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TMI Blog2014 (10) TMI 699X X X X Extracts X X X X X X X X Extracts X X X X ..... lled to go by the true nature of receipts and not to go by the entries made in the books of account – Decided partly in favour of assessee. Credit investigation expenses – expenses on application capture – Held that:- The reasoning given by AO in regard to 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 amount has been considered as expenditure relating to current AY and the balance being allowable in subsequent three years - 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 - the nature of application capture 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 – thus, the order of the CIT(A) is upheld. Partial disallowance of creation of brand and advertisement expenses – Held that:- AO had allowed 25% of the expenses treatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justify. The assessee, in its reply to show-cause notice issued by AO, submitted as under: During the captioned assessment year, the assessee has debited a sum of ₹ 2,90,73,000/- to its Profit Loss Account for F.Y. 2004-05 towards liability in respect of reward points met of payments made during the year and based on actuarial valuation granted to card holders under the Triple Advantage reward points scheme. The above amount of ₹ 2,90,73,000/-. 3. The movement chart in respect of liability for reward point was as under: Particulars Year ended 31.3.04 Year ended 31.03.05 Year ended 31.03.06 Opening Provision 33,24,000 1,69,90,000 4,60,63,000 Additions during the Year 1,41,85,173 3,26,02,047 6,23,00,786 Amounts used during The year 5,19,173 35,29,047 72,22,786 Closing provision 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the cost are recognized as they are incurred and recorded in the financial statements of the period to which they relate. 5. The assessee had relied on following decisions: 1. Calcutta Co. Ltd. vs. CIT (37 ITR 1); 2. Metal Box Company of India Ltd. vs. Their Workmen (73 ITR 53); 3. Bharat Earth Movers vs. CIT (245 ITR 428); 4. CIT vs. Beema Mfrs. (P) Ltd. (130 Taxman 400) (Mad.); 5. Tata Iron Steel Co. Ltd. vs. D.V. Bapat, ITO (101 ITR 292) (Mum.); 6. CIT, A.P.-II vs. Sh. Sarvaraya Sugars Ltd. (163 ITR 429) (AP); 7. CIT vs. Indian Transformers Ltd. (270 ITR 259) (Ker.); 8. Protos Engineering Co. P. Ltd. vs. DCIT (282 ITR 550) (Mum.); 9. Maruti Udyog Ltd. vs. Dy. CIT (92 ITD 119) (Del.); 6. The AO did not accept the assessee s contention, inter-alia, observing that provision was created in the books of account to meet unascertained liability and hence it was a provision for contingent liability.The AO relied on the decision of Hon ble Supreme Court in the case of M/s Indian Molasses Company (P) Ltd. vs. CIT, 37 ITR 66, wherein the Hon ble Supreme Court had, inter-alia, held that expenditure which is deductible for Income tax purposes is one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the spendings made by the credit cardholder using the credit card and liability towards redemption of reward points are inextricably linked with each other and therefore, if income accruing to the Appellant on account of spendings made through credit card are taken into account in a year, following the matching principle of accountancy, the liability in respect of the same should also be taken note of in the same year. 5.3 It has been claimed that the Institute of Chartered Accountants of India ( ICAI ) has issued accounting standards which are mandatorily required to be followed by all the companies. In this regard, attention has been drawn towards the Accounting Standard (AS)-1, Disclosure of Accounting Policies , which in its definition of accrual states that the cost are recognized as they are incurred and recorded in the financial statements of the period to which they relate. 5.4 It was pleaded that in the case of the assessee, obligation towards reward points arises as soon as a customer becomes entitled to the reward points although payment in this regard is made whenever the customer chooses to redeem the reward points any time in future. Thus, liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 9. In the result, this ground is dismissed. 10. Now we take the appeals for A.Y. 2006-07, vide ITA No. 2470 filed by the assessee and ITA No. 2808 filed by the Department. 10.1 In this assessment year, the assessee s business remained the same. The assessee had filed return of income declaring total income of ₹ 72,01,85,256/-. The assessment was completed at a total income of ₹ 120,52,30,650/- after making following additions: Income as per return declared 72 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. Being aggrieved with the order of ld. CIT(A), both Assessee and Department are in appeal before us. First we take up the assessee s appeal, vide ITA No. 2470/D/2011. The assessee has taken following grounds of appeal: 1. That on the facts and in the circumstances of the case and in law, the impugned order dated February 22, 2011 passed by the ld. CIT(A) u/s 250(6) of the Act for the subject year is erroneous and bad in law to the extent the same enhances the income of the Appellant/confirms the disallowances made by the Deputy Commissioner of Income Tax, Circle 7(1), New Delhi ( AO ); 2. That on the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in confirming the disallowance of provision for reward point redemption amounting to ₹ 5,50,78,000 considering the same as unascertained liability. The ld. CIT(A) has further erred in holding that the above liability accrues when the claim for redemption of reward points is lodged by the cardholder and not at the time of purchase by the cardholder; 2.1 That on the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in directing the AO to allow deduction of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject year, the same ought to be allowed in AY 2007-08. 