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August 2016

Business Expenditure- Capital or revenue- A. Y. 1997-98- Test of enduring benefit not to be mechanically applied- Expenses incurred for software development- Rapid advancement and changes in software industry- Difficult to attribute endurability- Expenditure to be treated as revenue

By K. B. Bhujle Advocate
Reading Time 1 mins
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Indian Aluminium Co. Ltd. vs. CIT; 384 ITR 386 (Cal):

The assessee was engaged in the manufacture and production of aluminium and related products. Bauxite was a basic raw material for manufacturing aluminium. The assessee claimed deduction of expenditure incurred on development of application software to help the assessee in planning the production and bauxite grade control in mines treating it as differed revenue expenditure and amortised a part of it debiting it to the profit and loss account. The Assessing Officer disallowed the deduction on the ground that the expenditure was capital in nature incurred with a view to obtain an asset or advantage of a permanent nature. The Tribunal upheld the disallowance.

On appeal by the assessee Calcutta High Court reversed the decision of the Tribunal and held as under:

“The software industry was one such field where advancements and changes happened at a lightening pace and it was difficult to attribute any degree of endurability. The software used by the assesee was a application software which needed to be updated due to the rapid advancements in technology and increasing complexity of the features. Disallowance of the expenditure incurred on software development was erroneous.”

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