2010 (7) TMI 642 - AT - Income Tax

Depreciation - Whether routers and switches can be classified as computer entitled to depreciation at 60% or have to be classified as general plant and machine entitled to depreciation only at 25% - Section 32, which grants depreciation allowance, does not define the word Computer - As per the General Clauses Act, 1897, if a particular word is not defined in the Central statute then meaning given to such expression under General Clauses Act may be considered for guidance and adoption in the former enactment - Thus in order to determine whether a particular machine can be classified as a computer or not, the predominant function, usage and common parlance understanding, would have to be taken into account - In the case of ITO Vs. Samiran Majumdar (2006) 280 ITR (AT) 74 (Kol.) ITAT, Kolkata Bench - Held that when a device is used as part of the computer in its functions, then it would be termed as a computer - In the result, both the appeals stands dismissed

Issues Involved:
1. Classification of routers and switches for depreciation purposes.
2. Determination of applicable depreciation rate for routers and switches.
3. Interpretation of the term "computer" under the Income Tax Act.

Detailed Analysis:

1. Classification of Routers and Switches for Depreciation Purposes:
The primary issue was whether routers and switches should be classified as computers eligible for a depreciation rate of 60% or as general plant and machinery eligible for a depreciation rate of 25%. The assessee argued that routers and switches are integral parts of computers and should be classified under the block of computers. The Assessing Officer (AO) disagreed, classifying them as networking tools not fitting the definition of computers.

2. Determination of Applicable Depreciation Rate for Routers and Switches:
The assessee claimed depreciation at 60% for routers and switches, treating them as computers. The AO reduced the depreciation rate to 25%, arguing that routers and switches do not perform the functions of a computer, such as logic, arithmetic, data storage, retrieval, communication, and control. The AO relied on the definition of "computer" from the Oxford Dictionary and past judgments to support this classification.

3. Interpretation of the Term "Computer" under the Income Tax Act:
The term "computer" is not defined in the Income Tax Act or Rules. The assessee and the AO referred to various definitions, including those from the Information Technology Act and judicial precedents, to support their arguments. The Tribunal examined these definitions and the functional aspects of routers and switches to determine their classification.

Tribunal's Findings:

Classification and Depreciation Rate:
The Tribunal concluded that routers and switches, when used as part of a computer system, should be classified as computer hardware. This classification is based on their integral role in facilitating data transmission between computers, making them essential for the computer's operation. The Tribunal emphasized that the predominant function and usage of these devices should be considered.

Interpretation of "Computer":
The Tribunal noted that the term "computer" should be understood in its common parlance and commercial sense. It includes not only the CPU but also input and output devices that are essential for the computer's operation. The Tribunal rejected the narrow interpretation that only devices performing logical, arithmetic, and memory functions should be classified as computers.

Judicial Precedents:
The Tribunal referred to various judicial precedents, including the cases of Samiran Majumdar and Routermania Technologies. The Tribunal preferred the broader interpretation from Samiran Majumdar, which included input and output devices as part of the computer, over the narrower view from Routermania Technologies.

Conclusion:
The Tribunal held that routers and switches, when used as part of a computer system, should be classified under the block of computers and are entitled to a depreciation rate of 60%. This decision was based on the functional integration of these devices with computers and their essential role in data transmission.

Order:
Both appeals were dismissed, and the Tribunal pronounced the order on July 9, 2010, affirming the classification of routers and switches as computers for depreciation purposes.

← Previous Next →