2021 (8) TMI 1379

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....yments were effected by the assessee to Cadence Systems, without deducting tax at source, AP proposed application of Section 40(a)(i) of the Act. To this proposal assessee replied that the payments having been capitalised only depreciation was claimed as an expenditure and hence Section 40(a)(i) could not be applied. However, AO was of the opinion that the claim on expenditure incurred for purchase of software was considered by him as 'Royalty', both under the Act as well as the DTAA between India and Ireland. According to him, assessee was obliged to deduct the tax at source, once the payments were considered as 'Royalty'. Deduction having not been done, AO held that Section 40(a)(i) of the Act, was attracted. Depreciation claimed at 60% which came to Rs. 2,43,22,950/- was disallowed. 04. Aggrieved assessee moved in appeal before the CIT (A) both on treatment of software expenditure as `Royalty' and also the disallowance sought to be made u/s.40A(i) of the Act. CIT (A) upheld the order of AO in so far as it concerned the treatment of payment as 'Royalty', but nevertheless held that disallowance u/s. 40(a)(i) of the Act was not warranted in view of the....

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....0(a) (i) contemplates that any interest, royalty, fee for technical services or other sum chargeable under this act, which is payable outside India as it is relevant for the case in hand on which tax is deductible at source under Chapter XVII -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 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 deduc....

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....he contrary the expenditure results a certain sums payable and goes out of the business of the assessee. The sum, as contemplated under sec. 40(a)(i) is the outgoing amount and therefore, necessarily refers to the outgoing expenditure. Depreciation is a statutory deduction 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 th....

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....ence by this Court. Thus, both the questions are answered against the revenue and in favour of the assessee." 16.4 In view of the above discussion as well as following the decision of the Hon'ble Punjab & Haryana High Court, we decide this issue in favour of the assessee and against the revenue." We find that arguments now taken by the Ld. DR were considered by the coordinate bench. We are, therefore, of the opinion that CIT (A) was justified in relying on the decision of the coordinate bench. No interference is required. Appeal of the Revenue stands dismissed. 08. Assessee in its cross objection though it assails treatment of payments made for purchase of software as 'royalty', Ld. AR submitted that if the claim of depreciation on the software was allowed, then the ground raised will not have significant effect on the assessment. As per the Ld. AR, assessee would be entitled to depreciation at the rate of 60% on the cost of software. In view of the above submissions of the Ld. AR, we dismiss the cross objection filed by the assessee. 09. In the result, both the appeal of the Revenue and the cross objection of the assessee are dismissed." 2. Against the above o....