Canons in Conflict

The Invisible Asset: How Ancient Latin Maxims Shape Modern Tax Law

When you drive on a modern toll road, you likely think about the road itself—the smooth tarmac, the bridges, and the tolls you pay. But in the world of tax law, the most valuable asset isn't the physical road; it's the invisible right to collect those tolls. Can a company claim depreciation on something it can't even touch?

The answer is a complex "maybe," and it hinges on the interpretation of two ancient Latin legal principles: noscitur a sociis and ejusdem generis. These canons of construction are at the heart of a significant debate in Indian tax jurisprudence, particularly concerning Section 32 of the Income Tax Act, 1961.

A Tale of Two Canons: Understanding the Legal Toolkit

At its core, statutory interpretation is about deciphering the intent of the legislature. To do this, courts rely on established principles or "canons." Two of the most important are:

• Noscitur a Sociis: This Latin maxim translates to "it is known by its associates". It suggests that the meaning of an ambiguous word can be understood from the context of the words surrounding it. As Lord Macmillan famously put it, a word is "judged by the company it keeps". This principle is broad and relies on general contextual association.

• Ejusdem Generis: Meaning "of the same kind or nature," this is a more specific rule. It applies when a list of specific items is followed by a general phrase. The doctrine holds that the general words should be interpreted as being of the same class, or

genus, as the specific items listed. Indian courts consider

ejusdem generis to be a specific application of the broader noscitur a sociis principle.

These are not unbreakable laws but rather rules of construction, employed when a statute is ambiguous, to avoid outcomes that don't align with the legislature's objectives.

The Battleground: Intangible Assets Under Section 32

The conflict between these two canons plays out vividly in Section 32(1)(ii) of the Income Tax Act. This section allows for depreciation on certain intangible assets acquired for business purposes. The crucial text lists:

"know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature...".

The entire debate hangs on that final phrase: "any other business or commercial rights of similar nature." How do we define "similar nature"? Do we look at the general context of the words (noscitur a sociis), or do we try to find a single, unifying category that all the listed items belong to (ejusdem generis)?

The legislative history suggests a preference for

ejusdem generis for intangible assets, aiming for a consistent and coherent interpretation. The very structure of the clause—a specific list followed by a general catch-all—is a classic setup for applying this doctrine.

The Big Question: Can a Toll Collection Right Be Depreciated?

This brings us back to our toll road. A Build-Operate-Transfer (BOT) operator invests heavily to construct a road but doesn't typically own the physical asset; ownership often remains with the government. What the operator acquires is a long-term license or concession to operate the road and collect tolls. Is this right a depreciable intangible asset?

The Argument for Depreciation:

The strongest argument in favor of depreciation relies on the

ejusdem generis principle, as applied by the Supreme Court in the landmark case CIT v. Smifs Securities Ltd.. The Court established a functional test, stating that the

genus connecting the assets listed in Section 32 is that they are all valuable commercial rights that serve as "tools of the trade" to facilitate business operations.

• A BOT operator's right to collect tolls fits perfectly within this category. It is the primary commercial tool that enables the business to operate and earn revenue.

• This view is supported by the Special Bench of the Income Tax Appellate Tribunal (ITAT) in

DCIT v. Progressive Constructions Ltd., which held that a BOT project gives rise to an intangible asset eligible for depreciation.

• Furthermore, the Supreme Court allowed depreciation on a Bombay Stock Exchange membership card, finding it to be a "business or commercial right" similar to a license or franchise. A toll concession agreement is functionally similar.

The Argument Against Depreciation:

However, this position is not without its legal challenges.

• A contrary view comes from the Madras High Court in

L&T Infrastructure Development Projects Ltd.. Applying a restrictive interpretation, the court concluded that the "other business or commercial rights" must be similar to intellectual property rights like patents and copyrights, which a toll right is not.

• Adding weight to this view is Circular No. 9/2014 from the Central Board of Direct Taxes (CBDT), which states that costs for BOT projects should be amortized over the concession period, not depreciated. While circulars are not binding on courts, they represent the official position of the tax department.

A Matter of Interpretation

So, where does that leave us? The judicial application of these principles has both expanded and restricted depreciation claims over the years. On one hand, courts have allowed depreciation for assets like non-compete rights, customer lists, and (formerly) goodwill. On the other, claims for assets like tenancy rights have been denied as they don't fit the required category.

While there is conflicting judicial precedent, the more robust legal argument appears to favor allowing depreciation for toll rights. The functional "tool of the trade" test established by the Supreme Court seems most aligned with the legislative intent to widen the scope of depreciation for valuable commercial assets that are essential to modern business. The Madras High Court's view, while a significant hurdle, appears to be an outlier.

This ongoing legal dialogue demonstrates how centuries-old principles of interpretation remain a dynamic and central feature of India's tax jurisprudence, shaping the outcome of high-stakes financial decisions and proving that sometimes, the meaning of a word is truly known by the company it keeps.