Depreciation on capitalised software cost cannot be disallowed under section 40(a)(i) for TDS failure on non-resident payment.

Depreciation on capitalised software cost cannot be disallowed under section 40(a)(i) merely because tax was not deducted at source on payment to a non-resident supplier. The provision disallows otherwise allowable business expenditure claimed under sections 30 to 38, whereas depreciation is a statutory allowance under section 32 on an asset owned and used for business, not a revenue outgoing. Failure to deduct tax may still trigger TDS consequences, including proceedings under section 201, but it does not convert capitalised software cost into disallowable expenditure for section 40(a)(i) purposes.

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Issues: Whether depreciation on software purchase cost capitalized in the assessee's books could be disallowed under section 40(a)(i) of the Income-tax Act, 1961 for failure to deduct tax at source on the remittance to a non-resident supplier.

Analysis: The payment for software was capitalized in the block of assets and was not claimed as a revenue expenditure. Section 40(a)(i) operates to disallow otherwise allowable business expenditure that remains payable without deduction of tax at source, and its reach is confined to amounts claimed in computing business income under the heads governed by sections 30 to 38. Depreciation, by contrast, is a statutory allowance under section 32 on an eligible asset owned and used for business, and it is not an outgoing expenditure. The failure to deduct tax at source may attract consequences under the TDS provisions, including proceedings under section 201, but it does not justify disallowance of depreciation under section 40(a)(i).

Conclusion: Depreciation could not be disallowed under section 40(a)(i) on the capitalized software cost, and the issue was decided in favour of the assessee.

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