2024 (6) TMI 876

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....Ground No. 2 Ground No. 2 Ground Nos. 2-10 Restriction of depreciation claimed on server/network equipments. (Covered by the decision of this Hon'ble Tribunal in Appellant's own case for the assessment year 200910) (Order dated 03.03.2017 passed by this Hon'ble Tribunal in IT(TP)A No. 55/Bang/2015 & IT(TP)A No. 60/Ban /2015) Ground No. 5 Ground No. 3 Ground No. 3 Ground No. 11   Issues AY 2011-12 AY 2012-13 AY 2013-14 AY 2014-15   Assessee's appeals (Revised grounds pursuant to MAP filed on 13.02.2024) Transfer Pricing (Academic) Ground No. 2 Ground No. 2 Ground No. 2 Ground No. 2   Disallowance of depreciation claimed on purchase of software under Section 40(a)(i)/(ia) of the Income-tax Act, 1961 ('the Act'). (Covered by the decision of the Hon'ble Karnataka High Court in PCIT- 7 v. Tally Solutions (P.) Ltd.) (Reported in [2021] 123 taxmann.com 21) Ground Nos. 3-6 Ground Nos. 3-6 Ground Nos. 3-6 Ground Nos. 3-5   Interest under Section 234A of the Act. (Return of income filed within time stipulated) - - - Ground No. 6   Interest....

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....bmitted that assessee is engaged in the business of development and sale of software project licenses, software maintenance as the profile of the assessee in the TP study captures itself to be a captive service provider and all the research and development carried out by the assessee are owned by the AE. The Ld.AR submitted that assessee had purchased software which was a "copyrighted article", and therefore it was not liable to deduct TDS. She submitted that the Ld.CIT(A) categorically recorded in para 4.11.2 that identical payments made by assessee during Assessment Year 2009-10 was allowed by the first appellate authority by relying on the decisions of this Tribunal in case of SKOL Breweries Ltd. vs. ACIT reported in (2013) 29 taxmann.com 111, SMS Demag Pvt. Ltd. vs. DCIT reported in (2010) 38 SOT 496 and held that provisions of section 40(a)(i)/(ia) referred to outgoing expenditure and not capital expenditure and hence depreciation cannot be disallowed. 6.1 It is further recorded by the Ld.CIT(A) that in case of SMS Demag Pvt. Ltd. vs. DCIT (supra), Hon'ble Delhi Tribunal has held that provisions of section 40(a)(i)/(ia) were not applicable on the purchases of software. 6....

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....een considered and found to be not in accordance with the provisions of the Income-tax Act in view of the following reasons:- i. Section 40 of the Income-tax Act is finding place in chapter IV of Income-tax Act, i.e., provisions with regard to "Computation of Business Income". As such, section 40 can be invoked in respect of any disallowances to be made while computing the business income of the assessee. ii. It is pertinent to note that the substantive provision of section 40 starts with "notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head 'profits & gains of business & profession' ". As such, the provisions of section 40 are applicable in respect of section 30 to 38. iii. As per section 40, certain amounts on which TDS has not been effected shall not be deducted in computing the income under the head 'profits & gains of business & profession'. As such, certain amounts which shall be deducted by virtue of section 30 to 38 while computing income under the head 'profits & gains of business & profession', shall be denied deduction....

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....ght in respect of any of the rights or interest as per any rights, as mentioned in section 14(a) and 14(b) of the Copyright Act. 10. We also note that the Ld.CIT(A) relied on the decision of Hon'ble Karnataka High Court in case of CIT vs.IBM reported in (2014) 43 taxmann.com 470. We have perused the said decision and note that the facts of IBM are distinguishable. The Hon'ble Court was dealing with an issue wherein the revenue had challenged the view taken by Tribunal that amount utilised by IBM towards software projects are revenue expenditure. Hon'ble High Court upheld Tribunal's view, and has been reproduced by the Ld.CIT(A). In our opinion the decision of IBM does not have even an iota of similarity on the issue under consideration with respect to the present appeals. 11. In the present facts of the case the assessee capitalised the software as asset in the block of asset, it is eligible to claim deprecation u/s 32(1)(ii) of the IT Act. Even otherwise, as per Explanation 5 to section 32 of the Act, it is obligatory on the part of the Assessing Officer to allow the depreciation, whether the assessee claims or not. The Ld.AR also contended that even otherwise, no income acc....

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....on 2 to clause (vii) of sub-section (1) of section 9;" 13. Under section 40(a)( i) any interest (not being interest on loan issued for public before 1/4/1938), royalty fee for technical services or sum chargeable under this Act which is payable outside India or inside India to a non-resident not being a company or to a foreign company on which tax is deductible at source and such tax has not been deducted or, after deduction, has not been paid during the previous year or in the subsequent before the expiry of the time prescribed under sub-section (1) of section 200 shall not be allowed as deduction while computing the income chargeable under the head "Profit and gains of business or profession". 13.1 There is a difference between the expenditure and other kind of deduction. The other kind of deduction which includes any loss incidental to carrying on the business, bad debts etc., which are deductible items itself not because an expenditure was laid out and consequentially any sum has gone out; on the contrary the expenditure results a certain sums payable and goes out of the business of the assessee. Thus, in our view, section 40 refers to the outgoing amount chargeable under....

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....hich has been capitalized and no amount was claimed as revenue expenditure, no disallowance under Section 40(a)(i) and (ia) of the Act would be made. It is also pertinent to note that depreciation is a statutory deduction available to the assessee on a asset, which is wholly or partly owned by the assessee and used for business or profession. The depreciation is an allowance and not an expenditure, loss or trading liability. The Commissioner of Income Tax (Appeals) has held that the payment has been made by the assessee for an outright purchase of Intellectual Property Rights and not towards royalty and therefore, the provision of Section 40(a)(ia) of the Act is not attracted in respect of a claim for depreciation. The aforesaid finding has rightly been affirmed by the tribunal. The findings recorded by the Commissioner of Income Tax (Appeals) as well as the tribunal cannot be termed as perverse. In view of preceding analysis, the substantial question of law framed by a bench of this court is answered against the revenue and in favour of the assessee." 17. We note that identical is the situation in the present case of assessee, wherein, provisions of section 9(1)(vi) Ex....