Enduring benefit test cannot be applied mechanically on software expenses

Brief of the case:

• The Hon’ble Kolkata High court in the case of Indian Aluminum Company Ltd. held that application software is an aid in the business operations rather than the tool itself. Therefore, the payment for such application software, though there is an enduring benefit, does not result in acquisition of any capital asset and it merely enhances the productivity or efficiency and hence, has to be treated as revenue expenditure.
• Therefore, the test of enduring benefit cannot be applied mechanically in case of software expenditure
  

Facts of the case:

• The assessee M/s. Indian Aluminum Co. Ltd. is engaged in the manufacture and production of aluminum and related products. During the relevant previous year the assessee incurred an expenditure of Rs. 41,08,556/- on software development. The assessee treated this expenditure as a deferred revenue expenditure in its books of accounts and amortized Rs. 2,40,000/- by debiting the same to the Profit and Loss Account of the relevant previous year.
• The AO in the assessment order disallowed the expenditure on account of software development by holding that it was a capital expenditure. Aggrieved by the order of the assessing officer the assessee appealed before the Commissioner of Income Tax (Appeals). CIT(A) decided the case in favour of the assessee and deleted the dis allowance of the expenditure incurred on software development.
• CIT(A) held that software used by the assessee is not or any enduring benefit as assessee has to change these software within a short span of time i.e. 4 months or 6 months and that at times it is of no use at all because it become outdated because of change of system and change of technology. Therefore, it cannot be treated as capital expenditure giving enduring benefit.
• On appeal to ITAT by revenue, ITAT reversing the order of CIT(A) held that the expenditure on software development was capital in nature and should be disallowed because the software was developed for the purpose of assessee’s business and it will be useful for a long period, thus it would be of enduring benefit to the assessee. Therefore, the AO rightly treated the same to be capital expenditure.
• Aggrieved assessee is in appeal before the High Court.
  

Contention of the Assessee: