ITAT: Depreciation Disallowance on Purchasing Software Can’t be Caused By Requesting Sec 40(a)(i)

It has been held by The Income Tax Appellate Tribunal, Bangalore Bench that the disallowance of the item ‘depreciation on software purchase’ cannot be done by invoking section 40(a)(i) of the Income Tax Act 1961.

Here, in this case, the assessee, ‘Messrs UKN Properties Private Limited’ is in the Real Estate Industry and involved in the development of Real Estate. However, the assessing officer of the Income Tax Department Here we have provided complete notifications related to the Income Tax and TDS provisions as per the official government laws. Read more came to know the fact that the assessee has paid for the buying of software without deducting the tax at the source. He further noticed that the assessee has done the capitalisation of the value of software and consequentially claimed the depreciation amounting to Rs 3,72,465. Given the fact that the assessee has not deducted the tax at the source from the payment that has been made for the purchase of the software, the assessing officer opined that the depreciation which has been claimed on the software is not allowable, as per the provisions of section 40(a)(ia) of the act. Consequentially, he did not allow the claim of depreciation u/s 40(a)(ia) of the aforesaid act.

The CIT (A) was of the opinion that the payment that has been made for buying of software falls within the domain of royalty as per the decision that has been rendered by the honourable Karnataka High Court in the case of Samsung Electronics Company Limited. In consequence, the assessing officer was directed to treat the software buying as the revenue expenditure within the domain of royalty. It is given that the assessee has not deducted the tax at source from the payment that is made for buying of the software, it was directed by CIT(A) to the assessing officer to not allow the entire purchase cost of the software as per section 40(a)(ia) of the Act.

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The Coram attended by the Accountant Member BR Baskaran and the vice-president NV Vasudevan while considering the decision of coordinate bench that was rendered in the case of ‘Kawasaki Microelectronics Inc. – India branch Vs. DDIT’ ultimately held that the provisions of section 40(a)(i) could not be invoked for not allowing depreciation on the buying of the software.