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M/s. Kawasaki Microelectronics Versus Dy. Director of Income Tax, (International Taxation) Circle 1 (1) , Bangalore

2015 (9) TMI 9 - ITAT BANGALORE

Disallowance of depreciation by invoking the provisions of section 40(a)(i) in respect of the payments made for purchase of software and capitalized by the assessee - Held that:- Once the assessee has capitalized the payment in question though the assessee has not deducted the tax at source on such payment, Section 40(a)(i) cannot be invoked for disallowance of depreciation. Accordingly, we set aside the orders of the authorities below and the addition made by the Assessing Officer is deleted. S .....

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ort the Act ) in pursuant to the directions of the Dispute Resolution Panel (DRP) dt.22.9.2010 passed under Section 144C(5) of the Act for Assessment Year 2007-08. 2. The assessee has raised the following grounds :- 1. The order of the learned AO and direction of the Hon ble DRP are based on incorrect interpretation of law and therefore are bad in law. 2. Based on directions of DRP, the learned AO erred in assessing the total income at ₹ 1,029,574/- as against returned loss of ₹ 718. .....

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ards purchase of software, tax depreciation claimed on computer software amounting to ₹ 1,747.680 is not allowable as a deduction under section 40(a)(i) of the Act. 5. The learned AO has erred in law by not considering that even if the tax depreciation is disallowed resulting in an income, Kawasaki India, being a unit registered under the Software Technology Parks of India (STPI) Scheme and having satisfied the conditions prescribed under section 10A of the Act, is eligible to claim deduct .....

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g Officer found that the assessee made the payment of ₹ 49,42,300 for purchase of software from Cadence Systems Ireland Limited (in short Cadence ). The software so purchased has been capitalized by the assessee under the block of computer and depreciation was claimed by the assessee. The Assessing Officer further noted that the assessee has not deducted the tax at source while making payment to Cadence and accordingly asked the assessee as to why the payment should not be disallowed under .....

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ty is chargeable under the Act and therefore covered under Section 40(a)(i) of the Act. Accordingly, the Assessing Officer proposed to disallow the depreciation of ₹ 17,49,680 claimed by the assessee in respect of the software purchased which was capitalized. The assessee raised the objection against the depreciation proposed to be disallowed by the Assessing Officer before the DRP, but could not succeed. 4. Before us, the learned Authorised Representative of the assessee has submitted tha .....

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T 142 ITD 49 (Mum) as well as the decision of the Delhi Bench of ITAT in the case of SMS Demang (P.) Ltd. V DCIT (2010) 38 SOT 496. The learned Authorised Representative has contended that the issue of disallowance of depreciation by applying the provisions of section 40(a)(i) of the Act is covered in favour of the assessee by the above said decisions of the Tribunal. 5. On the other hand, the learned Departmental Representative has submitted that there is no dispute that the assessee has made t .....

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ation. The learned Departmental Representative has contended that there is an intricable link between the provisions of sections 40, 195 & 201 of the Act. Once the assessee has failed to comply with the provisions of section 195, the provisions of section 40(a)(i) of the Act are applicable. Has relied on the orders of the authorities below. 6. We have considered the rival submissions as well as relevant the material on record. The issue before us is limited only with respect to the disallowa .....

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uction as per the section 32 of the Act can be disallowed by invoking the provisions of section 40(a)(i) of the Act. At the outset, it is to be noted that on the similar set of facts an identical issue has been dealt by the ITAT, Mumbai Bench in the case of SKOL Breweries Ltd. (supra), wherein it was held in paras 16.1 to 16.4 as under :- 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; bu .....

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echnical 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 wit .....

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nterest 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,- outside India; or 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 und .....

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tion 2 to clause (vi) of sub-section (1) of section 9; 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 deducti .....

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s 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. .....

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ction 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 Court in the case of Mark Auto Industries Ltd. (supra) in pars 5 & 6 as under: 5. Ad .....

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unt 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 faul .....

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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. 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 .....

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cide this issue in favour of the assessee and against the revenue. 7. As it is clear from the above decision that the Tribunal has discussed and analysed the provisions of section 40(a)(i) in detail in the context of disallowance of depreciation. The learned D.R. has submitted that once the assessee has violated the provisions of section 195, then, even the expenditure is capitalized by the assessee, the provisions of section 40(a)(i) are applicable for disallowance of depreciation on such capit .....

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