The Income Tax Appellate Tribunal (ITAT), Bangalore Bench while directing the AO to delete the disallowance held that disallowance of depreciation on Software can not be made under section 40(a)(ia) of the Income Tax Act.
The assessee, Wipro Pvt. Ltd. purchased software locally as well as from abroad for its own use. The assessee capitalized the value of software and accordingly, claimed depreciation on the software at the rate of 60%, as applicable to computers.
The AO noticed that the assessee has not deducted tax at source from the payments made for purchase of software. The A.O. took the view that the depreciation claimed by the assessee on the value of software is liable to be disallowed under section 40(a)(ia) of the Act, as the assessee did not deduct tax at source from the payments made for purchase of software.
The A.O. also held that the disallowance so made under section 40(a)(ia) of the Act is not eligible for deduction under section 10A/10B/10AA of the Act on the reasoning that the said disallowance is notional in nature and it does not generate any revenue.
The DRP confirmed the order passed by the A.O. However, it directed the AO to allow depreciation on the software already capitalized.
Accordingly, the AO made the disallowance of depreciation under section 40(a)(ia) of the Act.
The issue raised in this case pertains to disallowance of depreciation claimed by the assessee on the amount of software capitalized by it, by invoking provisions of section 40(a)(ia) of the Act for non-deduction of tax at source from the payments made for purchase of software.
The assessee is contending that the A.O. was not justified in disallowing the depreciation claimed on software by invoking the provisions of section 40(a)(ia) of the Act and also in not enhancing the quantum of deduction allowed under section 10A/10AA/10B of the Act by the amount so disallowed, since the profits eligible for deduction would go up by the said disallowance.
The two-member bench of B.R. Baskaran and Pawan Kumar Gadale noted that various benches of Tribunal are consistently holding that the depreciation is a statutory allowance and hence it cannot be considered as expenditure.
The bench further held that the disallowance of depreciation cannot be made under section 40(a)(ia) of the Act.
Therefore, the ITAT directed the AO to delete the disallowance on depreciation made under section 40(a)(ia) of the Act.
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