ITAT Chennai Ruling on Section 14A, Depreciation on Software, Section 10AA Loss Set-Off and MAT Adjustments

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) delivered an important decision in the case of Cognizant Technology Solutions India Pvt. Ltd. Vs DCIT for Assessment Year 2015-16, dealing with multiple high-value issues under the Income Tax Act 1961. Both the assessee and the Revenue filed cross appeals against the order passed by the Commissioner of Income Tax (Appeals)-18, Chennai dated 11.01.2022, arising from an assessment framed under Section 143(3) on 28.12.2017.

The Tribunal’s order covers:

• Scope and quantum of disallowance under Section 14A read with Rule 8D
• Rate of depreciation on computer software (whether 60% or 25%)
• Admissibility of fresh claims on long-term capital loss and RBI compounding fees
• Set-off of losses of Section 10AA units against other business income
• Adjustments under Section 115JB (MAT) for Section 14A disallowance and lease equalisation charges

Below is a structured analysis of the key issues and findings.

Assessee’s Appeal – Key Grounds and Tribunal’s Findings

1. Disallowance Under Section 14A – Restriction to Income-Yielding Investments

The assessee earned exempt dividend income of Rs. 4,56,83,550/- claimed under Section 10(38). The Assessing Officer invoked Section 14A read with Rule 8D and computed a disallowance based on the total investment portfolio.

The CIT(A) upheld the disallowance in principle but issued a direction that such disallowance, to the extent it enhances business income, should be treated as eligible for deduction under Section 10AA. He also indicated that dividend income should be reasonably apportioned between eligible and non-eligible units while applying this enhancement.

Before the Tribunal, the assessee did not dispute the applicability of Section 14A per se but argued that:

• Disallowance should be worked out only with reference to those specific investments which actually generated exempt income during the year.

The Tribunal:

• Noted that several High Courts and various benches of the Tribunal have consistently taken the view that, for the purpose of Rule 8D(2)(iii),
  • Only those investments which have yielded exempt income in the relevant year should be considered.
• Directed the Assessing Officer:
  1. To examine each investment/portfolio separately,
  2. To identify investments that actually resulted in exempt income, and
  3. To restrict the disallowance under Rule 8D(2)(iii) to such income-yielding investments alone.

Important: The ground on this issue was allowed for statistical purposes, with the matter remanded to the Assessing Officer for recomputation in line with this principle.

2. Depreciation on Computer Software – Eligibility for 60% Rate

The assessee claimed depreciation at 60% on computer software and related software licences, treating them as falling within the depreciation block for “computers including computer software”.

• The Assessing Officer treated the software licences as intangible assets (similar to licences under Part B of Appendix I) and restricted depreciation to 25%.
• The CIT(A) confirmed the action of the Assessing Officer.

Before the Tribunal, the assessee contended:

• That even if software applications and licences are considered intangible assets, they fall within the specific depreciation entry for “computers including computer software” qualifying for 60% depreciation.
• Reliance was placed on the judgment of the Hon’ble Madras High Court in CIT vs. Computer Age Management Services [2019] 109 com 134 (Mad.).

The Tribunal: