3. Principal CIT vs. Tally Solutions Pvt. Ltd. [2021] 430 ITR 527 (Karn) Date of order: 16th December, 2020 A.Y.: 2009-10
Business expenditure – Disallowance u/s 40(a)(i) – Depreciation – Scope of section 40(a)(i) – Depreciation is not an expenditure and is not covered by section 40(a)(i)
The assessee was engaged in the business of software development and sale of software product licences, software maintenance and training in software. For the A.Y. 2009-10, the A.O. disallowed a sum of Rs. 6,70,94,074 in respect of depreciation on intellectual property rights u/s 40(a)(i).
The Commissioner (Appeals) held that there being an irrevocable and unconditional sale of intellectual property and the transfer being absolute, it was an outright purchase of a capital asset and, therefore, section 40(a)(i) could not be invoked. This was confirmed by the Tribunal.
On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:
‘i) From a close scrutiny of section 40(a)(i) it is axiomatic that an amount payable towards interest, royalty, fee for technical services or other sums chargeable under the Act on which tax is deductible at source shall not be deducted while computing the income under the head profits and gains of business or profession where such tax has not been deducted. The expression “amount payable” which is otherwise an allowable deduction refers to expenditure incurred for the purpose of business of the assessee and, therefore, the expenditure is a deductible claim. Thus, section 40 refers to the outgoing amount chargeable under the Act and subject to tax deduction at source under Chapter XVII-B. The deduction u/s 32 is not in respect of an amount paid or payable which is subjected to tax deduction at source, but it is a statutory deduction on an asset which is otherwise eligible for deduction of depreciation.
ii) Section 40(a)(i) and (ia) provides for disallowance only in respect of expenditure, which is revenue in nature, and 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. Depreciation is not an outgoing expenditure and therefore the provisions of section 40(a)(i) and (ia) are not applicable. Depreciation is a statutory deduction available to the assessee on an asset, which is wholly or partly owned by the assessee and used for business or profession.
iii) The Commissioner (Appeals) had held that the payment had been made by the assessee for an outright purchase of intellectual property rights and not towards royalty. This finding had rightly been affirmed by the Tribunal. The findings recorded by the Commissioner (Appeals) as well as the Tribunal could not be termed perverse. Depreciation was allowable. In any case, the amount could not be disallowed u/s 40(a)(i).’
