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Expense should be cpitalised or charged to revenue

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Querist : Anonymous

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Querist : Anonymous (Querist)
Software expenses should be charged to revenue or should be capitalised ?
what if software is purchased by company and if software is prepared in house by the company ?
please provide the answer or article on it.

Expenditure on purchase of software is revenue.
Asahi India Safety Glass Ltd's case reported in (2011) 203 Taxman 277 (Del).

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 computer software is shorter (say less than 2 years), 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. However, that by itself will not make the expenditure incurred on software as capital in nature and the functional test as discussed above also needs to be satisfied.

Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business touching either capital, or revenue Held or its utility to a businessman which may touch either capital or revenue field.

different considerations will apply in testing the nature of expenditure in the context of acquisition of know-how compared to expenditure on acquisition of software because know-how is an intangible asset whereas as held by Hon'ble Supreme Court, software is a tangible asset.



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