CAD software expenses held as revenue due to rapid obsolescence; 80-IC computation to reflect full deduction

Issue

Whether expenditure incurred on the acquisition of “Premium CAD software,” which has a short useful life and requires frequent upgrades, should be treated as capital expenditure (eligible only for depreciation) or revenue expenditure (fully deductible), and the consequential impact on the computation of eligible profits for deduction under Section 80-IC.

Facts

Assessment Year: 2017-18.
Nature of Expense: The assessee purchased “Premium CAD software” and claimed the entire cost as revenue expenditure in its books.
AO’s Treatment: The Assessing Officer (AO) rejected this claim, arguing that the software provided an “enduring benefit” to the business. The AO treated the outlay as capital expenditure and capitalized it.
Depreciation Restriction: Since the software was acquired/put to use for less than 180 days during the year, the AO allowed depreciation at 12.5% (50% of the prescribed rate of 25% for intangible assets/licenses).
Impact on Deduction: This re-characterization altered the computation of “eligible profits” for the purpose of the deduction claimed under Section 80-IC (Special provisions for undertakings in special category states).
Assessee’s Plea: The assessee contended that the software had a very short shelf life, required continuous paid upgrades to remain useful, and thus did not confer a permanent enduring benefit.

Decision

Obsolescence Factor: The Tribunal/Court noted that in the technology sector, software often has a very short life cycle due to rapid technological advancements.
No Enduring Benefit: The concept of “enduring benefit” breaks down when an asset requires continuous upgrades to stay relevant. The software in question facilitated the running of the business but did not create an asset of permanent character.
Revenue Nature: Consequently, the expenditure on acquiring such software was held to be revenue in nature and fully allowable under Section 37(1).
Consequential Relief: The AO was directed to re-compute the deduction under Section 80-IC by treating the software cost as a revenue expense (fully deductible in the current year) rather than a capital asset.

Key Takeaways

Functional Test over Durability: For software expenses, the courts prioritize the “Functional Test” (does it facilitate day-to-day operations?) over the “Enduring Benefit Test.” If the software requires regular licenses or upgrades to function, it is typically revenue expenditure.

Depreciation Rate Trap: While software is generally depreciable at 40% (under “Computers” block), tax authorities often try to classify specialized software licenses as “Intangible Assets” (25%) or capitalize them to defer the deduction. This judgment reinforces the assessee’s right to claim it as a 100% revenue expense if rapid obsolescence is proven.

Impact on 80-IC: The classification of expenses directly impacts the “Profits and Gains of Business” eligible for tax holidays. Correct classification ensures the deduction is calculated on the true commercial profits of the undertaking.

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.