2025 (7) TMI 1507 - AT - Income Tax

Disallowance of Depreciation on POS machine - AO has made disallowance of excess deprecation on POS Machine by holding that POS machine is eligible for depreciation at the rate of 25% instead of 40% - HELD THAT - We find that in the case of Pr. CIT Vs. Connaught Plaza Restaurant Pvt. Ltd. 2016 (9) TMI 1485 - DELHI HIGH COURT has considered the issue i.e. Higher rate of depreciation on POS Terminals and has upheld the decision of the Tribunal where it has been held that assessee is entitled to depreciation @ 60% on POS Terminals. Disallowance of excess Depreciation on SAP License - depreciation on SAP License should be 25% OR 40% - HELD THAT - We observe that the issue under consideration is already settled by the various courts therefore we are in agreement with the findings of Ld. CIT(A) on this issue and find no infirmity in the order of Ld. CIT(A) in holding that depreciation on SAP License is allowable @ 40%. Disallowance of Bad debts claimed - assessee is engaged in the import of fertilizers and entitled to receive subsidy from government in the form of reimbursement of freight incurred for the distribution of fertilizers - HELD THAT - We observe that the assessee follows the mercantile accounting system and recorded the subsidy and credited the amount of subsidy as income in earlier years and amount receivable from MPS in the previous financial year i.e. 2017 18. We observe that as per the provisions of section 36(2) of the Act a deduction of bad debts shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year. What is relevant for consideration are whether the subsidy which was booked in the current year are recoverable or not. In case it is not recoverable it does not matter whether it is booked in the current year or earlier the relevant unrecoverable subsidy has to be allowed as bad debts in view of provisions of section 36 of the Act and there is no bar on the same. The assessee had the option to reverse the subsidy amount credited as income. Rather it initially booked the subsidy as income and the unrecovered amount was claimed as bad debts in the same year. Therefore ground raised by the assessee is allowed.

Summary

ISSUES:

Whether depreciation on POS machines is allowable at 40% or 25%.Whether depreciation on SAP License is allowable at 40% or 25%.Whether bad debts claimed under section 36(1)(vii) are allowable when income from such debts is offered in the same financial year or earlier years, in light of section 36(2) of the Income Tax Act.Whether bad debts claimed are allowable when subsidy claims are rejected due to violation of government norms.Whether evidence is required to establish that debts have actually become bad for claiming deduction under section 36(1)(vii).

RULINGS / HOLDINGS:

Depreciation on POS machines is allowable at the higher rate of 40% (or 60% as per precedent), as POS machines qualify as computer equipment or peripherals for depreciation purposes; the lower rate of 25% is not applicable.Depreciation on SAP License, being computer software, is allowable at 40%, consistent with settled judicial precedents; the disallowance of excess depreciation on this ground is not justified.Bad debts written off under section 36(1)(vii) are allowable if the amount of such debt has been taken into account in computing income in the previous year in which the debt is written off or an earlier previous year, per section 36(2); the timing of income recognition (same year or earlier years) does not bar deduction if the debt was included in income.Bad debts claimed on subsidy amounts rejected due to violation of government norms are allowable as deduction if the subsidy was credited as income in earlier years and subsequently found unrecoverable; the disallowance on the basis of subsidy rejection is not sustainable.There is no statutory requirement under section 36(2) to furnish evidence that debts have actually become bad to claim deduction; mere compliance with income recognition and write-off provisions suffices.

RATIONALE:

The Court applied the Income Tax Act, 1961, specifically sections 36(1)(vii) and 36(2), and relied upon authoritative judicial precedents including the decision of the Hon'ble Delhi High Court in Pr. CIT vs. Connaught Plaza Restaurant Pvt Ltd, which held POS machines qualify for higher depreciation rates as computer equipment.The Court emphasized the mercantile system of accounting followed by the assessee, under which subsidies are credited as income on an accrual basis, and bad debts are allowable when such income is not realized, consistent with the statutory language of section 36(2).The Court rejected the Revenue's contention that bad debts claimed in the same year as income recognition are disallowable, interpreting section 36(2) as permitting deduction provided the debt was taken into account in computing income in the year of write-off or earlier.The Court noted no requirement under section 36(2) for proof that debts have "actually become bad" beyond accounting treatment, thus rejecting the Revenue's demand for additional evidence.No dissent or doctrinal shift was indicated; the Court's reasoning aligns with established legal principles and precedent.