Whether Software Company is eligible for Additional Depreciation available to manufacturing company?

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Whether Software Company is eligible for Additional Depreciation available to manufacturing company?

Section 32 provides for additional depreciation to the manufacturing companies.

The question arises as to whether a Software company is eligible for Additional Depreciation available to manufacturing companies?

This was the issue before Banglore ITAT.

The case details is as under:

Sling Media (P.) Ltd.

[2022] 135 taxmann.com 164 (Bangalore – Trib.)

The main issue was regarding the claim of deduction towards additional depreciation. The crux of the controversy was whether assessee engaged in rendering software development services was not eligible for additional depreciation on computer and software as development activity carried out by assessee could not be considered as a manufacturing activity?

The ITAT analyzed Section 32 of the Income-tax Act, 1961 regarding the claim of Depreciation & additional depreciation (Computers) for the Assessment year 2016-17.

It was observed that the Assessee was a 100 per cent subsidiary of Sling Media Inc., USA and provides software development services to its parent company as a captive unit.

 Assessee claimed additional depreciation under section 32(1)(iia) on blocks of assets like Computers and Software.

 Assessing Officer disallowed claim of additional depreciation on premise that as per proviso 2B to section 32(1)(iia) any machinery or plant installed in office premises is not eligible for additional depreciation.

Commissioner (Appeals) has upheld disallowance of additional depreciation holding that the assessee was not engaged in manufacturing or production of article or thing and hence was not entitled for additional depreciation.

ITAT Bangalore decided that assessee could not be considered as manufacturing activity.

  The other issue in this case was regarding the deduction of CSR expenses u/s 80G.

The ITAT was dealing with the scope of Section 80G, read with section 37(1), of the Income-tax Act, 1961 & its Deductions under Chapter VI-A.

It has made Donations to certain funds & charitable institutions as CSR expenses. The relevant  Assessment year 2016-17 was involved in the case.

Though Assessee had spent a certain amount towards CSR activities in nature of donations made to certain eligible institutions, Assessee had suo motu disallowed expenditure towards CSR responsibilities under section 37(1) and claimed deduction under section 80G in respect of donations paid to eligible charitable institutions.

The Assessing Officer denied deduction under section 80G on ground that granting deduction to an expenditure which was disallowable under section 37(1) would amount to giving an unintended benefit which was not envisaged under provisions of law.

The issue before ITAT was whether assessee could not be denied benefit of claim under Chapter VI-A, which was considered for computing ‘Total, Taxable Income’, merely because such payment forms part of CSR, as it would lead to double disallowance, which was not intention of Legislature?

The ITAT decided the issue in favour of the assessee by replying it affirmatively in yes.

On the issue as to whether as Assessing Officer had not verified nature of payments qualifying exemption under section 80G and quantum of eligibility as per section 80G(1), Assessing Officer was to be directed to verify payments made by assessee towards CSR that also forms part of deduction under section 80G and then grant deduction claimed under section 80G in accordance with law.

In short, the Hon’ble ITAT concluded that Assessee could not be denied deduction under section 80G merely because underlying donation forms part of CSR as it would lead to double disallowance. Banglore ITAT has remarked that Assessee could not be denied deduction under section 80G merely because underlying donation forms part of CSR as it would lead to double disallowance. It’s a landmark judgment with far reaching implications.

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