M/s UKN Properties Pvt. Ltd., Bangalore V. Deputy Commissioner of Income Tax, Bangalore

ITA 2012/BANG/2016

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 1718 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-07-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 24-06-2021
• Assessment Year: 2011-2012
• Appeal Filed On: 21-11-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Opportunity of being heard; Earning of tax free income; Retrospective amendment; Cost of acquisition; Non-deduction of tax; Bad and doubtful debts; Revenue expenditure; Capital expenditure; TDS; Rule 8D; Set aside
• Section: 14A; 40(a)(ia); 195; 201; 194J; 13; 32

Judgement Text

ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER ITA NO.2012/BANG/2016 ASSESSMENT YEAR: 2011-12 M/S. UKN PROPERTIES PVT. LTD. NO.12, ST. PATRICKS ARCADE RESIDENCY ROAD, RICHMOND TOWN BANGALORE 560 025. PAN NO : AAACU3584A VS. DCIT CIRCLE-7(1)(1) BANGALORE APPELLANT RESPONDENT APPELLANT BY : SHRI NARENDRA SHARMA, A.R. RESPONDENT BY : SHRI KANNAN NARAYANAN, D.R. DATE OF HEARING : 24.06.2021 DATE OF PRONOUNCEMENT : 02.07.2021 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINS T THE ORDER DATED 31.8.2016 PASSED BY LD. CIT(A)-7, BENGALURU A ND IT RELATES TO THE ASSESSMENT YEAR 2011-12. 2. THE GROUNDS URGED BY THE ASSESSEE GIVE RISE TO T HE FOLLOWING ISSUES:- A) DISALLOWANCE MADE U/S 14A OF THE ACT. B) DISALLOWANCE MADE U/S 40(A)(IA) OF THE ACT C) ADDITION OF RENTAL INCOME DUE TO THE DIFFERENCE FOUND OUT IN FORM NO.26-AS ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE PAGE 2 OF 17 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DEVEL OPMENT OF REAL ESTATE. 4. THE FIRST ISSUE URGED BY THE ASSESSEE RELATES TO DISALLOWANCE U/S 14A OF THE ACT. THE A.O. NOTICED THAT THE ASSE SSEE HAS RECEIVED SHARE INCOME FROM PARTNERSHIP FIRM TO THE EXTENT OF RS.1.63 CRORES AND CLAIMED THE SUM AS EXEMPT U/S 10(2A) OF THE ACT . THE ASSESSEE DID NOT MAKE ANY DISALLOWANCE U/S 14A OF T HE ACT. ACCORDINGLY, THE A.O. COMPUTED DISALLOWANCE BY APPL YING THE PROVISIONS OF RULE 8D OF THE I.T. RULES. THE A.O. DISALLOWED A SUM OF RS.13.56 LAKHS OUT OF INTEREST EXPENDITURE UNDER RULE 8D(2)(II) OF THE ACT AND ALSO DISALLOWED A SUM OF RS.6.91 LAKHS OUT OF GENERAL EXPENSES UNDER RULE 8D(2)(III) OF THE ACT. THUS, T HE AGGREGATE DISALLOWANCE MADE BY THE A.O. U/S 14A OF THE ACT WA S RS.20.47 LAKHS. THE LD. CIT(A) ALSO CONFIRMED THE SAME. 5. THE LD. A.R. SUBMITTED THAT OWN FUNDS AND INTERE ST FREE FUNDS AVAILABLE WITH THE ASSESSEE DURING THE YEAR U NDER CONSIDERATION HAS EXCEEDED THE VALUE OF INVESTMENTS MADE IN THE PARTNERSHIP FIRM AND HENCE NO DISALLOWANCE OUT OF I NTEREST EXPENDITURE UNDER RULE 8D (2)(II) IS WARRANTED, AS PER THE DECISION RENDERED BY HONBLE JURISDICTIONAL KARNATAKA HIGH C OURT IN THE CASE OF CIT VS. MICRO LABS LTD. 383 ITR 490. WITH REGARD TO THE DISALLOWANCE OUT OF GENERAL EXPENSES, THE LD. A.R. SUBMITTED THAT THE ASSESSEE HAS RECEIVED SHARE INCOME FROM ONE PAR TNERSHIP FIRM ONLY AND THE ASSESSEE HAS NOT INCURRED ANY EXPENDIT URE FOR EARNING SHARE INCOME. ACCORDINGLY, HE SUBMITTED THAT NO DI SALLOWANCE UNDER RULE 8D(2)(III) IS CALLED FOR. IN THE ALTERN ATIVE THE LD. A.R. SUBMITTED THAT THE A.O. SHOULD HAVE CONSIDERED ONLY THOSE INVESTMENTS WHICH HAVE YIELDED EXEMPT INCOME FOR TH E PURPOSE OF COMPUTING AVERAGE VALUE OF INVESTMENTS, WHILE COMPU TING DISALLOWANCE U/R 8D(2)(III) OF I T RULES. FOR THIS PROPOSITION THE LD. ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE PAGE 3 OF 17 A.R. PLACED HIS RELIANCE ON THE DECISION RENDERED B Y SPECIAL BENCH OF TRIBUNAL IN THE CASE OF ACIT VS. VIREET INVESTME NTS PVT. LTD. (50 ITR (TRIB.) 313). 6. THE LD. D.R., ON THE CONTRARY, SUBMITTED THAT TH E DISALLOWANCE U/S 14A OF THE ACT IS CALLED FOR, SINCE THE ASSESSE E HAS EARNED EXEMPT INCOME. 7. WE HEARD RIVAL CONTENTIONS ON THIS ISSUE AND PER USED THE RECORD. THE ASSESSEE IS CONTENDING THAT IT IS HAVI NG OWN FUNDS AND INTEREST FREE FUNDS EXCEEDING THE VALUE OF INVESTME NTS AND HENCE THE DECISION RENDERED BY HONBLE JURISDICTIONAL HIG H COURT IN THE CASE OF MICRO LABS LTD. (SUPRA) IS APPLICABLE. THE ASSESSEE IS ALSO PLACING RELIANCE ON THE DECISION RENDERED BY SPECIA L BENCH OF TRIBUNAL IN THE CASE OF VIREET INVESTMENTS PVT. LTD . (SUPRA). THE ABOVE SAID CONTENTIONS URGED BEFORE US REQUIRE VERI FICATION OF FACTS PREVAILING IN THIS CASE. ACCORDINGLY, WE ARE OF TH E VIEW THAT THIS ISSUE REQUIRES FRESH EXAMINATION AT THE END OF THE A.O. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD. C IT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE A.O. FOR EXAMINING IT AFRESH BY FOLLOWING THE DECISION RENDERED IN THE CA SE OF MICRO LABS LTD. (SUPRA) AND VIREET INVESTMENTS PVT. LTD. (SUPR A). 