TMI Blog2015 (9) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... ct ) 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 ₹ 718.133 computed by the appellant. Grounds of appeal; 3. The learned AO has erred in law by holding that the payment made to Cadence Systems Ireland Ltd. ( Cadence ) for purchase of software (software was capitalized in the assessee s accounts), amounts to royalty under the Act and the India- Ireland Tax Treaty and therefore, tax was required to be deducted at source on the said payment. 4. The learned AO has erred in law by holding that since tax was not deducted at source from the payment made towards 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the provisions of section 40(a)(i) cannot be invoked for disallowance of the depreciation on the capitalized amount. It is not the case of the claim of any expenditure by the assessee but the expenditure which has already capitalized and consequently the provisions of section 40(a)(i) has no role to play. In support of his contention, he has relied upon the decision of Mumbai Bench, ITAT in the case of SKOL Breweries Ltd. Vs. ACIT 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 the payment for purchase of software which is in the nature of royalty and therefore the provisions of section 195 are applicable on such payment for deduction of tax at source. He has further submitted that it is also not in dispute that the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ,- 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,- 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 Court in the case of 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. Grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 capitalized expenditure. We do not agree with the contention of the learned D.R, because a remedy for violation of provisions of section 195 is available with the Assessing Officer under Section 201 201A of the Act. The provisions of section 40(a) is only an additional measure to enforce the compliance of Chapter XVIIB of the Act, by disallowing an expenditure which is otherwise allowable under the provisions of the Act. Therefore, the question of disallowance under Section 40(a) arises only when an expenditure is claimed by the assessee without deducting the tax at source as per the provisions of Chapter-XVIIB of the Act, 1961. In the case on hand, when the assessee has not claimed, the said payment as an expenditure then the question of disallowance under Section 40(a)(i) does not arise. The only remedy which might have been resorted to by the Assessing Officer is the action under Section 201 and 201A of the Act. A similar view has been taken by the Delhi Bench of the Tribunal in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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