Depreciation- special and higher rates.

[C.A. DEV KUMAR KOTHARI]

COMPUTER - THE WIDER MEANING FOR DEPRECIAITON IS DESIRABLE

Summary: Computer includes software, as specifically provided. Now-a-days, other attachments and accessories for computer also comes with software. Therefore, a part of such equipments is computer. The other part of such equipment also works with and in co-ordination with the computer, therefore such equipments like UPS, / Power backup, printers, scanners, Xerox machines, fax machines etc which functions with computer can be regarded as computer OR 'COMPUTER SYSTEM' eligible for higher rate of depreciation.

Some relevant definitions:

1.Computer as per dictionaries- an electronic device capable of storing and processing information in accordance with a set of instructions.

Computer - mainframe, micro, microcomputer, mini-computer, PC, personal computer, robot, word processor.

2. The Institute of Chartered Accountants of India in its study material PEE II Information Technology Paper VI has defined the term "computer" as follows:

"The term 'computer' can logically be applied to any calculating machine.  However, in common usage, the definition of a computer has become more limited in a contemporary usage.  We now define a computer as an electronic data processing device capable of receiving input, storing sets of instructions for solving problems and generating output with high speed and accuracy.  Computers are composed of switches, wires, motors, transistors and integrated circuits assembled on frames.  The frame form components such as keyboards, printers, visual display units, disk drives, magnetic tape drives and central processing units.  These components are wired together into a network called a computing system often called a computer."

3.Definition of Computer System:

In the Income tax Act, there is no definition of computer, however the computer system has been defined under Explanation (a) to clause (xi) of section 36(1) of the Income-tax Act which reads as under:

"computer system' means a device or collection of devices including input and output support devices and excluding calculators which are not programmable and capable of being used in conjunction with external files, or more of which contain computer programmes, electronic instructions, input data and output data, that performs functions including, but not limited to, logic, arithmetic, data storage and retrieval, communication and control."

Computer and accessories or devices:

A computer works with certain accessories which includes the following:-

(A)  Power back up or uninterrupted  Power Supply system (UPS).

  Now-a-days we find UPS which is also operated with help of software and it has  

  direct connectivity with the computer and it is possible to predetermine some

  functions of UPS. The UPS comes with a computer  programmee CD, which is required for installation of UPS and its co-ordination with computer.

(B)   Printer, Scanner, Fax, Xerox (photo copier).

 These facilities may be found in one or more machine which are also attached with the computer and worked with the computer.  These devices also have softwares which are to be loaded on the computer and   provides interface with computer. These devices have also data memory and storage for functioning.

 

(C)  Software

Softwares are loaded on the computer hard-discs or on storage devices like CD or floppy and with the help of software the computer works.

 

Computer includes software:

The Appendix I to the Income-tax Rules was amended and the amended appendix provides that software is included within computer.  In the latest appendix which is effective from assessment year 2006-07 onwards we find the following relevant entry:-

III. Machinery and plant

         "5. Computers including computer software (see note 7 below this table) - 60%"

The note number 7 reads as follows:-

"Computer software" means any computer program recorded on any disc, tape, perforated media or other information storage device.

Thus, we find that computer software which is required to operate the computer for different functions is included with the meaning of computer for the purpose of allowing depreciation allowance. Therefore, it is clear that accessories, apparatus necessary to run or maintain the computer can also be considered as part of computer and they definitely falls within the definition of computer system.

Other devices are also part of computer:

When we notice that computer software is included within the meaning of computer  and definition of 'computer system' is wider to include necessary devices ,there is no reason as to why other necessary apparatus used to make computer fully functional should not be included within  the meaning of computer.  Let us examine functions of some attachments as follows:-

a) UPS - UPS is attached with the computer and in modern UPS a software is also installed which provides interface with the computer.  Even when there is a continuing power supply the electricity passes through UPS and therein the voltage is stabilized and quality of current is improved and the improved electricity is provided to the computer.  This helps in reducing damages to the computer due to poor quality of electricity. When there is a power cut / loadsheding, the         UPS releases electricity from the storage device and therefore, avoiding sudden shutting off of the computer due to power failure.  Therefore, it can be concluded that UPS is an integral part of the computer.  It is not a separate stand-by power arrangement but it is an attachment which works as and when computer works.

