TMI Blog2010 (7) TMI 642X X X X Extracts X X X X X X X X Extracts X X X X ..... SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER Appellant by : Shri R.N. Jha (DR) Respondent by : S/Shri Vijay Mehta Amit N. Patel ORDER PER BENCH 1. In exercise of the powers vested in the Hon ble President, under section 255(3) of the Act, following question was referred to Special Bench and thus it was placed before us for consideration. Whether routers and switches can be classified as computer entitled to depreciation at 60% or have to be classified as general plant and machine entitled to depreciation only at 25%. 2. Briefly stated the facts of the case are that the assessee is engaged in data communication, design, development, purchase and sale of networking products, their maintenance and installation etc. In the previous year relevant to the assessment year 2002- 2003, the assessee claimed depreciation amounting to Rs.3,27,67,150 at the rate of 60% under the head Computers . On the perusal of the statement annexed to the return of income, the Assessing Officer found that the it had included Routers and Switches etc. in the block of computers. The assessee was called upon to explain the use of Routers and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In his view the Assessing Officer had unreasonably restricted the meaning of the computer to the CPU alone. He thus, accepted the assessee s claim. 6. The facts for assessment year 2003-04 are mutatis mutandis similar to those of the earlier year discussed above. In this year the assessee claimed depreciation amounting to Rs. 1.74 crores on routers and switches, which was reduced by the AO to Rs.66.81 lacs and the ld. CIT(A) rejected the view of the Assessing Officer. 7. The learned Departmental Representative opened his arguments by submitting that higher rate of depreciation at 60% was provided in the Appendix I to Income-tax Rules only in respect of Computers . He argued that the function of Router was only to transmit data from one computer to another or from one network to another. It was only a telecommunication device meant for transmitting data from one network to another or from one computer to another. Relying upon the definition of the expression Computers , as given in the Oxford Dictionary, he submitted that the function of a computer is to perform the logic, arithmetic, data storage, retrievable, communication and control functions. Since none of these function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tches which was applicable only to the computers. 8. The learned Counsel for the assessee, on the other hand, contended that the learned first appellate authority has rightly held that the routers and switches are part of computer. It was argued that the meaning of computer could not be restricted to the processing device alone but it also meant the essential input and output devices, which facilitate the operation of computer. It was put forth that Routers and Switches are nothing but input/output devices of computer as they have no independent utility and have to work necessarily with the Computers alone. In support of his contention, the learned A.R. relied on the following decisions :- (i) ITO Vs. Samiran Majumdar [(2006) 280 ITR (AT) 74 (Kol.)] ITAT, Kolkata Bench. (ii) Container Corporation of India Ltd. Vs. ACIT [(2009) 30 SOT 284 (Del.)] ITAT Delhi Bench. (iii) ACIT Vs. M/s.Cincom System India (P) Ltd. ITA No.1534/Del/2008 datad 13.4.2009 ITAT, Delhi Bench. (iv) ITO Vs. M/s.Nirmal Datacom Leasing P.Ltd. ITA No.9392/Mum/2004 datad 3.5.2007 ITAT, Mumbai Bench. (v) ITO Vs. M/s.Key Note Capital P. Ltd. ITA No.7049/Mum/2004 datad 22.11.2007 ITAT, Mumbai Bench. (vi) Expedito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n down value thereof as may be prescribed. Rule 5 (1) stipulates that depreciation in respect of any block of asset shall be calculated at the percentages specified in the second column of the Table in the Appendix I of these Rules on the written down value of such block of asset as are used for the purpose of business or profession of the assessee at any time during the previous year. Appendix-I, as applicable to assessment year 2002-2003 under consideration, has different blocks of assets. We are concerned with the block of assets of Machine and plant. General rate of depreciation provided is 25% against item 1 in respect of machine and plant other than those covered by specific sub-items. Sub-item (2B) is Computers and the rate of depreciation prescribed is 60%. Similarly for the assessment year 2003-2004, which is also under consideration, the general rate of depreciation on Machine and plant, other than those covered by specific sub-items, is 25%. Sub-item 5 is Computers including computer software on which rate of depreciation has been prescribed as 60%. It is only with effect from assessment year 2003-2004 that computer software has also been included in the category of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore the first day of April, 2000, wholly and exclusively in respect of a non-Y2K complaint computer system, owned by the assessee and used for the purposes of his business or profession. It was in this context that phrase Computer system came to be defined solely for the purpose of clause (xi) of section 36 (1). 14. From the above discussion it is seen that the Explanation (a) defines computer system and not computer and that too only for the purposes of clause (xi) of section 36 (1), which has force only for one year. As such we are not inclined to adopt this definition of computer system for the purposes of granting depreciation u/s 32 of the Act on computers . Recently the Hon ble Supreme Court, vide its judgment dated 07.05.2010, has held in JCIT vs. Saheli Leasing Industries Ltd. that : A particular word occurring in one Section of the Act, having a particular object cannot carry the same meaning when used in different Section of the same Act, which is enacted for different object. In other words, one word occurring in different Sections of the Act can have different meaning, if the object of the two Sections are different and when both operate in different fie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roposed to provide for legal recognition of electronic records and digital signatures. This will enable the conclusion of contracts and the creation of rights and obligations through the electronic medium. It is also proposed to provide for a regulatory regime to supervise the Certifying Authorities issuing Digital Signature Certificates. To prevent the possible misuse arising out of transactions and other dealings concluded over the electronic medium, it is also proposed to create civil and criminal liabilities for contravention of the provisions of the proposed legislation. 