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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SHRI GEORGE GEORGE K.
Per Chandra Poojari, Accountant Member Originally this appeal came up for consideration before the Tribunal. The Tribunal recorded the facts and decided the issue as follows vide order dated 29.6.2015:-
“02. Appeal of the Revenue is taken up first for disposal. Grievance raised by the Revenue is that depreciation on computers disallowed by the AO relying on Section 40(a)(i) of the Income-tax Act, 1961 (`the Act' in short), was allowed by the CIT (A).
3. Facts apropos are that the assessee had purchased software worth Rs.4,05,38,250/- from one Cadence Systems, Ireland. Software so purchased was capitalised by the assessee under the IT(IT)A No.1221/Bang/2014 Page 2 of 10 block "Computers" and depreciation was claimed. Since payments 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.
4. 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 decision of ITAT Mumbai Bench in the case of SKOL Breweries Ltd [(2013) 29 taxmann.com 111). According to the CIT (A), Section 40(a)(i) of the Act, would not apply to a depreciation claim.
5. Now before us, Ld. DR strongly assailing the order of CIT (A) submitted that Section 40(a)(i) of the Act started with a non- obstante clause and covered sections 30 to 38 of the Act. As per the Ld. DR, depreciation claim is covered u/s.32 of the Act, and, therefore, fell under the section 40(a)(i) of the Act. Hence according to her, assessee having failed to deduct tax at source on the payments effected, though such payments were capitalised, depreciation claimed could also not be allowed.
6. Per contra, Ld. AR once again relied on the decision of Mumbai ITAT in SKOL Breweries Ltd. (supra).
7. We have perused the orders and heard the rival contentions. In the case of SKOL Breweries Ltd. (supra), to which one of us was a party, similar issue had come up where disallowance u/s.40(a)(i) of the Act was made on a claim of IT(IT)A No.1221/Bang/2014 Page 3 of 10 depreciation. At paras 16 to 16.4 of its order dt.18.01.2013, it was held as under by the coordinate bench : "16. We have considered the rival submissions and carefully perused the relevant material on record. The Assessing Officer has disallowed the claim of depreciation on the ground that the assessee has not withheld the tax while remitting the amount despite the ruling of AAR in the case of Foster's Australia Ltd reported 302 ITR 289 whereby it has been held that the said amount is taxable as income in India. The question of taxability of the said payment in the hand of Foster's Australia Ltd is subjudice before the Hon'ble Delhi High Court in the writ petition filed by Foster 's Australia Ltd challenging the order of the AAR. Since the operation of the order of the AAR has been stayed by the Hon'ble High Court till the disposal of the matter; therefore, it is not appropriate to give any finding or expression on the question of taxability of the said amount in India when the issue is sub-judice before the Hon'ble High Court. 16.1 As regards the alternative plea of the ld Sr counsel for the assessee that since the assessee has not claimed the entire amount as revenue expenditure; but has capitalized the same and claimed only depreciation u/s 32(1)0; therefore, provisions of sec. 40(a)((i) shall not apply. Section 40(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 t 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 IT(IT)A No.1221/Bang/2014 Page 4 of 10 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 deducted in computing the income chargeable under the head "Profits and gains of business or profession",— (a) in the case of any assessee— [(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,— (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, 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 during the previous year, or in the subsequent year before the expiry of the time prescribed under subsection (1) of section 200 : Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Explanation.—For the purposes of this sub-clause,---- - (A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; IT(IT)A No.1221/Bang/2014 Page 5 of 10 (B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub- section (1) of section 9; 16.2 It is manifest from the plain reading of provisions of sec. 40(a)(i) that an amount payable towards interest, royalty, fee for technical services or other sums chargeable under this Act shall not be deducted while computing the income under the head profit and gain of business or profession on which tax is deductible at source; but such tax has not been deducted. The expression 'amount payable' which is otherwise an allowable deduction refers to the expenditure incurred for the purpose of business of the assessee and therefore, the said expenditure is a deductible claim. Thus, section 40 refers to the outgoing amount chargeable under this Act and subject to TDS under Chapter XVII-B. 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. 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 the Hon'ble Punjab & Haryana High Corut in the case of IT(IT)A No.1221/Bang/2014 Page 6 of 10 M/s Mark Auto Industries Ltd (supra) in pars 5 & 6 as under: "5. Adverting to questions (ii) and (iii), the issue which arises for consideration is whether the assessee could be disallowed claim for depreciation under Section 40(a)(i) of the Act on the ground that the payments made for technical know-how which had been capitalized, no tax deduction at source has been made thereon. The Tribunal while accepting the plea of the assessee, in para 3, had noticed as under: "3. Ground no.4 is against deletion of an addition of Rs6, 88,1751-made by the AO on account of deduction of depreciation on technical know-how as the assessee failed to deduct tax in accordance with the provision contained in section 40(a) (i). The finding of the learned CIT(A) was that the assessee had incurred, expenditure by way of technical know- how, which was capitalized amount as made in the return of income. Since the assessee had not claimed deduction for the amount paid, the provisions contained in section 40(a) (i) were not attracted. The learned DR could not find any fault with this direction of the CIT(A) also although she referred to page 4 of the assessment order, where it was mentioned that the tax deducted in respect of the payment was made over to the Government in the subsequent year and, therefore, depreciation could not be deducted on the capital expenditure incurred by the assessee. In reply, the learned counsel pointed out that the expenditure by way of technical knw-how was capitalized and it was not claimed as revenue expenditure. Therefore, there was also no reason to disallow depreciation on such capitalized amount as the aforesaid provision does not deal with deduction of depreciation. Having considered arguments from both the sides, we are of the view that there is no error in the order of the learned CIT(A) which requires correction from us. Thus, this ground is also dismissed."