8. THE NEXT ISSUE RELATES TO DISALLOWANCE MADE U/S 40(A)(IA) OF THE ACT. THE A.O. NOTICED THAT THE ASSESSEE HAS MA DE PAYMENTS FOR PURCHASE OF SOFTWARE WITHOUT DEDUCTING TAX AT SOURC E. THE A.O. NOTICED THAT ASSESSEE HAS CAPITALIZED THE VALUE OF SOFTWARE AND ACCORDINGLY CLAIM DEPRECIATION OF RS.3,72,465/-. SI NCE THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE FROM THE PAYMENT MAD E FOR PURCHASE OF SOFTWARE, THE A.O. TOOK THE VIEW THAT T HE DEPRECIATION CLAIMED ON SOFTWARE IS NOT ALLOWABLE, AS PER PROVIS IONS OF SECTION 40(A)(IA) OF THE ACT. ACCORDINGLY, HE DISALLOWED T HE CLAIM OF ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE PAGE 4 OF 17 DEPRECIATION U/S 40(A)(IA) OF THE ACT. THE LD. CIT (A) TOOK THE VIEW THAT THE PAYMENT MADE FOR PURCHASE OF SOFTWARE IS I N THE NATURE OF ROYALTY AS PER THE DECISION RENDERED BY HONBLE KAR NATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS COMPANY LT D. (2011) 203 TAXMANN 477. ACCORDINGLY, HE DIRECTED THE A.O. TO TREAT THE SOFTWARE PURCHASES AS REVENUE EXPENDITURE IN THE NA TURE OF PAYMENT OF ROYALTY. SINCE THE ASSESSEE HAS NOT DED UCTED TAX AT SOURCE FROM THE PAYMENT MADE FOR PURCHASE OF SOFTWA RE, THE LD. CIT(A) DIRECTED THE A.O. TO DISALLOW ENTIRE PURCHAS E COST OF SOFTWARE U/S 40(A)(IA) OF THE ACT. 9. WE HEARD THE PARTIES ON THIS ISSUE AND PERUSED T HE RECORD. WE NOTICE THAT THE COORDINATE BENCH OF TRIBUNAL HAS HELD IN THE CASE OF DCIT VS. SANGEETA MOBILES PVT. LTD. (ITA NO.715/BANG/2017 DATED 15.6.2018) THAT THE PROVISIO NS OF SECTION 40(A)(I) OF THE ACT CANNOT BE INVOKED FOR MAKING DI SALLOWANCE OF DEPRECIATION. IN THIS REGARD, THE COORDINATE BENCH HAS FOLLOWED THE DECISION RENDERED BY BANGALORE BENCH OF TRIBUNAL IN THE CASE OF KAWASAKI MCRO ELECTRONICS INC. INDIA BRANCH VS. D DIT. (ITA NO.1512/BANG/2010 DATED 26.6.2015). FOR THE SAKE O F CONVENIENCE, WE EXTRACT BELOW THE DECISION RENDERED BY THE COORDINATE BENCH IN THE CASE OF SANGEETA MOBILES PV T. LTD. (SUPRA). 6.3.1 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JU DICIAL PRONOUNCEMENT CITED. ON AN APPRAISAL OF THE FACTS ON RECORD, IT I S NOT IN DISPUTE THAT THE ASSESSEE HAD EXPENDED AN AMOUNT OF RS.2,26,381 FOR ACQUIRING 'COMPUTERS AND SOFTWARES', WHICH WERE CAPITALIZED AND DEPRECIA TION @ 60% WAS CLAIMED THEREON. THE ASSESSING OFFICER PROCEEDED TO DISALLOW THE DEPRECIATION CLAIMED BY THE ASSESSEE BY INVOKING TH E PROVISIONS OF SECTION 40(A)(I) OF THE ACT IN RESPECT OF THE AFORESAID PAYMENTS MA DE FOR PURCHASE OF COMPUTER AND SOFTWARE WHICH WAS CAPITALIZED BY T HE ASSESSEE. WE FIND THAT THE SIMILAR ISSUE WAS CONSIDERED AND ADJUDICAT ED IN FAVOUR OF THE ASSESSEE AND AGAINST REVENUE BY A CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF KAWASAKI MICROELECTRONICS INC - INDIA BRANC H V. DDIT (IT), CIRCLE 1(1), BANGALORE IN ITS ORDER IT(IT)A NO.1512/BANG/2 010 DT.26.6.2015. IN THIS REGARD, AT PARAS 3 TO 8 OF ITS ORDER (SUPRA), THE CO-ORDINATE BENCH HAS HELD AS UNDER :- ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE PAGE 5 OF 17 ' 3. THE ONLY ISSUE RAISED FOR OUR CONSIDERATION AN D ADJUDICATION IS REGARDING DISALLOWANCE OF DEPRECIATION BY INVOKING THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT IN RESPECT OF THE PAYMENTS MADE FOR PURCHASE OF SOFTWARE AND CAPITALIZED BY THE ASSESSE E. THE ASSESSING OFFICER FOUND THAT THE ASSESSEE MADE THE PAYMENT OF RS.49,42,300 FOR PURCHASE OF SOFTWARE ITA NO.715/BANG/2017 FROM CADENCE SYSTEMS IRELAND LIMITED (IN SHORT 'CADENCE'). THE S OFTWARE SO PURCHASED HAS BEEN CAPITALIZED BY THE ASSESSEE UNDE R THE BLOCK OF COMPUTER AND DEPRECIATION WAS CLAIMED BY THE ASSESS EE. THE ASSESSING OFFICER FURTHER NOTED THAT THE ASSESSEE H AS NOT DEDUCTED THE TAX AT SOURCE WHILE MAKING PAYMENT TO CADENCE A ND ACCORDINGLY ASKED THE ASSESSEE AS TO WHY THE PAYMEN T SHOULD NOT BE DISALLOWED UNDER SECTION 40(A)(I) OF THE ACT. THE ASSESSEE OBJECTED TO THE PROPOSED DISALLOWANCE UNDER SECTION 40(A)(I) OF THE ACT. THE ASSESSING OFFICER DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE THAT THE DEPRECIATION CANNOT BE ALLOWED UNDER SECTION 40(A)(I) OF THE ACT. THE ASSESSING OFFICER HAS HELD THAT THE PAYMEN T WAS MADE BY THE ASSESSEE TO A NON-RESIDENT ON WHICH THE TDS IS TO BE DEDUCTED AT SOURCE BUT THE ASSESSEE HAS NOT DEDUCTED THE TAX NO R HAS BEEN PAID. THE PAYMENT WHICH WAS IN THE NATURE OF ROYALTY IS C HARGEABLE UNDER THE ACT AND THEREFORE COVERED UNDER SECTION 40(A)(I) OF THE ACT. ACCORDINGLY, THE ASSESSING OFFICER PROPOSED TO DISA LLOW THE DEPRECIATION OF RS.17,49,680 CLAIMED BY THE ASSESSE E IN RESPECT OF THE SOFTWARE PURCHASED WHICH WAS CAPITALIZED. THE A SSESSEE RAISED THE OBJECTION AGAINST THE DEPRECIATION PROPOSED TO BE DISALLOWED BY THE ASSESSING OFFICER BEFORE THE DRP, BUT COULD NOT SUCCEED. 4. BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT SINCE THE EXPENDITURE IS CAPITAL IZED BY THE ASSESSEE, THEREFORE, THE PROVISIONS OF SECTION 40(A)(I) CANNOT BE INVOKED FOR DISALLOWANCE OF THE DEPRECIATION ON THE CAPITALIZED AMOUNT. IT IS NOT THE CASE OF THE CLAIM OF ANY EXPE NDITURE BY THE ASSESSEE BUT THE EXPENDITURE WHICH HAS ALREADY CAPI TALIZED AND CONSEQUENTLY THE PROVISIONS OF SECTION 40(A)(I) HAS NO ROLE TO PLAY. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON TH E DECISION OF MUMBAI BENCH, ITAT IN THE CASE OF SKOL BREWERIES LT D. VS. ACIT 142 ITD 49 (MUM) AS WELL AS THE DECISION OF THE DEL HI BENCH OF ITAT IN THE CASE OF SMS DEMANG (P.) LTD. V DCIT (20 10) 38 SOT 496. THE LEARNED AUTHORISED REPRESENTATIVE HAS CONT ENDED THAT THE ISSUE OF DISALLOWANCE OF DEPRECIATION BY APPLYING T HE PROVISIONS OF SECTION 40(A)(I) OF THE ACT IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ABOVE SAID DECISIONS OF THE TRIBUNAL. 5. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE HAS SUBMITTED THAT THERE IS NO DISPUTE THAT THE ASSESSE E HAS MADE THE PAYMENT FOR PURCHASE OF SOFTWARE WHICH IS IN THE NA TURE OF ROYALTY AND THEREFORE THE PROVISIONS OF SECTION 195 ARE APPLICABLE ON SUCH PAYMENT FOR DEDUCTION OF TAX AT SOURCE. HE HAS FURT HER SUBMITTED THAT IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE HA S NOT DEDUCTED THE ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE PAGE 6 OF 17 TDS IN RESPECT OF THE PAYMENT IN QUESTION AND THERE FORE THE ASSESSEE HAS VIOLATED THE PROVISIONS OF SECTION 195 OF THE ACT AND CONSEQUENTLY, THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT ARE APPLICABLE IN THE CASE UNDER CONSIDERATION. THE LEA RNED DEPARTMENTAL REPRESENTATIVE HAS CONTENDED THAT THER E IS AN INTRICABLE LINK BETWEEN THE PROVISIONS OF SECTIONS 40 , 195 & 201 OF THE ACT. ONCE THE ASSESSEE HAS FAILED TO COMPLY WIT H THE PROVISIONS OF SECTION 195 , THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT ARE APPLICABLE. HAS RELIED ON THE ORDERS OF THE AUTHORI TIES BELOW. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT THE MATERIAL ON RECORD. THE ISSUE BEFORE US IS LIMITED ONLY WITH RESPECT TO THE DISALLOWANCE OF DEPRECIATION BY INVOKING THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT. THERE IS NO DISPUTE THAT THE ASSESSEE HAS MADE THE PAYMENT IN QUESTION TO A NON-RESIDENT FOR PURCHASE OF SOFTWARE AND THE SAID PAYMENT HAS BEEN CAPITALIZED BY THE ASSESSEE IN THE BLOCK OF COMPUTER ASSET. ONCE THE ASSESSEE C APITALIZED THE PAYMENT AND HAS NOT CLAIMED THE SAME AS AN EXPENDIT URE AGAINST THE PROFITS OF THE BUSINESS OF THE ASSESSEE, THEN, THE QUESTION ARISES WHETHER THE DEPRECIATION WHICH IS A STATUTORY DEDU CTION 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 THE SIMILAR SET OF FACTS AN IDENTICAL ISSUE HAS BEEN DEALT BY THE ITAT, MUMBAI BENCH IN THE CASE OF SKOL BREWERIES LTD. (SUPRA), WHEREIN IT WAS HELD IN PARAS 16.1 TO 16.4 AS UNDER :- ' 16.1 AS REGARDS THE ALTERNATIVE PLEA OF THE LD SR COUNSEL FOR THE ASSESSEE THAT SINCE THE ASSESSEE HAS NOT CLAIMED TH E ENTIRE AMOUNT AS REVENUE EXPENDITURE; BUT HAS CAPITALIZED THE SAM E AND CLAIMED ONLY DEPRECIATION U/S 32(1)(II); THEREFORE, PROVISI ONS OF SEC. 40(A)((I) SHALL NOT APPLY. SECTION 40(A)(I) CONTEMPLATES THAT ANY INTEREST, ROYALTY, FEE FOR TECHNICAL SERVICES OR OT HER SUM CHARGEABLE UNDER THIS ACT, WHICH IS PAYABLE OUTSIDE INDIA AS I T IS RELEVANT FOR THE CASE IN HAND ON WHICH TAX IS DEDUCTIBLE AT SOUR CE UNDER CHAPTER XVII -B AND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTE R DEDUCTION, HAS NOT BEEN PAID, THE AMOUNT OF INTEREST, ROYALTY, FEE FOR TECHNICAL SERVICES AND OTHER SUM SHALL NOT BE DEDUCTED IN COM PUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS & GAINS O F BUSINESS OR PROFESSION'. THIS CONDITION OF DEDUCTIBILITY HAS BE EN STIPULATED U/S 40 NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTION 30 TO 38 OF THE ACT. SEC. 40 BEGINS WITH NON-OBSTANTE CLAUSE; T HEREFORE, IT IS AN OVERRIDING EFFECT T THE PROVISIONS OF SEC. 30 TO 38 OF THE I T ACT. THE QUESTION ARISES IS WHETHER ANY AMOUNT PAID OUTSIDE INDIA OR TO THE NON RESIDENT WITHOUT DEDUCTION OF TAX AT SOURCE AND THE ASSESSEE HAS CAPITALIZED THE SAME IN THE FIXED ASSETS AND CL AIMED ONLY DEPRECIATION IS SUBJECTED TO THE PROVISIONS 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 COMPUTIN G THE INCOME ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE PAGE 7 OF 17 CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUS INESS OR PROFESSION',-- IN THE CASE OF ANY ASSESSEE-- [(I) ANY INTEREST (NOT BEING INTEREST ON A LOAN ISS UED FOR PUBLIC SUBSCRIPTION BEFORE THE 1ST DAY OF APRIL, 1938), RO YALTY, FEES FOR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER TH IS ACT, WHICH IS PAYABLE OUTSIDE INDIA; OR IN INDIA TO A NON-RESIDEN T, NOT BEING A COMPANY OR TO A FOREIGN COMPANY, ON WHICH TAX IS DE DUCTIBLE AT SOURCE UNDER CHAPTER XVII-B AND SUCH TAX HAS NOT BE EN DEDUCTED OR, AFTER DEDUCTION, HAS NOT BEEN PAID DURING THE P REVIOUS YEAR, OR IN THE SUBSEQUENT YEAR BEFORE THE EXPIRY OF THE TIM E PRESCRIBED UNDER SUB-SECTION (1) OF SECTION 200 : PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM, TAX HAS BEEN DEDUCTED IN ANY SUBSEQUENT YEAR OR, HAS BEEN DEDUCT ED IN THE PREVIOUS YEAR BUT PAID IN ANY SUBSEQUENT YEAR AFTER THE EXPIRY OF THE TIME PRESCRIBED UNDER SUBSECTION (1) OF SECTION 200 , SUCH SUM SHALL BE ALLOWED AS A DEDUCTION IN COMPUTING THE INCOME O F 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 EXPLANA TION 2 TO CLAUSE (VI) OF SUB-SECTION (1) OF SECTION 9 ; 'FEES FOR TECHNICAL SERVICES' SHALL