4. With a view to facilitate Electronic Governance, it is proposed to provide for the use and acceptance of electronic records and digital signatures in the Government Offices and its agencies. This will make the citizens interaction with the Governmental Offices hassle free. 17. Having seen the object of the Information Technology Act, 2000, the question which arises for consideration is that can we import the definition of computer , as given in it, in the Income Tax Act, 1961 for the purposes of section 32 ? It has been held by the Hon ble Supreme Court in CIT vs. Venkateswara Hatcheries (1999) 237 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercial parlance tests as well as by analysing the intendment of providing for higher rate of depreciation. We may refer to several case law to analyse as to which formula would aptly suit the situation in the given case. 20. In Indian Hotels Co. Ltd. Ors. Vs. ITO Ors. (2000) 245 ITR 538 (SC), the issue was about the granting of deduction u/s. 80J to an industrial undertaking. It was noticed that Section 80J provides for grant of deduction to an assessee who derives income from an industrial undertaking or a ship or the business of a hotel to which the section applies and the section applies to any industrial undertaking, any ship or business of any hotel if the conditions prescribed under sub-sections (4), (5) and (6) respectively, are satisfied. It was noticed that the words industrial undertaking have not been defined in the Act. In this background of facts, the Hon ble Court posed the question to itself as to whether the assessee has derived profits and gains from an industrial undertaking or from the business of a hotel . After discussing the issue threadbare, it was held that : Industrial undertaking is not given any meaning under the Act, hence it is to be underst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re meant to perform some independent function(s) even though in achieving such desired independent function(s), some sort of computer functions are also involved. Today is an electronic age. Most of the products used by us involve some sort of mechanism, which may be loosely called as computer functions. Take the instance of Television set, Mobile phone and cars etc., all of which, inter alia, involve one form or the other of computer functions. Simply because some computer functions are involved in these equipments or the assistance of computers is taken as such at one stage or the other in their operation, these will not become Computer. The meaning of computer cannot be extended to another machine that operates with the assistance of computer. Conversely an item, which is an integral part of the computer, cannot be defined by it s operations which it is capable of performing, for eg : A wire and plug are electrical items in general but cost of a wire, integrally connected to television, may be added to cost of TV whereas a wire and plug attached to the computer system has to be treated as computer. 25. Thus in order to determine whether a particular machine can be classifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the destination and source IP addresses of the packet, the router decides which neighbor it will forward it to. 27. The assessee vide its letter dated 21-2-2005, addressed to the Assessing Officer, submitted a note on use of routers/switches by explaining that the routers are crucial device that let the messages flow from one computer to another. It was further explained that the router has two separate but related jobs, viz., (a) to ensure that the information does not go where it is not needed and (b) it makes sure that the information does make it to the intended destination. 28. A router is a networking device whose software and hardware are customized to the tasks of routing and forwarding information. A router has two or more network interfaces, which may be to different physical types of network (such as copper cables, fiber or wireless) or different network standards. Each network interface is a small computer specialized to convert electric signals from one form to another. Routers connect two or more logical subnets, which do not share a common network address. The subnets in the router do not necessarily map one-to-one to the physical interfaces of the router. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers. Because software runs on computer hardware, software programs often have system requirements , that list the minimum hardware required for the software to run. 31.1. In short, Router is a hardware device that routes data (hence the name) from a local area network (LAN) to another network connection. A router acts like a coin sorting machine, allowing only authorized machines to connect to other computer systems. Most routers also keep log files about the local network activity. Now the question is whether this machine can be used independent of Computer. If yes, then it cannot be called Computer Hardware in all circumstances. 31.2. When Computer Hardware , is used as a component of the computer, it becomes part and parcel of the computer, as in the case of operating software in the computer. In such a situation, hardware in question can be considered as a part of a computer and hence a computer . Per contra, when the machine is not used as a necessary accessory or in combination with a Computer, it cannot be called a Computer component. 31.3. Coming to the Routers, it is seen that these can also be used with a Television and in such use, no computer is require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not perform any logical, arithmetical or memory functions by manipulations of electronic, magnetic or optical impulses. 33. We prefer the view taken in the case of Samiran Majumdar (supra) over that in the case of Routermania Technologies (supra) ; With utmost respect, the Mumbai Bench had taken a narrow view on this issue, by holding that only a device which can perform logical, arithmetical or memory functions by manipulations of electronic impulses etc. is computer. It has restricted the meaning of computer only to the CPU of the computer and pulled out the input and output devices from the ambit of computer. No doubt the function of the computer, as one composite unit, is to perform logical, arithmetical or memory functions etc., but it is not only the equipment which performs such functions that can be called as computer; All the input and output devices, as discussed above, which support in the receipt of input and outflow of the output are also part of computer. CPU alone, in our opinion, cannot be considered as synonymous to the expression Computer . The function of CPU is akin to the brain playing a pivotal role in the conduct of the body. As we do not call the br ..... X X X X Extracts X X X X X X X X Extracts X X X X
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