“depreciation on software”
The decision most relied on for depreciation on software is Techno Shares and Stocks Ltd. v. CIT (327 ITR 323), cited in 130 judgments on BharatTax.
Leading authorities on depreciation on software
Membership rights and business contracts, as 'business or commercial rights of similar nature' to a license or franchise, qualify as intangible assets eligible for depreciation under Section 32(1)(ii) of the Income-tax Act.
Depreciation is allowable on computer software, including software licenses, at the rate of 60%.
Expenditure on application software, which enhances business efficiency and requires a computer system to function, constitutes revenue expenditure rather than acquisition of a capital asset, even if it provides an enduring benefit.
The deduction under Section 10A/10B is a deduction, not an exemption, and must be given effect to at the stage of computing the profits and gains of business. For this purpose, commercial profits mean profits without adjustment of depreciation as per the Income Tax Act.
Transactions carried out on the purchase of off-the-shelf software prior to the jurisdictional High Court's decision in CIT v. Samsung Electronics Co. Ltd. (October 15, 2011) are not liable for Tax Deducted at Source (TDS).
A deduction for interest expense on borrowed funds used for interest-free advances to group companies is permissible only if the assessee establishes these advances were from surplus funds. The decision further clarifies eligibility for depreciation on intangible assets like non-compete fees, software, goodwill, and commercial rights under section 32(1)(ii), often arising from a slump sale.
Section 40(a)(i)/(ia) of the Income Tax Act, 1961, pertains to outgoing revenue expenditure and does not apply to capital expenditure, meaning depreciation cannot be disallowed under these provisions for capital expenses, such as software purchases.
Software integrated with a computer system is eligible for the same rate of depreciation as the computer system itself.
