Software Expenses incurred by Bank are Revenue in Nature: Delhi HC [Read Judgment]

While granting relief to Oriental Bank of Commerce, a two-judge bench of the Delhi High Court held that the software expenses incurred by the Banks are deductible from the total income of the assessee since it constitutes revenue expenditure under the provisions of the Income Tax Act, 1961.

In the instant case, the assessee/bank incurred expenditure as amounts spent towards acquiring various categories of software. The Assessing Officer, however, took a view that the software expenses charged to the Revenue could not be allowed since they fell in the capital stream. Accordingly, he disallowed the claim. On appeal, the ITAT upheld the order.

Before the High Court, the assessee contended that the software in issue by and large were specialized and meant for banking and bank-related operation and the motive for acquiring them was to optimize performance and streamline the efficiency of the bank.

On the other side, the Revenue relied on the findings of the CIT(A) who conducted a detailed enquiry as to the nature of the software and the utility of each of them, and held that these were depreciable assets, for which the rates of the depreciation were set out in part B of the Schedule to the Income Tax Rules – consequently the expenditure could not be treated as falling in the revenue stream.

After hearing the submissions from both sides, the bench noted that the nature of the articles acquired in the present case is licensed. “They do not confer any enduring right – much less a permanent right as in the nature of acquisition of property. These copyright licenses are used for the duration, spelled out by the licensor/intellectual property owner. Furthermore and importantly, the bank’s objective is not to carry on software business, rather it uses the computer software as a tool to maximize its performance and streamline its efficiency,” the bench said.

While concluding the issue in favor of the Assessee-Bank, the bench held that “The mere circumstance that the depreciation rate is spelled out in the Schedule to the Income-tax Act in our opinion is not conclusive as to the nature of the expenditure and whether it resulted from an enduring advantage to a particular assessee. It is nobody’s case that assessee is dealing with computer software or is in the business of any related services. Rather it uses specific customized software, which is specific to its banking activities. But for the use of such software, the nature of expenditure otherwise incurred for streamlining its functions i.e. towards fee payable to the consultants for systems and employment of special professionals to carry on the tasks that the software in fact performs would have fallen undoubtedly in the revenue stream.”