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M/s. Wintac Limited Versus Deputy Commissioner of Income-Tax, Central Circle 12 (5) , Bengaluru

Disallowance of depreciation invoking of section 40(a)(ia) in respect of ERP system software purchased by the assessee and capitalized the same - Held that:- Once the assessee has capitalized the payment in question, then even the assessee has not deducted tax at source on such payment, the provisions of section 40(ia) cannot be invoked for disallowance of the claim of depreciation. Accordingly, we set aside the orders of the authorities below and allow the claim of the assessee. - ITA No.834/Ba .....

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of ₹ 10,35,657 on computer software is against law, facts of the case and weight of evidence. 2. The CIT(A) has erred in sustaining disallowance of depreciation of ₹ 10,35,657 on the ground that amount paid to obtain computer software has been held by the jurisdictional High Court as in the nature of royalty and hence cannot be added to block of assets of computer. 3. The learned CIT(A) has erred in not following the decisions of the jurisdictional High Court in ITA No 507/2002 - CI .....

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s case. 5. The learned CIT (A) erred in holding that appellant was obliged to deduct tax at source in the previous Year 2007-08 and 2008-09 on the payment made to the vendor for acquisition of license, increase in users and extension of license when such payment was held not to be royalty by the jurisdictional tribunal. 6. The learned CIT (A) erred in concluding that amount in the nature of royalty cannot be capitalised. 7. The CIT (A) has erred in including professional fees of ₹ 7,17,744 .....

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e same. The assessee has incurred an expenditure of ₹ 34,52,190/- on ERP system. The license of the software named as Navision is owned by Microsoft Corporation. This total expenditure of ₹ 34,52,190/- comprising of a sum of ₹ 21,52,826/- towards the cost of license and the balance amount was towards the cost of extension of license for three years as well as for implementation expenditure incurred by the assessee was capitalized and claimed depreciation. The AO held that this .....

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and claimed only depreciation under section 32 of the Act, then the provisions of section 40(a)(ia) cannot be invoked for disallowance of the claim of depreciation. He has relied upon the decision dated 26.06.2015 in the case of M/s. Kavasaki Microelectronics Inc., DDIT (International Taxation) in IT(TP) A No. 1512/2010. On the hand, the learned DR relied upon the orders of the authorities below. 4. Having considered the rival submissions as well as relevant material on record, at the outset we .....

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resident for purchase of software and the said payment has been capitalized by the assessee i n the block of computer asset. Once the assessee capitalized the payment and has not claimed the same as an expenditure against the profits of the business of the assessee, then, the question arises whether the depreciation which is a statutory deduction 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 .....

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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&quo .....

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isions 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 ch .....

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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,- royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; "fees for technical services" shall have the same meaning as in .....

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wable 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 .....

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igible 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 .....

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see 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 ₹ 6,88,1751- made by the AO on account of deduction of depreciation on technical know-how as the assessee failed to deduct tax .....

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er, 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 know-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 provis .....

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iture, 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. 7. As it is .....

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cause 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 sour .....

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