Since depreciation-related deductions are included in the calculation of total taxable income, helping the firm reduce the overall tax amount, calculating depreciation becomes a crucial component in determining the payment of corporate tax. Depreciation is covered under Section 32 of the Income Tax Act of 1961. This clause is subject to Rule 5 of the Income Tax Rules of 1962. According to the Income Tax Act, a suitable amount of deduction is given when the value of the tangible or intangible asset utilised by the assessee decreases. The income-tax division determines the depreciation at the time of the deduction using the asset’s life cycle cost rather than the asset’s total cost. 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.
Computers’ Rate of Depreciation
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. 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.
What Is 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 1987. 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. This implies that in order to ascertain the meaning of the phrase and how the legislators intended it to be used in order to offer a greater depreciation rate, one needs seek outside the dictionary.
“Computer” is defined as follows under Section 2 (1) (i) of the Information Technology Act of 2000:
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.
According to Cambridge Dictionary, a “computer” is:
“An electronic device used for calculating, controlling other devices, and storing, organizing, and locating words, figures, and images.”
According to Oxford Dictionary, a “computer” is:
“An electronic device which is capable of receiving information (data) in a certain form and of completing a series of actions in line with a specified but variable set of procedural instructions”
Court Interpretations
1. Computer peripherals and add-ons.
The word “computer” was ruled to be inapplicable in the case of Ushodaya Enterprises Ltd. v. Assistant Commissioner of Income Tax, Hyderabad because there are other pieces of technology that may carry out analytical, mathematical, or memory functions. The word “computer” was regarded to cover all input and output devices, including the keyboard, mouse, printer, switches, modem, hubs, cards, and cables, which make it easier for data to be input and output when used with computers or are part of the computer system itself. The same rate of depreciation that is used for computers is also applicable to these products. To evaluate whether a certain piece of equipment qualifies as a “computer” for charging depreciation at 40% in this legal case, the Bench adopted a criteria. Here’s how to take the test:
When used as a part of the device, “computer hardware” becomes an essential component of the computer, just as when operating software is a component of the device. In this case, the hardware may be considered to be a component of the computer and be subject to a 40% depreciation rate.
However, if a device is not used in connection with a computer or as a necessary assessor, it cannot be referred as a “computer component.”
2. Switches and Routers
Datacraft India Ltd. v. Deputy Commissioner of Income Tax, Mumbai, ITAT Mumbai defined the purpose and definition of “router and switches.” Was it possible to classify “routers” and “switches” as computer gear in order to claim a higher depreciation rate? According to The Bench, a router is a particular device that transfers data from one computer system to another for display, archiving, or further processing. Switches are streamlined versions of routers that perform comparable functions to routers but within a smaller container. The Bench ruled that although a router may not be considered a computer when used alone or when its functionalities are merged with a computer, routers and switches may be considered computer hardware and subject to 40% depreciation when used in conjunction with computers.
3. Visual Fibers
The Supreme Court of India has declared that optical fibers used for computer configuration qualify as a component of computer systems and are eligible for a higher depreciation rate of 40% in the case of GVK Jaipur Expressway Ltd. (SC) v. Principal Commissioner of Income Tax.
4. Resources for Media Boards (MRB)
The Bench in the most recent case of Onmobile Global Ltd. v. Additional Commissioner of Income Tax, Bangalore had to decide whether Media Resource Boards (MRB), which are used primarily in computer servers to help with call interpretation, voice-to-digital conversion, and vice versa, would qualify as “computers” to deduct depreciation at a higher rate of 40%. The Bench determined in this case law that MRBs are a crucial component of the computer system that works alongside servers and PCs. The MRB cannot function without computers, and the computers cannot do the functions required in the present situation without MRBs.
5. Telebanking devices (ATMs)
The High Court of Karnataka ruled that ATMs should be treated as computers in the case of Commissioner of Income Tax-III, Bangalore v. NCR Corporation (P.) Ltd. as long as the functions of the computers are carried out in conjunction with other functions that are also dependent on the functions of the computer. It was decided that the computer is an essential part of the ATM and that only data processed by the computer in the ATM is utilized to carry out the mechanical function of issuing cash or receiving cash deposits. ATMs were thus considered to be eligible for a higher depreciation rate.
6. Devices for communication or enjoyment.
- Cellular devices and EPBAX
In Federal Bank Ltd. v. Assistant Commissioner of Income Tax, the issue at hand was whether mobile phones and EPBAX, office equipment that speeds up corporate telephonic communication with single phone line extensions, should be subject to a 40% depreciation penalty. The High Court of Kerala ruled that since EPABX and mobile phones are considered communication devices rather than computers, they cannot be classed as computers. Therefore, the greater depreciation rate of 40% is not applicable to mobile phones or EPABX.
- IPads
The Income Tax Appellate Authority (ITAT) Amritsar in September 2022 in the case of Kohinoor Indian Pvt. Ltd. v. Assistant Commissioner of Income Tax, Amritsar, where the court analyzed whether iPads can be categorized as “computers,” provided one of the most recent clarifications on the definition of “computer.” It was decided that because an iPad’s main uses are as a communication tool rather than a computer instrument and its key features include email, Whatsapp, calls, music, movies, and the like, depreciation on iPads is applied at a rate of 15% rather than 40%. Even if iPad and PCs may share certain responsibilities, a computer or laptop still provides a wide range of utilities and capabilities, making it impossible for an iPad to completely replace one. Additionally, the iPad is not marketed by the Apple Store as a computing device but rather as a communication and entertainment device. The iPad is subject to 15% depreciation under the plant and equipment category since it is often regarded to be a communication device with some additional computing features.
Conclusion
Depreciation may be claimed under the Income Tax Act for purchases made by an assessee during the financial year in furniture, equipment, and machinery. For a corporate entity, depreciation on computers and computer resources may be a substantial source of corporate tax savings. However, courts continue to review the concept of what constitutes a “computer” on a regular basis. According to recent legal rulings, 40% depreciation may be claimed on peripherals such as printers, routers, modems, cables, MRBs, optical fibers, and the like in addition to the main body of the computer, which consists of the display and CPU. For depreciation reasons, even ATMs may fall under this category under certain circumstances. However, any entertainment or communication devices whose main purposes are not to do tasks that computer resources may perform will only be subject to a 15% depreciation rate rather than the greater rate of 40%. To prevent legal action, assets should be properly categorized based on their traits and rate of depreciation. To avoid being exposed to legal investigation or losing out on tax advantages as a result of wrong classification, all legal corporations must use due diligence when classifying their assets.
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