Madras HC Quashes Income Tax Reassessment Against Cognizant, Upholds 60% Depreciation on Computer Software for AY 2002-03 [Read Order]

In a recent judgment, the Madras High Court quashed the reassessment proceedings against the assessee as time-barred. It upheld the company's entitlement to claim 60% depreciation on computer software for the assessment year 2002–03.

Cognizant Technology Solutions India Pvt. Ltd., the assessee had filed its income tax return for AY 2002-03 on time and the case selected for scrutiny. The assessment was completed under Section 143(3) on 17 March 2005, during which the tax authorities checked and accepted the company’s claim of 60% depreciation on computer software.

Later, the Commissioner revised the assessment under Section 263, but only to recompute exemption under Section 10B. The issue of depreciation was not disturbed. Nearly six years after the end of the assessment year, the Assessing Officer (AO) issued a notice under Section 148 on 3 March 2009 to reopen the assessment, stating that depreciation on computer software should have been allowed only at 25%, as the amendment granting 60% depreciation was applicable from AY 2003-04.

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The revenue counsel argued that the original assessment order did not discuss depreciation in detail and that the limitation should be counted from the revised assessment order passed in 2007.

The assessee’s counsel argued that full disclosure had been made in the original return and financial statements, that depreciation was consistently claimed under the “computers” entry which allowed 60%, and that the revision under Section 263 did not relate to depreciation.

The Division Bench comprising Justice AnitaSumanth and Justice K. Govindarajan Thilakavadi observed that the original assessment was completed after proper scrutiny and that the reassessment was based only on the same material already on record.

The court observed that there was no failure by the assessee to make full and true disclosure, which is required to reopen an assessment after the limitation period. The court also pointed out that limitation had to be counted from the original assessment date, since depreciation was not part of the revision proceedings.

On merits, the court observed that before AY 2003-04, there was no separate entry for computer software and depreciation was rightly claimed under the entry for “computers” at 60%, which had been accepted in earlier years.

The court dismissed the Revenue’s appeal, upheld the tribunal’s order, and ruled in favour of the assessee. No costs were awarded.

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