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Issues: Whether disallowance of depreciation on capitalised software expenditure could be made by invoking section 40(a)(ia) of the Income-tax Act, 1961 when the assessee had not claimed the expenditure as revenue deduction.
Analysis: The software cost was capitalised and only depreciation was claimed under section 32. Section 40(a)(ia) applies to an amount otherwise deductible in computing business income and operates to disallow specified outgoing expenditure where tax required to be deducted at source has not been deducted or paid. Depreciation, being a statutory allowance on an eligible asset, is not itself an outgoing expenditure. Where the underlying payment has been capitalised, the proper consequence of any failure to deduct tax at source lies under the TDS provisions, not by disallowing depreciation under section 40(a)(ia).
Conclusion: Disallowance of depreciation under section 40(a)(ia) was not permissible and the claim of depreciation was allowed in favour of the assessee.
Final Conclusion: The capitalised software expenditure remained eligible for depreciation, and the TDS default did not justify denial of that allowance under section 40(a)(ia).
Ratio Decidendi: Section 40(a)(ia) cannot be used to disallow depreciation claimed under section 32 on capitalised expenditure, because depreciation is a statutory allowance on an asset and not a deductible outgoing expenditure.
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