By TIOL News Service

NEW DELHI, NOV 12, 2014: THE issue before the Bench is - Whether when assessee executes toll road on BOT basis, the same can be treated as 'plant' and depreciation is available. NO is the answer.

Facts of the case

The assessee, a 100% subsidiary of National Highways Authority of India (NHAI), is formed with the sole object of constructing the highway and bypass at Moradabad, covering a total stretch of 18.2 kms, which was ultimately executed on Build, Operate and Transfer (BOT) basis. The assessee had filed its return declaring a loss of Rs. 10,02,63,570/-, Rs. 25,94,56,570/- and Rs. 20,83,84,640/- respectively for different A.Ys, and claimed depreciation at the rate of 25% on the toll roads constructed by it. The case was selected for scrutiny and notice u/s 143(2) was issued to the assessee. Subsequently, the AO held that the assessee could claim depreciation at the rate of 10% written down value on roads and not @ 25%, and added the balance 15% towards the total income of assessee. On appeal, the CIT(A) held that the road cannot be said to be 'plant' but would fall under the head 'building' for the purpose of allowing depreciation and accordingly rejected the claim of assessee. On further appeal, the Tribunal confirmed the order of the CIT(A).

On appeal before the High Court, the counsel for assessee submitted that the Tribunal had erred in not appreciating the facts in proper perspective. It was submitted that the assessee had rightly claimed depreciation on toll road at the rate of 25%. He submitted that the assessee was constituted for the sole object of construction of highway, a toll road and was authorized to collect toll tax from the vehicles passing on the toll road, which being road by itself was not a part of 'building' or within the confines of a 'building' or an approach road to the 'building'. He further submitted that toll road was a structure which constituted an apparatus or tool by means of which business activities were carried on and it would amount to 'plant'.

However, the counsel for revenue contended that the 'toll road' could not be construed as a 'plant' as sought by the counsel for the assessee. The DR further contended that under the IT Rules as well as u/s 43(3), 'buildings' had defined to include roads, bridges, culverts, wells and tube-wells, and as such the road being a 'building', rate of depreciation for 'plant' at the rate of 10% could not be taken for that purpose.

Having heard the parties, the High Court held that,

++ it is a settled law that depreciation generally speaking is an allowance for diminution in the value due to wear and tear of capital asset employed by the assessee in his business and section 32 of provides for depreciation of capital assets in respect of machinery, plant or furniture etc, however it does not include roads. The issue whether roads can be included within the meaning of 'buildings' had come up for interpretation before the Supreme Court in case of Gwalior Rayon Silk Manufacturing Co. Ltd., wherein the Apex Court has held that the 'roads' would be 'buildings' within the meaning of Section 32 as the 'road' has provided approach to the 'buildings' as necessary adjuncts to the factory building for carrying out business activities. However, such decision was concerned with the roads within the factory premises and not the roads in general. Although it cannot be disputed that 'roads' were treated and regarded as 'buildings', in the given fact situation. Subsequently, the Allahabad High Court in the case of Noida Toll Bridge, after referring extensively the judgment of the Apex Court in Gwalior Rayon Silk Manufacturing Co. Ltd. held that the assessee company is entitled to the depreciation on toll road but at the rate prescribed and applicable to the head 'building';

++ it is noted that u/s 43(3), it is clear that roads referred therein are 'roads' per se without any qualification attached therewith. Had it been 'road adjunct to building', the same would have been suggested itself in the said provision. Thus all roads whether adjunct and within a factory, or a toll road, would get covered under the said heading. There is no dispute that for a toll road operator, the 'road' is an asset used for business purposes and he can claim depreciation over it as a 'building'. The Revenue also does not dispute that the assessee is entitled to depreciation on the toll road as a 'building'. At the same time, in terms of Section 43(3), 'plant' does not include 'buildings'. It must be held so as the legislative intent was to include 'roads' as 'buildings' and not as a 'plant'. That being the intent of the legislature, it must be held that 'road' is a 'building' and cannot be construed or held as a 'plant' in any circumstance, even if the tests laid down to decide what is a 'plant' in various judgments are fulfilled. 'Road', by specific stipulation would necessary allowed depreciation at rates applicable to 'building' and cannot be treated as a 'plant'. It is seen that in the case of CIT vs. Dr. B.Venkata Rao, the Supreme Court has held that if it was found that the 'building' or structure constituted an apparatus or a tool of the taxpayer by means of which business activities were carried on, amounted to a 'plant', but where the structure played no part in the carrying on these activities but merely constituted a place where they were carried on, 'building' could not be regarded as a 'plant';

++ it is clear that for the real test to construe a structure as a 'plant', it is to be seen that the structure is used as a tool or apparatus in the business of the assessee. As it is seen that the toll road has been executed by the assessee on BOT basis. The BOT is a form of project financing wherein a private entity receives a concession from the public sector or for that matter private sector to finance, design, construct and operate a facility stated in the concession contract. This enables the project proponent to recover its investment, operating and maintenance expenses in the project. The facility shall be transferred to the public sector at the end of the concession period. The word 'build' signifies construction of a road, whereby the tax payer brings into existence a structure and nothing more. Similarly, the word 'operate' signifies the understanding between the assessee and the public authority to collect charges for the usage of the road. It is thus clarified that 'plant' as defined and understood for tax purposes means tool or equipment used for purposes of business or profession. Accordingly, toll road would not be a 'plant' in that sense, as it is a capital asset which when used by any person, who makes payment for the said use, results in accrual of income. It is a capital asset which is the very business of the assessee and not an implement or a tool used by the assessee for his business. Therefore, this court is of the view that the toll road will not qualify as a 'plant' so as to entitle the assessee a higher rate of depreciation.

(See 2014-TIOL-1932-HC-DEL-IT)