HAVE THE SAME M EANING AS IN EXPLANATION 2 TO CLAUSE (VII) OF SUB-SECTION (1) OF SECTION 9 ; 16.2 IT IS MANIFEST FROM THE PLAIN READING OF PROVI SIONS OF SEC. 40(A)(I) THAT AN AMOUNT PAYABLE TOWARDS INTEREST, R OYALTY, FEE FOR TECHNICAL SERVICES OR OTHER SUMS CHARGEABLE UNDER T HIS ACT SHALL NOT BE DEDUCTED WHILE COMPUTING THE INCOME UNDER THE HE AD PROFIT AND GAIN OF BUSINESS OR PROFESSION ON WHICH TAX IS DEDU CTIBLE 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 CLA IM. THUS, SECTION 40 REFERS TO THE OUTGOING AMOUNT CHARGEABLE UNDER THI S ACT AND SUBJECT TO TDS UNDER CHAPTER XVII-B. THERE IS A DIF FERENCE BETWEEN THE EXPENDITURE AND OTHER KIND OF DEDUCTION. THE OT HER KIND OF DEDUCTION WHICH INCLUDES ANY LOSS INCIDENTAL TO CAR RYING ON THE BUSINESS, BAD DEBTS ETC., WHICH ARE DEDUCTIBLE ITEM S ITSELF NOT BECAUSE AN EXPENDITURE WAS LAID OUT AND CONSEQUENTI ALLY ANY SUM HAS GONE OUT; ON THE CONTRARY THE EXPENDITURE RESUL TS A CERTAIN SUMS PAYABLE AND GOES OUT OF THE BUSINESS OF THE ASSESSE E. THE SUM, AS CONTEMPLATED UNDER SEC. 40(A)(I) IS THE OUTGOING AM OUNT AND THEREFORE, NECESSARILY REFERS TO THE OUTGOING EXPEN DITURE. ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE PAGE 8 OF 17 DEPRECIATION IS A STATUTORY DEDUCTION AND AFTER THE INSERTION OF EXPLANATION 5 TO SEC. 32, IT IS OBLIGATORY ON THE P ART OF THE ASSESSING OFFICER TO ALLOW THE DEDUCTION OF DEPRECIATION ON T HE ELIGIBLE ASSET IRRESPECTIVE OF ANY CLAIM MADE BY THE ASSESSEE. THE REFORE, DEPRECIATION IS A MANDATORY DEDUCTION ON THE ASSET WHICH IS WHOLLY OR PARTLY OWNED BY THE ASSESSEE AND USED FOR THE PU RPOSE 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 STATUTO RY DEDUCTION ON AN ASSET WHICH IS OTHERWISE ELIGIBLE FOR DEDUCTION OF DEPRECATION. DEPRECIATION IS NOT AN OUTGOING EXPENDITURE AND THE REFORE, THE PROVISIONS OF SEC. 40(A)(I) OF THE ACT ARE NOT ATTR ACTED ON SUCH DEDUCTION. THIS VIEW HAS BEEN FORTIFIED BY THE DECI SION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF MARK AUTO INDUSTRIES LTD. (SUPRA) IN PARS 5 & 6 AS UNDER: '5. ADVERTING TO QUESTIONS (II) AND (III), THE ISSU E WHICH ARISES FOR CONSIDERATION IS WHETHER THE ASSESSEE COULD BE DISA LLOWED 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. T HE 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 RS. 6,88,1751- MADE BY THE AO ON ACCOUNT OF DEDUCTION OF DEPRECIAT ION ON TECHNICAL KNOW-HOW AS THE ASSESSEE FAILED TO DEDUCT TAX IN ACCORDANCE WITH THE PROVISION CONTAINED IN SECTION 40(A)(I) . THE FINDING OF THE LEARNED CIT(A) WAS THAT THE ASSESSEE HAD INCURRED, EXPENDITURE BY WAY OF TECHNICAL KNOW-HOW, WHICH WAS CAPITALIZED AMOUNT AS MADE IN THE RETURN OF INCOME. SINCE THE A SSESSEE HAD NOT CLAIMED DEDUCTION FOR THE AMOUNT PAID, THE PROVISIO NS CONTAINED IN SECTION 40(A) (I) WERE NOT ATTRACTED. THE LEARNED DR COULD NOT FIND ANY FAULT WITH THIS DIRECTION OF THE CIT(A) AL SO ALTHOUGH SHE REFERRED TO PAGE 4 OF THE ASSESSMENT ORDER, WHERE I T WAS MENTIONED THAT THE TAX DEDUCTED IN RESPECT OF THE PAYMENT WA S MADE OVER TO THE GOVERNMENT IN THE SUBSEQUENT YEAR AND, THEREFOR E, DEPRECIATION COULD NOT BE DEDUCTED ON THE CAPITAL EXPENDITURE IN CURRED BY THE ASSESSEE. IN REPLY, THE LEARNED COUNSEL POINTED OUT THAT THE EXPENDITURE BY WAY OF TECHNICAL KNOW-HOW WAS CAPITA LIZED AND IT WAS NOT CLAIMED AS REVENUE EXPENDITURE. THEREFORE, THERE WAS ALSO NO REASON TO DISALLOW DEPRECIATION ON SUCH CAPITALI ZED AMOUNT AS THE AFORESAID PROVISION DOES NOT DEAL WITH DEDUCTIO N OF DEPRECIATION. HAVING CONSIDERED ARGUMENTS FROM BOTH THE SIDES, WE ARE OF THE VIEW THAT THERE IS NO ERROR IN THE ORDER OF THE LEARNED ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE PAGE 9 OF 17 CIT(A) WHICH REQUIRES CORRECTION FROM US. THUS, THI S GROUND IS ALSO DISMISSED.' 6. LEARNED COUNSEL FOR THE REVENUE WAS UNABLE TO SU BSTANTIATE THAT IN THE ABSENCE OF ANY REQUIREMENT OF LAW FOR MAKING DEDUCTION OF TAX OUT OF THE EXPENDITURE ON TECHNICAL KNOW HOW WH ICH WAS CAPITALIZED AND NO AMOUNT WAS CLAIMED AS REVENUE EX PENDITURE, THE DEDUCTION COULD BE DISALLOWED UNDER SECTION 40(A)(I) OF THE ACT. ACCORDINGLY, NO INFIRMITY COULD BE FOUND IN THE ORD ER PASSED BY THE TRIBUNAL WHICH MAY WARRANT INTERFERENCE BY THIS COU RT. 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 FOL LOWING THE DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT , WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST TH E REVENUE.' 