2022 (1) TMI 732 - AT - Income Tax

Depreciation on computer softwares - forming part of the block of assets of computers at the rate of 25% OR rate of 60% claimed by the appellant - restricting the claim of depreciation on computer softwares forming part of the block of assets - AO was of the view that software license is not the computer - whether the software purchased by the assessee is part of computer for the purpose of depreciation or the same can be treated as intangible asset? - HELD THAT - Software is part of computer. Hence, the depreciation on the same is allowable at the rate applicable for computer. In this regard we also find support and guidance from the judgment in case of CIT vs. Computer Age Management Services (P.) Ltd. 2019 (7) TMI 1153 - MADRAS HIGH COURT as held software application, which was acquired by the assessee would fall under Entry 5 of Part A of New Appendix I, which states that computers including computer software are entitled to depreciation at 60% - Decided against revenue. Addition under the provisions of section 35D OR 37(1) - nature of expenses incurred were travelling expenses, legal and professional expenses, salary expenses for employees appointed especially for the project, insurance, electricity charges, and security charges - As per assessee expenses were incurred after the commencement of business but before the commencement of the commercial production. - HELD THAT - We note that the provisions of section 35D are applicable for the expenditures incurred before the commencement of the business or after the commencement of the business in connection with the extension of the undertaking/setting up of new unit. There is no allegation of the AO whether the expenditure were incurred by the assessee were before the commencement of the business or after the commencement of the business in connection with the extension of undertaking/setting up of a new unit. Thus in the absence of such finding of the AO, we are of the view that the provisions of section 35D cannot be invoked in the given facts and circumstances. As there are certain categories of expenses for which the provisions of section 35D of the Act can be applied. These expenses have been specified under subsection 2 of section 35D of the Act. But in the present case, we note that none of the expenses claimed by the assessee was in the category of such expenses. Likewise, the AO has also not brought anything on record suggesting that the nature of the expenses claimed by the assessee are those expenses mention under section 35D(2) of the Act. On this count only, the order of the AO is not sustainable. CIT (A) has given very clear finding that the expenses were incurred by the assessee to increase the capacity of the plant. The learned DR at the time of hearing has not controverted the finding of the learned CIT (A). Assessee has also claimed identical expenses in the return of income in the immediate preceding assessment year i.e. assessment year 2012-13 which seems to have been allowed by the revenue. Our view is based on the fact that the learned DR at the time of hearing has not brought anything on record suggesting that the impugned expenses were disallowed by the revenue in the earlier year as well.- Decided against revenue.

Issues Involved:
1. Depreciation rate on software license.
2. Capitalization of preliminary expenses under section 35D of the Income Tax Act.
3. Classification of certain expenses as revenue expenses under section 35D(2) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Depreciation Rate on Software License:
The primary issue was whether the software license purchased by the assessee should be classified as part of the computer for depreciation purposes or as an intangible asset. The assessee claimed depreciation at 60% on the software license, treating it as part of the computer. The Assessing Officer (AO) restricted the depreciation rate to 25%, considering the software license as an intangible asset.

The CIT(A) allowed the appeal of the assessee, referencing the Hon’ble Mumbai ITAT's decision in the case of National Collateral Management Services Pvt. Ltd., which held that computer software is eligible for depreciation at 60%. The CIT(A) directed the AO to provide depreciation at 60% as per the New Appendix I of Income-tax Rules, 1962. The Appellate Tribunal upheld the CIT(A)'s decision, noting that software is indeed part of the computer and eligible for the higher depreciation rate, supported by the judgment of the Hon’ble Madras High Court in CIT vs. Computer Age Management Services (P.) Ltd.

2. Capitalization of Preliminary Expenses under Section 35D of the Income Tax Act:
The second issue involved the capitalization of expenses incurred by the assessee in connection with the expansion of its plant. The AO treated these expenses as preliminary expenses under section 35D, which should be amortized over five years. The assessee argued that these expenses were revenue in nature and should be allowed as deductions under section 37(1) of the Act.

The CIT(A) observed that the expenses were not in the nature of those specified under section 35D(2), such as feasibility reports, project reports, or legal charges for drafting agreements. Instead, they were operational expenses like traveling, salary, and other administrative costs incurred for expanding the existing unit. The CIT(A) held that section 35D was not applicable and allowed these expenses as revenue deductions. The Appellate Tribunal agreed with the CIT(A), noting that the AO did not establish that the expenses fell under the categories specified in section 35D(2). The Tribunal also highlighted the principle of consistency, noting that similar expenses were allowed in the previous assessment year.

3. Classification of Certain Expenses as Revenue Expenses under Section 35D(2) of the Income Tax Act:
The third issue was whether expenses like salary and traveling incurred for expanding the unit should be classified as revenue expenses. The AO had capitalized these expenses, treating them as preliminary expenses under section 35D.

The CIT(A) found that these expenses were operational and incurred for the expansion of an existing unit, not for setting up a new unit or undertaking. Therefore, they should be treated as revenue expenses. The Appellate Tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not provide evidence that these expenses were of the nature specified under section 35D(2). The Tribunal reiterated that these expenses were operational and related to the expansion of the existing unit, thus qualifying as revenue expenses.

Conclusion:
The appeal filed by the Revenue was dismissed. The Tribunal upheld the CIT(A)'s decisions on all issues, affirming that the software license qualifies for 60% depreciation, and the expenses incurred for the plant expansion should be treated as revenue expenses, not preliminary expenses under section 35D. The judgment emphasized the importance of adhering to the specific provisions of the Income Tax Act and the principle of consistency in tax assessments.

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