Premium CAD Software expenses are Revenue in nature, not Capital; ITAT allows full deduction.

Premium CAD Software expenses are Revenue in nature, not Capital; ITAT allows full deduction.

Issue

Whether expenditure incurred on procuring “Premium CAD Software” should be treated as Capital Expenditure (providing enduring benefit) or Revenue Expenditure (due to short shelf-life), and its consequent impact on the computation of deduction under Section 80IC of the Income Tax Act.

Facts

• The Expense: The assessee incurred an expenditure of Rs. 25,94,500/- for purchasing CAD (Computer-Aided Design) software.

• Claim: The assessee treated this as revenue expenditure and claimed it as a deduction while computing eligible profits for Section 80IC benefits (tax holiday for specific zones/industries).

• AO’s Stand: The Assessing Officer (AO) held that the software provides a benefit to the assessee for a number of years. Therefore, he treated it as Capital Expenditure.

  • Instead of allowing the full amount as an expense, the AO allowed depreciation @ 12.5% (50% of the normal 25% rate, as the asset was used for less than 180 days).

• CIT(A)’s Ruling: The Commissioner (Appeals) upheld the AO’s decision.

Decision

• The Income Tax Appellate Tribunal (ITAT) allowed the appeal in favor of the assessee.

• Reasoning: The Tribunal observed that the AO’s assumption regarding “enduring benefit” was misplaced in the context of modern technology.

• Nature of Software: The Bench noted that software has a very short life and requires continuous upgradation. Therefore, it does not grant an enduring benefit in the traditional sense associated with capital assets.

• Ruling: The expenditure of Rs. 25,94,500/- was directed to be treated as Revenue Expenditure. Consequently, the AO was directed to recompute the Section 80IC deduction granting the full benefit to the assessee.

Key Takeaways

• Software is Revenue Expenditure: Expenses on application software (like CAD) are generally treated as revenue in nature because technology becomes obsolete quickly and requires constant updates, negating the concept of “enduring benefit.”

• Impact on Tax Holidays: For units claiming deductions under sections like 80IC or 80IA, classification of expenses is crucial. Treating an item as revenue reduces current profits but avoids capitalization; however, in this case, the dispute was likely regarding the correct computation mechanism of the eligible profit.

• Enduring Benefit Test: The traditional test of enduring benefit breaks down when applied to rapidly evolving technological assets.