7. AS IT IS CLEAR FROM THE ABOVE DECISION THAT THE TRIBUNAL HAS DISCUSSED AND ANALYSED THE PROVISIONS OF SECTION 40(A)(I) IN DETAIL IN THE CONTEXT OF DISALLOWANCE OF DEPRECIATION. THE LE ARNED D.R. HAS SUBMITTED THAT ONCE THE ASSESSEE HAS VIOLATED THE P ROVISIONS OF SECTION 195 , THEN, EVEN THE EXPENDITURE IS CAPITALIZED BY THE ASSESSEE, THE PROVISIONS OF SECTION 40(A)(I) ARE APPLICABLE FOR DISALLOWANCE OF DEPRECIATION ON SUCH CAPITALIZED EX PENDITURE. WE DO NOT AGREE WITH THE CONTENTION OF THE LEARNED D.R , BECAUSE 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 DISA LLOWING AN EXPENDITURE WHICH IS OTHERWISE ALLOWABLE UNDER THE PROVISIONS OF THE ACT. THEREFORE, THE QUESTION OF DISALLOWANCE UN DER SECTION 40(A) ARISES ONLY WHEN AN EXPENDITURE IS CLAIMED BY THE ASSESSEE WITHOUT DEDUCTING THE TAX AT SOURCE AS PER THE PROV ISIONS OF CHAPTER-XVIIB OF THE ACT, 1961. IN THE CASE ON HAND , WHEN THE ASSESSEE HAS NOT CLAIMED, THE SAID PAYMENT AS AN EX PENDITURE THEN THE QUESTION OF DISALLOWANCE UNDER SECTION 40(A)(I) DOES NOT ARISE. THE ONLY REMEDY WHICH MIGHT HAVE BEEN RESORTED TO B Y THE ASSESSING OFFICER IS THE ACTION UNDER SECTION 201 AND 201A OF THE ACT. A SIMILAR VIEW HAS BEEN TAKEN BY THE DELHI BEN CH OF THE TRIBUNAL IN THE CASE OF SMS DEMANG (P) LTD. (SUPRA) IN PARA 8 AS UNDER :- '8. AS REGARDS THE CLAIM OF ASSESSEE FOR DEPRECIATI ON ON ASSETS CAPITALIZED, DEPRECIATION CANNOT BE DISALLOWED ON T HE GROUND THAT AT THE TIME OF REMITTANCE, NO TAX WAS DEDUCTED AT SOUR CE. PROVISIONS OF SECTION 40(A)(I) ARE NOT APPLICABLE FOR CLAIM FOR DEDUCTION UNDER SECTION 32 OF THE ACT. ACCORDINGLY, IN OUR CONSIDERED OPINION , THE AO WAS NOT JUSTIFIED IN DISALLOWING 50 PERCENT OF DEPRECIATION ON THE GROUND THAT PROVISIONS OF SECTION 40(A)(I) WERE APPLICABLE. ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE PAGE 10 OF 17 HOWEVER, THE AO WILL VERIFY THE FACT WHETHER THE AS SETS IN RESPECT OF WHICH EXPENDITURE HAS BEEN CAPITALIZED HAVE BEEN US ED IN BUSINESS FOR PERIOD MORE THAN 180 DAYS. IF THE ASSETS HAVE B EEN USED FOR MORE THAN 180 DAYS, THE AO WILL ALLOW FULL DEPRECIA TION, AS CLAIMED BY THE ASSESSEE. THE AO IS DIRECTED ACCORDINGLY'. ' 6.3.2 FOLLOWING THE AFORESAID DECISION OF THE CO-OR DINATE BENCH OF THIS TRIBUNAL IN THE CASE OF KAWASAKI MICROELECTRONICS I NC - INDIA BRANCH V.DDIT (IT), CIRCLE 1(1), BANGALORE (SUPRA), WHICH IS ON SIMILAR FACTS AS THOSE IN THE CASE ON HAND, WE ARE OF THE OPINION AN D HOLD THAT ONCE THE ASSESSEE HAS CAPITALIZED THE PAYMENT IN QUESTION TH OUGH THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE ON SUCH PAYMENT, THE PRO VISIONS OF SEC.40(A)(I) CANNOT BE INVOKED FOR DISALLOWANCE OF DEPRECIATION. 10. FOLLOWING THE ABOVE SAID DECISION OF COORDINATE BENCH, PROVISIONS OF SECTION 40(A)(I) CANNOT BE INVOKED FO R MAKING DISALLOWANCE OF DEPRECIATION ON SOFTWARE PURCHASE. 11. THE LD. CIT(A) HAS FOLLOWED THE DECISION RENDER ED BY HONBLE KARNATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRO NICS COMPANY LTD. (SUPRA) AND ACCORDINGLY HELD THAT THE SOFTWARE PURCHASE COST IS IN THE NATURE OF ROYALTY AND HENCE ALLOWABLE AS REV ENUE EXPENDITURE. ACCORDINGLY, HE HAS DIRECTED THE A.O. TO DISALLOW THE ENTIRE COST OF SOFTWARE PURCHASE U/S 40(A)(I) OF TH E ACT FOR NON- DEDUCTION OF TAX AT SOURCE. THE LD. A.R. SUBMITTED THAT THE YEAR UNDER CONSIDERATION IS ASSESSMENT YEAR 2011-12 AND DECISION IN THE CASE OF SAMSUNG ELECTRONICS LTD., HAS BEEN REND ERED ON 15.10.2011 I.E. SUBSEQUENT TO THE COMPLETION OF THE TRANSACTION OF PURCHASE OF SOFTWARE. PRIOR TO THE DECISION RENDER ED BY HONBLE KARNATAKA HIGH COURT IN THE ABOVE SAID CASE, CERTAI N RULINGS WERE AVAILABLE HOLDING THAT THE SOFTWARE PURCHASES ARE N OT IN THE NATURE OF ROYALTY PAYMENTS. HENCE THE ASSESSEE HAS NOT DE DUCTED THE TAX AT SOURCE. SINCE THE TRANSACTIONS HAVE ALREADY BEE N COMPLETED PRIOR TO THE RULING GIVEN BY HONBLE KARNATAKA HIGH COURT IN THE ABOVE SAID CASE, THE ASSESSEE SHOULD NOT BE BURDENE D WITH THE LIABILITY OF TDS FOR THE PAST TRANSACTIONS. UNDER THE IDENTICAL SET OF FACTS, COORDINATE BENCH HAS HELD IN THE CASE OF M/S . TEEKAYS ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE PAGE 11 OF 17 INTERIOR SOLUTIONS PVT. LTD. VS. DCIT (ITA NO.400/B ANG/2017 DATED 15.2.2019) THAT THE DISALLOWANCE U/S 40(A)(IA) OF T HE ACT SHOULD NOT BE MADE SINCE THE ASSESSEE CANNOT BE FASTENED WITH THE LIABILITY TO DEDUCT TAX AT SOURCE RETROSPECTIVELY. 12. WE FIND MERIT IN THESE CONTENTIONS OF LD. A.R. FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW THE DECISION RENDERED BY COORDINATE BENCH IN THE CASE OF TEEKAYS INTERIOR SOLUTIONS PVT . LTD. (SUPRA). 11. WE HEARD THE LEARNED DR AND PERUSED THE RECORD. WE NOTICED THAT AN IDENTICAL ISSUE WAS CONSIDERED BY THE CO- ORDINATE BENCH IN THE CASE OF ALLEGIS SERVICES INDIA PVT. LTD. (2017)(51 CCH 0083 ) AND IDENTICAL DISALLOWANCE MADE WAS DELETED BY THE CO-ORDINATE BE NCH ON THE REASONING THAT THE TDS LIABILITY CANNOT BE FASTENED UPON THE ASSESSEE RETROSPECTIVELY. FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW THE O PERATING PORTION OF THE ORDER PASSED BY THE CO-ORDINATE BENCH:- '4. GROUND NOS.2 TO 5 ARE REGARDING DISALLOWANCE UN DER SECTION 40(A)(IA) OF THE INCOME TAX ACT , 1961 (IN SHORT 'THE ACT') OF PAYMENT TOWARDS SOFTWARE LICENSES TREATED BY THE ASSESSING OFFICER AS ROYALTY FOR WANT OF TDS. THE ASSESSEE HAS ALSO RAISED ADDITIONAL GROUND S WHICH ARE AS UNDER : CORPORATE TAX MATTERS 21. ' WITHOUT PREJUDICE TO THE GROUNDS 2 TO 4, THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THAT DURING THE FINANCIAL YEAR 2008-09 RELEVANT TO THE ASSESSMENT YEAR 2009-10, THE APPELLANT WAS NOT LIAB LE TO WITHHOLD TAX ON THE PAYMENTS MADE AS THERE WAS NO PROVISION UNDER T HE ACT MANDATING THE DEDUCTION OF TAX AT SOURCE ON THE PAYMENTS MADE ON PURCHASE OF COMPUTER SOFTWARE AND THERE WERE MANY FAVORABLE JUDICIAL PRE CEDENCE INCLUDING THE JURISDICTIONAL TRIBUNAL RULINGS. 