2017 (8) TMI 73 - AT - Income Tax

Depreciation on expenditure incurred on the development of software as well as purchase of software is capital in nature - at the rate of 25% or at the rate of 60% - Held that - Income Tax Act, 1961 and the Income Tax Rules, 1962 prescribe the rate of depreciation on computer software at the rate of 60% from 01/04/2003, prior to which the rate of depreciation was 25% only. Hence, as per the rate prescribed by the Income Tax Rules, the assessee is entitled to depreciation at the rate of 60% and the action of the assessee in claiming the depreciation on the basis of the amended rate of depreciation on software cannot be faulted with and the same cannot be restricted to 25% merely on the ground that depreciation was claimed at the rate of 25% till assessment year 2003-2004. Although, the assessee has classified the software under computer software and intellectual property rights , it is very well settled that nomenclature cannot be conclusive and decisive regarding the nature of transaction and it is the substance of the matter which should be looked into rather than the form or the nomenclature by which the same might have been called. - Decided against revenue

Summary

Issues Involved:
- Disallowance of depreciation on software and intellectual property rights
- Rate of depreciation - 25% or 60%
- Classification of assets as tangible or intangible
- Interpretation of relevant tax laws and rules

Analysis:

1. Disallowance of Depreciation on Software and Intellectual Property Rights:
The case involved appeals by the Department regarding the disallowance of depreciation on software and intellectual property rights by reducing the claimed rate from 60% to 25%. The Assessing Officer (AO) had made significant additions to the income of the assessee based on this disallowance for the assessment years 2008-09 and 2009-10. The Commissioner of Income Tax (Appeals) had deleted these additions, leading to the Department's appeal before the ITAT.

2. Rate of Depreciation - 25% or 60%:
The core issue revolved around the correct rate of depreciation applicable to the software and intellectual property rights. The Department argued for restricting the depreciation to 25%, citing past practices. However, the assessee contended that the applicable rate was 60% as per the Income Tax Rules from 01/04/2003. The ITAT analyzed the definitions of computer software and intellectual property rights, emphasizing that the software purchased or developed in-house did not qualify as intellectual property rights since they were not registered as patents or copyrights. Therefore, the ITAT upheld the assessee's claim for depreciation at the rate of 60%.

3. Classification of Assets as Tangible or Intangible:
The ITAT clarified the distinction between computer software (tangible asset) and intellectual property rights (intangible asset). It highlighted that the nomenclature used by the assessee, such as "software and intellectual property rights," did not determine the nature of the assets. The substance of the transaction was deemed more crucial than the form or nomenclature. This distinction was pivotal in determining the correct rate of depreciation applicable to the assets in question.

4. Interpretation of Relevant Tax Laws and Rules:
The ITAT's decision was based on a thorough analysis of the Income Tax Act, 1961, and the Income Tax Rules, 1962. It emphasized that the prescribed rate of depreciation on computer software was 60% from 01/04/2003, superseding the earlier rate of 25%. By interpreting the relevant laws and rules, the ITAT concluded that the assessee was entitled to claim depreciation at the rate of 60% for the software assets, dismissing the Department's grounds of appeal.

In conclusion, the ITAT upheld the Commissioner of Income Tax (Appeals)'s decision to delete the additions made by the AO, thereby dismissing the Department's appeals for both assessment years. The judgment provided a comprehensive analysis of the issues, focusing on the correct interpretation of tax laws and the classification of assets to determine the applicable rate of depreciation.