Before the Special Bench could sit and hear the appeals filed in the case of Amway, a similar issue relating to allowability of software expenditure arose for consideration before the Division Bench of Tribunal i.
Having noted that a similar issue relating to allowability of software expenditure has already been referred to the Special Bench in the case of Amway, this case was also referred to the Special bench which was duly acceded to.
The Special Bench exhaustively considered the issue referring to several landmark judgements from the Indian Supreme Court and other foreign courts. The Bench took guidance from Lord Denning in Heather v. Consulting Group Ltd. In many cases the answer is easy; but in others it is difficult.
The difficulty arises because of the nature of the question. It assumes that all expenditure can be put correctly into one category or the other: but this is simply not possible. Some cases lie on the border between the two: and this border is not a line clearly marked out; it is a blurred and undefined area in which anyone can get lost.
Different minds may come to different conclusions with equal propriety. It is like the border between day and night, or between red and orange. Everyone can tell the difference except in marginal cases; and then everyone is in doubt. Each can come down either way. When these marginal cases arise, then the practitioners be they accountants or lawyers must of necessity put them in one category or another. And then, by custom or by law, by practice or by precept, the border is staked out with more certainty.
In this at least, where no decision can be said to be right or wrong, the only safe rule is to go by precedent. So the thing to do is to search through the cases and see whether the instant problem has come up before. If so, go by it. If not, go by the nearest you can find. And observed,. While dealing with this complex issue, three tests generally applied to decide the nature of expenditure as to whether it is capital or revenue, are the test of. Applying the said tests, expenditure is treated as capital expenditure either when it results in acquisition of capital asset by the assessee as owner thereof or when it results in accrual of advantage of enduring nature to the assessee in the capital field.
In the first situation, the ownership test assumes greater significance because the acquisition of capital asset by the assesses as a result of incurring expenditure is a condition. If the expenditure is resulting merely in acquisition or creation of asset without the assessee becoming owner thereof, it cannot be said that the said expenditure is a capital expenditure.
The coming into existence of an asset as a result of incurring expenditure alone thus is not sufficient to treat the said expenditure as of capital nature unless the asset coming into existence is also owned by the assesses.
In other situation, the expenditure can be treated as capital expenditure only when it results in accrual of advantage of enduring nature to the assesses in the capital field. The relevant tests applied to determine the nature of expenditure in such a situation are the functional tests and the test of enduring benefit. An advantage is to be considered as of enduring benefit if the benefit accruing is not of a transient nature but is of such durability as to justify it being treated as a capital asset.
The Tribunal considered in detail the landmark decision of the Sc in the famous TCS case on software and observed, i it is no doubt true that a transaction of sale of computer software package off the shelf was held to be a sale of "goods" by the Supreme Court in the case of TCS relying, inter alia, on the extended definition given in Section 2 n of the Andhra Pradesh General Sales Tax Act. An early growth stage company may choose to heavily reinvest revenues into sales personnel in order to take as much market share as possible.
The accounting for intangible assets and goodwill is a little tricky as it relates to acquisitions, and its treatment for depreciation amortization is different than for fixed assets. However, in the case of computer software, most companies report that as part of their fixed Plant, Property, and Equipment assets as of today, in the year As such, software that qualifies as PPE would be depreciated like any other fixed asset, on its own schedule.
That means that depreciation expenses on the income statement would be spread out over the determined useful life of the software, rather than being expensed all upfront. It seems that software can be a fixed asset or an intangible asset depending on its features. For example, if a computer software is an integral part of hardware that would be classified as PPE, then that software would also be depreciated along with the physical hardware and also classified as PPE.
Then you have the differences between if the software is developed in-house or if it is purchased or licensed…. But in general, management has the discretion to make these decisions on whether to capitalize depreciate their software or not, and for how long. Print this page. Is this page useful?
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