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TMI Blog2015 (1) TMI 607X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Joint Venture promoted by State Bank of India GE Capital (Mauritius) Investment Company Ltd., Mauritius. The assessee was incorporated on May 15, 1998 and is engaged in the business of issuance of credit cards and providing card services to customers in India. It had filed its return of income declaring income of ₹ 87,84,00,090/-. The assessment was completed at a total income of ₹ 88,13,76,451/-, inter-alia, making a disallowance in respect of provision for reward point redemption amounting to ₹ 2,90,73,000/- on the ground that the said provision was for unascertained liability. 2. Ld. CIT(A) confirmed the AO s action. 2.1 Being aggrieved with the order of ld. CIT(A), the assessee is in appeal before us and has, inter-alia, taken following grounds of appeal: 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 ₹ 2,90,73,000/- by erroneously considering the same as unascertained liability. 2.2 Brief facts apropos this issue are that assessee had offered 2,90,73,000/- being provision for reward point redemption in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd. The Company s liability towards reward points redemption accrues. Hence, this liability towards reward point redemption is an actual liability in present. It is a definite and certain liability only its quantification is based on actuarial valuation. Also as per the opinion of Expert Advisory Committee of Institute of Chartered Accountants of India, the said amount is crystallized liability and, therefore, the same has been claimed as deductible by the assessee in its return of income. The opinion expressed by the Expert Advisory Committee of Institute of Chartered Accountants of India has also been reproduced in this regard. It is submitted that the spends made by the credit card holder using the credit card and liability towards redemption of reward points are bound with each other and, therefore, if spends made through credit card are taken note 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. 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, your kind attentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision at assessment stage only. Before ld. CIT(A) it was submitted as under: 5.1 The AR also submitted that the scheme is open for holders of SBI Gold Card, SBI Card for Doctors and SBI International card. For every ₹ 125 spent using SBI Card, the cardholder earns one reward point. Thus, once the cardholder make spends using the card, the Appellant s liability towards reward points redemption accrues. Hence, this liability towards reward point redemption is an actual liability in prasenti. It is a definite and certain liability, although to be discharged at subsequent date. Also, as per the opinion of Expert Advisory Committee of Institute of Chartered Accountants of India, the said amount is crystallized liability and, therefore, the same has been claimed as deductible by the assessee in its return of income. The opinion expressed by the Expert Advisory Committee of Institute of Chartered Accountants of India is as under: The Committee is of the view that the bank should create a provision for the liability at an amount equivalent to the cost expected to be incurred on the redemption of outstanding reward points any time in future. The liability for the reward points ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imum points, then customers were free to encash those points. The assessee was legally bound to provide equivalent of reward points in cash or kind. In the case of the assessee, the reward points are given in the form of cash reimbursement. The fact that the customers did not make claim for such reimbursement will not stop the accrual of liability. In our view, the liability of the assessee insofar as accumulated reward points are concerned is certain and the revenue has not disputed the basis of quantification of such liability. In such circumstances, we are of the view that in the light of the principles laid down by the Hon ble Supreme Court in the case of BEML (supra), the claim for deduction should be allowed. We, accordingly, direct then AO to allow the claim of the assessee in this regard. Ground No. 1 2 raised by the assessee are accordingly allowed. 8.1 Therefore, ld. Counsel submitted that the provision made by assessee is legally allowable. However, he submitted that he has instructions that since liability on actual payment basis has been allowed, therefore, this issue need not be pressed any further. 8.2 We have considered the rival submissions and have peruse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... require adjudication 2. Provision for reward Point redemption 6,23,00,786 Dismissed with directions to allow part relief 3. Provision for doubtful debts as per RBI Norms 8,74,93,050 Dismissed 4. Credit investigation expenses 5,65,63,127 Allowed 5. Application capture expenses 73,50,418 Allowed 6. Advertisement and sales promotion expenses 42,11,31,848 Allowed 7. Withdrawal of Interest u/s 244A - Consequential 8. Levy of Interest u/s 234D - Consequential 9. Initiation of penalty proceedings - Dismissed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, revenue expenses have to be allowed in entirely in the year of accrual and no adverse inference can be drawn on the basis of entries in the books of accounts. 