IT(IT)A No.1221/Bang/2014 Page 7 of 10
6. Learned counsel for the revenue was unable to substantiate that in the absence of any requirement of law for making deduction of tax out of the expenditure on technical know how which was capitalized and no amount was claimed as revenue expenditure, the deduction could be disallowed under Section 40(a)(i) of the Act. Accordingly, no infirmity could be found in the order passed by the Tribunal which may warrant interference 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 order of Tribunal, the department went in appeal before the Hon’ble High Court of Karnataka. The Hon’ble High Court in by judgment dated 09.12.2020 remanded the matter back to the Tribunal by holding as follows:-
IT(IT)A No.1221/Bang/2014 Page 8 of 10 “4. We have considered the rival submissions made on both the sides and have perused the record. The tribunal has not taken into account the decision rendered by M/S. WIPRO LTD. VS. DCIT, 383 ITR 179 (KAR) and without assigning any reasons has placed reliance on decision of the coordinate bench. Therefore, in peculiar facts of the case, the impugned order passed by the tribunal is quashed and the matter is remitted to tribunal for decision afresh and in accordance with law in the light of rival contentions made by the parties. Therefore, it is not necessary for us to answer the substantial question of law. ”
Later, there was a R.P. No.56 of 2021 arising out of of 2016 wherein the Hon’ble High Court by order dated 26.03.2021 observed as follows:-
2. We have considered the submissions of the review petitioner. From perusal of the judgment dated 09.12.2020, it is clear that we have not expressed any opinion as to whether or not the decision of M/s. WIPRO LTD., supra apply to the case of the assessee. Therefore, it is clarified that it would be open for the assessee to contend before the Tribunal that the aforesaid decision does not apply to the case of the assessee.
Accordingly, the appeal was listed for hearing before the Tribunal. The issue raised by the revenue in this appeal is that the CIT(Appeals) was not justified in allowing depreciation on computers disallowed by the AO by invoking the provisions of section 40(a)(ia) of the Income-tax Act, 1961 [the Act].
We have heard both the parties and perused the material on record. The ld. counsel for the assessee while supporting the order of the CIT(Appeals) submitted that the issue is covered by the judgment of the Hon’ble High Court of Karnataka in PCIT v. Tally Solutions Pvt. Ltd. [2021] 123 taxmann.com 21 wherein it was held as under:-
Thus, from close scrutiny of section 40(a)(i), it is axiomatic that an amount payable towards interest, royalty, fee for technical IT(IT)A No.1221/Bang/2014 Page 9 of 10 services or other sums chargeable under this Act shall not be deducted while computing the income under the head profit and gain of business or profession on which tax is deductible at source; but such tax has not been deducted. The expression 'amount payable' which is otherwise an allowable deduction refers to the expenditure incurred for the purpose of business of the assessee and, therefore, the said expenditure is a deductible claim. Thus, section 40 refers to the outgoing amount chargeable under this Act and subject to TDS under Chapter XVII-B and the deduction under section 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 depreciation. Section 40(a)(i) and (ia) provides for disallowance only in respect of expenditure, which is revenue in nature, therefore, the provision does not apply to a case of the assessee whose claim is for depreciation, which is not in the nature of expenditure but an allowance. The depreciation is not an outgoing expenditure and therefore, provisions of section 40(a)(i) and (ia) are not applicable. In the absence of any requirement of law for making deduction of tax out of expenditure, which has been capitalized and no amount was claimed as revenue expenditure, no disallowance under section 40(a)(i) and (ia) 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 (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)(i) 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 (Appeals) as well as the Tribunal cannot be termed as perverse. [Para 10].
Being so, applying the above ratio laid down by the Hon’ble jurisdictional High Court, the issue is decided in favour of the assessee and against the department.
IT(IT)A No.1221/Bang/2014 Page 10 of 10
In the result, the appeal by the revenue is dismissed.
Pronounced in the open court on this 05th day of August, 2021.