2015 (1) TMI 607 - AT - Income Tax

Provision for reward point redemption disallowed as unascertained liability - Held that - The assessee had made a provision on the basis of opinion expressed by the Expert Advisory Committee of Institute of Chartered Accountants of India on the issue of reward point provided by Banks in order to promote their credit cards as contained at pages 159 to 163 of paper book. As clearly demonstrated by ld. Counsel for the assessee, the provision made by assessee was an allowable deduction. Therefore, the submission of ld. Counsel for the assessee that the provision was made on bona fide basis cannot be disputed. However, since ld. Counsel for the assessee has not seriously pressed this ground as deduction on actual payment basis has already been allowed to assessee and the taxes were already paid by the assessee, therefore, this ground is dismissed. Decided against assessee. Card acquisition expenses - change of accounting policy - Held that - There is no concept of deferred revenue expenditure under the Income Tax Act except under certain specific provisions like section 35D. Therefore, unless statutory provision is there to defer the revenue expenditure over a period, the entire amount is to be allowed in the year in which it is incurred for running the business as per section 37 of the Income Tax Act. It is well settled that the entries in the books of account cannot be the basis whether a receipt is taxable or not or whether expenses are allowable as a deduction or not. Courts are compelled to go by the true nature of receipts and not to go by the entries made in the books of account. - Decided in favor of assessee. Credit investigation expenses - CIT(A) deleted the disallowance being 75% of the total expenditure - Held that - We are in agreement with the submissions of ld. Counsel for the assessee that the reasoning given by AO in regard to impugned amount is akin to treating the amount as deferred revenue expenditure inasmuch as the AO himself has observed that there was necessity of this expenditure and while so holding, the AO himself has allowed 25% of this expenditure impliedly 1/4th of the impugned amount has been considered as expenditure relating to current assessment year and the balance being allowable in subsequent three years. Therefore, the finding of AO that the impugned amount was capital in nature was not correct but he has primarily treated the expenditure as deferred revenue expenditure. As discussed in assessee s appeal for A.Y. 2006-07, this treatment is not permissible in law and the entire amount had to be allowed u/s 37 of the Income Tax Act being incurred wholly and necessarily for the purpose of business. In view of above discussion, we uphold the order of ld. CIT(A). - Decided against revenue. Expenditure on application capture - CIT(A) deleted the disallowance being 75% of the total expenditure - Held that - The nature of this expenditure, reasons for making disallowance by AO and the reasons for allowing this expenditure by ld. CIT(A) are identical to the issue relating to credit investigation expenses and, therefore, for the reasons given in regard to ground no. 1, this ground is also dismissed. -Decided against revenue. Creation of brand and advertisement expenses - CIT(A) deleted the disallowance being 75% of the total expenditure - Held that - As is evident from the findings of AO, he has allowed 25% of the expenses treating the same being relating to current year under consideration and balance has been disallowed. This implies that he has primarily treated this amount as deferred revenue expenditure and, therefore, for the reasoning given in regard to ground no. 3 of the assessee s appeal for A.Y. 2006-07 and also after taking into consideration the various decisions relied upon by ld. Counsel for the assessee, the entire amount was rightly allowed by ld. CIT(A) particularly because 79% of the expenditure was in the nature of commission paid to marketing agent for procuring new cardholders. It cannot be denied that this expenditure though classified under the head advertising expenditure was essential for running of assessee s business. - Decided against revenue.

Issues Involved:
1. Disallowance of provision for reward point redemption.
2. Disallowance of credit investigation expenses.
3. Disallowance of application capture expenses.
4. Disallowance of advertisement and sales promotion expenses.
5. Enhancement of income by disallowing card acquisition expenditure.

Issue 1: Disallowance of Provision for Reward Point Redemption
The assessee, a joint venture engaged in issuing credit cards, made a provision for reward point redemption amounting to Rs. 2,90,73,000/-. The AO disallowed this provision, considering it an unascertained liability. The CIT(A) upheld this disallowance. The assessee contended that the liability was actual and certain, based on actuarial valuation and supported by the Expert Advisory Committee of the Institute of Chartered Accountants of India (ICAI). The Tribunal, referencing the Bangalore Tribunal's decision in Syndicate Bank vs. DCIT, acknowledged that the provision was made on a bona fide basis. However, since the assessee had already been allowed the deduction on an actual payment basis, this ground was dismissed.

Issue 2: Disallowance of Credit Investigation Expenses
The AO disallowed 75% of the credit investigation expenses amounting to Rs. 5,65,63,127/-, treating it as capital expenditure. The assessee argued that these expenses were necessary for verifying the creditworthiness of prospective customers and did not result in an enduring benefit. The CIT(A) allowed the expenses as revenue expenditure. The Tribunal agreed with the CIT(A), noting that the AO's treatment of the expenses as deferred revenue expenditure was incorrect, and the entire amount should be allowed as a revenue expense under Section 37 of the Income Tax Act.

Issue 3: Disallowance of Application Capture Expenses
The AO disallowed 75% of the application capture expenses amounting to Rs. 73,50,418/-, treating it as capital expenditure. The CIT(A) allowed the expenses as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, reasoning that the nature of the expenditure and the AO's treatment were similar to the credit investigation expenses, and thus, the entire amount should be allowed as a revenue expense.

Issue 4: Disallowance of Advertisement and Sales Promotion Expenses
The AO disallowed 75% of the advertisement and sales promotion expenses amounting to Rs. 42,11,31,848/-, treating it as capital expenditure for brand building. The assessee argued that these expenses were necessary for business promotion and did not result in an enduring benefit. The CIT(A) allowed the expenses as revenue expenditure, noting that 79% of the expenses were commissions paid to marketing agents. The Tribunal upheld the CIT(A)'s decision, emphasizing that the expenditure was essential for running the business and should be allowed in full as a revenue expense.

Issue 5: Enhancement of Income by Disallowing Card Acquisition Expenditure
The AO disallowed Rs. 17,93,59,566/- of card acquisition expenditure, treating it as deferred revenue expenditure. The assessee argued that the entire amount should be allowed as a revenue expense in the year incurred. The CIT(A) upheld the AO's disallowance. The Tribunal, referencing various judicial precedents, concluded that there is no concept of deferred revenue expenditure under the Income Tax Act unless specifically provided by statute. Therefore, the entire amount should be allowed as a revenue expense in the year incurred.

Conclusion:
The Tribunal dismissed the assessee's ground regarding the provision for reward point redemption but allowed the grounds related to credit investigation expenses, application capture expenses, advertisement and sales promotion expenses, and card acquisition expenditure. The Department's appeal was dismissed, and the assessee's appeal was partly allowed.

← Previous Next →