Depreciation can not be disallowed even if software purchased was second hand – ITAT

Merely because vendor could not produce evidence for original purchase of software sold to assesssee, the depreciation thereon could not be disallowed.

In a recent judgment, ITAT Ahmedabad has held that merely because vendor could not produce the evidence for original purchase of software made by it, the depreciation claimed on software by the assessee can not be disallowed.

ABCAUS Case Law Citation:
4742 (2025) (09) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) National Faceless Appeal Centre (NFAC) disallowance of depreciation on software purchased.

The appellant assessee was engaged in the business of providing information and technology enabled services in the sector of Knowledge Process outsourcing (KPO) and Business Process outsourcing (BPO).  

The case of the assessee was selected for scrutiny under CASS.  The assessment was completed under Section 143(3) of the Act. In the course of assessment, the Assessing Officer had made several additions including disallowance of depreciation on intangible asset i.e. software purchased.

During the course of assessment, the Assessing Officer had made verification by issuing notice u/s 133(6) of the Act to the vendor of the software. As the vendor did not respond to the notice in time and also couldn’t satisfy the AO about all the queries, the purchase of software was treated as bogus and the AO had disallowed the depreciation claimed thereon.

Before the Tribunal the assessee submitted that the vendor had sent the reply to the Assessing Officer and when the vendor had confirmed the sale of software to the assessee company, the Revenue was not correct in disallowing the depreciation claimed thereon.  

The Revenue submitted that the vendor did not give any details about its original/first purchase before its re-sale to the assessee company.  It was further submitted that the vendor was not dealing in sale of software and related product’s business, hence the genuineness of the purchase was under doubt. Therefore, the disallowance of depreciation as made aby the Assessing Officer was correct. 

The Tribunal observed that the purchase of computer software was duly confirmed by the vendor. According to the Revenue, the software purchased by the assessee was not the first purchase but it was re-sale of used software and, therefore, the assessee was not eligible for capital subsidy thereon. 

The Tribunal opined that the eligibility for subsidy was altogether a different aspect and not connected with the present disallowance. The Tribunal opined that merely because the vendor could not produce the evidence for original purchase of software made by it, the purchase as shown by the assessee could not have been disallowed when the purchase of computer software by the assessee was duly confirmed by and copy of bills and vouchers as well as the payment details for purchase of software were duly brought on record by the assessee and no infirmity was found therein by the AO.

The Tribunal noted that it was not the case of Revenue that the payment made by the assessee for purchase of the software was ultimately returned back to it, as no such finding has been brought on record by the AO. It further transpired that the depreciation on this software was not disallowed by the Revenue in the subsequent years. Thus, the Revenue had treated the purchase of software as genuine in the subsequent years.

The Tribunal held that considering the evidences on record, the Revenue was not correct in disallowing the depreciation on purchase of software during the current year.  Accordingly, the addition in respect of disallowance of depreciation was deleted. 

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