DEPRECIATION ON ‘ATM’

[Mr. M. GOVINDARAJAN]

Depreciation

The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation. Depreciation, i.e. a decrease in an asset's value, may be caused by a number of other factors as well such as unfavorable market conditions, etc.  As per section 32 of the Income Tax Act, 1961, depreciation is allowed on tangible assets and intangible assets owned, wholly or partly, by the assessee and used for the purposes of business or profession.

Depreciation rate.

The rates of depreciation under Income Tax Act, 1961 (‘Act’ for short) are from 5% to 40%.  An assessee may use either the straight-line approach or the written line method to determine the decline in asset value brought on by depreciation, with the latter being the way that the Income Tax Department prefers most. Depreciation is allowed for physical (real estate, equipment, and the like) and intangible (technical know-how, licenses, patents, copyrights, and the like) assets under Sections 32(1)(i) and 32(2)(ii) of the Income Tax Act, 1961, respectively. Computing depreciation on computer hardware and software is crucial in the current era of globalization and digitalization, when they have become a valuable asset for any organization.

Depreciation for computer

A high rate of 40% is the depreciation for computer hardware and software. That indicates that when calculating their taxable business revenue, the assessee may deduct 40% of the cost of computers and software.

ATM a computer?

The term ‘computer’ is not defined under the Income Tax Act of 1961, the Income Tax Rules of 1962, or the General Clauses Act of 1897. The Information Technology Act of 2000’s definition of the word ‘computer’ and the principles of legislative interpretation must both be taken into consideration when evaluating the meaning of the term. Computers are defined as ‘any electronic, magnetic, optical, or other high-speed data processing device or system that performs logical, arithmetic, and memory functions by manipulation of electronic, magnetic, or optical impulses,’ and they also include all input, output, processing, storage, computer software, or communication facilities that are linked to or associated with the computer as part of a computer system or computer network.

The equipment must come within the definition of ‘computer’ in order to qualify for a high 40% depreciation rate. If the item in issue does not meet the definition of ‘computer’ it may be eligible for depreciation at the 15% rate that is applicable to plant and machinery.  Which equipment qualifies as a computer to earn depreciation at a 40% rate is the key issue facing every corporate entity.

The ITAT in many a case held that the ATM is a computer and eligible for depreciation @ 40%.

Case law

In M/S. FINANCIAL SOFTWARE AND SYSTEMS PRIVATE LIMITED VERSUS THE ASST. COMMISSIONER INCOME TAX, CORPORATE RANGE 2, CHENNAI AND VICE-VERSA - 2019 (6) TMI 1454 - ITAT CHENNAI , Chennai, the assessee entered into contracts with Banks wherein the assessee was awarded the contract to carry out end to end maintenance, software development and integration between ATMs and Banks. The return of income for the Asst Year 2013-14 was filed by the assessee company originally and later the same was revised under section 139(5) of the Act on 19.11.2014 declaring loss of Rs. 27,70,84,312/-. AO show caused the assessee as to why the depreciation on ATMs should be granted at the rate of 15% as against the rate of 60% claimed by the assessee. The assessee replied that it had capitalized the ATMs in its books as ‘Computers’ and had accordingly claimed depreciation on such machines at the rate of 60% as prescribed under the Income Tax Rules, 1962 on the basis of functional similarities between ATMs and Computers and on the ground that ATM machines are computerized telecommunication device and would fall under the definition of ‘computer network’ which is included in the definition of ‘computers’ as per the provisions of section 2(i) of the Information Technology Act, 2000. The Assessing Officer however disregarded the contentions of the assessee and treated the ATMs as mere Electronic devices and granted depreciation at the rate of 15%.  The same was upheld by the Commissioner of Income Tax (Appeals) on the appeal filed by the assessee.

The ITAT, on the appeal filed by the assessee, observed that the ATM machines are nothing but computers as they deal with the functions of decoding the information, processing the same and giving the output. The ATM machines are computerized machines which not only allow the customers to withdraw money but they can check the account balance, pay bills, purchase goods and services, and therefore, unless it is computerized and linked with the main server, it is not possible to operate the ATM.  The ITAT held that the assessee is entitled for the deduction under section 80JJAA and accordingly, the ITAT set aside the orders of the lower authorities and allow deduction under section  80JJAA.

