ITAT Delhi Clarifies Bad Debt Deduction on Unrecoverable Subsidy and Higher Depreciation on POS & SAP

The Delhi Bench of the Income Tax Appellate Tribunal in the case of Indian Potash Limited Vs DCIT examined several important issues for Assessment Year 2018-19, arising from cross appeals filed by the assessee and the Revenue. The decision provides significant clarity on:

  • Eligibility of higher depreciation rates on POS (Point of Sale) machines
  • Allowability of higher depreciation on SAP licence treated as computer software
  • Deduction of bad debts under Section 36(1)(vii) read with Section 36(2) where Government subsidy earlier recognised as income subsequently becomes unrecoverable

The Tribunal ultimately dismissed the Revenue’s appeal in full and allowed the assessee’s appeal, thus granting relief on all disputed issues.

Background of the Case

Both the assessee and the Revenue preferred appeals against the order of the CIT(A), Delhi–23 dated 10.07.2024 for A.Y. 2018-19.

Revenue’s Grounds

The Revenue disputed the following deletions made by the CIT(A):

  1. Disallowance of alleged excess depreciation of ₹88,67,868 on POS machines
  2. Disallowance of alleged excess depreciation of ₹70,55,840 on SAP licence
  3. Disallowance of ₹9,71,46,262 on account of bad debts relating to subsidy claims rejected by the Government

Assessee’s Grounds

The assessee, Indian Potash Limited, challenged the CIT(A)’s partial sustenance of disallowance of bad debts of ₹25,90,391, contending that:

  • The amount had already been recognised as income in the same previous year in which it was written off
  • Section 36(2) permits a bad debt deduction where the amount is taken into account in computing income of either the year of write-off or any earlier previous year

The assessee asserted that the CIT(A) had misinterpreted the requirement of Section 36(2) by assuming that the income must necessarily have been offered only in an earlier year.

Issue 1: Higher Depreciation on POS Machines

Facts

  • The assessee claimed depreciation on POS machines at the higher rate applicable to computer/computer peripherals.
  • The Assessing Officer restricted the depreciation to 25%, treating POS machines as ordinary plant and machinery instead of computer equipment, and disallowed ₹88,67,868 as excess depreciation.
  • The CIT(A) allowed the assessee’s claim of higher depreciation.

Before the Tribunal, the Departmental Representative supported the Assessing Officer’s view. The Authorised Representative of the assessee relied on:

  • The order of the CIT(A)
  • The judgment of the Hon’ble Delhi High Court in Pr. CIT vs. Connaught Plaza Restaurant Pvt. Ltd. (2016) (9) TMI 1485 holding that POS terminals are eligible for higher depreciation as computer equipment

Tribunal’s Analysis

The Tribunal noted that the Delhi High Court in Pr. CIT vs. Connaught Plaza Restaurant Pvt. Ltd. had already considered the identical issue of depreciation on POS terminals and upheld the Tribunal’s view allowing depreciation at 60%. The High Court had observed that:

“The revenue’s appeal urges that a substantial question of law arises i.e. whether P.O.S. terminal, is a computer or alternatively falls within the classification of computer peripherals and accessories for the purpose of depreciation… This court is of the opinion that no question of law, much less a substantial one arises for determination under section 260A.”

The Delhi High Court had thereby accepted that POS terminals are akin to computer systems/peripherals eligible for the higher rate of depreciation.

Decision on POS Machines

Since the legal position stood concluded by the binding decision of the Delhi High Court, the Tribunal followed that precedent and: