Depreciation on non-compete rights and capitalised software cannot be denied by invoking section 40(a)(i).

A right acquired under a non-compete arrangement may qualify as an intangible commercial or business right eligible for depreciation, and the characterisation of the payment as goodwill or non-compete fee does not by itself defeat that claim. On software purchases that were capitalised, depreciation cannot be disallowed under section 40(a)(i) because that provision applies to sums otherwise deductible as expenditure, not to a statutory depreciation allowance on a capital asset. The proper consequence for any tax withholding default lies elsewhere, so the disallowance was held unsustainable and the assessee's relief was sustained.

---

---

Issues: (i) Whether depreciation was allowable on the additional amount paid by the assessee by treating it as goodwill or non-compete fee; (ii) Whether disallowance under section 40(a)(i) could be made in respect of software purchases that were capitalised and depreciated.

Issue (i): Whether depreciation was allowable on the additional amount paid by the assessee by treating it as goodwill or non-compete fee.

Analysis: The issue was covered by the assessee's own earlier years, where the co-ordinate bench had followed the jurisdictional High Court and treated the right acquired under the non-compete arrangement as a commercial or business right falling within the category of intangible assets. The facts were found to be similar, and the distinction suggested by the Revenue was not accepted. Accordingly, the characterisation of the payment as goodwill or non-compete fee did not affect eligibility for depreciation.

Conclusion: Depreciation was allowable. This issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether disallowance under section 40(a)(i) could be made in respect of software purchases that were capitalised and depreciated.

Analysis: The expenditure on computers and software had been capitalised, and only depreciation was claimed. The disallowance mechanism under section 40(a)(i) applies to sums otherwise deductible in computing business income, whereas depreciation is a statutory allowance on a capital asset and not an outgoing expenditure. The proper consequence for any failure to deduct tax at source lies in the provisions dealing with tax deduction default, not in disallowing depreciation on a capitalised asset. Following co-ordinate bench and High Court authority, the disallowance was held unsustainable.

Conclusion: Disallowance under section 40(a)(i) was not permissible. This issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The Revenue's challenge failed on both substantive grounds, and the appellate relief granted to the assessee was sustained.

Ratio Decidendi: Depreciation cannot be denied on a capitalised asset by invoking section 40(a)(i), and a right acquired under a non-compete arrangement may qualify as an intangible business or commercial right eligible for depreciation.

---