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Depreciation not allowed on toll road constructed under BOT basis since the
toll road is owned by the Government and not by the developer
21 November 2014
Background
Recently, the Bombay High Court (High Court) in the
1
case of North Karnataka Expressway Ltd. (the
taxpayer) held that depreciation is not allowable on toll
road constructed under the Built, Operate and Transfer
(BOT) basis, since the toll road belongs to the
Government and the taxpayer was not the owner of the
said road. The High Court observed that merely
because the National Highway is built, maintained,
managed and operated by private entities does not
mean that the private entity can enjoy or claim the
rights of the Central Government/Union in the National
Highway. The ownership of the National Highway,
being that of the Government, it can never be said to
be divested of that absolute right by engagement of
any person or by entrusting any of the functions of the
authority to him.
construct a toll road. The road was to be
constructed and maintained on BOT basis on the
land owned by the Government.

In terms of the agreement, the taxpayer had to
construct the toll road and thereafter maintain and
operate it for a period of 17 years and 6 months
which is known as the concession period. At the
end of this period, the toll road is required to be
handed over to the NHAI free of cost.

During the year under consideration the taxpayer
claimed depreciation at the rate of 10 per cent on
the capitalised cost of the toll road. The taxpayer
claimed that it was the owner of the toll road and
the entire cost incurred for construction thereof was
capitalised in its books during the year in which the
construction of the toll road was completed.

The Assessing Officer (AO) has allowed the claim
of depreciation on toll road. However, the
Commissioner of Income-tax (CIT) revised the
assessment order passed by the AO as in his
opinion the AO was not correct in allowing
depreciation on the toll road constructed on BOT
basis.
Facts of the case

The taxpayer is an Indian company engaged in the
business of infrastructure development. The
taxpayer executed a concession agreement with
the National Highway Authority of India (NHAI) to
___________
1
North Karnataka Expressway Ltd. v. CIT (ITA No. 499 of 2012) –
Taxsutra.com
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The Income-tax Appellate Tribunal (the Tribunal) upheld
the order of the CIT.

Merely because the Central Government or an
authority causes development and maintenance of
the National Highway by involving a private entity
or private party does not mean that the said
private party can enjoy or claim the rights of the
Central Government or this authority in the
National Highway.

When the language of the statute is plain and
clear, then, there was no scope for interpretation.
The Court must apply such language which is
clear and that is called as rule of literal
interpretation.

It would not be proper to read into Section 32 of
the Act something which is defeating and
frustrating the mandate of the law. It can never be
intended by the legislature that the broad and wide
definition of the term ‘owner’ as appearing in the
Act would interfere with or take away the absolute
rights of the above nature conferred in the union of
the National Highways.

A provision in one statute or a definition in one
statute cannot be interpreted so as to defeat and
frustrate another law or statute or any definition
therein and when that another statute is a special
legislation. The National Highways Act and the
National Highways Authority of India Act are
special statutes and when the concept of
ownership and vesting therein is of absolute
nature that cannot be said to be in any manner
restricted or curtailed by a general definition or
understanding of the term owner as appearing in
the Act.

The decisions of the Supreme Court in the case of
2
Mysore Minerals Ltd. and Podar Cement Pvt.
3
Ltd.
relied on by the taxpayer were
distinguishable on the facts of the present case.

The taxpayer is eligible to claim depreciation on
the investments made in the project of
construction development and maintenance of the
National Highway and further if such assets are in
the form of building and plant and machinery etc.
However, in the present case the controversy was
with respect to the claim of depreciation on the
land or a road itself.
High Court’s ruling

On a perusal of Section 32 of the Income-tax Act, 1961
(the Act) it indicates that in respect of the depreciation
on buildings, machinery, plant or furniture being
tangible assets, the deductions under Section 32(i) of
the Act shall be allowed provided these assets are
owned wholly or partly by the taxpayer and used for the
purpose of his business or profession.

The High Court agreed with the findings recorded by
the Tribunal that the depreciation is allowable only in
respect of assets owned by the taxpayer. Since the toll
road belongs to the Government and the taxpayer was
not the owner of the said road, the depreciation was not
allowable on the toll road.

The National Highways Act, 1956 indicates that the
National Highways vest in the union and include all
appurtenant lands whether demarcated or not, all
bridges, culverts, tunnels, causeways, carriageways
and other structures constructed on or across such
highways and all fences, trees, posts and boundary,
furlong and mile stones appurtenant to such Highways
are included in the term Highways.



The exclusive responsibility for the development and
maintenance of National Highway is of the Central
Government. As per the provisions of National Highway
Act, 1956, the Central Government is empowered to
enter into an agreement with any person in relation to
the development and maintenance of the whole or any
part of a National Highway, but that in no way affects
the vesting of the National Highways in the Union.
Merely because the National Highway is built,
maintained, managed and operated by private entities
does not mean that the vesting of the National Highway
in the Union is affected. That does not dilute the right
conferred or take away the ownership of this Highway,
meaning thereby, its vesting in the union. It is thus, the
union in which the National Highway vests and that are
all pervasive.
The National Highways Authority of India Act, 1988 is
an Act to provide a constitution of authority for the
development, maintenance and management of
National Highway’s and for matters connected therewith
or incidental thereto. The superior or higher right of the
union is, then, capable of being further entrusted or
vested in such authority and which is a creation of the
Central Government itself.
__________________
2
3
Mysore Minerals Ltd. v. CIT [1999] 239 ITR 775 (SC)
Podar Cement Pvt. Ltd. and others [1997] 226 ITR 625 (SC)
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
The High Court did not agree with the observations and
conclusions made by the Allahabad High Court in the
4
case of Noida Toll Bridge Co. Ltd. since the Allahabad
High Court had emphasised only on Section 32 of the
Act. It had followed the Supreme Court’s decision in the
case of Mysore Mineral Limited but did not refer to the
provisions of the National Highways Act, 1956 or the
National Highways Authority of India Act, 1988.

Accordingly, the High Court held that the taxpayer was
not eligible to claim of depreciation on toll roads since
the ownership criteria provided in National Highway Act
has not been satisfied in the present case.
Our comments
Under the Build–Operate–Transfer (BOT) projects, the
developer, in terms of a concessionaire agreement with
Government or its agencies is required to construct,
develop and maintain the infrastructural facility of roads,
highways, etc. at its own cost and its utilisation thereof for a
specified period. As a consideration thereof, the taxpayer is
accorded a right to collect toll from users of such facility. In
such BOT arrangements, as a matter of general practice,
possession of land is handed over to the developer by the
Government/notified authority for project without any actual
transfer of ownership and such taxpayer has only a right to
develop and maintain such asset. At the end of the
specified period, the developer may generally be required
to hand over the infrastructure facility to the government at
free of cost.
The eligibility to claim depreciation on toll road is a matter of
debate before Courts/Tribunal. Some of the High Courts/
5
Tribunal had held that toll road would fall under the head
‘building’ eligible for depreciation at 10 per cent. Some
6
Courts had held that the entire cost of construction and
development of the infrastructure facility had to be
amortised evenly over the period of the concessionaire
agreement and allowed as business expenditure under
Section 37(1) of the Act. However, on the other hand a few
7
Courts/Tribunal had held that the cost incurred for the
development and construction of the infrastructure facility
on BOT basis was treated as ‘license/right to collect toll’
and hence the same was an intangible asset entitled for
depreciation at 25 per cent under Section 32 of the Act.
8
However, various High Courts/ Tribunal have held
that road constructed by taxpayer on BOT basis is
eligible for depreciation even though the taxpayer is
not the legal owner of the road. The Supreme Court in
9
the case of Mysore Minerals has elaborately
discussed the concept of ‘owner’ and held that the
term ‘owned’ as occurring in Section 32(1) of the Act
must be assigned a wider meaning. The tax benefit on
account of depreciation legitimately belongs to one
who has invested in the capital asset and there cannot
be two owners of the property simultaneously. The
depreciation is allowable to the person in whom for the
time-being vests and who has the dominion over the
building and who is entitled to use it in his own right.
However, the Bombay High Court in the present case
has not considered the ownership criteria on the basis
of Income-tax Act, 1961 but on the basis of National
Highways Act, 1956 or the National Highways
Authority of India Act, 1988. The High Court has held
that as per these Acts the taxpayer was not the owner
of toll road which was constructed and maintained by
it and therefore, depreciation cannot be allowed on the
same.
It is important to note that the Central Board of Direct
10
Taxes (CBDT) vide its Circular has clarified that the
cost of construction on development of Infrastructure
facility of roads/highways under BOT basis may be
amortised evenly over the period of the
‘concessionaire agreement’ after excluding the time
taken for creation of such facility. However, this
Circular has not been considered in this decision.
____________
4
CIT v. Noida Toll Bridge Co. Ltd. (ITA No.316 of 2011, dated 8 November 2012)
West Bengal Forest Development Corporation Ltd. v. ITO [1983] 15 TTJ 257 (Cal),
Moradabad Toll Road Co Ltd. v. ACIT (ITA Nos. 51/2013 and CM 1558/2013),
Gujarat Road & Infrastructure Co. Ltd. v. CIT [2011] 15 taxmann.com 387 (Ahd)
6
Madras Industrial Investment Corp v. CIT [1997] 225 ITR 802 (SC)
7
ACIT v. Ashoka Buildcon Ltd. (ITA No. 2317/PN/2012), Ashoka Info (P.) Ltd. v.
ACIT [2010] 35 SOT 50 (Pune), ACIT v. Ashoka Infraways (P.) Ltd [2013] 33
taxmann.com 499 (Pune), Dimension Construction Pvt. Ltd. v. DCIT (ITA No. 222,
223, 233 & 857/PN/2009)
_____________
5
8
CIT v. Noida Toll Bridge Co. Ltd. [2013] 30 taxmann.com 207 (All), DCIT v.
Swarna Tollway (P.) Ltd. [2014] 43 taxmann.com 252 (Hyd)
9
Mysore Minerals Ltd v. CIT [1999] 239 ITR 775 (SC)
10
CBDT Circular No. 9, dated 23 April 2014
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