Depreciation on in-house software determined at 60% under precedents, overturning lower 25% limitation and allowing claim.

Issue concerns allowable depreciation on capitalised software classified as an intangible asset. The article explains that a revenue authority's restriction of depreciation to 25% for allegedly bespoke in-house software was reversed by reliance on a line of judicial precedents recognising computer software as an intangible asset eligible for higher depreciation rates. The precedent trajectory, including higher court authority, supports allowance of depreciation at 60% for such software; consequence: the higher depreciation claim is sustained and the lower 25% restriction rejected.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether specialised software used for the assessee's high-frequency trading activity is eligible for depreciation at 60% (as part of "computer including computer software") or only at 25% by treating it as an "intangible asset", where the lower authorities proceeded on the basis that the software was developed in-house and suited to the assessee's peculiar requirements.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Applicable rate of depreciation on specialised trading software (60% vs 25%)

Legal framework (as deliberated in the judgment): The Court considered the depreciation rates as applied by the tax authorities under the Act and its depreciation schedule/appendix distinctions between "computers including computer software" attracting 60% depreciation and "intangible assets" attracting 25% depreciation. The Court proceeded on the basis that the classification of software for depreciation depends on the applicable entry and how the asset is used in the business.

Interpretation and reasoning: The Court examined the assessee's submission that, as a trading member engaged in high-frequency trading, it required specialised software integral to its business operations, and that software cannot operate in isolation but functions only when loaded on and used with computer systems. The Court noted that the same controversy had been conclusively dealt with in a prior Tribunal decision, which in turn relied on judicial authority treating "computer software" as falling within the specific entry of "computers including computer software," warranting depreciation at 60%. The Court treated the prior Tribunal view as governing and found the present facts to be similar, warranting consistent treatment. In doing so, the Court rejected the approach of restricting depreciation to 25% merely by labelling the software as an "intangible asset" on the premise of being developed in-house or customised to the assessee's requirements, since the operative classification turned on the entry applied to computer software and its functional integration with computers in the business.

Conclusions: The Court held that the specialised software used in the assessee's high-frequency trading business is eligible for depreciation at 60%. Consequently, the restriction to 25% upheld by the lower appellate authority was not sustained, and the assessee's appeal on merits was allowed.

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