DCIT vs India Mortgage Guarantee Corporation Pvt Ltd | Depreciation on Software Allowability | Assessment Year 2016-17

DCIT vs India Mortgage Guarantee Corporation Pvt Ltd: Depreciation on Software Allowability for Assessment Year 2016-17

Case Number: ITA 6502/DEL/2019

Appellant: DCIT Circle-12(1), New Delhi

Respondent: India Mortgage Guarantee Corporation Pvt Ltd, New Delhi

Assessment Year: 2016-17

Order Date: 26th December 2022

Pronounced On: 26th December 2022

Order Type: Final Tribunal Order

Background

India Mortgage Guarantee Corporation Pvt Ltd, a company engaged in the mortgage guarantee business, filed its return of income for the assessment year 2016-17, declaring a loss of Rs. 14,25,40,510. During the assessment proceedings, the Assessing Officer (AO) scrutinized the company’s return and raised an issue regarding the depreciation claimed by the company on its policy administration software license. The company had claimed a depreciation rate of 60%, which the AO challenged, arguing that the software should be classified as an intangible asset eligible for a depreciation rate of only 25%.

Why the Case Was Filed

The core issue in this appeal was the appropriate rate of depreciation applicable to the software purchased by India Mortgage Guarantee Corporation Pvt Ltd. The company classified the software under the head of plant and machinery, claiming a depreciation rate of 60%. However, the AO contended that the software should be categorized as an intangible asset, which, under the Income Tax Act, 1961, attracts a lower depreciation rate of 25%. This discrepancy in the classification led to a significant difference in the allowable depreciation amount, prompting the Revenue to disallow Rs. 1,32,06,490/- as excess depreciation.

CIT(A)’s Decision

Aggrieved by the AO’s decision, the company appealed to the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A), following its earlier decisions in the company’s own cases for AY 2014-15 and 2015-16, ruled in favor of the company. The CIT(A) upheld that the software purchased by the company indeed fell under the category of plant and machinery and was thus eligible for a higher depreciation rate of 60%. Consequently, the CIT(A) deleted the addition made by the AO, granting substantial relief to the company.

Revenue’s Appeal to the ITAT

Unhappy with the CIT(A)’s decision, the Revenue filed an appeal before the Income Tax Appellate Tribunal (ITAT). The Revenue argued that the CIT(A) erred in allowing the higher depreciation rate and that the software should be treated as an intangible asset with a maximum allowable depreciation of 25%. The Revenue’s contention was based on the interpretation of the Income Tax Act, which, according to them, clearly categorized software as an intangible asset.

ITAT’s Analysis and Final Judgment

The ITAT bench, comprising Shri Anil Chaturvedi, Accountant Member, and Shri Anubhav Sharma, Judicial Member, heard the appeal. The bench noted that the issue raised by the Revenue was not new and had already been addressed in the company’s favor in earlier assessment years (AY 2014-15 and AY 2015-16). In those cases, the ITAT had ruled that the software should be classified under plant and machinery, entitling the company to a 60% depreciation rate.

The ITAT observed that the Revenue had not presented any new evidence or distinguishing facts that could warrant a different conclusion for the assessment year 2016-17. The bench reaffirmed that the software in question qualified as plant and machinery under the relevant provisions of the Income Tax Act, and therefore, the company was entitled to claim depreciation at the rate of 60%.

The ITAT dismissed the Revenue’s appeal, upholding the CIT(A)’s decision. The tribunal’s order emphasized that the consistent application of the law in similar cases across multiple years supported the principle of judicial consistency and fairness.

Conclusion

The case of DCIT vs India Mortgage Guarantee Corporation Pvt Ltd serves as a critical precedent in the classification of software for depreciation purposes under the Income Tax Act. The consistent rulings by the CIT(A) and the ITAT across multiple years highlight the importance of proper asset classification in tax assessments. This case reiterates that software, when used as an integral part of the business’s operations, can qualify as plant and machinery, thereby allowing a higher rate of depreciation. The ITAT’s decision not only provided relief to the company but also set a clear example for future cases involving similar disputes over asset classification and depreciation rates.

DCIT vs India Mortgage Guarantee Corporation Pvt Ltd | Depreciation on Software Allowability | Assessment Year 2016-17