13. Ground no. 1 is general and does not call for any adjudication. 14. Apropos ground no. 2 to 2.2, the facts are identical to the solitary issue in A.Y. 2005-06 in assessee s appeal. In the present assessment year the assessee had made the provision on the basis of Actuarial Valuer s report contained at page 315 of paper book which further prove the assessee s bona fide in making the provision. In view of these facts for the reasons given in A.Y. 2005-06 in assessee s appeal these grounds are dismissed. 15. Apropos ground no. 3 to 3.3, brief facts are that AO noticed that during the year under appeal, the assessee had changed its accounting policy for booking of card acquisition expenses. He referred to schedule XIV clause (2F) of the significant accounting policies forming part of the audited financial statement for the relevant year which read as under: Deferred card acquisition cost: Till 31st March, 2005 sales force compensation, card acquisition cost (sales service provider expenses, incentives related to card acquisition, credit investigation cost, application printing cost), consumption of plastic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtment was denied going in further appeal by the COD. Ld. CIT(A) however, did not accept the assessee s contentions for the following reasons: 1. Section 211(2) of the Companies Act, 1956 provides that every Profit Loss Account of a company shall give a true and fair view of the Profit Loss of the company for the financial year. Sub-sections (3A) (3C) of section 211 of the Companies Act provide that every Profit Loss Account of the Company shall comply with the accounting standards prescribed by the Institute of Chartered Accountants of India. 2. He pointed out that as per (AS-5) issued by the Institute of Chartered Accountants of India, the same accounting policies should normally be adopted for similar events of transactions in each period. In view of these, ld. CIT(A) pointed out that in view of section 211(3A) (3C) of the Companies Act, AS-5 issued by the Institute of Chartered Accountants of India needs to be mandatorily followed. There is no choice left with the assessee in this regard. Ld. CIT(A) referred to the decision of Hon ble Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. (2009) 312 ITR 254 (SC) and pointed out that in this ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as claimed as deduction in the computation of income u/s 37 of the Income Tax Act. Ld. Counsel submitted that balance sheet in the case of a company would be prepared as per the requirements of the Companies Act but for computation of income under the Income Tax Act, the provisions of the Income tax Act have to be applied. 19. Ld. DR relied on the order of ld. CIT(A). 19.1 We have considered the rival submissions and have perused the record of the case. We find 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. Ld. CIT(A) has relied on the decision of Hon ble Supreme Court in the case of Woodward Governor (supra), wherein the issue was regarding claim for foreign exchange loss and there was no issue regarding deferred revenue expenditure. The said decision is not applicable to the facts of the present case. The Hon ble Supreme Court considered the applicabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per which part of the expenditure had to be deferred and claimed in the subsequent years and, therefore, approach of the AO was correct. However, this argument overlooks that even in Madras Industrial Investment Corporation (supra), on which the reliance was placed by Ms. Bansal, the general principle stated was that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business can be allowed in the year in which it is incurred. Some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assesse who wanted spreading the expenditure over a period of time as was justifying such spread. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of issue of debentures itself. The Court found that the assessee could still be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilize the said amount and secure the benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. 6. It was held that the claim of the Revenue that the revenue expense should be deferred in the absence of a statutory provision or spread over some years cannot be accepted. In the case of Commissioner of Income Tax vs. Casio India Ltd. MANU/DE/2405/2011 : (2011) 335 ITR 196 (Del.), reference was made to the decision in the case of Citi Financial Consumer Fin. Ltd. (supra). It was held that the expenditure incurred on investment and sale promotion was business expenditure u/s 37(1) of the Act and the concept of deferred revenue expenditure should not be accepted at the behest of the Revenue. 19.2 Similar view has been taken in following decisions: 1. 