In M/S. FINANCIAL SOFTWARE AND SYSTEMS PRIVATE LIMITED VERSUS THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 2 (1) , CHENNAI. - 2020 (3) TMI 802 - ITAT CHENNAI  the Assessing Officer for the AY 2014 - 15 allowed the depreciation @ 15% for the ATMs as against the claim of the assessee at 60%, rejecting the contention of the assessee that ATM machine falling within the meaning of ‘’computer’’ qualifying for depreciation @60%.  The ITAT observed that when considering whether an item is to be considered as ‘plant and machinery’ and/or ‘building’ or any of the items specified in the Appendix to the Income tax Rules, 1962, functional test is the decisive test, as to whether an ATM fulfill the functions of a Computer in the business activity of an assessee? Is it a tool of his trade with which it carries on his business?

If the answer is in affirmative, it would be a computer and moreover the issue was already decided in favour of the assessee in assessee's own case by the Co-ordinate Bench of the Tribunal [M/S. FINANCIAL SOFTWARE AND SYSTEMS PRIVATE LIMITED VERSUS THE ASST. COMMISSIONER INCOME TAX, CORPORATE RANGE 2, CHENNAI AND VICE-VERSA - 2019 (6) TMI 1454 - ITAT CHENNAI] and hence, we do not find any reason to depart from the findings of the Co-ordinate Bench of the Tribunal. Accordingly, ITAT directed the Assessing Officer to allow depreciation @60% as claimed by the assessee. Thus, the appeal filed by the assessee for assessment year 2015-2016 stands allowed.

In DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 1 (4) , CHENNAI VERSUS M/S. FINANCIAL SOFTWARE AND SYSTEMS PVT LTD. - 2023 (7) TMI 1267 - ITAT CHENNAI , the assessee Financial Software and Systems Private Limited is engaged in the business of providing software and related services for banking and financial service sector.   The assessee has filed its return of income for the assessment year 2020-21 on 12.02.2021, by admitting total income of Rs. 43,55,26,900/-.  The Department selected this for scrutiny.  During the scrutiny it was found that the assessee claimed depreciation on ATM @ 40% against 15% as applicable to normal plant and machinery.  After giving reasonable opportunity to the assessee the Assessing Officer disallowed the excess depreciation claimed over and above normal depreciation of 15% on plant and machinery and made addition of Rs. 8,28,55,082/-..

Being aggrieved against the order of Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals).  The Commissioner of Income Tax (Appeals) allowed the appeal deleted the additions considering the order of ITAT in the case of assessee previously. 

Against the order of Commissioner of Income Tax (Appeals) the Department filed an appeal before the Income Tax Appellate Tribunal (‘ITAT’ for short).  The Revenue raised the following grounds of appeal-

• The order of the Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law.
• The Commissioner of Income Tax (Appeals) erred in allowing depreciation on ATMs at the rate of 40% by treating the ATMS as computers, without appreciating the fact that the ATMS are electronic device and therefore eligible for deprecation as applicable to plant and machinery only.
• The Commissioner of Income Tax (Appeals) ought to have appreciated the fact that the ATMS are electronic devices guided by external computers and cannot carry out any of the functions of a computer and therefore depreciation as applicable to computers cannot be allowed for ATMs.
• ATM is neither a computer nor a part of a computer but an electronic device only.
• Although the issue is covered by the decision of the ITAT, Chennai Benches in assessee’s own case for earlier years, but fact brought on record by the Assessing Officer clearly shows that ATM machines are not computer for which higher depreciation @ 40% as against normal depreciation eligible for plant and machinery .is allowed.

The assessee contended that the issue is covered in favor of the assessee by the decision of the ITAT, Chennai Benches in assessee’s own case for assessment year 2017-18 in M/S. FINANCIAL SOFTWARE AND SYSTEMS VERSUS THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 2 (1)  - 2022 (8) TMI 1414 - ITAT CHENNAI , where the tribunal by following its earlier order for assessment years 2015-16 & 2016-17 held that ATM machines are eligible for higher depreciation as claimed by the assessee.  The ITAT analyzed the said orders. 

In  view of the matter and consistent with view taken by the coordinate bench in assessee’s own case for earlier assessment year, we direct the Assessing Officer to allow higher depreciation of 40% as claimed by the assessee on ATM machine.  The ITAT dismissed the appeal filed by the Revenue.