Computer Software Eligible for Depreciation at 60%: ITAT [Read Order]

The Income Tax Appellate Tribunal ( ITAT ), Ahmedabad Bench, has recently, in an appeal filed before it, held that computer software is eligible for depreciation at 60%.

The aforesaid observation was made by the Ahmedabad ITAT, when an appeal was preferred before it by the Revenue, as against the order of the Commissioner of Income-Tax (Appeals), Ahmedabad [CIT(A)], dated 18.2.2020, passed under section 250 of the Income Tax Act, 1961, pertaining to the Asst.Year 2015-16.

The sole grievance of the Revenue being the allowance of depreciation on computer software at the rate of 60%, as opposed to 25% held to be allowable by the AO, the grounds raised in this regard, by the Revenue was as to whether theCIT(A) has erred in law and on facts, in allowing depreciation at 60%, instead of 2%, on the computer software treated as intangible asset.

The facts relating to the computer software, on which the assessee had claimed depreciation at the rate of 60%, noted in the order of the AO, was that, it related to the SAP products which the AO noted was a customized licensed product.

The assessee having incurred an expenditure to the tune of Rs.17,30,28,684/-on the purchase of the said SAP product,it had claimed depreciation at the rate of 60% thereon, which was reduced to 25% by the AO holding that the application software being licensed was an intangible asset.

Accordingly, the depreciation at the rate of 25% was made applicable to it by the AO,while the CIT(A) allowed the claim of the assessee of 60% depreciation, thereon following order of the ITAT in the assessee’s own case for Asst.Year 2010-11 to 2012-13. And it is against the same that the Revenue has preferred the instant appeal before the Ahmedabad ITAT.

The contentions of the Revenue as presented by Shri V.K. Mangla, the Sr.DR, being to the effect that the ITAT while deciding issue in the case of the assessee in the preceding Asst.Years 2010-11 to 2012-13, has placed reliance on its own decision in the case of ACIT Vs. Zydus Infrastructure P.Ltd., which was distinguishable on facts, he added that in the said case, the software was basically systems software on which the computer hardware ran, and noting the fact that it wasimpossible to use the computer without this software, had the ITAT held that it was entitled to depreciation on computer software at the rate of 60%.

The contention of the Revenue was that in the present case, the software purchased was not one on which the computer hardware ran, in fact, the software was for the smooth and efficient functioning of the assessee’s business activities, giving enduring benefit to the assessee, and thus, was in the nature of intangible asset. And for the said purpose, the Revenue relied on the judgment of the ITAT, Chennai Bench in the case of Pentamedia Graphics Ltd. Vs. DCIT.

The counsel for the assessee,Shri Dhinal Shah, the AR however, countered the same by stating that, this distinction between application software and systems software was of no relevance at all, and  pointed out that the Madras High Court in the case of CIT Vs. Computer Age Management Services P.Ltd., had categorically held that all computer software of whatever nature, as long as they qualify in the definition of computer software products as appearing in Appendix-Ito the Income Tax Rules, 1962, wherein they have defined to mean any programme recorded on CD or disc, tape, perforated media or other information storage devices ,qualified as computer software for the purpose of claiming depreciation at the rate of 60%.

Hearing the opposing contentions of either sides and perusing the materials available on record, the Ahmedabad ITAT observed:

“The Hon’ble High Court of Madras, in the case of Computer Age Management Services (supra) has categorically held that items listed in Appendix I, prescribingrates of depreciation for different assets under the Act, have to be literally interpreted since the entry is in a taxing statute. In the matter before it the issue was identical, of rate of depreciation applicable to softwares, which as per the Revenue qualified as intangible assets since the softwares were actually licenses granted. The Hon’ble high court held that since computer software has been defined in Appendix as any computer program recorded on disc, tape or other information storage device, it has to be identified accordingly and the description could not be ignored.”

“Therefore, irrespective of the usage of the software, the Hon’ble high court has held that as long as it fell within the definition provided in the appendix it qualified as computer software for enhanced rate of depreciation of 60%. The ITAT, Ahmedabad Bench, in the case of Voltamp Transformers Ltd., has also categorically held that Income Tax Rules providing for rate of depreciation makes no distinction between the system software and application software while prescribing 60% depreciation thereon. Therefore, the distinction pointed out by the ld.DR that software of the assessee was utility software and such softwares qualify as intangible assets for the purposes of rate of depreciation, we hold is of no relevance.”, the ITAT Panel consisting of Madhumitha Roy, the Judicial Member, along with Annapurna Gupta, the Accountant Member , added.

Thus, dismissing the Revenue’s appeal, the Ahmedabad ITAT held:

“We see, therefore, no reason to interfere in the order of the ld. CIT(A) upholding the claim of depreciation at the rate of 60%. The ground of appeal of the Revenue is rejected.”

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