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2021 (8) TMI 1379 - AT - Income TaxDepreciation on computers disallowed u/s 40(a)(ia) - HELD THAT - Issue decided in favour of assessee as relying on Tally Solutions Pvt. Ltd case 2020 (12) TMI 1160 - KARNATAKA HIGH COURT Section 40(a)(i) and (ia) provides for disallowance only in respect of expenditure which is revenue in nature therefore the provision does not apply to a case of the assessee whose claim is for depreciation which is not in the nature of expenditure but an allowance. The depreciation is not an outgoing expenditure and therefore provisions of section 40(a)(i) and (ia) are not applicable. In the absence of any requirement of law for making deduction of tax out of expenditure which has been capitalized and no amount was claimed as revenue expenditure no disallowance under section 40(a)(i) and (ia) would be made. Depreciation is a statutory deduction available to the assessee on a asset which is wholly or partly owned by the assessee and used for business or profession. Depreciation is an allowance and not an expenditure loss or trading liability. Commissioner (Appeals) has held that the payment has been made by the assessee for an outright purchase of Intellectual Property Rights and not towards royalty and therefore the provision of section 40(a)(i) is not attracted in respect of a claim for depreciation. Decided in favour of the assessee.
Issues Involved:
1. Disallowance of Depreciation on Computers under Section 40(a)(i) of the Income-tax Act, 1961. 2. Treatment of Software Expenditure as 'Royalty'. Detailed Analysis: 1. Disallowance of Depreciation on Computers under Section 40(a)(i) of the Income-tax Act, 1961: The core issue was whether the depreciation on computers, disallowed by the Assessing Officer (AO) under Section 40(a)(i) due to non-deduction of tax at source on payments made for software, was rightly allowed by the Commissioner of Income Tax (Appeals) [CIT(A)]. Facts and Arguments: - The assessee purchased software worth Rs. 4,05,38,250/- from Cadence Systems, Ireland, capitalized it under "Computers," and claimed depreciation. - The AO treated the payment as 'Royalty' under the Act and the DTAA between India and Ireland, necessitating tax deduction at source. Non-deduction led to disallowance of depreciation under Section 40(a)(i). - CIT(A) upheld the 'Royalty' treatment but allowed depreciation, relying on the ITAT Mumbai Bench's decision in SKOL Breweries Ltd, which held that Section 40(a)(i) does not apply to depreciation claims. Tribunal’s Decision: - The Tribunal, referencing the SKOL Breweries Ltd case, concluded that depreciation is a statutory deduction and not an outgoing expenditure. Thus, Section 40(a)(i) does not apply to depreciation claims. - The Tribunal dismissed the Revenue’s appeal, affirming CIT(A)'s decision. 2. Treatment of Software Expenditure as 'Royalty': The assessee contested the treatment of software payments as 'Royalty'. However, it was noted that if the depreciation claim was allowed, this issue would not significantly impact the assessment. High Court’s Intervention: - The Hon’ble High Court of Karnataka remanded the matter back to the Tribunal, instructing it to reconsider the case in light of the decision in M/S. WIPRO LTD. VS. DCIT, 383 ITR 179 (KAR). - The High Court clarified that it did not express any opinion on the applicability of the WIPRO decision to the assessee’s case. Subsequent Tribunal Hearing: - The Tribunal revisited the issue, considering the High Court’s directive. - The Tribunal referred to the Karnataka High Court's ruling in PCIT v. Tally Solutions Pvt. Ltd., which clarified that Section 40(a)(i) pertains to revenue expenditure and not statutory deductions like depreciation. - The Tribunal upheld that depreciation is an allowance, not an expenditure, and thus, Section 40(a)(i) is not applicable. Conclusion: The Tribunal concluded that Section 40(a)(i) does not apply to depreciation claims and dismissed the Revenue’s appeal, affirming the CIT(A)'s decision to allow depreciation on the software capitalized as computers. The cross-objection by the assessee regarding the treatment of software payments as 'Royalty' was dismissed as it became redundant with the allowance of depreciation.
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