2020 (10) TMI 145 - HC - Income Tax

Maintainability of appeal - low tax effect - Depreciation on Intangible assets - Tribunal allowing depreciation at 60% in respect of design and assembly drawings of hydraulics cylinders, Bill of materials and other components in CD as computer software - As submitted Monetary limit for filing or pursuing an appeal before the High Court has been increased to ₹ 1 Crore - HELD THAT - The above tax case appeal is dismissed on account of the low tax effect. The substantial question of law framed is left open. In the event the tax effect is above the threshold limit fixed in the said circular, liberty is granted to the Revenue to make a mention to this Court to restore the appeal to be heard and decided on merits.

Summary

Issues: Appeal against order allowing higher depreciation on intangible assets under Income Tax Act, 1961 for assessment year 2013-14.

Analysis:
1. Depreciation on Intangible Assets: The primary issue in this case revolves around the depreciation rate applicable to intangible assets, specifically design and assembly drawings of hydraulics cylinders, Bill of materials, and other components stored in a CD as computer software. The appellant, Revenue, contested the Tribunal's decision to allow a higher depreciation rate of 60% on these assets, arguing that they should be eligible for depreciation at 25% only. The crux of the matter lies in whether these assets qualify as software programs readily available for purchase in the market or as developed designs tailored to specific requirements, impacting the depreciation rate applicable.

2. License Agreement Consideration: Another crucial aspect addressed in the appeal is the consideration of 11,00,000 US dollars paid for a license agreement with AE Bailey International Corporation USA concerning the impugned assets. The appellant contended that this payment was for intangible assets not covered under the heading of computer software eligible for 60% depreciation. The argument questions the rationale behind allowing a higher depreciation rate based on assets acquired through such agreements and their classification under the Income Tax Act.

3. Tax Effect and Dismissal: The learned Senior Standing Counsel for the appellant highlighted that the appeal was not being pursued by the Revenue due to the low tax effect, falling below the monetary limit set by Circular No.17/2019 issued by the Central Board of Direct Taxes. As the tax effect was less than the threshold limit of ?1 Crore, the appeal was dismissed on this basis. However, the substantial questions of law framed in the appeal were left open for future consideration if the tax effect surpasses the threshold. The judgment allowed the Revenue the liberty to seek restoration of the appeal for a hearing on merits if the tax effect exceeds the prescribed limit, maintaining a fair approach to the dismissal based on financial considerations.

In conclusion, the judgment by the Madras High Court addressed the intricate issues surrounding the depreciation rates on intangible assets and the impact of license agreements on asset classification under the Income Tax Act, 1961. The decision to dismiss the appeal due to the low tax effect while leaving the substantial questions of law open demonstrates a balanced approach to legal proceedings, ensuring fairness and consideration of financial implications in tax matters.