Machines containing Computer & Computer Software not eligible for depreciation @ 60% alike Computer & Computer Software
Appendix I in Income Tax Rules, 1962 in respect of rates at which depreciation is admissible provides depreciation on computers including computer software @ 60%. Recently, in Dinamalar vs. The ITO [T.C.A.No.624 of 2016, Decided on 02.09.2016], the assessee in respect of the claim of depreciation on computers and computer peripherals, claimed depreciation on the items, viz., cannon lide, scanner, computerized counting & stacking machines, transportation charges, CTP machine, scanner, sisco router, modem, computerized counting & stacking (F/C), CTP machine (clearing charges), CTP machine(erection) treating it as Computers as mentioned in New Appendix-I-III-(5) of the Income Tax Rules, which according to him, were eligible for depreciation @ 60%. The Assessing Officer(AO) disallowed the claim of higher depreciation at 60%, on the following remarks:
“The depreciation in respect above machineries was claimed at the rate of 60% under the head computers. Only computers including computer software is eligible for depreciation at 60% as classified in SI. No. 5 under the heading III. Plant and Machinery of Part- A of the depreciation table. The above machineries are computerized machines and are not computers classified in the depreciation table. Hence they are eligible for depreciation @ 15% only. Accordingly the excess depreciation of Rs. 17,13,508/- and Rs.9,01,181 calculated above is disallowed and added to the total income.”
The appellant-assessee preferred an appeal in I.T.A.No.12/2014-15, to the CIT (Appeals)-II, Madurai, contending interalia that:
“(i) The assessing officer failed to consider that computer accessories and peripherals such as printers, scanner and server etc., being integral part of computer system and they cannot used without computer as decided in the case of C.l.T vs. BSES Yamuna Power LTD[358 I.T.R 47 (Delhi)].
(ii) The assessing officer failed to consider the decision made in the case A.C.l.T Circle -12(1) vs G.E. Capital Business NewDelhi Process Management services Pvt. Ltd., AIFACS IN I.T.A No.2887/Del/2011 for the assessment year 2007 -08 in which case the claim of Depreciation @ 60% was allowed on Laptops, Printer, Scanner, Laptop Mouse, IBM San Switches, Projector, Pendrive, Network equipment, router pack desktop with monitor, visual impex etc.
(iii) The assessing officer failed to consider the decision made in the case of CIT vs. BSES Rajdhani powers Ltd In I.T. Appeal No.1266 (Delhi) of 2010, Hon’ble Delhi High Court held that the computer accessories and peripherals such as printers, scanners and servers etc., form an integral part of computer system and in fact, the computer accessories and peripherals cannot be used without computer and consequently as they are the part of computer system, they are entitled to 60% of depreciation.
(iv) The above decision was followed in the case of Omni Globe Information and Technologies India (P) Ltd (131 I.T.D 280 (Delhi))
(v) In the case of DCIT vs Data Craft India Ltd in I.T.A. Nos 7462 & 754/Mum/2007, the Mumbai Special Bench held that routers and switches are to be included in the block of computers entitled of 60% Depreciation. From the above decisions, it is clear and evident that the computers, computer accessories and peripherals such as printers, scanners, servers Router, Modem and computerized Machineries and plants are form part of computer and hence they are eligible 60% Depreciation.”
While considering the explanation, “Computerized Counting & Stacking Machine and the CTP Machine“, the CIT(Appeals)-II, Madurai, vide order in I.T.A.No.12/2014-15, dated 21.10.2014, upheld the findings of the AO, as hereunder:
“5.5 Surprisingly, the name of the machine in the invoice is Logic stacker with strapper. Assessee classified this machine with the description computer counter and stacker. It is surprising how Appellant has modified the name of the machine. Normally the name of the machine in the accounts should always be what is indicated in the invoice and in: my view Appellant has no choice of writing the description as it wishes. When questioned, Appellant stated that it is based on the function it performs.
5.6 With regard to the 2 machine assessee has recorded the name in the accounts as, CTP machine, It was explained during appeal that CTP means Computer to Printer. This is the latest machine wherein the draft of the layout of the newspaper is made on the computer which is then transmitted to the printing press. This machine replaces the earlier method of manual typesetting and preparing the block for printing press Appellant was asked to produce copy of invoice of this machine which is enclosed as annexure 2 of this order This machine is imported from Taiwan and name in the invoice as Register TY-800 AOL Vision plate punching and bending system. The invoice mentions that Register TY-800 AOL Vision plate punching and bending system is a machine with 3 different components as under:
a) One TY-800 AOL Auto Vision Punching and Bending;
b) One Standard Conveyor;
c) One plate stacker.
5.7 Customs authorities have also classified this machine and charged the applicable customs duty with the following description Register TY-800 AOL Vision plate punching and bending system and has 3 components:
a) One TY-800 AOL Auto Vision Punching and Bending;
b) One Standard Conveyor;
c) One plate stacker.
5.8 Name of asset in the invoice as “Register TY-800 AOL Vision plate punching and bending system”. Assessee classified this machine with the description CTP machine. It is surprising how Appellant has modified the name of the Asset. Normally the name of the machine in the accounts should always be what is indicated in the invoice and in my view Appellant has no choice of writing the description as it wishes. When Appellant questioned stated that it is based on the function it performs.
5.9 Increasingly organizations are moving towards computerized integrated manufacturing, where more and more computers, robots, and microprocessors are used in conjunction with the machines. But the machines cannot be called as computers even though computer is an integral and dedicated part of the whole machine. That computer in the machine cannot be used for any other purpose. For example a CNC (Computerized Numerically Controlled) lathe machine has a computer and microprocessor to control the movement of the spindle but that cannot make a CNC lathe as a computer. It still does machining, cutting metal and creating shapes in the metal but it is more automated and driven by pre programmed instructions through the computer. it is still a machine assisted by a computer and microprocessor.
5.9 As per the schedule of depreciation, the rate 60% .of depreciation is allowable only to computers and at best may include accessories like servers, scanner sisco router modem etc as held in the decisions cited by the Appellant but can never include the 2 machines acquired by the assessee. The description of the machines as per the invoice is different and Appellant s decision to use its own names adding the word computer is incorrect. Assessee cannot invent its own nomenclature add the word computer which is not there in invoice and then proceed to claim depreciation at 60% with the argument that they are computers.
5.10 Even on functionality test, these machines represents plant and machine which helps in easier typesetting and faster printing of the newspaper and automated stacking of newspaper in correct numbers. The machines do contain computer as one part of the whole machinery, but it should be noted that the computer is dedicated to that machine and does only the functions for that machine. This in my view does not make machines as computers to be eligible for claiming the depreciation at 60%.
5.12 The decisions relied by the Appellant only cover assets like laptops, servers, printers, scanner, sisco router, modem, laptop mouse, Projector, Pendrive, Network equipment, router pack desktop with monitor. IBM San Switches which are integral parts of computer band those which cannot be used without being attached to the computers. None of these decisions cover the any machine used for manufacturing which has computer as one of the components.
5.13 In view of this factual and legal position, it is held that out of the Assets listed by the AC, only scanner, sisco router modem is, eligible for depreciation at 60%. Rest of the assets listed by the AC form part of plant and machinery and thus is eligible for depreciation only at 15%. The AO’s decision to treat the machines not as computers but as Plant & Machinery and restricting the claim of depreciation to 15% on these machines is in order and the assessee’s arguments are rejected.”
After, the order of the appellate authority in I.T.A.No.12/2014-15, dated 21.10.2014, the assessee preferred an appeal in I.T.A.No.2829/Mds/2013before ITAT, Chennai, which on the claim of depreciation on computers and computer peripherals held, as follows:
“We agree with the view of the Ld. CIT (A). Only computer peripherals can be at the most considered as computers for the purpose of claiming depreciation at the rate prescribed in New Appendix-III(5) of the Income Tax Rules. All other items fall in the category mentioned in New Appendix-III(1) of the Income Tax Rules as held by the Ld. CIT (A). Therefore, we do not find any reason to interfere with the order of the Ld. CIT (A) on this issue who has elaborately considered this matter in his order.”
Being aggrieved by the same, the assessee, filed the Appeal before Madras High Court, on the following substantial question of law: “Whether the Appellate Tribunal is correct in law, in passing a cryptic order in sustaining the action of the respondent in restricting the claim of higher depreciation of 15% as against the claim of 60% for the computer machineries, thereby confirming the addition of the differential depreciation in the computation of taxable total income, while overlooking the functional test proving and establishing perversity in the order passed by them both on facts and in law?”
The learned judges of the Madras High Court after going through the material on record and the orders of the authorities and ITAT, held that, we are of the considered opinion that orders of the authorities and the ITAT, are correct, in holding that the machineries, for which, depreciation to the extent, sought for, do not fall under the definition, “computer, including computer software”.
Machines containing computer & computer software cannot be termed as ‘computer & computer software’ itself, eligible for depreciation @ 60% but ‘computer and computer software’ in this category itself is eligible for depreciation @60% in terms of Appendix I of the Income Tax Rules, 1962.