter alia:
    • Investment in intangible assets;
    • Deductions claimed in Schedule BP;
    • High creditors/liabilities; and
    • Business losses.

2.3 Depreciation Claim on Intangible Asset

  • The assessee capitalised the concession fee and certain project-related expenditure to a block of intangible assets.
  • In the relevant previous year, the assessee:
    • Invested around Rs. 43.26 crores (including EPC work, traffic management systems, etc.);
    • Incurred interest expenditure of Rs. 40.94 crores;
    • Added these to the block of intangible assets; and
    • Claimed depreciation @ 25%, aggregating to about Rs. 39 crores for the year.
  • Cumulatively, depreciation on this asset block was stated to be around Rs. 93 crores (approx.).
  • In the books of account, however, the assessee amortised the expenditure over the concession period, but for income-tax computation, it treated the same as an intangible asset eligible for depreciation.

The Assessing Officer (AO) issued queries during scrutiny, examined the materials including the concession agreement and supporting details, and eventually passed an order under Section 143(3) read with Section 144B dated 29.09.2022, accepting the returned income without adjustment on this issue.

3. Section 263 Proceedings Initiated by PCIT

3.1 Basis of Revision

The PCIT examined the assessment records after noting a Revenue audit objection, and issued a Section 263 show cause notice dated **20.02.2025`. In essence, the PCIT’s objections were:

  • The assessee had:
    • Amortised costs in its books of account; but
    • Claimed depreciation @ 25% under the Income Tax Act by treating the road-related rights as an intangible asset.
  • The concession road itself remained the property of NHAI; ownership was never transferred to the assessee.
  • Therefore:
    • The assessee was not the owner of the road asset;
    • It was only entitled to amortisation of expenditure, not depreciation;
    • The depreciation claim led to excess deduction of about Rs. 77.19 crores.
  • Consequently, the assessment order dated 29.09.2022 was alleged to be:
    • Erroneous, and
    • Prejudicial to the interests of Revenue, within the meaning of Section 263.

3.2 Assessee’s Objections before PCIT

The assessee filed a detailed reply dated 07.03.2025, challenging the revision both on jurisdiction and merits. Its key submissions included:

  • On jurisdiction / legality:
    • The AO had specifically raised queries regarding depreciation on intangible assets.
    • In response, the assessee furnished:
      • The NHAI concession agreement;
      • A detailed note explaining the additions to the intangible asset block; and
      • Supporting workings and schedules.
    • After full consideration, the AO chose to accept the claim and made no variation. Therefore, the assessment order reflected a conscious and informed view.
    • Section 263 can be invoked only if:
      1. The order is erroneous; and
      2. It is prejudicial to the interests of Revenue.
    • Mere disagreement with the AO’s view or alleging inadequate enquiry is not sufficient, relying on CIT Vs Vikas Polymers, (2010) 194 Taxman 57 (Delhi High Court).
    • Assessment orders typically do not narrate every accepted issue; lack of detailed discussion does not imply lack of enquiry.