2020 (5) TMI 310 - AT - Income Tax

Depreciation on Digital Content/Animation Software developed - held by assessee as an asset which is used in various films by assessee - Eligible to depreciation @ 60% or 25% - definition of computer software - HELD THAT - The scope of Information Technology Software as is referred to in Hon ble Supreme Court judgment in assessee s own case 2006 (5) TMI 90 - SUPREME COURT was in context of Customs Laws which was very vide definition and hence we cannot draw analogy in the 1961 Act read with 1962 Rules. Digital contend developed by assessee can be equated with computer program is far fetched but rather it is a copyrighted material developed by assessee which is stored in computer. This digital content was manipulated by assessee to be used in different films but still it cannot be categorized at higher pedestal of being termed as computer program rather it still retains the character of copyrighted material being intangible asset and in our considered view, the assessee is eligible for depreciation @ 25% as these copyrighted material developed by assessee being Digital Content which is used by the assessee in various films etc. - Decided against assessee. Disallowance u/s14A r.w.r. 8D(2)(iii) - expenses incurred by assessee in relation to earning of an exempt income - AO disallowed the expenses by invoking Rule 8D(2)(iii) by applying 0.5% of the average investments - HELD THAT - We find merit in contentions of the assessee that the investments in Indian companies which did not yielded exempt income during the year cannot be included for computing disallowance of expenditure u/s 14A read with Rule 8D of the 1962 Rules and we are restoring the matter back to the file of the AO for verification of the contentions of the assessee and to re-adjudicate the matter on merits in accordance with law. Thus, all those investments in indian companies which did not yielded exempt dividend income during the year shall be excluded while computing disallowance of expenditure u/s 14A read with rule 8D(2)(iii) of the 1962 Rules. Case of ACIT v. Vireet Investment Private Limited 2017 (6) TMI 1124 - ITAT DELHI is relevant. This ground partly allowed for statistical purposes

Summary

Issues Involved:

1. Rate of depreciation allowable on 'Digital Content'.
2. Disallowance of expenses under Section 14A of the Income Tax Act, 1961.

Issue 1: Rate of Depreciation on 'Digital Content'

The primary issue for adjudication was whether the assessee is entitled to depreciation at the rate of 25% or 60% on 'Digital Content'. This issue arose in the context of assessment years 2007-08 and 2009-10. The assessee argued that 'Digital Content' constitutes computer software and is thus eligible for a 60% depreciation rate. The Revenue, however, contended that 'Digital Content' is an intangible asset, eligible only for a 25% depreciation rate.

The Tribunal noted that the assessee is engaged in developing animation and special effects software, which is stored on hard disks and used in film production. The assessee relied on Explanation 2 to Section 10B of the Income-tax Act, which defines computer software as any programme recorded on any disc, tape, perforated media, or other information storage device.

The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] both held that the 'Digital Content' developed by the assessee is an intangible asset and not computer software, thus eligible for 25% depreciation. The AO emphasized that the software developed by the assessee is used in movie production and is an intellectual property right with enduring benefits. The CIT(A) supported this view by highlighting that the software developed is highly customized and cannot be equated with off-the-shelf software, which is eligible for 60% depreciation.

The Tribunal affirmed the decisions of the AO and CIT(A), concluding that the 'Digital Content' developed by the assessee is an intangible asset, not a computer program. Therefore, it is eligible for depreciation at the rate of 25%. The Tribunal emphasized that the statutory definition of computer software in the Income-tax Act is restrictive and does not cover the 'Digital Content' developed by the assessee.

Issue 2: Disallowance of Expenses under Section 14A

For the assessment year 2009-10, the second issue concerned the disallowance of expenses under Section 14A of the Income-tax Act, read with Rule 8D(2)(iii) of the Income-tax Rules. The AO disallowed expenses by applying 0.5% of the average investments, which was affirmed by the CIT(A).

The assessee contended that investments in foreign companies, from which taxable dividend income was received, should be excluded from the disallowance calculation. Additionally, the assessee argued that investments in Indian companies that did not yield any dividend income during the year should also be excluded.

The Tribunal found merit in the assessee's contentions and restored the matter to the AO for verification. The AO was directed to exclude investments in foreign companies that yielded taxable dividend income and investments in Indian companies that did not yield any dividend income during the year while computing the disallowance under Section 14A.

Conclusion:

1. The appeals concerning the rate of depreciation on 'Digital Content' were dismissed, affirming that 'Digital Content' is an intangible asset eligible for 25% depreciation.
2. The issue of disallowance under Section 14A was partly allowed for statistical purposes, with directions to the AO for re-verification and exclusion of certain investments from the disallowance calculation.