Printers etc. - The modern printer have several facilities and all these facilities are worked with the computer.  In fact, the printer itself has computer devices by which certain documents can be kept in the memory of printer and some information can be

carried out independently also.  For example, in case of HP Office Jet 5510 all- in- one equipment, we find printer, fax, scanner and copier.  In this equipment the software is   also found and some information can be performed independently. We get the equipment with two CD of soft wares.

Xerox copies can be obtained even when the printer is not connected with the computer or when the computer is off.  However, other functions like printing of documents, scanning of documents can be done only when it is attached to and the computer is on.  The fax can be sent independently if the document to be faxed is loaded on the machine.  However, if a document is to be faxed from the computer then computer must be attached and   it must be on.  Some quantity of data can be stored in the system of printer and those stored documents can be printed even when the computer is off.  Therefore, we find that the printer with other facilities is itself an automatic device based on data  storage and computing facilities.  Therefore, such printer will also be part of computer system.

Xerox machines - Certain Xerox machines also have machine and software like any computer.  The Xerox machine can have different functions like :-

a)     enlarging the document

b)    reducing the document

c)     black printing

d)    colour printing in one or more colours and different brightness etc.

We also find that these machines are programmable.  In the sense that instructions can be given for printing certain number of copies of document, re-sizing of document, type of printing etc.  These all are based on computing devices which are in-built in the hardware and software used in the Xerox machine.  Therefore, such Xerox machines can also be considered as a computer or part of computer and part of computer system, as defined.

Telephone handsets with Computer facilities

We find many mobile phones with various computing , data processing and data retrieval, transmission and reception facilities.  They are based on software loaded in the equipment.  With the mobile phone we can take photographs, download e-mail, send e-mail, receive and send music, type documents and send them as SMS or e-mail.  Therefore, these instruments are also similar to computer so far the information and functions  are concerned.  In some mobile phones we find full set of key-board and it can be used just like a computer.  Therefore, such telephones are also akin to computer and they can be considered as computer for higher rate of depreciation.

On principal one can also rely on DCIT V Vippy Solvex Products Ltd (2007) 164 Taxman 483 (MP) , in this case automatic coal supply system was considered as part and parcel of boiler eligible for 100% depreciation.

In CIT V Cochin Refineries Ltd. (1988) 173 ITR 461 (Ker.) it was held that various assets formed part of refinery plant including waste ponds, fresh water tanks, alloy piping jetty facilities etc.

Other article:

The  readers can fruitfully refer to another article by the author published in 20 CCD 619 (15.08.08 issue) under head "Depreciation allowance on devices used with equipment having special rates".

A judgment of ITAT:

INCOME-TAX OFFICER v. SAMIRAN MAJUMDAR

[2006] 280 ITR (AT) 74 (Kolkata)

In this case the assessee owned and used Colour Xerox machines for the purpose of business and treated them as computer and claimed higher depreciation at sixty per cent,  but the Assessing Officer allowed only twenty per cent. depreciation on the colour Xerox treating them general plant or machinery.

Commissioner (Appeals)  on perusal of remand report supported by report of Inspector of Taxes, found that the  Inspector  after verifying the function of the printer and scanner, reported that the xerox machine ran with the help of a computer and was an external device attached to the computer through  cables. Therefore, the Commissioner (Appeals) accepted the assessee's contentions and allowed the higher depreciation.  On revenue's appeal, the Tribunal dismissed the appeal and confirmed the order of the CIT(A) after consideration of , the report of the inspector, definitions of computer system, and computer ( as noted earlier), the functions and integrality of computer and printer etc. 

On the utility of equipment and functional tests and the principal that it works with other equipment or system the Tribunal relied on:

CIT v. Kanodia Warehousing Corporation [1980] 121 ITR 996(All)

CIT v. Karnataka Power Corporation [2001] 247 ITR 268 (SC) .

The Tribunal concluded that a fair reading of the report of the Inspector showed that the printer and scanner could not be used without the computer, that is, they were part of the computer system, the printer and scanner were an integral part of the computer system and they were to be treated as computer for the purpose of allowing higher rate of depreciation.

Conclusion:

The Tribunal as a matter of fact found that if the Xerox machine works with the computer and has some functions of computer, it is computer. The Tribunal applied well recognized 'functional test'.

Applying the same test it can be said that the UPS, printer, scanner, and software and other such items which are required for making operational a computer and which work with computer for, storage, processing, transformation, transmission of information between two or more devices are computer and part of  computer system.