Depreciation on expenditure for software development

[MALAYANUR PADMANABHARAO]

We have established a software company. The objects of the company is to develop a software product useful for banks in digital banking. The company spent considerable amount over 5 years to develop the software and till the product was ready company recognised as product development expenditure in the balance sheet. Most of the expenses incurred for salaries, etc., were treated as product development and in the fin.year brought out the product and selling in the market. Company did not claim on depreciation on this expenditure in any previous fin.years as per IT, but claimed depreciation at the rate of 25% on the capitalised product of 5 years expenditure as an intangible asset under technical know how, patents, etc. Company has applied for patent of the product which is under process. Assessing officer negates that this is not an intangible assets and should have been claimed in respective assessment years of the expenditure incurred.

Wish to know whether company's claim of depreciation on the amount under intangible asset is correct or not.

[Ganeshan Kalyani]

Depreciation is allowed on the asset in the year in wich it is put to use .

[Ganeshan Kalyani]

Refer section 32 of Income Tax Act.

AI Summary

Depreciation on capitalised software development: allowable when asset is first put to use, per income tax rule. Whether depreciation is allowable on capitalised software development expenditure treated as an intangible asset when the product is completed and put to use. The company capitalised five years of development costs, applied for a patent (pending), did not claim depreciation in the years of expenditure, and later claimed depreciation on the capitalised intangible after marketing the product. The assessing officer argues the costs should have been claimed in the respective years rather than as depreciation.