22. WITHOUT PREJUDICE TO THE GROUNDS 2 TO 4, THE LE ARNED CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT EXPLANATION 5 TO SECTION 9(1)(VI) WAS INSERTED VIDE FINANCE ACT , 2012 WITH EFFECT FROM 1 JUNE 1976 AND WAS HIT BY THE DOCTRINE OF 'IMPOSSIBILITY OF PERFORMANCE'.' THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE ARE N OT NEW ISSUES BUT AN ADDITIONAL PLEA/ARGUMENT RAISED BY THE ASSESSEE REG ARDING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 40(A)(IA) OF THE ACT. THEREFORE IN VIEW OF THE FACT THAT THE SUBSTAN TIAL ISSUE HAS BEEN RAISED IN THE MAIN GROUND, THE ADDITIONAL GROUNDS RAISED B Y THE ASSESSEE ON THE SAME ISSUE ARE ADMITTED FOR CONSIDERATION AND ADJUD ICATION ALONG WITH THE GROUND NOS.2 TO 5. ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE PAGE 12 OF 17 5. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASS ESSEE HAS SUBMITTED THAT PRIOR TO THE DECISION OF HON'BLE JURISDICTIONAL HIG H COURT IN THE CASE OF CIT VS. SAMSUNG ELECTRONICS CO. LTD. 320 ITR 209, THE A SSESSEE WAS UNDER THE BONA FIDE BELIEF THAT THE PAYMENT ON ACCOUNT OF SOF TWARE LICENSES DOES NOT FALL UNDER THE DEFINITION OF ROYALTY AND THEREFORE THE ASSESSEE WAS UNDER NO OBLIGATION TO DEDUCT TAX AT SOURCE ON THE SAID PAYM ENT FOR SOFTWARE LICENSE. HE HAS FURTHER SUBMITTED THAT THERE WERE NUMBER OF JUDICIAL PRECEDENTS ON THIS ISSUE WHEREIN THIS TRIBUNAL HAS HELD THAT THE PAYMENT MADE FOR PURCHASE OF SOFTWARE DOES NOT FALL UNDER THE DEFINI TION OF ROYALTY PROVIDED UNDER SECTION 9(1)(VI) OF THE ACT. THUS HE HAS SUBMITTED THAT A SUBSEQUEN T AMENDMENT OR A DECISION CANNOT BE THRUST UPON THE A SSESSEE FOR DEDUCTION OF TAX IN RESPECT OF A TRANSACTION COMPLETED MUCH P RIOR TO THE SAID DECISION. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON DE CISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL DT.23.11.2016 IN THE CASE OF ACIT VS. AURIGENE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THA T DISALLOWANCE MADE BY THE ASSESSING OFFICER IS NOT JUSTIFIED WHEN THER E WAS NO SUCH LAW OR DECLARATION OF LAW AT THE TIME OF PAYMENT MADE BY T HE ASSESSEE TO CAST THE DUTY ON THE ASSESSEE TO DEDUCT TAX. 6. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE HAS SUBMITTED THAT THE DECISION OF HON'BLE JURISDICTION AL HIGH COURT IN THE CASE OF CIT VS. SAMSUNG ELECTRONICS CO. LTD. (SUPRA) THO UGH WAS SUBSEQUENT TO THE TRANSACTION IN QUESTION HOWEVER, THE SAID DECIS ION HAS NOT BROUGHT INTO STATUTE ANY NEW LAW BUT IT IS ONLY A DECLARATION AN D INTERPRETATION OF EXISTING LAW. HE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE THAT THE TR ANSACTION IN QUESTION REGARDING PAYMENT OF PURCHASE OF SOFTWARE WAS COMPL ETED IN THE F.Y.2008- 09 WHEREAS THE DECISION OF HON'BLE JURISDICTIONAL H IGH COURT IN THE CASE OF CIT VS. SAMSUNG ELECTRONICS CO. LTD. (SUPRA) WAS PA SSED ON 15.10.2011 MUCH LATER THAN THE TIME OF TRANSACTION CARRIED OUT BY THE ASSESSEE. IT IS ALSO NOT IN DISPUTE THAT THIS ISSUE OF CONSIDERING THE PAYMENT FOR PURCHASE OF SOFTWARE AS ROYALTY IS A HIGHLY DEBATABLE ISSUE AND VARIOUS HIGH COURTS HAVE TAKEN DIVERGENT VIEWS ON THIS ISSUE. THE CO-OR DINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ACIT VS. AURIGENE DISCOVERY TECHNOLOGIES (P) LTD. (SUPRA) HAS CONSIDERED AN IDENTICAL ISSUE IN PARAS 3 TO 5 AS UNDER : ' 03. WE HEARD THE RIVAL SUBMISSIONS AND GONE THROU GH THE RELEVANT ORDERS. THE ASSESSEE RESUBMITTED THE PLEA TAKEN BEFORE THE LOWER AUTHORITIES AND PLACED ON THE RULING OF THE HON'BLE BANGALORE ITAT IN SONATA INFORMATION TECHNOLOGY LTD V. ACIT (103 ITD 324) WHICH HAD HELD THAT PAYMENTS FOR SOFTWARE LICENSES DO NOT CONSTITUTE ROYALTY UNDER T HE PROVISIONS OF THE ACT AND HENCE DISALLOWANCE UNDER SECTION40(A) (IA) OF T HE ACT WOULD NOT BE APPLICABLE. THE CHANGE IN THE LEGAL POSITION ON TAX ATION OF COMPUTER SOFTWARE WAS ON ACCOUNT OF THE RULING OF THE KARNAT AKA HIGH COURT IN CIT V. SAMSUNG ELECTRONICS CO. LTD . (320 ITR 209), WHICH WAS PRONOUNCED ON 15.10.11 THAT IS MUCH LATER THAN THE CLOSURE OF THE FY 2010-11. SUBSEQUENTLY, THE FINANCE ACT 2012 ALSO INTRODUCED, RETROSPECTIVELY, ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE PAGE 13 OF 17 EXPLANATION 4 TO SECTION 9 (1 (VI) OF THE ACT TO CLARIFY THAT PAYMENTS FOR, INTER ALIA. LICENSE TO USE COMPUTER SOFTWARE WOULD QUALIFY AS ROYALTY. DURING THE FY 10-11, THE ASSESSEE DID NOT HAVE THE BENEFIT OF CLARIFICATION BROUGHT BY THE RESPECTIVE AMENDMENT. AS SUCH, FOR T HE FY 2010-11, IN LIGHT OF THE PROVISIONS OF SECTION 9(1)(VI) OF THE ACT READ WITH JUDICIAL GUIDANCE ON THE TAXATION OF COMPUTER SOFTWARE PAYMENTS, TAX WAS NOT REQUIRED TO BE DEDUCTED AT SOURCE. GIVEN THE PRACTICE IN PRIOR ASS ESSMENT YEARS, THE ASSESSEE WAS OF THE BONA FIDE VIEW THAT THE PAYMENT OF SOFTWARE LICENSE FEE WAS NOT SUBJECT TO TAX