Depreciation on capitalised software cost is outside TDS disallowance provisions when only section 32 allowance is claimed.

Section 40(a)(i) and section 40(a)(ia) do not apply to depreciation claimed under section 32 on software expenditure that was capitalised. The Tribunal applied the High Court's reasoning that those disallowance provisions target revenue outgoings on which tax was deductible at source, whereas depreciation is a statutory allowance on an eligible asset and is not itself an expenditure outgoing. Because only depreciation was claimed on the capitalised software cost, no disallowance under section 40(a)(i) or section 40(a)(ia) was attracted, and the assessee succeeded.

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Issues: Whether disallowance under section 40(a)(i) and section 40(a)(ia) of the Income-tax Act, 1961 could be made in respect of depreciation claimed on software expenditure that had been capitalised and not claimed as revenue expenditure.

Analysis: The Tribunal applied the jurisdictional High Court's reasoning that section 40(a)(i) and section 40(a)(ia) operate to disallow outgoing expenditure of a revenue nature where tax deductible at source has not been deducted or paid. Depreciation under section 32 is a statutory allowance on an eligible asset and is not itself an outgoing expenditure. Where the software cost had been capitalised and only depreciation was claimed, the amount was not a deduction of the kind contemplated by section 40(a)(i) or section 40(a)(ia).

Conclusion: Disallowance under section 40(a)(i) and section 40(a)(ia) was not attracted to the depreciation claim, and the issue was decided in favour of the assessee.

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