Specialised banking software expenditure treated as revenue where licences were temporary and only improved operational efficiency.

Expenditure on specialised banking software was treated as revenue expenditure because the software was acquired only as limited-duration licences, created no permanent or enduring proprietary right, and served as a tool to improve operational efficiency rather than alter the profit-making apparatus. Applying the functional test, the court noted that spending which helps the business structure operate more efficiently while leaving the source of income intact is revenue in nature. The presence of depreciation entries in the tax schedule was not conclusive. The outlay was therefore held to be revenue expenditure and not capital expenditure.

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Issues: Whether expenditure incurred on specialised banking software was capital expenditure or revenue expenditure.

Analysis: The software acquired by the assessee was in the nature of licences used for a limited duration and did not create any permanent or enduring proprietary right. The assessee was not in the business of software, but used the software as a tool to improve efficiency and streamline banking operations. Applying the principle that expenditure which enables the profit-making structure to work more efficiently while leaving the source of income untouched is revenue in nature, the Court held that the mere presence of depreciation entries in the tax schedule was not conclusive. The functional test and the limited life span of the software favoured treatment of the outlay as revenue expenditure.

Conclusion: The software expenditure was revenue expenditure and not capital expenditure; the question was answered in favour of the assessee.

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