2023 (2) TMI 590 - AT - Income Tax

Tribunal affirms higher depreciation rate for software purchase; distinction between system & application software deemed irrelevant.

The Tribunal upheld the CIT(A)'s decision, allowing 60% depreciation on computer software purchased by the assessee. The distinction between system and ... Depreciation on the computer software - @ 60% OR 2% treated as intangible asset - HELD THAT:- Hon’ble High Court of Madras ,in the case of Computer Age Management Services [2019 (7) TMI 1153 - MADRAS HIGH COURT] has categorically held that items listed in Appendix I , prescribing rates of depreciation for different assets under the Act, have to be literally interpreted since the entry is in a taxing statute - 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 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%. In the case of Voltamp Transformers Ltd. (2013 (3) TMI 804 - ITAT AHMEDABAD] 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. 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. Issues Involved:- Allowance of depreciation on computer software at the rate of 60% versus 25%.Detailed Analysis:1. Allowance of Depreciation on Computer Software:The primary issue in this case is whether the computer software purchased by the assessee qualifies for depreciation at the rate of 60% as claimed by the assessee or at 25% as determined by the Assessing Officer (AO). The AO had categorized the software as an intangible asset, thereby allowing only 25% depreciation. In contrast, the Commissioner of Income-Tax (Appeals) [CIT(A)] allowed 60% depreciation, following precedents set in the assessee's own case for previous assessment years.2. Facts and Arguments:The assessee incurred expenditure on the purchase of SAP software and claimed 60% depreciation. The AO reduced this to 25%, treating the software as an intangible asset. The CIT(A) allowed the higher depreciation rate based on previous ITAT decisions in the assessee's favor.3. Revenue's Contention:The Revenue argued that the software in question was application software, not system software, and should be treated as an intangible asset, thus qualifying for only 25% depreciation. They relied on the ITAT Chennai Bench decision in Pentamedia Graphics Ltd. Vs. DCIT, which distinguished between system and application software for depreciation purposes.4. Assessee's Counter-Argument:The assessee contended that the distinction between system and application software is irrelevant. They cited the Madras High Court decision in CIT Vs. Computer Age Management Services P.Ltd., which held that all computer software, regardless of type, qualifies for 60% depreciation if it meets the definition in Appendix-I of the Income Tax Rules, 1962.5. Tribunal's Findings:The Tribunal upheld the CIT(A)'s decision, emphasizing that the issue had been consistently decided in favor of the assessee in previous years. They noted that the Madras High Court and various ITAT decisions had held that the type of software (system or application) does not affect the depreciation rate. As long as the software falls within the definition provided in Appendix-I, it qualifies for 60% depreciation.6. Conclusion:The Tribunal found no reason to interfere with the CIT(A)'s order, which allowed 60% depreciation on the software. The Revenue's appeal was dismissed, reaffirming that the assessee is entitled to the higher depreciation rate.Final Judgment:The appeal of the Revenue was dismissed, and the order allowing 60% depreciation on the computer software was upheld. The judgment was pronounced on 25th January 2023 at Ahmedabad.