The Commissioner of Income Tax and The Joint Commissioner of Income Tax (Assistant) Special Range vs The Karnataka Bank Ltd.

B.V. Nagarathna, J.—The Revenue has preferred this appeal by challenging the order dated 11.05.2005 passed in ITA No. 778/Bang/2000 by raising the following substantial question of law:

i) Whether the appellate authorities were correct in holding that software implementing charges cannot be treated as expenditure incurred in the capital field but it should be treated as revenue expenditure without applying the correct test by proceeding to arrive at the conclusion on mere conjecture and surmises?

The relevant facts of the case are that the respondent. Assessee, which is a bank, filed its return of income for the assessment year 1997-98 by claiming a sum of Rs. 5,13,545/-as revenue expenditure towards software implementation charges as the said expenditure according to the Assessee was incurred to provide software package for working of computers installed in the various branches of the bank. The Assessing Officer however did not accept the contention of the Assessee and held that the installation of software has given the bank an enduring benefit and accordingly passed an order dated 23.03.2000, which order was appealed against by the Assessee before the Commissioner of Income Tax (Appeals), which was allowed in part by an order dated 08.09.2000. The Revenue being aggrieved by the said order preferred an appeal before the Tribunal. The Income Tax Appellate Tribunal held in favour of the Assessee and deducted the said amount as being revenue expenditure. It is against the said order, the present appeal has been filed.

We have heard the learned Counsel for the appellant Revenue and the learned Sr. Counsel for the respondent Assessee.

It is contended on behalf of the appellant that the respondent which is a bank, was maintaining its accounts manually and that for the first time computers were installed in the various branches of the bank and for which the software was installed and it is with regard to the software implementation charges that the Assessee has claimed that the said amount has to be treated as revenue expenditure which has been erroneously accepted by the Tribunal. He further submits that when for the first time the computers were installed by the bank and software was also installed for the first time, the said expenditure is to be treated as capital expenditure. Though no material has been placed by the Assessee to show that it was by way of upgradation that the software was installed so as to contend that the expenditure is revenue in nature, the Tribunal in the absence of such material could not have held that it was revenue expenditure.

Per contra, the learned Sr. Counsel supporting the order of the Tribunal submits that there was already computer system established by the bank and that by way of upgradation or for improving the said system, software was purchased and therefore the expenditure in that regard has to be treated as revenue expenditure and that the Tribunal was justified in holding so.

Having heard the Counsel on both the sides and on perusal of the material on record, it is not in dispute that the Assessee has claimed a sum of Rs. 5,13,545/- as software implementation charges which was incurred for providing software packages for working of computers installed in the various branches of the bank. However it is not established by the respondent-assessee as to whether the said charges were incurred for the first time when the computer systems were installed in the various branches of the bank or it was by way of recurring expenditure for providing upgradation to the existing software or on account of installation of improvised or more suitably improvised software due to existing software becoming obsolete. In the absence of such material, it cannot be concluded that the implementation of software and the expenditure incurred in that regard are for enduring the benefit to the Assessee and therefore has to be treated as capital expenditure.

We are therefore of the view that the matter has to be given a fresh consideration by considering the relevant material on record as to whether the expenditure incurred was when the computer systems were established for the first time by the bank and for that purpose software implementation charges were incurred by the bank or in an already established computerised system there was replacement of the existing or obsolete software by a more advanced or modern software in which event, the same would have been treated as revenue expenditure. Since no material in this regard is placed by the respondent Assessee, we are of the view that the matter has to be remanded back to the Assessing Officer by giving an opportunity to the respondent Assessee to place all relevant, material evidence on record and make out a case as to whether the expenditure incurred towards the software implementation was by way of improvisation or upgradation or whether the said expenditure was incurred for the first time when the bank was computerized and there was a change in the system of maintenance of accounts by way of computerization. Therefore, the substantial question of law raised in this appeal need not be answered in view of the remand made to the Assessing Officer.

Accordingly, we set aside the order of the Tribunal and remand the matter to the Assessing Officer to decide the question in the light of the aforesaid observations.