3.2 That the ld. CIT(A) has erred in not applying the under-noted binding judicial precedents on the allowability of card acquisition expenses: a) That the Hon ble Income Tax Appellate Tribunal, Delhi Branch ( ITAT ) has dismissed the Departmental appeal for AYs 2000-01 to 2002-03 on this issue for want of approval of Committee of Disputes ( COD ); b) That the COD has declined permission to Central Board of Direct Taxes to appeal before the Hon ble ITAT on deduction of card acquisition expenditure for AYs 2000-01 and 2001-02, by holding that above expenditure is revenue expenditure allowable under the Act; c) That the ld. CIT(A), New Delhi has also deleted the disallowance of card acquisition expenses made in assessment order for AYs 2000-01 to 2002- 03 on similar grounds. 3.3 Without prejudice to above, the ld. CIT(A) has erred in directing the AO to allow deduction of ₹ 17,93,59,566 towards card acquisition expenditure in AY 2007-08 only on the condition that no appeal is filed against the above dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax purposes, he found that the aforesaid expenses, which were deferred in the books of account to the extent of ₹ 19.64 crores, had been claimed as a deduction. Consequently, the book results, which should have shown a higher profit by ₹ 19.64 crores, had been neutralized and for income tax purposes, profits had been disclosed at a lower figure. 16. The assessee filed detailed submissions, in which, inter-alia, it was submitted that the expenditure had been incurred by the assessee for running the business more efficiently and effectively and as such allowable u/s 37(1) of the Act. The assessee had relied on the decision in the case of Empire Jute Co. Ltd. vs. CIT, 124 ITR 1. It was further submitted that since legislature has not provided any deferment of expenses of the nature present in the instant case, it will be against the intent of the legislature to defer such expenses. The assessee relied on the decision in the case of Hindustan Commercial Bank Limited vs. Revenue 21 ITR 353 (All.) and Kedarnath Jute vs. CIT, 82 ITR 363 (SC). The assessee also pointed out that in assessment years 2000-01 2001-02, the assessee had amortized such expenses over the period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the State of Affairs of the business, profession or vacation in the financial statement prepared and presented on the basis of such accounting policy. 17.1 Ld. CIT(A) further discussed in detail the assesses submissions but did not agree with the earlier decision of ld. CIT(A) or with the decisions relied by the assessee and held that the claim of the deduction of the deferred revenue expenditure amounting to ₹ 19,64,39,035/-, had been wrongly made in the computation of income. He, accordingly, disallowed the assessee s claim for a sum of ₹ 17,93,59,566/- (19,64,39,035/- - 1,70,79,469/-), since in the computation of income, the income from membership fee amounting to ₹ 1,70,79,469/- had been offered to tax. Though, in view of the changed of accounting policy, the same was not credited to the profit and loss account. 18. Ld. Counsel for the assessee submitted that there is no dispute that the impugned amount was revenue expenditure and incurred during the year under consideration. However, since the impugned amount was of deferred revenue nature, being partly relatable to current year and partly to subsequent year, therefore, for preparation of balance sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 deduction of one-fifth as expenditure in the year under assessment, and (ii) in holding that the unutilized amount of DEPB would be allowed as expenditure u/s 37(1) of the Income Tax Act,1961, and could be allowed as loss, were substantial questions of law. 3. CIT vs. Panacea Biotech Ltd., vide ITA No. 22 24/2012, wherein the Hon ble Delhi High Court observed as under: 4. The question of deferred revenue expenditure and the judgment of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT, MANU/SC/0493/1997 : (1997)225 ITR 802 (SC) was examined and distinguished in CIT vs. Industrial Corporation of India MANU/DE/2521/2009 : (2009) 185 Taxman 296 (Delhi) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture is made not only once and for all, but with a view to bringing into existence of an advantage for which enduring benefit of a trade, the expenditure can be treated as capital in nature and not attributable to revenue . However, cautioned the court, it would be misleading to suppose that in all cases securing a benefit for business expenditure would be capital expenditure. The court added the caution in the following words: .There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee s business to be carried on more efficiently or more profitably white leaving the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Act, adopted a method of accounting wherein only part of the expenditure in question was debited to the profit and loss account. The issue, in our considered opinion, is covered in favour of the assessee and against the revenue by a number of decisions which were cited before us by the learned counsel for the assessee. In the Hyderabad Bench in the case of Amar Raja Batteries vs. Asstt. CIT [2004] 91 ITD 280 which is squarely applicable to the facts of this case, it was held that- The undisputed fact is that the expenditure is in the revenue filed. The only issue to be considered is whether the assessee can claim the entire expenditure in this year itself, even though it had written off this expenditure