CAD Software expenses allowed as Revenue Expenditure due to short shelf-life; 80-IC benefits restored

Issue

Whether expenditure incurred on the acquisition of “Premium CAD Software” constitutes Capital Expenditure (providing enduring benefit) or Revenue Expenditure (due to rapid obsolescence), and the consequential impact on the computation of eligible profits for deduction under Section 80-IC.

Facts

Assessment Year: 2017-18.
The Expense: The assessee purchased Premium CAD software and claimed the outlay as revenue expenditure in its books.
AO’s Treatment: The Assessing Officer (AO) held that the software provided an “enduring benefit” to the business and treated the outlay as capital expenditure.
Depreciation Restriction: The AO disallowed the full deduction and instead allowed depreciation at 12.5% (restricting the normal 25% rate to 50% because the asset was put to use for less than 180 days).
Impact: This disallowance and re-characterization affected the computation of profits eligible for the tax holiday deduction under Section 80-IC.

Decision

Short Life Cycle: The Tribunal noted that the software had a very short useful life and required continuous upgradation to remain relevant.
No Enduring Benefit: Applying the functional test, it was held that due to the need for constant updates and rapid technological changes, the software did not grant an “enduring benefit” of a permanent nature.
Revenue Nature: The expenditure was held to be revenue in nature and fully allowable as a deduction in the year of purchase.
80-IC Benefit: Consequently, the computation of the deduction under Section 80-IC was directed to be made accepting the expense as revenue, thereby granting the assessee the consequential benefits.

Key Takeaways

Obsolescence trumps Enduring Benefit: In the technology sector, the “Enduring Benefit” test is often overridden by the “Obsolescence” factor. If software becomes obsolete quickly or requires paid upgrades, it is a running expense (Revenue), not a fixed asset (Capital).

Full Deduction vs. Deferred Depreciation: Treating software as revenue expenditure allows for a 100% deduction in the current year, whereas capitalizing it locks the value into slow depreciation (usually 40% for computers or 25% for licenses), significantly impacting cash flow and tax liability.

IN THE ITAT CHANDIGARH BENCH ‘B’

MVM Industries

Deputy Commissioner of Income-tax/ACIT^*

Rajpal Yadav, Vice President
and Manoj Kumar Aggarwal, Accountant Member

ITAppeal No. 639 (CHD) OF 2025
[Assessment year 2017-18]

NOVEMBER 12, 2025

Parveen Sharma, Adv. and Vishal Mohan, Sr. Adv. for the Appellant. Dr. Ranjit Kaur, Addl. CIT for the Respondent.

ORDER

Rajpal Yadav, Vice President. – The assessee is in appeal before the Tribunal against the order of the ld. Commissioner of Income Tax (Appeals) [in short ‘the CIT (A)’] dated 05.03.2025 passed for assessment year 2017-18.

2. The assessee has taken three grounds of appeal out of which ground Nos. 1 and 3 are general grounds which do not call for recording of any finding.

3. In ground No.2, assessee has pleaded that ld.CIT (Appeals) has erred in upholding the action of the AO vide which expenditure of Rs.25,94,500/- incurred on procuring Premium CAD Software as capital expenditure and consequently, disallowance was made in the computation of deduction u/s 80IC of the Act.

4. With the assistance of the ld. Representative, we have gone through the record carefully. The assessee is entitled for deduction u/s 80IC @ 25% of eligible profit. It has purchased a CAD software for Rs.25,94,500/-. The AO was of the view that this expenditure is to be treated as capital expenditure. The assessee will avail benefit of this software for number of years. Accordingly, he disallowed the claim of revenue expenditure but granted depreciation on this @ 25%. The AO was of the view that since benefit of this software in this year is to be taken for less than 180 days, hence, depreciation is to be calculated at 12.5%, which is 50% of 25% granted on this asset. We find that assumptions of the AO are misplaced. The software have very short life and they require continuous upgradation. It will not grant any enduring benefit to the assessee, hence it is to be allowed as revenue expenditure. Accordingly, we set aside the findings of Revenue Authorities and direct the AO to allow expenditure of Rs.25,94,500/- as revenue expenditure. Consequently, all other benefits of computation u/s 80IC is to be granted to the assessee. In view of the above appeal of the assessee is allowed.

5. In the result, appeal is allowed.