Expenditure on Software is of Revenue Nature: Special Bench

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Expenditure on Software is of Revenue Nature: Special Bench

AIT News Network

NEW DELHI. Special Bench of ITAT vide a landmark ruling dated 15^th February 2008 AIT-2008-66-ITAT has ruled on the following debatable issues:

“(i) Whether, in the facts and circumstances of the case, the expenditure incurred by the assessee on account of computer software is of revenue nature or capital nature?

(ii) If the expenditure incurred on computer software is held to be of capital nature, what would be the rate of depreciation applicable thereon?"

The Special Bench has ruled as under:

When the assessee acquires a computer software or for that matter the license to use such software, he acquires a tangible asset and becomes owner thereof as held relying on the decision of Supreme Court in case of AIT-2004-01-SC
Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time. It can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. Any software having its utility to the assessee for a period beyond two years can be considered as accrual of benefit of enduring nature. However, that by itself will not make the expenditure incurred on software as capital in nature and the functional test as discussed above also needs to be satisfied.
Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business touching either capital, or revenue Held or its utility to a businessman which may touch either capital or revenue field.
different considerations will apply in testing the nature of expenditure in the context of acquisition of know-how compared to expenditure on acquisition of software because know-how is an intangible asset whereas as held by Hon'ble Supreme Court, software is a tangible asset.

(Click here for full text of Special Bench Ruling AIT-2008-66-ITAT)

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