By C. N. Vaze, Shailesh Kamdar, Chartered Accountants
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27 (2007) 114 TTJ 476 (Del.) (SB)
Amway India Enterprises v. Dy. CIT
ITA No. 72 (Del.) of 2006
A.Ys. 2001-02 to 2002-03. Dated : 15-2-2008
S. 37(1) of the Income-tax Act 1961 — Computer software in a
disk is a tangible asset — Ownership test, enduring benefit test and functional
test are applied to decide the nature of expenditure on computer software —
whether capital or revenue.
For A.Y. 2001-02, the assessee claimed deduction in respect
of software expenditure incurred for purchase of various types of application
software for use in its business. The Assessing Officer held that the softwares
were part of plant and machinery and gave enduring benefit to the assessee,
since they had long-lasting use of more than three four years. This treatment of
software being capital expenditure was confirmed by the CIT(A), since he found
that the assessee had not upgraded or replaced the software frequently.
The Division Bench of the ITAT found that divergent views
were expressed on the issue by the various Division Benches in various cases
and, since this issue was expected to occur regularly in many cases, it felt the
need for a Special Bench to consider this matter.
The Special Bench noted as under :
(1) The cardinal rule is that the question whether certain
expenditure is capital or revenue should be decided from the practical or
business view-point and in accordance with sound accountancy principles and
this rule is of special significance in dealing with expenditure on expansion
and development of business.
(2) Three tests generally applied to decide whether an
expenditure is capital or revenue in nature are :
l
Ownership test
l
Test of enduring benefit
l
Functional test
(3) Computer software has not been defined in the Act but
in Note 7 to Appendix 1 to the IT Rules it has been explained to include
computer programme recorded on any disk, tape, perforated media or other
information storage device. Therefore, computer software is goods and a
tangible asset by itself. An assessee purchasing such software, or the licence
to use such software, becomes owner thereof. (Decision of the Supreme Court in
the case of Tata Consultancy Services v. State of Andhra Pradesh, 192
CTR 257/137 STC 620 applied.)
(4) In terms of the enduring benefit test, the duration of
time for which the assessee acquires the right to use the software becomes
relevant. What is material to consider is the nature of the advantage in a
commercial sense and it is only where the advantage is in capital field that
expenditure would be disallowable on the application of this test.
(5) The period of advantage in the context of computer
software should not be viewed from the point of view of different assets or
advantages like tenancy or use of know-how, because software is a business
tool enabling a businessman’s ability to run his business. (Decision of the
Supreme Court in the case of Empire Jute Co. Ltd. v. CIT, 17 CTR
113/124 ITR 1 applied.)
(6) 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 software is short (say, less
than two years), then 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.
(7) Once the tests of ownership and enduring benefit are
satisfied, it has to be seen from the point of its utility to the businessman
and to see how important an economic or functional role it plays in the
business. Therefore, the functional test becomes more important because of the
peculiar nature of the software and its possible use in different areas of
business touching either capital or revenue field or its utility to a
businessman which may touch either capital or revenue field.
(8) If the advantage consists merely in facilitating the
assessee’s trading operations or enabling the management and conduct of the
business to be carried on more efficiently or more profitably while leaving
the fixed capital untouched, then the expenditure would be on revenue account
even though the advantage may endure for an indefinite future.
(9) Merely because the software is acquired on a licence,
it cannot be concluded whether it is revenue in nature if on application of
the functional test it is found that the expenditure operates to confer a
benefit in the capital field. Similarly, some software having a very limited
economic life cannot be treated as capital in nature even if it is owned by
the assessee.
The matter was remanded to the Assessing Officer for deciding
the issue afresh based on the above criteria.
