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TMI Blog2022 (1) TMI 282X X X X Extracts X X X X X X X X Extracts X X X X ..... visions under the Act was less than the computation of total income on the basis of books profits under section 115JB of the Act and therefore the total income of the assessee was determined in terms of section 115JB of the Act. While computing the total income of the assessee as per the normal provisions of the Act, the AO made several additions to the total income declared by the assessee. Against those additions, the assessee preferred an appeal before the CIT(A) and by order dated 19.05.2011, the CIT(A) deleted certain additions made by the AO and confirmed certain additions made by the AO. Against the additions that were confirmed by the CIT(A), the assessee filed appeal before the Tribunal and against the relief allowed by the CIT(A), the Revenue preferred appeal before the CIT(A). The appeal of the Revenue was ITA No.733/Bang/2011 and the appeal of the assessee was ITA No.748/Bang/2011. The Tribunal passed common order dated 28.08.2014 deciding the appeals of the assessee and of the Revenue. The Tribunal allowed assessee's appeal and dismissed the Revenue's appeal. 3. The Revenue filed appeal before the Hon'ble High Court against the order of the Tribunal and in so far as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties before us, we deem it appropriate to quash the order passed by the tribunal so far as it pertains to findings of substantial question of law No.1 and remit the matter to the tribunal for decision afresh in accordance with law after considering the rival submissions made on both sides. Therefore, the first substantial question of law is answered accordingly." 5. It can be thus seen from the order of the Hon'ble High Court that the Hon'ble High Court remanded only the question with regard to eligibility of the claim of the assessee for deduction of a sum of Rs. 23,05,49,466/- as revenue expenditure and all other grounds have been dismissed. Consequently the only issue that survives for consideration before the Tribunal is the issue remanded by the High Court which is ground Nos.7 to 10 of the grounds of appeal of the assessee in ITA No.748/Bang/2011. The Registry has however erroneously restored ITA No.733/Bang/2011 also which does not survive for consideration as it has already been decided by the Tribunal and confirmed by the Hon'ble High Court. Consequently, ITA No.733/Bang/2011 is dismissed as not required for adjudication. 6. Grounds 7 to 10 in ITA No.748/Bang/2011 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he bank and the solution vendors so that the core banking solution is rolled out as per the requirement of the bank's prioritized business projects. 3. IBM 8,40,00,000 For customizing the PROFILE as per the requirements of Indian Banking Procedures and helping in implementing the software at the 4. Bangalore Labs 16,17,000 Fborar npcrhoevsi.ding networking software for the project Total 23,05,49,466 9. Apart from the above, the assessee also incurred a sum of Rs. 3,35,16,164/-towards purchase of computer systems from IBM in connection with the above project. This amount was capitalized by the assessee and there is no dispute in this regard. The assessee claimed the expenditure of Rs. 23,05,49,466/- as detailed above, towards purchase of software as Revenue Expenditure. The contention of the assessee was that the bank has only purchased software license and not the ownership. Further, it was the case of the assessee that the software enables smooth running of the business of the assessee. Since the software is an application software, the same is an allowable expenditure u/s 37 of the Act. 10. The AO in the Order of Assessment has made the foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ples of application programs would include an accounts package or a CAD program. Other broad classes of application software include real-time software. business software, scientific and engineering software, embedded software. personal computer software and artificial intelligence software". 13. It has been contended by the learned counsel for the assessee before us that the difference between the system software and application software is as follows: Differences between System Software and Application Software System software is meant to manage the system resources. It serves as the platform to run application software. Application software helps perform a specific set of functions for which they have been designed. System software is developed in a low-level language (assembly language for example) Application software is developed in a high-level language such as Java. C++, .net and VB. System software automatically starts running once the system is turned on and stops when the system is shut down. Application software runs as and when the user requests it. A system cannot even start without system software Application software is user specific and it is not n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets untouched would be an expenditure in the nature of revenue expenditure even though the advantage would thus collapse in such like cases. It would be only truer in cases which deal with technology and software application which do not in any manner supplant the source of income or added to the fixed capital of the assessee. 17. The learned DR while relying on the order of the CIT(A), pointed out that the assessee by incurring expenses on the project "Vysyamulya" linked 125 branches with a Centralized Processing Solution. The expenses would provide an enduring benefit to the assessee. He submitted that computerization through utilization of modern know-how would give a permanent benefit to the assessee. He submitted that the assessee was allowed depreciation at 25% of the expenses incurred and would get the benefit of deduction of the entire expenses over a period of 4 years. According to him the legislature in its wisdom has allowed higher depreciation on computers/computer software keeping in mind the fact that obsolescence of computer/computer software is faster than other assets. 18. We have considered the rival submissions. The issue before us is as to whether expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21.2.2000 (copy at page 67 to 124 of assessee's paper book). This agreement gives a picture of what problem the assessee faces in its business and the objective behind undertaking the CBS project. The problem statement says that the assessee wants to gain and exploit technology advantage to be able to provide anytime anywhere, any channel banking services to its clients and compete with international banks and new private sector banks operating in India. The technology solution was desired to have (i) customer centric approach to provide full range of customer, deposit and loan applications and providing on-line batch services to meet the assessee's transaction processing and financial management requirements. (ii) to meet mandatory functional needs of the bank and regulators, (iii) support overall IT strategy of the Bank and (iv) make it reasonably future-proof meaning that it is based on open systems, standards confirms to usage of contemporary technologies and supports the bank's evolving functional needs. The technology solutions were to support retail banking, corporate banking, commercial banking, retailing of financial products and services, loan origination and collection p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al amount over a period of 10 Assessment years. 24. Before we specifically deal with the issue in this appeal whether expenditure incurred in implementation of CBS project is to be regarded as Capital Expenditure or Revenue expenditure, it would be relevant to dwell upon the general guidelines and principles laid down by the various higher Courts including the Hon'ble Apex Court for deciding the nature of any expenditure whether capital or revenue. Lord Denning in Heather v. P.E. Consulting Group Ltd. (1972) 48 TC 293 made the following still very pertinent observations at page 321 A: "The question revenue expenditure or capital expenditure - is a question which is being repeatedly asked by men of business, by accountants and by lawyers. 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceutical products, upon the technical knowledge of the Swiss company for a limited period and since the Swiss company did not part with any asset of its business nor did the assessee acquire any asset or advantage of enduring nature for the benefits of its business, the payment made by the assessee to Swiss company under the agreement was held by the Hon'ble Supreme Court to be towards revenue expenditure observing that the nature of receipt as capital or revenue is not always determinative of the nature of this outgoing in the hands of the person who receives it. Explaining further, it was observed by the Hon'ble Apex Court that the license was for a period of five years liable to be terminated in certain events and since the object of the agreement was to obtain the benefit of the technical assistance for running the business of the assessee the expenditure in question was of revenue nature. 26. A resume of the aforesaid judicial pronouncements shows that there cannot be any specific or precise test, which can be applied conclusively or universally for distinguishing between capital and revenue expenditure. It is a blurred and undefined area in which anyone can get lost. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and compete with international banks and new private sector banks operating in India. Towards this end the assessee acquired license to use software "profile" which was to maintain loan and deposit account of customers from Sanchez. It engaged the services of a consultant to design, develop and implement CBS project and the purpose or objectives are already given in paragraph-20 of this order and are not repeated. IBM was engaged to develop a Data Centre and Bangalore Labs Private Limited carried out networking of all the branches of the assessee with Head office through Data Centre. The objective of CBS project is that the assessee wants to gain and exploit technology advantage to be able to provide anytime anywhere, any channel banking services to its clients and compete with international banks and new private sector banks operating in India. The technology solutions were to support retail banking, corporate banking, commercial banking, retailing of financial products and services, loan origination and collection processes, interbranch transactions and reconciliation till all branches operate from the core solution, capital assets accounting, consolidation of GL of all branches ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ows you to complete a specific task - like conduct Google searches. The software in respect of which the assessee acquired license from Sanchez is an application software. The Hon'ble Karnataka High Court in the case of IBM Ltd. (supra) taken the view that payment of application software though there is an enduring benefit, it does not result into acquisition of any capital asset and merely enhances the productivity or efficiency and hence has to be treated as revenue expenditure. 31. Another important aspect that needs to be addressed is the stand of the revenue that under clause 5.1 of the license agreement between assessee and Sanchez, the license to use the software is in perpetuity and therefore the assessee has acquired a capital asset which also provides enduring benefit to the assessee. As we have already observed the tests for deciding the question whether an expenditure is capital or revenue in nature cannot be decided on the basis of ownership test or enduring benefit test alone. The question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or funct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cense is in perpetuity, the expenditure incurred is capital expenditure. 32. In the light of the above discussion, we hold that advantage of an enduring benefit, need not be on capital account. If the advantage consists merely in facilitating the assessee's trading operations or enabling him to manage and conduct his business more efficiently or more profitably while leaving the fixed capital untouched, the same cannot be regarded as on capital account. In order to treat any expenditure as capital expenditure, the same should result in accrual of advantage of enduring benefit and such benefit should accrue to the assesses in the capital field. Such accrual of benefit in the capital field would mean that the said benefit should form part of the profit-making apparatus of the assessee's business. The expenditure in question only facilitates carrying on the business of the assessee more profitably without touching the profit making apparatus of the bank which is receiving deposits and lending/investing them for profit. Therefore the expenditure in question has to be regarded as revenue expenditure. Thus the relevant grounds of appeal are allowed. 34. In the result, the appeal of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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