335 ITR 29, CIT vs. Citi Financial Consumer Finance Ltd., wherein it was observed as under: We may also add here that in the Income-tax law, there is no concept of deferred revenue expenditure. Once the assessee claims the deduction for the whole amount of such expenditure, even in the year in which it is incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il to take off in the year of launch itself or may have a long life as a product. There is no way in which it can definitely be estimated that the benefit of the expenditure would last for a particular period of time. The entries in the books of account do not clinch the issue either way and they do not determine the allowability or otherwise of the expenditure. The entire advertisement expenditure for product launching is to be allowed in this year. The disallowance of ₹ 1,03,63,401/- made by the Assessing Officer on account of advertisement expenditure is deleted. 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. If any authorities are required to be cited on this case on this issue we derive strength strongly from the following decisions: 1) CIT vs. India Discount Co. Ltd. [1970] 75 ITR 191 (SC). 2) Kedarnath Jute Mfg. Co. Ltd. vs. CIT [1971] 82 ITR 363 (SC). 19.3 In view of above discussion, these grounds are allowed. 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this kind of investigation is a one time verification of credit worthiness and credit history of the prospective customers which leads to creation of data base which is not only used by assessee company but also shared by other such credit card companies and banks. Once the investigation is completed in respect of a prospective customer, there is no need for further investigation and if Okayed, such customers keeps on enjoying the services rendered by assessee company. 23. The AO held the expenditure being in capital field observing as under: The assessee has mentioned that such kind of expenditure is essential in order to reduce the high level of delinquencies and credit losses. I agree with the contention of the assessee regarding the necessity of the expenditure but at the same time such kind of expenditure cannot be justified as recurring expenditure. Even if, Assessee Company denies a card to a prospective customer after investigating his creditworthiness even then no further expenditure is required on such prospective customer. Therefore, it can be safely held that the credit investigation expenses are predominantly one time expense for both kinds of decisions viz. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 regard in ground no. 3 to 3.3 of 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). 28. Brief facts apropos ground no. 2 are that AO noticed that assessee company had debited a sum of ₹ 98,00,557/- under the head Application Capture Expenses . The assessee pointed out that these expenses pertain to capturing of data entered by prospective cardholder into application form. The AO observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the future since new products with enhanced features may be introduced by the competitors, thus making the product unpopular. f) Assessee introduces various schemes, which have a very short shelf life i.e. not more than 2 to 3 months. Since the product itself has such a short life, the expenses incurred to advertise or publicize the product cannot be treated as providing any enduring benefit to the assessee. These expenses are incurred on the business captured during the year. Assessee has also relied upon following decisions of various codes in support of its claim: 1. Alembic chemicals words versus CIT (177 ITR 377). 2. CIT vs. Berger Paints (254 ITR 503). 3. Hindustan Commercial Bank vs. CIT (21 ITR 353). 4. Empire Jute Co. Ltd. vs. CIT (124 ITR 1). 30. The AO after detailed discussion, held as under: In view of above discussion and facts circumstances of the case, the amount spent on advertisement and sale promotion is held to be capital in nature and creating of intangible asset in form of Brand which is of similar nature of capital assets as mentioned in section 32(1)(ii) of the I.T. Act. Therefore, amount claimed as advertisement sales pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33.1 Ld. Counsel further referred to following decisions in support of his contention that advertisement expenses are to be allowed in full in the year in which they are incurred for the purposes of business. For the assessment year 2001-02, the assessee had incurred advertising expenditure of about ₹ 3.08 crores for launching of its products and the Assessing Officer held that the expenditure was of an enduring nature and treated one-third of it as capital expenditure. The Tribunal, confirming the findings of the Commissioner (Appeals) that the expenditure was revenue expenditure, held that there was a direct nexus between the advertising expenditure and the business of the assessee and that unless the assessee made its products known in the market, its business would suffer. On appeal by the Department: Held, that no interference was necessary in the issue in regard to advertising expenditure. Held also, that the questions whether the Tribunal was correct (i) in deleting the addition made by the AO by amortising the expenditure towards the professional fee paid towards the project of supply chain management and human resource revenue-engineering by allowing deduc ..... 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