Depreciation not allowable for Expenditure availed on Professional or Legal Services which don’t create Commercial Right: ITAT [Read Order]

In a significant ruling of Banglore International Airport, the Bangalore Bench, of the Income Tax Appellate Tribunal, held that depreciation is not allowable for expenditure availed on professional or legal services which don’t create any commercial right.

The appellant was represented by Smt. Tanmayee Rajkumar and the respondent were represented by Shri Sanjay Kumar S.R.

The assessee engaged in the business of designing, financing, constructing, operating and maintenance of Bengaluru International Airport at Devanahalli for which filed its e-return of income declaring a total income of Rs.7,77,16,290 and a book profit of Rs.179,95,15,810 was computed u/s. 115JB of the Income-tax Act, 1961. The AO completed the assessment u/s. 143(3) of the Act by disallowance made on concession fees, depreciation of intangible assets, repairs of Building and Machinery and software expenses.

The CIT(Appeals) deleted the additions made towards concession fees and restricted the disallowance towards repairs to Rs.5,77,500 and upheld the addition with respect to the disallowance of depreciation on intangible assets and disallowance of software expenses

The assessee claimed depreciation of Rs.2,25,00,657 on intangible assets @ 25% and stated that he obtained rights under various agreements to do various activities like operate the airport infrastructure and establish a proper ATM system for proper governance of the airport. Further contended that the agreements provide an enabling business or commercial right to the assessee which was owned and used by the assessee for the purpose of its business, and the costs identified and allocated to such rights will qualify for capitalization as intangible assets u/s. 32 of the Act, & 

It was observed that the expenditure was towards availing of professional and legal services during the pre-operative period before commencement of the commercial operation which was revenue in nature incurred during the pre-operative period and it cannot be said that the assessee had acquired any commercial rights. The Tribunal viewed that the treatment under the act on the nature of expense on software is determined based on the nature of software whether it is a system software or application software that needs to be analysed.   

Shri N V Vasudevan, vice president and Ms Padmavathy S, accountant member upheld the disallowance of depreciation on intangible assets and remit back the issue of the nature of software expense to the AO to verify the facts afresh after considering the breakup of the software expenses submitted as additional evidence. The appeal of the assessee was partly allowed.

To Read the full text of the Order CLICK HERE

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