in the books over a period of five years. Though the assessee has written off the expenditure in its books of account over a period of five years, it must be allowed in its entirety in the year in which it was incurred, if it is revenue expenditure and if it is wholly and exclusively incurred for the purposes of business. The assessee had launched a new product and incurred heavy advertisement expenditure. The period for which the assessee can be said to have secured benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture. 22. Brief facts apropos ground no. 1 are that from perusal of profit and loss account, the AO noticed that assessee had debited ₹ 7,54,17,503/- on account of credit investigation expenses. The assessee submitted as under: In this regard, it is submitted that the assessee receives applications from various prospective customers for issuance of credit cards and it needs to verify information and data provided by these customers to establish their bonafide and credit worthiness. For this purpose, the assessee engages the services for credit verification agencies/firms of Chartered Accountants, who carry out residence verification/business verification and report on the bonafide of the data provided by the prospective cardholders. This is essential in order to reduce/curtail the high level of delinquencies and resultant credit losses which are widely prevalent in the credit card industry. I have gone through the submission of the assessee and other details filed by the assessee. Its is clear that the need of the credit investigation arises for prospective customers for issuance of credit card. This includes the verification of information and data provided by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the benefit of this expenditure is enduring in nature. She submitted that ld. CIT(A) adopted his own reasoning and, therefore, the matter should be restored back to the file of CIT(A) for considering the AO s reasoning. 26. Ld. Counsel submitted that reasoning given by AO is akin to treating the expenditure as deferred revenue expenditure. He submitted that merely because benefit from a particular expenditure endures over a period does not necessarily make the same as capital expenditure unless the expenditure results into profit yielding apparatus. Ld. Counsel submitted that the expenditure was incurred even for those applicants who did not actually become its customers on account of having poor credit history and from whom the assessee does not obtain any benefit from such investigation. Therefore, it is not correct to say that by incurring this expenditure, the assessee had created a profit yielding apparatus for future. 27. Ld. DR s submission that the matter should be restored back to the file of AO as ld. CIT(A) has given his own reasoning cannot be accepted because ld. CIT(A) has primarily considered the issue in the light of AO s finding that the impugned amount wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f brand of SBI Card. The assessee in its reply submitted as under: Assessee has submitted its reply vide letter dated 22.12.2009 wherein it has contended that advertisement and sales promotion is essential part of today s business in today s competitive world and also that such expenses do not provide any enduring benefit to the assessee because of following reasons: a) Customer can terminate the use of credit card at any point of time. b) Numerous competitors targeting the customers in a competitive market and short memory of purchasing market advertisement expenses does not have any enduring benefit to the assessee. c) Expenditure incurred by the assessee are ordinary and routine expenditure which are required to be incurred from year to year. d) In this era of cut throat competition, it is important for the companies in business of card services to launch new products with enhanced utility and features on regular intervals. Such products are made known to the public at large by undertaking extensive advertising and publicity to promote sales. In the absence of such publicity, the new and enhanced features of products would remain unknown to the public, which woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts for procuring new cardholders. Accordingly, I hold that no intangible asset has been created by the Appellant by incurring of said expenditure and the whole expense of ₹ 56,15,09,131/- charged to the profit loss account is on revenue account and, therefore, allowable as such. Hence, the Ground No. 6 stands allowed. 32. Ld. DR relied on the assessment order and submitted that since the expenditure had been incurred for brand building of SBI Card, therefore, it was in capital field. 33. Ld. Counsel for the assessee submitted that the disallowance made by AO has to be considered in the light of its allowability/ disallowability u/s 37 of the I.T. Act and the decision of Spl. Bench of Delhi Tribunal in the case of LG Electronics India Pvt. Ltd. vs. Asstt. CIT, vide ITA No. 5140/Del/2011dated 23/01/2013 is not applicable to the present facts. In this regard ld. Counsel referred to page 90 of LG s decision (supra) para 16.8, wherein Tribunal has, inter-alia, observed as under: The exercise of separating the amount spent by the assessee in relation to international transaction of building brand for its foreign AE for separately processing as per section 92 of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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