2012 (12) TMI 89 - AT - Income Tax

Disallowance of Sales promotion expenditure - rewards point can be redeemed by the customers by way of rebate from the sale price while making additional purchases at the assessee s stores disallowance of claim on the ground that the expenditure is an unascertained expenditure Held that - As and when the customer of the assessee makes a particular purchase, the customer is given a monetary right, in the form of rebate in the cost of goods that he may purchase at a future date. Thus, as and when a right is given, the assessee incurs a liability which it has claimed as marketing expenditures. The assessee, based a historical data, in a scientific manner, has estimated that only 50% of the reward points given are likely to be encashed by the customers. Out of this, 50% gross profit margin is reduced and the balance is only claimed as expenditure - assessee has also proved that this is a consistent accounting policy being followed year after year Disallowance deleted In favor of assessee

Summary

Issues Involved:
1. Allowability of the claim on reward points as an expenditure.
2. Re-opening of assessments.

Issue-wise Detailed Analysis:

1. Allowability of the claim on reward points as an expenditure:

The primary issue in this appeal is whether the assessee's claim of expenditure on reward points under the "First Citizen" scheme is allowable. The assessee, a company running retail stores, introduced this scheme to encourage customer loyalty. Customers earned reward points on purchases, which could be redeemed for discounts on future purchases. The assessee recognized the liability for these reward points in the year they were earned, debiting the Profit & Loss account. The Assessing Officer disallowed this claim, arguing that the expenditure should be accounted for only when actually incurred, labeling it as an unascertained expenditure.

The Commissioner (Appeals) deleted the addition, supporting the assessee's method. The Revenue's representative argued that the liability crystallized only upon redemption and that the expenditure was contingent. The assessee's counsel countered by emphasizing the consistent accounting method and reliance on past experience, where 50% of reward points were estimated to be redeemed. The Commissioner (Appeals) agreed with the assessee, noting that the liability was attached to corresponding revenue and based on scientific calculation and historical trends, thus making the claim allowable.

The Tribunal upheld the Commissioner (Appeals)'s findings, agreeing that the assessee incurred a liability as soon as the reward points were given, based on a scientific estimate of 50% redemption and adjusted for gross profit margin. The Tribunal also noted that the assessee consistently followed this accounting policy, and any lapsed points were shown as income in subsequent years. Consequently, the Tribunal dismissed the Revenue's appeal on this ground.

2. Re-opening of assessments:

The assessee's counsel invoked Rule-27, challenging the re-opening of assessments. He argued that the Assessing Officer relied on incorrect notes to accounts, leading to a change of opinion, which is not permissible. The Tribunal, having upheld the Commissioner (Appeals)'s order on the primary issue, did not adjudicate the issue of re-opening, considering it an academic exercise.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the Commissioner (Appeals)'s decision to allow the assessee's claim on reward points as an expenditure. The Tribunal agreed that the liability was accurately quantified based on historical data and consistent accounting practices. The issue of re-opening of assessments was not adjudicated as it became academic after the primary issue was resolved.