DEDUCTION AT SOURCE UNDER SE CTION194J/195 OF THE ACT. IT IS SUBMITTED THAT LIABILITY TO DEDUCT TAX A T SOURCE CANNOT BE FASTENED ON THE ASSESSEE ON THE BASIS OF RETROSPECTIVE AMEND MENT TO THE ACT (FINANCE ACT 2012 AMENDMENT THE DEFINITION OF ROYALTY WITH RETR OSPECTIVE EFFECT FROM 01.04.1976) OR A SUBSEQUENT RULING OF A COURT (THE KARNATAKA HC IN CIT V SAMSUNG ELECTRONICS CO. LTD. (16 TAXMAN N.COM 141) WAS PASSED ON OCTOBER 15,2011). COURTS HAVE CONSISTENTL Y UPHELD THIS PRINCIPLE AS SEEN IN: ITO V. CLEAR WATER TECHNOLOGY SERVICES (P.) LTD. (52 TAXMANN.COM115) KERALA VISION LTD V. ACIT (46 TAXMANN.COM 50) SONIC BIOCHEM EXTRACTIONS (P.) LTD V. ITO (35 TAXMANN.COM 463) CHANNEL GUIDE INDIA LTD V. ACIT (25 TAXMANN.COM 2 5) DCIV. VIROLA INTERNATIONAL (20 14(2) TMI 653) CIT V. KOTAK SECURITIES LTD . (20 TAXMANN.COM 846). 04. THE RELEVANT PORTION OF THE CIT(A) ORDER IS EXT RACTED AS UNDER : ' DISALLOWANCE OF EXPENSES UNDER 40(A)(I) / 40(A)(I A) : 5.1. AS REGARDS DISALLOWANCE OF EXPENSES UNDER 40(A )(I)/40(A)(IA), IT HAS BEEN SUBMITTED THAT THE COMPANY HAD DETERMINED THE RATE OF TAX TO BE DEDUCTED AND FOLLOWING THE JUDGMENTS THAT WERE PREV ALENT AT THE TIME OF TAX DEDUCTION, SUPREME COURT IN THE CASE OF TATA CONSUL TANCY SERVICES AND JURISDICTIONAL TRIBUNAL IN THE CASE OF SAMSUNG ELEC TRONICS CO. LTD, THE APPELLANT SUBMITTED THAT THE SAID JUDGMENT SHALL NO T BE APPLICABLE SINCE IT WAS PRONOUNCED ON 15/10/2011 AND VELANKANI MAURITIU S LTD., WHEREAS THE LIABILITY TO DEDUCT TAX FOR THE APPELLANT WAS THE F .Y. 2010-11. THE APPELLANT HAS RELIED ON THE JUDGMENT OF COCHIN TRIB UNAL IN THE CASE OF KERALA VISION LTD AND AGRA TRIBUNAL IN THE CASE OF VIROLA INTERNATIONAL, WHEREIN IT WAS HELD THAT - 'THE LAW AMENDED WAS UNDOUBTEDLY RETROSPECTIVE IN N ATURE BUT SO FAR AS TAX WITHHOLDING LIABILITY IS CONCERNED, IT DEPENDS ON THE LAW AS IT EXISTED AT THE POINT OF TIME WHEN PAYMENTS, FROM WHICH TAXES O UGHT TO HAVE BEEN WITHHELD, WERE MADE. THE TAX-DEDUCTOR CANNOT BE EXP ECTED TO HAVE CLAIRVOYANCE OF KNOWING HOW THE LAW WILL CHANGE IN FUTURE.' FURTHER, SOFTWARE PAYMENT WAS INCLUDED IN DEFINITIO N OF ROYALTY ONLY VIDE EXPLANATION TO SECTION 9(1)(VI) INSERTED RETROSPECTIVELY VIDE FINANCE ACT , 2012 AND WHEN THE PURCHASE WAS MADE, THE APPELLANT DID NOT HAVE THE BENEFIT OF CLARIFICATION BROUGHT BY THE RETROSPECTI VE AMENDMENT. IT IS ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE PAGE 14 OF 17 IMPOSSIBLE TO FASTEN LIABILITY FOR DEDUCTING TAX AT SOURCE RETROSPECTIVELY AS TAX IS TO BE DEDUCTED AT SOURCE AT THE TIME WHEN TH E PAYMENT IS CREDITED OR MADE. THIS VIEW HAS BEEN UPHELD BY THE BANGALORE TR IBUNAL IN THE CASE OF DCIT VS M/S WS ATKINS INDIA PVT L TD (ITA NO 14671B ANG12014 AND THE MUMBAI TRIBUNAL IN THE CASE OF CHANNEL GUIDE INDIA LTD. VS ACIT ([2012] 25 TAXMANN.COM 25). 5.2 THE ITAT 'C' BENCH IN THE CASE M/S WS ATKINS IN DIA PVT. LTD AND IN THE CASE OF INFOTECH ENTERPRISES LTD OF THE HYDERABAD B ENCH OF THE TRIBUNAL WHEREIN IT HAS BEEN HELD THAT SECTION 40(A)(IA) WOULD NOT APPLY TO DISALLOW PAYMENTS WHEN TDS WAS NOT D O N E A N D SUBSEQUENTL Y BECOME TAXABLE ON ACCOUNT OF A RETROSPECTIVE LEGISLATION. IT HAS ALSO REFERRED TO IN THE CASE OF SONIC BIOCHEM EXTRACTIONS PVT. LTD. (SUPRA), IDENTI CAL ISSUE WAS CONSIDERED AND DECIDED BY THE MUMBAI TRIBUNAL. FOLLOWING WERE THE RELEVANT OBSERVATIONS:- 'THE ASSESSEE PURCHASED SOFTWARE, CAPITALIZED THE P AYMENT TO THE COMPUTERS ACCOUNT AS THE SOFTWARE CAME ALONG WITH T HE HARDWARE OF COMPUTERS AND CLAIMED DEPRECIATION. ON THE GROUND T HAT PURCHASE OF SOFTWARE IS ESSENTIALLY PURCHASE OF COPYRIGHT WHICH ATTRACTS TAX DEDUCTION AT SOURCE UNDER SECTION 194J , THE ASSESSING OFFICER INVOLVED THE PROVISIONS O F SECTION 40(A (IA) AND DISALLOWED THE DEPRECIATI ON CLAIMED. THE COMMISSIONER (APPEALS), CONFIRMED THE ACTION OF THE ASSESSING OFFICER ON THE GROUND THAT THE PURCHASE OF SOFTWARE AMOUNTED T O ACQUISITION OF INTANGIBLE ASSET AND THEREFORE, THE PAYMENT WAS ROY ALTY AND DISALLOWABLE. ON APPEAL: HELD, (I) THAT MERE PURCHASE OF SOFTWARE, A COPYRIG HTED ARTICLE, FOR UTILISATION OF COMPUTERS CANNOT BE CONSIDERED AS PU RCHASE OF COPYRIGHT AND ROYALTY. THE ASSESSEE DID NOT ACQUIRE ANY RIGHTS FO R MAKING COPIES, SELLING OR ACQUIRING WHICH GENERALLY COULD BE CONSIDERED WI THIN THE DEFINITION OF 'ROYALTY'. EXPLANATION 2 TO SECTION 9(1)(VI) CANNOT BE APPLIED TO PURCHASE OF A COPYRIGHTED SOFTWARE, WHICH DOES NOT INVOLVE A NY COMMERCIAL EXPLOITATION THEREOF. THE ASSESSEE SIMPLY PURCHASED SOFTWARE DELIVERED ALONG WITH COMPUTER HARDWARE FOR UTILIZATION IN THE DAY-TO-DAY BUSINESS.' 5.3 RELYING ON THE ABOVE DECISION, THE ITAT `C'BENC H, BANGALORE UPHELD THE ORDER OF THE CIT(A) WHO HAD OBSERVED THAT THE A SSESSEE DID NOT HAVE THE BENEFIT OF THE CLARIFICATION BROUGHT BROUGHT ABOUT BY THE RETROSPECTIVE AMENDMENT THAT THE PAYMENTS TANTAMOUNT TO PAYMENT F OR ROYALTY AND CONSEQUENTLY TAX WAS TO BE DEDUCTED U/S 194J. THE L AW AS EXTANT ON THE DATE WHEN THE PAYMENT FOR OBTAINING THE SOFTWARE WAS MAD E, HAS NOT CATEGORICALLY LAID DOWN THAT TAX IS REQUIRED TO BE DEDUCTED. IT IS IMPOSSIBLE TO FASTEN LIABILITY FOR DEDUCTING TAX AT SOURCE RET ROSPECTIVELY. 