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TMI Blog2021 (7) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The assessee did not make any disallowance u/s 14A of the Act. Accordingly, the A.O. computed disallowance by applying the provisions of rule 8D of the I.T. Rules. The A.O. disallowed a sum of Rs. 13.56 lakhs out of interest expenditure under Rule 8D(2)(ii) of the Act and also disallowed a sum of Rs. 6.91 lakhs out of general expenses under Rule 8D(2)(iii) of the Act. Thus, the aggregate disallowance made by the A.O. u/s 14A of the Act was Rs. 20.47 lakhs. The Ld. CIT(A) also confirmed the same. 5. The Ld. A.R. submitted that own funds and interest free funds available with the assessee during the year under consideration has exceeded the value of investments made in the partnership firm and hence no disallowance out of interest expenditure under Rule 8D (2)(ii) is warranted, as per the decision rendered by Hon'ble jurisdictional Karnataka High Court in the case of CIT Vs. Micro Labs Ltd. 383 ITR 490. With regard to the disallowance out of general expenses, the Ld. A.R. submitted that the assessee has received share income from one partnership firm only and the assessee has not incurred any expenditure for earning share income. Accordingly, he submitted that no disallowance und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he A.O. to treat the software purchases as revenue expenditure in the nature of payment of royalty. Since the assessee has not deducted tax at source from the payment made for purchase of software, the Ld. CIT(A) directed the A.O. to disallow entire purchase cost of software u/s 40(a)(ia) of the Act. 9. We heard the parties on this issue and perused the record. We notice that the coordinate bench of Tribunal has held in the case of DCIT Vs. Sangeeta Mobiles Pvt. Ltd. (ITA No.715/Bang/2017 dated 15.6.2018) that the provisions of section 40(a)(i) of the Act cannot be invoked for making disallowance of depreciation. In this regard, the coordinate bench has followed the decision rendered by Bangalore bench of Tribunal in the case of Kawasaki Mcro Electronics Inc. - India branch Vs. DDIT. (ITA No.1512/Bang/2010 dated 26.6.2015). For the sake of convenience, we extract below the decision rendered by the coordinate bench in the case of Sangeeta Mobiles Pvt. Ltd. (supra). "6.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. On an appraisal of the facts on record, it is not in dispute that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objection against the depreciation proposed to be disallowed by the Assessing Officer before the DRP, but could not succeed. 4. Before us, the learned Authorised Representative of the assessee has submitted that since the expenditure is capitalized by the assessee, therefore, the provisions of section 40(a)(i) cannot be invoked for disallowance of the depreciation on the capitalized amount. It is not the case of the claim of any expenditure by the assessee but the expenditure which has already capitalized and consequently the provisions of section 40(a)(i) has no role to play. In support of his contention, he has relied upon the decision of Mumbai Bench, ITAT in the case of SKOL Breweries Ltd. Vs. ACIT 142 ITD 49 (Mum) as well as the decision of the Delhi Bench of ITAT in the case of SMS Demang (P.) Ltd. V DCIT (2010) 38 SOT 496. The learned Authorised Representative has contended that the issue of disallowance of depreciation by applying the provisions of section 40(a)(i) of the Act is covered in favour of the assessee by the above said decisions of the Tribunal. 5. On the other hand, the learned Departmental Representative has submitted that there is no dispute that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -B and such tax has not been deducted or, after deduction, has not been paid, the amount of interest, royalty, fee for technical services and other sum shall not be deducted in computing the income chargeable under the head "profits & gains of business or profession". This condition of deductibility has been stipulated u/s 40 notwithstanding anything to the contrary in section 30 to 38 of the Act. Sec. 40 begins with non-obstante clause; therefore, it is an overriding effect t the provisions of sec. 30 to 38 of the I T Act. The question arises is whether any amount paid outside India or to the Non Resident without deduction of tax at source and the assessee has capitalized the same in the fixed assets and claimed only depreciation is subjected to the provisions of sec. 40(a)(i) or not ?. We quote the provisions of sec. 40(a)(i) as under: 40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",-- in the case of any assessee-- [(i) any interest (not being interest on a loan issued for public subscription before the 1st day of Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and after the insertion of Explanation 5 to sec. 32, it is obligatory on the part of the Assessing Officer to allow the deduction of depreciation on the eligible asset irrespective of any claim made by the assessee. Therefore, depreciation is a mandatory deduction on the asset which is wholly or partly owned by the assessee and used for the purpose of business or profession which means the depreciation is a deduction for an asset owned by the assessee and used for the purpose of business and not for incurring of any expenditure. 16.3 The deduction u/s 32 is not in respect of the amount paid or payable which is subjected to TDS; but is a statutory deduction on an asset which is otherwise eligible for deduction of deprecation. Depreciation is not an outgoing expenditure and therefore, the provisions of sec. 40(a)(i) of the Act are not attracted on such deduction. This view has been fortified by the decision of the Hon'ble Punjab & Haryana High Court in the case of Mark Auto Industries Ltd. (supra) in pars 5 & 6 as under: "5. Adverting to questions (ii) and (iii), the issue which arises for consideration is whether the assessee could be disallowed claim for depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee and against the revenue." 7. As it is clear from the above decision that the Tribunal has discussed and analysed the provisions of section 40(a)(i) in detail in the context of disallowance of depreciation. The learned D.R. has submitted that once the assessee has violated the provisions of section 195, then, even the expenditure is capitalized by the assessee, the provisions of section 40(a)(i) are applicable for disallowance of depreciation on such capitalized expenditure. We do not agree with the contention of the learned D.R, because a remedy for violation of provisions of section 195 is available with the Assessing Officer under Section 201 & 201A of the Act. The provisions of section 40(a) is only an additional measure to enforce the compliance of Chapter XVIIB of the Act, by disallowing an expenditure which is otherwise allowable under the provisions of the Act. Therefore, the question of disallowance under Section 40(a) arises only when an expenditure is claimed by the assessee without deducting the tax at source as per the provisions of Chapter-XVIIB of the Act, 1961. In the case on hand, when the assessee has not claimed, the said payment as an expenditure then th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transaction of purchase of software. Prior to the decision rendered by Hon'ble Karnataka High Court in the above said case, certain rulings were available holding that the software purchases are not in the nature of royalty payments. Hence the assessee has not deducted the tax at source. Since the transactions have already been completed prior to the ruling given by Hon'ble Karnataka High Court in the above said case, the assessee should not be burdened with the liability of TDS for the past transactions. Under the identical set of facts, coordinate bench has held in the case of M/s. Teekays Interior Solutions Pvt. Ltd. Vs. DCIT (ITA No.400/Bang/2017 dated 15.2.2019) that the disallowance u/s 40(a)(ia) of the Act should not be made since the assessee cannot be fastened with the liability to deduct tax at source retrospectively. 12. We find merit in these contentions of Ld. A.R. For the sake of convenience, we extract below the decision rendered by coordinate bench in the case of Teekays Interior Solutions Pvt. Ltd. (supra). 11. We heard the learned DR and perused the record. We noticed that an identical issue was considered by the co- ordinate bench in the case of Allegis Serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this Tribunal has held that the payment made for purchase of software does not fall under the definition of royalty provided under Section 9(1)(vi) of the Act. Thus he has submitted that a subsequent amendment or a decision cannot be thrust upon the assessee for deduction of tax in respect of a transaction completed much prior to the said decision. In support of his contention, he has relied upon decision of the co-ordinate bench of this Tribunal dt.23.11.2016 in the case of ACIT Vs. Aurigene learned Authorised Representative has submitted that disallowance made by the Assessing Officer is not justified when there was no such law or declaration of law at the time of payment made by the assessee to cast the duty on the assessee to deduct tax. 6. On the other hand, the learned Departmental Representative has submitted that the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Samsung Electronics Co. Ltd. (supra) though was subsequent to the transaction in question however, the said decision has not brought into statute any new law but it is only a declaration and interpretation of existing law. He has relied upon the orders of the authorities below. 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act (Finance Act 2012 amendment the definition of royalty with retrospective effect from 01.04.1976) or a subsequent ruling of a court (the Karnataka HC in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15,2011). Courts have consistently upheld this principle as seen in: * ITO v. Clear Water Technology Services (P.) Ltd. (52 taxmann.com115) * Kerala Vision Ltd v. ACIT (46 taxmann.com 50) * Sonic Biochem Extractions (P.) Ltd v. ITO (35 taxmann.com 463) * Channel Guide India Ltd v. ACIT (25 taxmann.com 25) * DCIv. Virola International (20 14(2) TMI 653) * CIT v. Kotak Securities Ltd. (20 taxmann.com 846). 04. The relevant portion of the CIT(A) order is extracted as under : " Disallowance of expenses under 40(a)(i) / 40(a)(ia) : 5.1. As regards disallowance of expenses under 40(a)(i)/40(a)(ia), it has been submitted that the company had determined the rate of tax to be deducted and following the judgments that were prevalent at the time of tax deduction, Supreme Court in the case of Tata Consultancy Services and jurisdictional Tribunal in the case of Samsung Electronics Co. Ltd, the appellant submitted that the said judgment s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground that the purchase of software amounted to acquisition of intangible asset and therefore, the payment was royalty and disallowable. On appeal: Held, (i) that mere purchase of software, a copyrighted article, for utilisation of computers cannot be considered as purchase of copyright and royalty. The assessee did not acquire any rights for making copies, selling or acquiring which generally could be considered within the definition of "royalty". Explanation 2 to section 9(1)(vi) cannot be applied to purchase of a copyrighted software, which does not involve any commercial exploitation thereof. The assessee simply purchased software delivered along with computer hardware for utilization in the day-to-day business." 5.3 Relying on the above decision, the ITAT `C'Bench, Bangalore upheld the order of the CIT(A) who had observed that the assessee did not have the benefit of the clarification brought brought about by the retrospective amendment that the payments tantamount to payment for royalty and consequently tax was to be deducted u/s 194J. The law as extant on the date when the payment for obtaining the software was made, has not categorically laid down that tax is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchases, following the above said decision we hold that the TDS liability cannot be fastened upon the assessee retrospectively and accordingly disallowance u/s 40(a)(i) is not called for even if the software purchases is treated as revenue expenditure. Accordingly, we are of the view that there is no reason to treat the cost of software capitalized by the assessee as revenue expenditure. Accordingly we set aside the order passed by Ld. CIT(A) and direct the AO to treat the cost of software as capital expenditure and delete the disallowance made on this issue. 14. The next issue relates to addition made by the AO due to difference in the income reported by the assessee under form No.26AS. 15. The AO noticed that there was difference between the income reported by the assessee in the profit & loss account and form No.26AS and accordingly added the difference of Rs. 2,62,761/-. Before Ld. CIT(A), the assessee got partial relief and the Ld. CIT(A) confirmed the addition to the extent of Rs. 1,65,375/-. The Ld. A.R. submitted that the assessee has offered the above said amount of Rs. 1,65,375/- in the succeeding assessment year i.e. in assessment year 2012-13, since it was received ..... X X X X Extracts X X X X X X X X Extracts X X X X
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