State Government Grants for Infrastructure are Promoter's Capital Contribution, Not Taxable Income.

State Government Grants for Infrastructure are Promoter’s Capital Contribution, Not Taxable Income.

Issue

Whether grants received by a state-owned infrastructure undertaking from the State Government, for the specific purpose of infrastructure development, are taxable revenue receipts or are non-taxable capital contributions from a promoter.

Facts

The assessee, a wholly-owned undertaking of the Government of Maharashtra, was engaged in infrastructure development under Build-Operate-Transfer (BOT) arrangements.
It received grants and contributions from the State Government, which were specifically for infrastructure development projects.
The assessee treated these grants as capital receipts (a promoter’s contribution) and credited them to a capital reserve account.
The Assessing Officer (AO) disagreed, treating the grants (both received and accrued) as revenue receipts and added them to the assessee’s total income.
The assessee argued that it was merely a contractor executing projects for the State, not the owner of the projects.

Decision

The court held that the grants received by the assessee were capital in nature and could not be treated as income.
It was ruled that the grants were not provided to support the assessee’s day-to-day business activities or to supplement its profits.
The funds were determined to be a capital contribution by the State Government (as the promoter), specifically earmarked to cover the capital costs of the infrastructure projects.

Key Takeaways

Purpose of the Grant: The tax treatment of a grant is determined by its purpose. Grants given to meet the capital cost of specific projects are “capital receipts,” whereas grants to assist with daily operations or supplement profits are “revenue receipts.”
Promoter’s Contribution: When a promoter (in this case, the State Government) provides funds to its undertaking for the creation of capital assets, such funds are treated as a capital contribution and are not taxable as income.
Ownership vs. Execution: The fact that the assessee was merely an executing contractor and not the owner of the assets further supported the conclusion that the funds were not its income but were capital investments in the projects themselves.

AO Cannot Tax Gross Toll Revenue Without Allowing Estimated Maintenance Costs.

Issue

Whether an Assessing Officer (AO) can make an addition by “grossing up” the revenue from a long-term toll contract without simultaneously allowing a deduction for the estimated future costs (like maintenance and improvement) that are an integral part of the same contract.

Facts

The assessee was awarded a 15-year contract for the collection of toll, as well as the operation, maintenance, and improvement of a section of a highway.
In its books, the assessee recognized the net consideration from the contract as its income.
The Assessing Officer (AO) challenged this method and made an addition by considering only the gross revenue of the assessee.
However, while making this upward adjustment to the income, the AO failed to consider or allow a corresponding deduction for the estimated costs of maintenance and improvement that the assessee was contractually obligated to incur.

Decision

The court deleted the addition made by the Assessing Officer.
It held that the AO’s approach of considering only the gross income, without accounting for the associated costs, was incorrect.
The court ruled that if the income is to be recognized on a gross basis, then a corresponding reduction for the estimated expenditure must also be allowed.

Key Takeaways

Matching Principle: In taxation and accounting, the “matching principle” is essential. An AO cannot recognize the gross revenue from a long-term contract without also recognizing the estimated costs that are contractually required to earn that revenue.
One-Sided Adjustments are Invalid: An assessment cannot be framed by only considering the income side of a transaction while ignoring the corresponding and contractually-mandated expenditure side.
True Income: The goal of an assessment is to tax the true income. In a BOT contract, the true income is the net figure after accounting for the contractual obligations of maintenance and improvement, not just the gross toll collection.

IN THE ITAT MUMBAI BENCH ‘B’

Maharashtra State Road Development Corporation Ltd.

Income-tax Officer

Amit Shukla, Judicial Member
and Ms. Padmavathy S., Accountant Member

IT Appeal No. 3484 (Mum) OF 2014
[Assessment year 2006-07]

OCTOBER 27, 2025

Dalpat Shah and B.S. Sharma for the Appellant. Leyaqat Ali Aafaqui, Sr. AR for the Respondent.

ORDER

Padmavathy S, Accountant Member. – This appeal by the assessee is against the order of the Commissioner of Income Tax (Appeals)-9 Mumbai [In short ‘CIT(A)’] passed under section 250 of the Income Tax Act, 1961 (the Act) dated 14.02.2014 for Assessment Year (AY) 2006-07. The assessee has raised the following grounds of appeal:

“1. Reopening of Assessment U/sec 147 void:

On the facts and circumstances of the case, the Id. Commissioner of Income Tax (Apples)- 9, Mumbai, erred in not considering the fact that the Reopening of completed Assessment u/sec 147 is void as the same is based on “change of opinion” and based on “Notes to the Accounts” in the Annual Report which were verified by the A.O. during the Original Assessment Completed u/sec 143(3).

ON MERIT

2. Addition of Government Grants / Contribution of Rs.179.08 Crores

2.1 On the facts and circumstances of the case, the said CIT(A) erred in confirming the addition of receipts of Government Grants / Support of Rs.179.08 Crores based on Note No. 11(4) ofNotes to Accounts, ignoring the fact that the said Grants are in the nature of “Capital Contributions” in compliance of Accounting Standard AS-12 as the same was contributed by the Government Authorities for development of road infrastructure in the State of Maharashtra.

2.2 Without Prejudice, the said CIT(A) erred in not reducing the said Grants received from the Government from the capital cost of the Road Projects and not allowing to amortize the net cost which is also clarified by the CBDT Circular no.9/2014 dated 23.04.2014.

3. Addition of Government Grants / Contribution Not Recognised in Books of Rs. 285.13 Crores

3.1 On the facts and circumstances of the case, the said CIT(A) erred in confirming the addition of Government Grants / Support of Rs.385.13 Crores based on Note No. 11(4) of Notes to Accounts, ignoring the fact that the said Grants were not accounted in the books of accounts as the same had neither accrued nor received by the appellant and the same will be booked on actual disbursement from the Government Authorities when they are due.

3.2 Without Prejudice, if the said Grant is held to be due, the said CIT(A) erred in not reducing the said Grants to be received from the capital cost of the Road Projects and erred in not allowing to amortize the net cost which is also clarified by the CBDT Circular no.9/2014 dated 23.04.2014.

4. Addition of Toll Income of Rs.25.27 Crore

On the facts and circumstances of the case, the said CIT(A) erred in confirming the addition of Rs.25.27 Crores being Toll Income based on Note 20(a) to Notes to the Accounts ignoring the fact that the Toll Income was offered as per the Agreement for Toll Contract and the said capital expenditure of Rs.402.93 crores was to be incurred by the Contractor and therefore, the same cannot be taxed in the hands of the appellant.

5. Addition of Toll Income of oRs.13.80 Crores

On the facts and circumstances of the case, the said CIT(A) erred in confirming the addition of Rs.13.80 Crores being Toll Income based on Note 20(b) to Notes to the Accounts ignoring the fact that the Toll Income were offered as per the Agreement for Toll Contract and the said capital expenditure of Rs.97.47 crores was to be incurred by the Contractor and therefore, the same cannot be taxed in the hands of the appellant.

6. The appellant craves leaves to add, amend, alter, modify, delete and/or change all or any of the above grounds on or before the date of hearing.”

2. The assessee is a wholly owned undertaking of the Government of Maharashtra incorporated in 1996. The assessee is engaged in the business of infrastructure development i.e. construction operation maintenance of flyovers etc. the assessee filed the return of income for AY 2006-07 on 30.12.2008 disclosing of total loss of Rs.39,051.29/-. The assessment u/s. 143(3) was completed accepting the loss retuned by the assessee. Subsequently, the AO reported the assessment for the reason that certain incomes of the assessee has escaped assessment based on the audit observation. The AO called on the assessee to furnish various details and after considering the submissions of the assessee concluded the assessment u/s. 147 by making addition towards

(i)

Grants/ support received from government- Rs. 179.08 crores

(ii)

Grants/support due but not received from government -Rs. 385.13 crores

(iii)

Toll operation – Mumbai, Pune NH4 – Rs. 25.27 crores

(iv)

Toll operation – Thane GhodbandarRoad – Rs. 13.80 crores

3. Aggrieved the assessee filed further appeal before the Ld. CIT(A) who dismissed the appeal by confirming the additions made by the AO.

Grants/ support received from government – Rs. 179.08 crores

4. In Note No.11(4) to Notes to Accounts the assessee has disclosed the following amounts as grants/ contributions from state government.

Grants/contribution till 31.03.2006	– Rs. 1206.90 crores
Less : grants/contributions till 31.03.2005	– Rs. 1027.82 crores
Grants received during AY 2006-07	– Rs. 179.08 crores

5. The assessee submitted before the AO that the grants received are capital in nature and is a contribution made by the promoters through various government agencies for the development of cities, districts or locations as decided by the government. The assessee further submitted that since the contributions are received from the promoters the same is accounted under capital reserve. The assessee also submitted that as per AS-12 the contribution received are to be treated as shareholder’s funds and accordingly the receipts are not the income of the assessee. The AO however, did not accept the submissions of the assessee and treated the grants received during the year as the income of the assessee by holding that:

“Grants/Supports received from Government:

On perusal of clause 11(4) of schedule 20 of Annual Report being Notes on Accounts and Schedule 2 of B. Sheet as on 31.3.2006, it is observed that total of grants received by the assessee from the Govt as on 31.3.05 and 31.3.06 was Rs. 1027792.09 lacs & Rs. 120690.83 lacs respectively. This means that assessee was in receipt of Govt. Grant / support of Rs. 17908.74 lacs during the previous year relevant to the assessment year under consideration. The grant being received by the assessee for development of infrastructure le road the business in which assessee company is engaged into. Taking into consideration the fact that the grant received after the commencement of business and for development of business it bear the character of revenue nature. As a result following the principle of accountancy and having regards to the statutory provisions the assessee ought to have offered the grant of Rs. 17908.74 lacs during the year for tax either by crediting it to P & LA/c or considering it directly in the computation.

The Assessee’s representative claims that the grant received by the Govt. is capital in nature and does not form the part of total income for taxation purpose. At the outset it needs to be mentioned that as stated earlier the grant has been given by the Govt. of Maharashtra to the assessee after the commencement of business and for the development of Assessee’s business of infrastructure development. As a result such a grant is a revenue in nature and ought to have offered for tax by the assessee following the law laid down by the Hon, Apex Court through the judgements in the following cases,

Sahney Steel & Press Works Ltd. etc. etc. v. CIT 228 ITR 253 (SC)

CIT v. Rajaram Maize Products 251 ITR 427 (SC)

Bengal Textiles Association v. CIT 39 ITR 723 (SC)

Considering the facts of the case, accounting principles and law pronounced by the Hon. Apex court through the judgements sited above a sum of Rs. 17809 lakhs is brought to tax.”

5.1. The Ld. CIT(A) confirmed the addition made by the AO.

6. The Ld. AR submitted that the PWD, Government of Maharashtra handed over few incomplete road projects to the assessee vide Government Resolutions (GR) with specific terms of contribution of funds by the state government along with other statutory authorities (page 312 to 363 of paper book). The Ld. AR further submitted that, the assessee accounted the projects taken over from PWD in its books as capital WIP and transfer the cost already incurred by the state government as capital reserve as being promoter’s contribution in compliance with AS-12. The Ld. AR also submitted that, the assessee reduces the depreciation on completed projects from capital reserve every year as the assessee is not the owner of the road projects as the same is on Build-Operate-Transfer (BOT) basis. The Ld. AR argued that the contention of the revenue that the grants received after commencement of business are revenue in nature is not correct since the grants are paid by the state government in the capacity as promoter as a contribution towards development of infrastructure. Accordingly, the Ld. AR argued that the grants received are capital in nature and cannot be treated as the income of the assessee.

7. The Ld. DR on the other hand, submitted that the grants are provided by the government to support the assessee’s ongoing business activities such as infrastructure development and maintenance. The Ld. DR further submitted that the Hon’ble Supreme Court in the case of Sahney Steel and Press Works Limited v. CIT (SC) has ruled that the government grants intended for supporting the ongoing business activities are revenue in nature. The Ld. DR also submitted that the accounting treatment followed by the assessee as per AS-12 is not relevant for tax purposes. Accordingly, the Ld. DR supported the order of the lower authorities.

8. We heard the parties and perused the material on record. The assessee is a wholly owned undertaking of the government of Maharashtra and this engaged in the business of infrastructure development for general public. The assessee undertakes the infrastructure projects under BOT basis which means that the assessee is not owner of the projects undertaken by it. The government of Maharashtra hands over certain incomplete road projects to the assessee vide GR and provides grants/contributions for the assessee to complete the projects. The assessee as per AS-12 treats the incomplete projects by debiting the capital WIP and by crediting the capital reserve. The assessee credits the subsequently grants received towards completion of project the capital reserve account. It is relevant to mentioned here that the assessee reverses the depreciation on completed project to the capital reserve account since the assessee is not the owner of the projects. It is also relevant to notice that on the completion of the stipulated period in the GR the assessee hands over the completed project back to the state government. AS-12 deals with accounting for Government Grants and the same provides that Grants which have the characteristics similar to those of promoters’ contribution should be treated as part of shareholders’ funds. In the given case, the assessee is a wholly owned undertaking of Government of Maharashtra and accordingly there cannot be any dispute that the grants/contributions of the government are in the nature of promoter’s contribution. AS-12 under the “capital approach” of accounting for grants provides that –

(i)

Many government grants are in the nature of promoters’ contribution, i.e., they are given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay and no repayment is ordinarily expected in the case of such grants. These should, therefore, be credited directly to shareholders’ funds.

(ii)

It is inappropriate to recognise government grants in the profit and loss statement, since they are not earned but represent an incentive provided by government without related costs.

9. The ld AR during course of hearing submitted that the grants/contributions received by the assessee being in the nature of promoters contribution is not repayable and is credited to the capital reserve account. Further the depreciation of the projects are credited to the capital reserve since the assessee is not the owner of the projects. From the perusal of these facts we are of the view that the grants/contributions by the state government are in the nature of investments made by the promoter i.e. the state government for infrastructure development and the assessee’s role is that of contractor to carry out the projects given through GR. Since the assessee is carrying out the activity on BOT basis the grants/ contributions by the state government cannot be considered as a support extended for the day today business activities of the assessee, but is a capital contribution by the state government towards cost of the projects to be incurred by the assessee. Accordingly, we hold that the treatment of the grants/contributions received by the assessee is capital in nature being a promoter’s contribution and, therefore, cannot be treated as the income of the assessee.

Grants/contributions accrued but not received from government

10. The AO similar to the addition made towards grants/contribution received during the year also made an addition towards grants receivable as mentioned below in the notes to accounts of the assessee.

Grants/contribution till 31.03.2006	– Rs. 1180.16 crores
Less : grants/contributions till 31.03.2005	– Rs. 795.03 crores
Grants received during AY 2006-07	Rs.385.13 crores

10.1. The AO made the addition towards the grants receivable for the reason that the assessee is following the mercantile system of accounting and since the grants/contributions is revenue in nature the income should be accrued to the assessee. Accordingly, the AO treated the above sum of Rs. 385.13 crores as the income of the assessee.

11. The Ld. AR made similar submissions as made with regard to grants/contributions received by the assessee as bring in the nature of capital receipts as they are promoters contribution. The Ld. AR further submitted that as per AS-12 the grants should not be recognised unless reasonably assured to be realised and the enterprise complies with the conditions attached to the grant. The Ld. AR also submitted that in assesses case lot of uncertainty is surrounding the receipt of grants and therefore the assessee does not recognised the amount receivable in the books of accounts. Accordingly, the Ld. AR argued that the impugned addition made by the AO cannot be sustained.

12. The Ld. DR on the other hand supported the orders of the lower authorities.

13. We heard the parties and perused the material on record. We have while considering the issue of treatment of grants/ contributions received as income, already held that the receipts are in the nature of promoter’s contributions and accordingly capital receipt. In our considered view the said ratio should be applicable to the addition made by the AO on accrual basis towards the grants/contributions receivable from the government. Accordingly we hold that the grants /contributions receivable cannot also be treated as the income of the assessee. Accordingly we direct the AO to delete the addition made in this regard.

Toll Operation – Mumbai-Pune NH4 and Thane GhodbandarRoad

14. On perusal of clause 20(a) and 20(b) of notes to accounts to annual report the AO notice that the assessee is awarded the contract for collection of toll operation, maintenance and improvement of Mumbai-Pune section of NH-4 with self-finance of contractor along with award of operation maintenance and toll collection rights on NH-4 for 15 years from August, 2004. The AO further noticed that the assessee has received a sum of Rs. 918 crores as net consideration towards the same. The AO also noticed that the assessee has disclosed the following accounting treatment in the books:

Rs. 1320.93 crores is shown as advance toll receipts which will be apportioned based on the cash flow for a period of 15 years included in contract.

Rs. 402.93 cores is shown as advances towards the expected cost of improvement of Mumbai-pune section of NH-4 and Mumbai-Pune express way. This amount will be amortized over contract period along with the above sum to give effect to annual net consideration in profit and loss account.

15. The AO was of the view that the assessee has under stated the income by recognising 1/15^th of the net consideration of Rs.918 instead of recognising 1/15^th of the gross amount of Rs. 1320.93 crores. Accordingly, the AO made an addition of Rs. 25.27 crores towards toll operations of Mumbai – Pune NH-4. The AO made a similar addition of Rs. 13.80 crores towards Thane Ghodbandar toll operations where the assessee had recognised the income by considering the net consideration of Rs. 140.40 crores. The gross amount as per Notes to Accounts is that the assessee has accounted advance toll receipt is Rs. 237.87 crores and the cost of improvement accounted as advances is Rs. 97.47 crores. On further appeal the Ld. CIT(A) confirmed the impugned additions made by the AO.

16. The Ld. AR submitted that as per the bidder agreement dated 04.08.2004 the contract value awarded to the assessee is only Rs. 918 crores and that the assessee has recognised 1/15^th of the said amount as income. The Ld. AR further submitted that the amount of Rs. 1320.93 crores are merely the net present value of the contract and based on the quotation received from the contractor towards repairs and maintenance amounting to Rs. 402.93 crores the assessee has shown the gross amounts in the notes to accounts. The Ld. AR also submitted that the assessee instead of showing the 1/15^th of gross amount and 1/15^th of the expenses towards repairs and maintenance cost has accounted 1/15^th of the net amount as income. The Ld. AR argued that the AO is not correct in considering only the grossed up amount as income without reducing the expenses towards repairs and maintenance to be born by the assessee. The Ld. AR also submitted that the AO erred in making the identical addition towards toll operation of Thane Ghodbandar Road.

17. The Ld. DR on the other hand, argued that for long term toll operation contracts under the BOT model, taxing the gross contract value pro-rata over the contract period is the appropriate way of recognising the income as it accurately reflects the real income earned by the assessee. The Ld. DR further argued that the said method of taxing gross contract value in long term projects in well established and therefore, the lower authorities have correctly made the addition in this case.

18. We heard the parties and perused the material on record. We notice from perusal of the bidder agreement dated 04.08.2004 (page 132 of paper book) that the assessee is awarded the toll operation on maintenance of Mumbai-Pune section of NH-4 for a period of 15 years for a consideration of Rs. 918 crores. We further notice from the Notes to Accounts as extracted above that the assessee has grossed of the amount based on the estimated expenses to be incurred towards the maintenance and improvement of Mumbai-Pune section NH-4. We also notice that the assessee instead of showing the gross revenue and the expenses in the profit and loss account recognised the net consideration as per the agreement as income. The AO while completing the assessment has considered only the income grossed by the assessee but has failed to consider the cost estimated to be incurred towards maintenance and improvement. In view of this factual findings there is merit in the submission of the assessee that the addition made by the AO cannot be sustained and the alternate plea that if the income is to be recognised on gross basis then the reduction towards the estimated expenditure also to be allowed. Accordingly, we direct the AO to delete the addition made in this regard.

19. We notice that the addition made by the AO towards toll operation of Thane Ghodbandar Road are identical to the addition made towards toll operation of Mumbai-Pune NH-4. Accordingly, we direct the AO to delete the addition made towards toll operation of Thane Ghodbandar Road also.

20. Ground No.1 of the assessee pertains to the legal contention that the reopening is based on mere change of opinion since the AO during the assessment proceedings u/s.143(3) has raised queried with regard to the impugned additions and has accepted the submissions made by the assessee. The assessee is also contending that the reopening based on the same materials which are already part of records during regular assessment is also not valid. Since we have already deleted the additions made by the AO based on merits, the legal contentions have become academic and are left open accordingly.

21. In the result, the appeal of the assessee is allowed.