Computer software expenditure must be tested on function and enduring benefit; 60 per cent depreciation applies only prospectively.

Expenditure on computer software must be classified by examining the nature of the commercial advantage, the enduring benefit test, ownership, and the functional role of the software in the business. Licence-based use does not by itself make the outlay revenue or capital; the decisive question is whether the payment creates an asset or advantage in the capital field, or merely facilitates day-to-day operations without affecting fixed capital. If the software is capital in nature, depreciation is available under the depreciation scheme, but the 60 per cent rate applies only prospectively from 1 April 2003; for earlier periods, normal depreciation applies.

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Issues: (i) Whether expenditure incurred on acquisition or licence-based use of computer software was capital or revenue in nature. (ii) If treated as capital, what rate of depreciation applied to such software.

Issue (i): Whether expenditure incurred on acquisition or licence-based use of computer software was capital or revenue in nature.

Analysis: The applicable tests were the nature of the advantage in commercial terms, the enduring benefit test, the ownership test, and the functional test. Computer software was treated as goods/tangible property for tax purposes, but the mere fact that software is acquired on licence did not by itself determine the character of the expenditure. The decisive question was whether the expenditure brought into existence an asset or advantage in the capital field, or merely facilitated the assessee's trading operations and efficient conduct of business while leaving the fixed capital untouched. The duration of useful life, the nature of the business, and the role of the software in the profit-making apparatus were all relevant. Software with a short commercial life and used only to improve day-to-day efficiency could be revenue in nature, whereas software forming part of the profit-making apparatus or conferring a durable capital-field advantage could be capital.

Conclusion: The nature of the expenditure could not be decided by a single universal rule and had to be determined on the facts of each software item by applying the stated tests.

Issue (ii): If treated as capital, what rate of depreciation applied to such software.

Analysis: Where software is treated as capital expenditure, depreciation is allowable under the depreciation scheme. For periods prior to 1 April 2003, software was not separately placed with computers for the higher rate then introduced later, and the amendment introducing 60 per cent depreciation on computer software was prospective. Accordingly, the pre-1 April 2003 position attracted normal depreciation, while the later amended rate applied only from the effective date of the amendment.

Conclusion: If the software expenditure was capital in nature, depreciation at the normal rate applied up to 31 March 2003 and 60 per cent applied only from 1 April 2003.

Final Conclusion: The legal tests for software expenditure were settled, but the individual software claims required fresh examination on facts by the Assessing Officer, and the connected appeals were sent back for further proceedings in accordance with those tests.

Ratio Decidendi: Expenditure on computer software must be classified by applying the enduring benefit, ownership, and functional tests cumulatively; licence-based use is not ative by itself, and depreciation at 60 per cent applies only prospectively from 1 April 2003 where the software is held to be capital.

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