2020 (7) TMI 305 - AT - Income Tax

Depreciation on Content Management Software ( CM Software ) u/s 32 @12.5% - Disallowance of depreciation claimed on webmaster software for which the appellant failed to satisfy the test of ownership for claiming depreciation - alternatively, the expenditure be allowed as Revenue expenditure u/s 37(1) - HELD THAT - Assessee has given the description of the software, its functionality which was also submitted before the CIT(A) - From the details and the submissions it is the assessee s contention that the CMS Software has been developed by it, owned by it and it is used for the purpose of business by updating and managing the Income Tax Act and the other Acts and Rules published by assessee each year. The contention of the assessee of having owning the CMS software by it has not been controverted by the Revenue - incurring of expenditure on its development has also not been disputed by the Revenue. Before us the Ld AR has also pointed out the the software apart from being mainly used by the assessee for its own business is also being used by it to upgrade the website of the Income tax Department. These contentions of the Ld AR has not been controverted by Revenue by placing any material on record. Claim of depreciation made by the assessee in the subsequent year has not been disturbed by the Revenue. Thus we are of the view that the AO was not justified in denying the claim of depreciation u/s 32 - alternate claim of allowing the entire expenditure u/s 37(1) is rendered academic and therefore, not adjudicated. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of depreciation on Content Management Software (CMS) claimed under section 32 of the Income Tax Act, 1961.
2. Allowance of expenditure incurred for development of software as revenue expenditure under section 37(1) of the Act.

Analysis:

Issue 1: Disallowance of Depreciation on CMS
- The assessee, a company engaged in publication and software trading, filed its return for AY 2015-16, claiming depreciation on CMS.
- The AO disallowed the depreciation as the software was not owned by the assessee, leading to a reduced claim of depreciation.
- The assessee contended that CMS was developed and owned by them, used for internal purposes and services to the Income Tax Department.
- The AR argued that the software supported content creation, version control, and was used for managing the ITAT's website.
- The AR emphasized that the software was proprietary, capitalized in books, and met the requirements of section 32 for depreciation.
- The Tribunal found the AO's denial unjustified, as the ownership and usage of CMS by the assessee were established.
- The claim of depreciation was allowed, and the alternate claim under section 37(1) was not adjudicated due to the depreciation allowance.

Issue 2: Allowance of Expenditure as Revenue
- The AR raised an alternate claim for treating the expenditure as revenue under section 37(1) before the CIT(A).
- The CIT(A) dismissed this claim, stating it was not part of the original assessment order or appeal.
- The AR argued citing the NTPC Ltd case that the issue was justifiably raised before the CIT(A).
- The Tribunal did not address this claim due to allowing depreciation, rendering the alternate claim academic.
- The subsequent year's depreciation claim by the assessee was not disturbed by the Revenue, supporting the assessee's position.

Conclusion:
- The Tribunal allowed the appeal, directing the AO to permit the depreciation claim on CMS.
- The alternate claim for revenue expenditure under section 37(1) was not addressed due to the allowance of depreciation.
- The decision was pronounced on 08.07.2020 in favor of the assessee.