2018 (4) TMI 1534 - HC - Income Tax

Nature of expenditure - software expenses - revenue expenditure or a capital expenditure? - Held that - mere circumstance that the depreciation rate is spelt out in the Schedule to the Income-tax Act, is not conclusive as to the nature of the expenditure and whether it resulted an enduring advantage to a particular assessee - Taking these into account and that the software itself would have run its course or life span as it were, given that the earlier assessment year in question is 2008-09, the question of law framed is to be answered in favor of the assessee and against the revenue - appeal allowed.

Summary

Issues:
1. Whether software expenses incurred by the Appellant are capital or revenue expenditure?
2. Whether the Tribunal and CIT(A) correctly determined the nature of the software expenses?

Analysis:

1. The primary issue in this case revolves around determining whether the software expenses incurred by the Appellant should be classified as capital or revenue expenditure. The Assessing Officer disallowed the software expenses charged to the Revenue, considering them as falling within the capital stream. The CIT (A) upheld this determination, concluding that the expenses on software, except AMC, should be treated as capital. The ITAT also affirmed this decision, stating that the CIT(A) had made a detailed discussion on the issue and passed a valid order. The Appellant contended that the specialized software acquired were meant for optimizing performance and efficiency of the bank. The Court acknowledged that the software licenses did not confer enduring rights and were used for a specific duration. Referring to previous judgments, the Court emphasized that expenses enabling the profit-making structure to work more efficiently, without altering fixed assets, should be considered revenue expenditure. The Court ultimately ruled in favor of the assessee, stating that the software expenses were revenue expenditure.

2. The second issue pertains to the correctness of the Tribunal and CIT(A) in determining the nature of the software expenses. The revenue argued that all authorities consistently ruled against the assessee and that the CIT(A) conducted a detailed inquiry into the software's nature and utility, categorizing them as depreciable assets. However, the Court highlighted that the objective of the bank was not to engage in software business but to utilize software to enhance performance and efficiency. Quoting previous judgments, the Court emphasized that expenses fine-tuning business operations for effective management, without impacting fixed assets, should be considered revenue expenditure. The Court referenced the Supreme Court's stance on the replacement of enduring assets and concluded that the nature of expenditure should not be solely determined by depreciation rates. Considering the specific nature of the software used for banking activities and the temporary lifespan of the software, the Court ruled in favor of the assessee, allowing the appeals.