Software what kind of asset

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.

But it was not the only basis on which the decision of the Hon'ble Apex Court was exclusively based. First and foremost, there was a reference made to the decisions of American Courts rendered in several cases including especially the cases of Commerce Union Bank v.

Sales Tax Act was taken into account and relied upon by the Hon'ble Supreme Court to hold that a software, whether customised or non-customised, satisfies all the attributes of being a "goods' and as such, the same is capable of being bought and sold add becomes an object of trade and commerce. Rules, it has been explained to include computer programme recorded on any disc, tape, perforated media or other information storage device.

Therefore computer software whether in canned form or uncanned form is goods and a tangible asset by itself. But the test of ownership in the computer software in the light of the question whether the same is capital or revenue cannot be decided on the basis of ownership test alone but has to be seen from the point of its utility to businessman and to see how important an economic or functional role it plays in his business.

That by itself will not be sufficient to conclude that the said expenditure is revenue expenditure, if on application of the functional test, it is fond that the expenditure operates to confer a benefit in the capital field. Whether expenditure on computer software gives an enduring benefit to an assessee: For ascertaining as to whether expenditure on computer software gives an enduring benefit to an assessee, the duration of time for which the assessee acquires right to use the software becomes relevant.

Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, if can be said that that where the life of the computer software is shorter say less than 2 years , it may be treated as revenue expenditure. It is also evident from the amendment to the law w. An assessee may own a software outright or be a licensee but the same ratty operate to confer benefit only in the revenue field and therefore is may have to be regarded as Revenue Expenditure.

So the Tribunal concluded:- i When the assessee acquires a computer software or for that matter the license to use such software, he acquires a tangible asset and becomes owner thereof as held above relying on the decision of Supreme Court in the case of TCS. 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 also needs to be satisfied.

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 field or its utility to a businessman which may touch either capital or revenue field.

Having laid down the criteria for determining the nature of expenditure incurred on acquisition of software, whether capital or revenue, the Special Bench was of the view that these criteria need to be applied to determine the exact nature of expenditure incurred by the assessees in the present cases for acquiring different softwares.

Since this exercise is required to be done in respect of each and every software independently having regard to the criteria laid down above, the matter needs to be restored back to the file of the Assessing Officer for doing such exercise. The AO shall examine the question whether expenditure on computer software is capital or revenue in the light of the criteria laid down above after giving an opportunity of being heard to the assessees.

If on such examination, the AO comes to the conclusion that the expenditure is capital expenditure, then the question regarding allowing depreciation will be decided in accordance with the principles laid down.

Copyright has been purchased for telecasting a serial on Serial is to be telecasted after What would be put to use? Abhinandhkumar CA Student 05 December Mhon Ngullie 11 September Is Firewall Software assets. If yes, under which head i can show as asset. Buildings or 2. Your are not logged in. More Post. In this article, we'll review the accounting standards that are in place to classify computer software.

Intangible assets are typically nonphysical assets used over the long-term. Intangible assets are often intellectual assets, and as a result, it's difficult to assign a value to them because of the uncertainty of future benefits. On the other hand, tangible assets are physical and measurable assets that are used in a company's operations. Under most circumstances, computer software is classified as an intangible asset because of its nonphysical nature.

This article only touches on a few of the key topics. Many other instances may have different accounting standards that might need to be applied such as cloud computing, multi-use software, developmental software, and shared software between divisions. Federal Accounting Standards Advisory Board. Accessed July 28, Governmental Accounting Standards Board. Financial Statements. Corporate Finance. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. You use them over an extended period of time, and they must be tangible. Fixed assets differ from current assets, which intangible items like investments, cash, accounts receivable, prepaid expenses, inventory, marketable securities and other liquid assets that can be converted into cash.

In the event of an impending bankruptcy, a company could cash out its current assets to help pay off debts. If you use the above definitions as your guide, then, is software a fixed asset? The website softwarevalue. These criteria both describe tangible assets.