Disallowance of depreciation claim on intellectual property rights on account of non deduction of TDS u/s 40(a)(ia) is not sustainable

Disallowance of depreciation claim on purchase of Intellectual Property Rights due to non-deduction of TDS u/s 40(a)(ia) not sustainable

Question before the Hon’ble Court:

Whether on the facts and in circumstances of the case, the Tribunal was right in deleting the disallowances made u/s 40(a)(ia) in respect of depreciation on intellectual property rights as the assessee had failed to deduct TDS on payments made in respect of purchase of software as required u/s 195 of the Act?

Facts of the case: -

The assessee is engaged in business of software development and sale thereof and maintenance & training in software. The learned A.O. concluded the assessment by making certain additions and disallowed a sum of Rs. 6,70,94,074/- in respect of depreciation on the Intellectual Property Rights on account of non-deduction of TDS on purchase of software.
The assessee filed an appeal before CIT (Appeals) who allowed the claim of the assessee as the purchase of software was an outright purchase of capital asset and therefore, section 40(a)(ia) of the Act could not be invoked in case of a claim for depreciation. On further appeal by Revenue, the Tribunal upheld the decision of CIT(A). The Revenue further preferred an appeal before the Hon’ble High Court.

Findings & Judgement of the Hon’ble Court:

From the close scrutiny of Section 40(a)(ia) of the Act, it is axiomatic 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 “Profits and Gains 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. 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 depreciation.

Section 40(a)(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)(ia) of the Act are not applicable. In the absence of any requirement of law for making deduction of tax out of expenditure, which has been capitalized, no disallowance u/s 40(a)(ia) would be made.

It is important t note that depreciation is a statutory deduction available to the assessee on an asset owned wholly or partly and used for the business or profession. The depreciation is an allowance and not an expenditure, loss or trading liability.

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.