5.4 IN VIEW OF THE ABOVE DECISIONS, IT IS CORRECT T O SAY THAT IT IS NOT POSSIBLE TO FASTEN LIABILITY FOR DEDUCTING TAX AT SOURCE RET ROSPECTIVELY AS TAX IS TO BE DEDUCTED AT SOURCE AT THE TIME WHEN THE PAYMENT IS CREDITED OR MADE. WHEN ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE PAGE 15 OF 17 PURCHASE OF SOFTWARE WAS MADE THE ASSESSEE DID NOT HAVE THE BENEFIT OF T H E CLARIFICATION BROUGHT ABOUT BY THE RETROSPECTIVE AM ENDMENT. THE CONTENTION OF THE APPELLANT IS CORRECT THAT THE SOFTWARE PAYME NT DISALLOWED BY THE AO DID NOT WARRANT WITHHOLDING OF THE TAX U/S 40(A)(IA ) AND 40(A)(IA) (BY AN ORDER OF CORRIGENDUM DT 20.11.2015) OF THE AC T. TH EREFORE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF SOFTWARE PAYMENT WANT OF WITHHOLDING OF TAX IS HEREBY DELETED.' 05. THE CIT(A) FOLLOWED THE DECISION OF THIS TRIBUN AL IN M/S WS ATKINS INDIA PVT. LTD, SUPRA, WHICH REFERRED THE DECISIONS OF HYDERABAD BENCH OF THE TRIBUNAL IN INFOTECH ENTERPRISES LTD IN ITA 115 /HYD/2011 WHEREIN IT HAS BEEN HELD THAT SECTION 40(A)(IA) WOULD NOT APPLY TO DISALLOW PAYMENTS WHEN TDS WAS NOT D O N E A N D S U B S E Q U E N T L Y B E C O M E T A X A B L E O N A C C O U N T O F A RETROSPECTIVE LEGISLATION. IT HAS ALSO REFERRED TO THE DECISIONS OF THE DELHI & MUMBAI TRIBUNAL IN SMS DEM AG PVT LTD , 132 ITJ 498 & SONIC BIOCHEM EXTRACTIONS PVT. LTD. 23 ITR (T RIB) 447, RESPECTIVELY. WE UPHOLD THE DECISION OF THE CIT(A) AND DISMISS TH E GROUNDS RAISED BY THE REVENUE.' THUS IT IS CLEAR THAT THE CO-ORDINATE BENCH OF THIS TRIBUNAL WHILE DECIDING THIS ISSUE HAS TAKEN NOTE OF VARIOUS DECISIONS IN F AVOUR OF THE ASSESSEE ON THE POINT THAT THE PAYMENT FOR PURCHASE OF SOFTWARE DOES NOT FALL IN THE DEFINITION OF ROYALTY. RESPECTFULLY FOLLOWING THE D ECISION OF CO-ORDINATE BENCH OF THIS TRIBUNAL, WE DELETE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER.' 12. CONSISTENT WITH THE VIEW TAKEN ON THE ABOVE CAS E, WE ALSO HOLD THAT THE ASSESSEE CANNOT BE FASTENED WITH THE LIABILITY TO D EDUCT TAX AT SOURCE RETROSPECTIVELY AND ACCORDINGLY, WE SET ASIDE THE O RDER PASSED BY THE LEARNED CIT(A) ON THIS ISSUE AND DIRECT THE A.O. TO DELETE THE IMPUGNED ADDITION. 13. SINCE THE TRANSACTIONS OF PURCHASE OF SOFTWARE HAS BEEN COMPLETED PRIOR TO RENDERING OF DECISION BY HONBLE KARNATAKA HIGH COURT AND SINCE THERE WERE DECISIONS WHICH HAVE HEL D THAT TDS IS NOT REQUIRED TO BE MADE OUT OF PAYMENT MADE FOR SOF TWARE PURCHASES, FOLLOWING THE ABOVE SAID DECISION WE HOL D THAT THE TDS LIABILITY CANNOT BE FASTENED UPON THE ASSESSEE RETR OSPECTIVELY AND ACCORDINGLY DISALLOWANCE U/S 40(A)(I) IS NOT CALLED FOR EVEN IF THE SOFTWARE PURCHASES IS TREATED AS REVENUE EXPENDITUR E. ACCORDINGLY, WE ARE OF THE VIEW THAT THERE IS NO REASON TO TREAT THE COST OF SOFTWARE CAPITALIZED BY THE ASSESSEE AS REVENUE EXP ENDITURE. ACCORDINGLY WE SET ASIDE THE ORDER PASSED BY LD. CI T(A) AND DIRECT ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE PAGE 16 OF 17 THE AO TO TREAT THE COST OF SOFTWARE AS CAPITAL EXP ENDITURE AND DELETE THE DISALLOWANCE MADE ON THIS ISSUE. 14. THE NEXT ISSUE RELATES TO ADDITION MADE BY THE AO DUE TO DIFFERENCE IN THE INCOME REPORTED BY THE ASSESSEE U NDER FORM NO.26AS. 15. THE AO NOTICED THAT THERE WAS DIFFERENCE BETWEE N THE INCOME REPORTED BY THE ASSESSEE IN THE PROFIT & LOSS ACCOU NT AND FORM NO.26AS AND ACCORDINGLY ADDED THE DIFFERENCE OF RS. 2,62,761/-. BEFORE LD. CIT(A), THE ASSESSEE GOT PARTIAL RELIEF AND THE LD. CIT(A) CONFIRMED THE ADDITION TO THE EXTENT OF RS.1,65,375 /-. THE LD. A.R. SUBMITTED THAT THE ASSESSEE HAS OFFERED THE ABOVE S AID AMOUNT OF RS.1,65,375/- IN THE SUCCEEDING ASSESSMENT YEAR I.E . IN ASSESSMENT YEAR 2012-13, SINCE IT WAS RECEIVED IN THE SUCCEEDI NG YEAR. ACCORDINGLY, HE SUBMITTED THAT ADDITION OF RS.1,65, 375/- MADE IN THIS YEAR MAY BE DIRECTED TO BE DELETED AS THE SAME IS REVENUE NEUTRAL. IN THIS REGARD, HE PLACED HIS RELIANCE ON THE DECISION RENDERED BY HONBLE SUPREME COURT IN THE CASE OF EX CEL INDUSTRIES (299 ITR 1). HE ALSO SUBMITTED THAT THE ADDITION MA DE IN THIS YEAR RESULTS IN DOUBLE TAXATION OF SAME ITEM OF INCOME. 16. THE LD. D.R., HOWEVER, SUBMITTED THAT THE CLAIM OF THE ASSESSEE REQUIRES EXAMINATION AT THE END OF THE A.O 17. WE HEARD THE RIVAL CONTENTIONS ON THIS ISSUE AN D PERUSED THE RECORD. WE FIND MERIT IN THE SUBMISSION MADE BY LD . D.R. ACCORDINGLY, WE RESTORE THIS ISSUE TO THE FILE OF T HE AO FOR EXAMINING THE EXPLANATIONS FURNISHED BY THE ASSESSEE. AFTER AFFORDING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE , THE A.O. MAY TAKE APPROPRIATE DECISION IN ACCORDANCE WITH LAW. ITA NO.2012/BANG/2016 M/S. UKN PROPERTIES PVT. LTD., BANGALORE PAGE 17 OF 17 18. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 2 ND JULY, 2021. SD/- (N.V. VASUDEVAN) VICE PRESIDENT SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 2 ND JULY, 2021. VG/SPS COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.