Mumbai ITAT: 60% Depreciation on Computer Software Upheld; Section 14A Disallowance Restricted to Suo Motu Amount
Case Overview
Case Name: PRPL Enterprises Private Limited Vs CIT (ITAT Mumbai)
Assessment Year: 2015-16
Forum: Income Tax Appellate Tribunal, Mumbai
Order Date: 24 June 2026
Assessment Order: Passed under Section 143(3) of the Income Tax Act, 1961 dated 26.12.2017 by the Deputy Commissioner of Income Tax, Circle-7(3)(2), Mumbai
Background and Brief Facts
PRPL Enterprises Private Limited, a company engaged in real estate development and related activities, filed its return of income for Assessment Year 2015-16 on 29.09.2015, declaring a total loss. The case was subsequently selected for scrutiny, and notices under the relevant provisions of the Income Tax Act, 1961 were duly issued. During the assessment proceedings, the Assessing Officer raised several objections and ultimately recomputed the assessee's income by making certain disallowances, which the assessee disputed.
Aggrieved by the assessment order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi. The CIT(A), however, was not persuaded by the assessee's submissions and dismissed the grounds of appeal vide order dated 08.09.2025. The assessee thereafter preferred an appeal before the Mumbai ITAT, challenging the following principal issues:
- Disallowance of depreciation on computer software claimed at 60% but restricted to 25% by the Assessing Officer
- Enormous disallowance computed under
Section 14Aread withRule 8Dof the Income Tax Rules, 1962, despite a voluntary suo motu disallowance already made by the assessee - Addition of the
Section 14Adisallowance for computing book profits underSection 115JBof the Income Tax Act, 1961 - Consequential recomputation of losses and unabsorbed depreciation carried forward
- Levy of interest under
Section 234BandSection 234Cof the Act
Issue 1: Depreciation on Computer Software — 60% or 25%?
The Dispute
During the year under consideration, the assessee had capitalized expenditure on various software purchases under the head "Intangible Assets — Computer Software," aggregating to Rs. 83,51,955/-. The software purchased included widely-used licensed application programs such as SAP License, AutoCAD, Adobe Acrobat, MS Office 2013, MS Project 2013, Windows 7 Pro, and Salesforce Software Customization.
The assessee claimed depreciation on these software assets at 60%, treating them as falling under the block "Computers including computer software" at Serial No. III(5) under Part A of Appendix I to the Income Tax Rules. The Assessing Officer, however, restricted the depreciation rate to 25%, classifying such independently purchased software as intangible assets under Section 32(1)(ii) of the Income Tax Act, 1961. This resulted in an excess depreciation disallowance of Rs. 29,23,184/-, which was subsequently revised to Rs. 20,80,548/- pursuant to a rectification order under Section 154 dated 20th February, 2018.
The CIT(A) upheld the Assessing Officer's position, reasoning that software purchased independently and separately from a computer system could not be considered an integral part of any computer hardware, and therefore properly fell within the category of "Business or Commercial Rights" under Section 32(1)(ii), warranting depreciation at only 25%. The CIT(A) further noted that since the assessee had itself capitalized the software under the head "Intangible Assets" in its books, the Assessing Officer was justified in his classification.
ITAT's Analysis and Decision
The ITAT, after examining the rival contentions and an extensive body of judicial precedents placed on record by the assessee's counsel, ruled decisively in favour of the assessee.
The Tribunal took note of the consistent position adopted by various High Courts and Tribunals on this precise question, including the following key decisions: