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License fee paid for 2 years

Lila (Job) (490 Points)

21 December 2020

License fee has been paid for use of software for 2 years by a Private Limited Co. How this should be treated in accounts. 1) Should it be capitalized as fixed assets - in that case how to show this in ITR (as there is no option of charging off depreciation in 2 years) Or 2) Proportionate amount should be charged off this year and balance to be carried forward as Current / Non-current asset.

Kindly guide.

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3 Replies

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 21 December 2020

Licenses as we all know are capitalised when they fall into the category of PPE.

Fixed assets a/c

To Bank a/c

Initial recognition at cost And then

amortisation a/c

To Accumulated amortisation a/c

subsequent recognition is cost less accumulated amortisation and accumulated impairment.

please not that there should be no residual value (SLM amortisation is best method to follow). The amortised amount is multiplied with corporate tax rate and the result will be your deduction and the rest will reduce the profits. Tax amortisation of intangibles in India is defined by the Income Tax Act of 1961^[1] as amended by Finance Act 2012. The carrying amount is revised through subsequent treatment either as a single asset or group of similar class of intangible assets. AS 26

sry not sure about the ITR process.

Lila (Job) (490 Points)
Replied 23 December 2020

Is it to be classified as intangible asset even if the fee has been paid just for 2 years.

Also some one please guide on Income Tax part as well.

There is a separate column for intangible assets (under fixed assets) but rate of depreciation is 25%. Which means it will be written off in 4 years. But since this license fee is paid for 2 years, it needs to be written off @ 50%,. So how do we resolve this.

Someone pls guide.

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 23 December 2020

Yes you can recognise intangible asset, here in AS standard, does not prescribe if finite and infinite recognition criteria. IndAS has clearer prescripttion of this issue.

Next, depreciation method needs to be chosen by your pattern of consumption. If someone is not sure, they follow SLM method. If your want to follow WDV method, not a problem, but for all methods assume that residual value is ZERO and do the calculations not unless the asset is intended to be sold off before its useful life.

Tax im unclear if 100% is claimable.