Section 263 Revision Toll-Rights Depreciation ITAT 2026

What Happened?

The Income Tax Appellate Tribunal (ITAT) Mumbai has recently quashed a Section 263 revision order passed by the Assessing Officer (AO) relating to depreciation claimed on sea-link toll-rights. The tribunal held that once the AO has conducted a detailed examination of the depreciation claim during the original assessment, they cannot later revise the same issue under Section 263 simply because a CBDT circular was issued on Build-Operate-Transfer (BOT) construction matters. This ruling provides significant relief to infrastructure and toll-project companies claiming depreciation on toll-rights in Assessment Year 2025-26 and onwards.

Background & Legal Context

Section 263 of the Income Tax Act 2025: This section grants the Principal Commissioner of Income Tax (PCIT) the power to revise any order passed by the AO if they believe the order is erroneous in so far as it is prejudicial to the interests of the revenue. However, this power is NOT absolute. The law clearly states that Section 263 cannot be used to revisit issues that have already been examined and decided during the original assessment.

Key Legal Principle: The settled legal position, which this ITAT Mumbai judgment reinforces, is that Section 263 revision is a limited remedy. It cannot be invoked to:

• Re-examine factual matters already considered by the AO
• Substitute one view of law for another when both views are reasonable
• Correct errors in discretionary decisions once the discretion has been exercised
• Revisit depreciation allowances once the quantum has been assessed after detailed enquiry

The Toll-Rights and BOT Circular Issue: The Assessing Officer had initially accepted the depreciation claim on toll-rights during the assessment process. However, after the CBDT issued a circular providing guidance on depreciation for BOT construction projects, the AO sought to revise the order under Section 263, arguing that the circular clarified the correct treatment.

The ITAT rejected this argument. The tribunal observed that:

• The original assessment was not erroneous when made (the depreciation was allowed after examination)
• Mere issuance of a subsequent circular providing guidance does not make a previously examined claim now 'erroneous'
• If the AO disagreed with the treatment, they should have raised it during the original assessment, not after
• Section 263 cannot be used as a backdoor mechanism to reopen settled issues

Applicable Sections: This ruling applies under Section 263 of the Income Tax Act 2025. It is important to note that Section 263 is a re-enactment of the earlier Section 263 of the Income Tax Act 1961, so judicial precedents from prior years remain highly relevant. The tribunal's interpretation follows the Supreme Court's strict approach to Section 263 revision powers established in cases like CIT v. Futuristic Retail Ltd.

What Does This Mean for You?

For Infrastructure & BOT Companies: If your company operates toll roads, sea-links, bridges, or similar Build-Operate-Transfer projects and claims depreciation on toll-rights, this judgment provides strong legal protection. Once your depreciation claim is examined and allowed by the AO during the original assessment, the revenue department cannot easily revise it later simply by issuing circulars or changing their mind about the treatment.

For Other Asset Depreciation Claims: This principle extends beyond toll-rights. Any business claiming depreciation on intangible assets, right-of-use assets, or other depreciable property has stronger protection against surprise Section 263 revisions if the original assessment was thorough.

For Assessment Year 2025-26 Onwards: Taxpayers currently in assessment or facing Section 263 revision notices related to depreciation should rely on this judgment to challenge the revision if:

• The claim was examined in detail by the AO
• The AO passed detailed orders allowing or disallowing the claim
• The revision is based on a subsequently issued circular or change in revenue department's interpretation

Practical Impact: This ruling significantly reduces the risk of post-assessment harassment through Section 263 revisions on depreciation matters. It discourages revenue authorities from waiting for circulars to be issued before deciding whether to challenge previously accepted positions. This provides certainty and finality to tax planning for infrastructure projects with long-term toll-rights.

What Should You Do Now?

Step 1: Review Your Assessment Orders If you have received an assessment order in AY 2025-26 or earlier years where depreciation on toll-rights or similar intangible assets was allowed, preserve that order carefully. This judgment strongly supports the finality of that decision.

Step 2: Challenge Pending Section 263 Revisions If you have received a Section 263 revision notice from the PCIT relating to depreciation, immediately file a response with this ITAT Mumbai judgment as precedent. Point out that if the issue was examined during original assessment, it cannot be revisited under Section 263 merely because of a subsequent circular.

Step 3: Strengthen Your Depreciation Documentation Maintain detailed working papers showing:

• How you computed depreciation on toll-rights
• The useful life assumptions you used
• Any professional valuation reports
• Correspondence with the AO during assessment

Step 4: Proactive Disclosure in Fresh Assessments If you are filing returns for AY 2026-27 onwards and claiming depreciation on toll-rights, provide comprehensive details in your return and annexures. This reduces the AO's scope to claim they were unaware of your position during assessment.

Step 5: Consider Advance Ruling For large depreciation claims on unusual assets, consider filing an application for Advance Ruling under Section 245Q of the Income Tax Act 2025. This provides binding certainty and makes Section 263 revision much more difficult.

Key Takeaways

• Section 263 Cannot Reopen Examined Claims: Once an AO has examined and decided a depreciation issue during original assessment, the PCIT cannot revise it under Section 263 merely because a circular was later issued.
• Finality is Key: This ruling emphasizes that assessment orders, when based on detailed examination, achieve finality and cannot be easily reopened through the back door of Section 263 revisions.
• Infrastructure Projects Protected: Toll-rights, BOT projects, and similar long-term infrastructure investments get strong legal protection for their depreciation allowances once assessed.
• Circular Cannot Override Assessed Position: The revenue authority cannot use subsequent circulars as a basis to revise depreciation claims that were allowed after examination during the original assessment.
• Applicable to All Intangible Assets: While this ruling concerns toll-rights, the principle extends to depreciation claims on all types of intangible assets, improving certainty for businesses across sectors.

Bottom Line: This ITAT Mumbai judgment is a significant win for taxpayers. It reinforces that Section 263 is meant to correct genuinely erroneous orders, not to implement policy changes retroactively. If your depreciation claim was examined and allowed, you have strong legal ground to resist revision.

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