2014 (10) TMI 699 - AT - Income Tax

Tribunal Decision on Revenue and Expenditure Treatment

The Tribunal upheld the decisions to allow credit investigation, application capture, and advertisement expenses as revenue expenditures. It also ... Deferred revenue expenditure - assessee submitted that since the amount was of deferred revenue nature, being partly relatable to current year and partly to subsequent year, therefore, for preparation of balance sheet, it was claimed as deferred revenue expenditure in the balance sheet but for Income tax purposes the entire amount was claimed as deduction in the computation of income u/s 37 – Held that:- There is no concept of deferred revenue expenditure under the Income Tax Act except under certain specific provisions like section 35D - 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 – following the decision in COMMISSIONER OF INCOME TAX Versus SALORA INTERNATIONAL LIMITED [2008 (8) TMI 138 - DELHI HIGH COURT] - 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 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 treating the same being relating to current year under consideration and balance has been disallowed - he has primarily treated this amount as deferred revenue expenditure - the entire amount was rightly allowed by 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-wise Detailed Analysis:1. Disallowance of Provision for Reward Point Redemption:The primary issue was whether the provision for reward point redemption amounting to Rs. 2,90,73,000/- should be considered an ascertained liability. The assessee argued that the provision was based on actuarial valuation and was a definite liability. The AO and CIT(A) disallowed this, considering it unascertained. The Tribunal referenced the Bangalore Tribunal's decision in the case of Syndicate Bank vs. DCIT, which allowed similar provisions based on actuarial methods. However, since the assessee had already been allowed the deduction on an actual payment basis, the Tribunal dismissed this ground.2. Disallowance of Credit Investigation Expenses:The AO disallowed 75% of the credit investigation expenses, treating them as capital expenditure, arguing that these expenses created an enduring benefit. The CIT(A) allowed the expenses as revenue expenditure, and the Tribunal upheld this decision. The Tribunal noted that the AO's treatment was akin to considering the expenses as deferred revenue expenditure, which is not permissible under the Income Tax Act. The entire amount was allowed under Section 37 of the Act.3. Disallowance of Application Capture Expenses:The AO treated 75% of the application capture expenses as capital expenditure. The CIT(A) allowed these expenses as revenue expenditure, and the Tribunal upheld this decision. The Tribunal found that the nature of these expenses and the reasons for disallowance were identical to the credit investigation expenses, thus allowing the entire amount under Section 37 of the Act.4. Disallowance of Advertisement and Sales Promotion Expenses:The AO treated 75% of the advertisement and sales promotion expenses as capital expenditure, arguing that these expenses led to brand creation. The CIT(A) allowed the expenses as revenue expenditure. The Tribunal upheld this decision, noting that 79% of the expenses were commissions paid to marketing agents for procuring new cardholders, essential for running the business. The Tribunal referenced various judicial precedents supporting the allowance of such expenses as revenue expenditure.5. Enhancement of Income by Disallowing Card Acquisition Expenditure:The AO noticed a change in the accounting policy for booking card acquisition expenses and disallowed Rs. 17,93,59,566/-, treating it as deferred revenue expenditure. The CIT(A) upheld this disallowance. The Tribunal, however, allowed the expenditure, noting that there is no concept of deferred revenue expenditure under the Income Tax Act, except under specific provisions like Section 35D. The Tribunal referenced several judicial precedents, including decisions from the Delhi High Court, which held that such expenses should be allowed in the year they are incurred.Conclusion:The Tribunal provided a detailed analysis of each issue, referencing relevant judicial precedents and accounting standards. The Tribunal upheld the CIT(A)'s decisions to allow the credit investigation, application capture, and advertisement expenses as revenue expenditures. It also allowed the card acquisition expenditure in the year it was incurred, rejecting the concept of deferred revenue expenditure under the Income Tax Act. The Tribunal dismissed the ground related to the provision for reward point redemption, as the deduction on an actual payment basis had already been allowed.