2015 (1) TMI 202 - HC - Income Tax

Treatment of amount incurred on credit investigation Verification of information and data provided by prospective customers Amount to be treated as Capital or revenue expenses - Held that - CIT(A) and the Tribunal rightly treated the expenditure as revenue in nature - the main business of the assessee was receiving applications from prospective clients for issue of credit cards, consequent verification and issuance of credit cards - Information and details furnished by the prospective clients had to be verified, details checked and creditworthiness ascertained - Credit card business involved risks as the person to whom credit card was issued was entitled to make purchases and subsequently make payment - the exercise to verify and check the truthfulness and correctness of the details/data and creditworthiness was a part and parcel of the day to day conduct of business - The expenditure, in fact, was similar to and like other revenue expenditure incurred in the normal course of business - the exercise had to be taken periodically and routinely as and when new applications were received from the prospective customer - It was an ongoing, continuous and perpetual exercise, directly connected with the line of business. The expenditure incurred to carry out verification was a part of the running cost incurred to earn profit - The business of the assessee was not to create and sell the database or provide the said information to third parties for consideration - It was not an expenditure incurred to create an asset or an asset of enduring nature - the principal and main object of the assessee was to appraise and ascertain financial position and creditworthiness of the person, so as to issue a credit card and earn money - no credit card would have been issued, due to a negative report - These were direct business expenses, revenue in nature - No one would issue a credit card or enter into a transaction on the basis of database and credit valuation 6 or 8 months old without ascertaining the true and correct position at the relevant time. Disallowance of 75% of expenses incurred on scanning or capturing the applications data into electronic form Held that - Criteria/test of once for all/lump-sum payment and periodical payments may not and in several cases would not be the true and correct test to determine, revenue or capital nature of an expense - The aim and object of the expenditure would be decisive - expenditure for running of business or working with a view to produce profits, would be revenue expenditure, whereas expenditure to acquire or bring into existence as asset or advantage of enduring benefit, would be of capital nature relying upon CIT versus J.K. Synthetics Ltd 2008 (12) TMI 21 - DELHI HIGH COURT - Application capture and data entry facilitated and helped the assessee to conduct their day to day business operations - Profiles of applicants and their creditworthiness had to be assessed and evaluated on specific parameters - To make the process of evaluation faster, accurate and more systematic, the information/details were scanned or captured/converted into e-format - E-formated data processing ensured objectivity and fairness - This reduced possibility of errors and of issuance of credit cards to undeserving candidates the order of the Tribunal is upheld. Expenses on brand creation and advertisement expenditure Held that - Advertisement expenditures in the present day context should normally be treated as revenue expenditure, unless there are special circumstances and reasons to hold that the expenditure was capital in nature - the advertisements do not have a lasting and long term effect and the memory of the customers or targeted audience is short lived - The advertisements fade away and do not have an enduring impact - If there is a lack of advertisement by one, the vacuum and space is taken over by others with benefit and advantage to the detriment of the first relying upon Reference can be made to CIT vs. Salora International Ltd. 2008 (8) TMI 138 - DELHI HIGH COURT . Addition made by CIT(A) Notice for enhancement issued Held that - The Tribunal rightly deleted the addition made by the CIT(A) - there is no provision in the Act which postulates or refers to deferred revenue expenditure - deferred revenue expenditure is, therefore, not as such recognised in the Act - Accounting principles or standards have to be applied and adopted and they must disclose fair and true financial position and the income, but they cannot be contrary to the provisions or the mandate of the Act - The Act would then override the accountancy principles - There are several provisions in the Act like Section 43B which provide for different treatment than required under the provisions of the Companies Act or the accounting principles or standards the right to claim deferred revenue expenditure is given to the assessee and not to the revenue - the expenditure as per the CIT(A) should be partly spread over two years, instead of the year in which it was incurred - the expenditure was revenue in nature - It had accrued and was paid - Nothing and no acts had to be performed and undertaken in future - It is not shown how and why, if the expenditure was allowed in the current year, it would not reflect true and correct financial position or income of the assessee in the current assessment year the order of the Tribunal is upheld Decided against revenue.

Summary

Issues Involved:
1. Treatment of credit investigation expenses.
2. Treatment of expenses for scanning/capturing application data into electronic form.
3. Treatment of brand creation and advertisement expenditure.
4. Treatment of card acquisition expenses.

Issue-wise Detailed Analysis:

1. Treatment of Credit Investigation Expenses:
The first issue concerns the treatment of Rs. 7,54,17,603/- incurred on credit investigation to verify information and data provided by prospective customers. The Assessing Officer (AO) treated this expenditure as capital in nature, arguing that it created a database with enduring benefits. However, the Commissioner of Income Tax (Appeals) and the Tribunal disagreed, treating it as revenue expenditure. The Court upheld this view, noting that the verification of creditworthiness is a routine, ongoing business activity essential for issuing credit cards. The Court emphasized that the creation of a database was incidental and not the primary objective, and the expenditure did not result in an enduring benefit or asset.

2. Treatment of Expenses for Scanning/Capturing Application Data into Electronic Form:
The second issue involves the disallowance of 75% of Rs. 98,00,557/- spent on scanning and capturing application data into electronic form, which the AO deemed capital in nature. The Court found this reasoning unacceptable, stating that the expenditure was for facilitating day-to-day business operations and ensuring accurate and systematic evaluation of applicants. The Court agreed with the Tribunal that this expenditure was revenue in nature, as it was directly related to the business's operational efficiency.

3. Treatment of Brand Creation and Advertisement Expenditure:
The third issue pertains to the addition of Rs. 42,11,31,848/- on account of brand creation and advertisement expenditure. The AO considered this expenditure as capital in nature, arguing it created an asset by enhancing market share and turnover. However, the Court found this reasoning flawed, noting that the major expenditure was on sales commission, directly related to business operations and not brand building. The Court emphasized that advertisement expenditures in the current economic context should generally be treated as revenue expenditure, as they do not have a lasting impact and are essential for maintaining business profitability.

4. Treatment of Card Acquisition Expenses:
The fourth issue involves the addition of Rs. 17,93,59,566/- by the Commissioner of Income Tax (Appeals), who held that the card acquisition expenses should be amortized over two years. The Tribunal disagreed, and the Court upheld the Tribunal's view, stating that the expenditure was revenue in nature and should be allowed in the year it was incurred. The Court noted that the Income Tax Act does not recognize deferred revenue expenditure, and accounting principles cannot override the Act's provisions. The Court emphasized that the expenditure had accrued and was paid, and spreading it over two years was not justified.

Conclusion:
The Court dismissed the appeals, agreeing with the Tribunal's findings on all issues. The expenditures in question were deemed revenue in nature and should be allowed in the year they were incurred, ensuring a true and fair representation of the assessee's financial position and income.