TaxTMI 
TaxTMI 
TaxTMI 
2015 (1) TMI 607
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....on 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 Rs. 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 computation of income by reserving the right to claim the aforesaid liability as an allowable deduction during the course of assessment proceedings which it was required to 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 Rs. 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 sche....
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....e 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 attention is 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. 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....
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.... 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 outstanding expected to be redeemed in future may be estimated, at the year-end, by applying the actuarial method." 5.2 It was 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 t....
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....at 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 perused the record of the case. 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. 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 rem....
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....dged 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 Rs. 72,22,786/- towards actual reward points redeemed by the Appellant, subject to the Appellant accepting the disallowance of Rs. 6,23,00,786. The ld. CIT(A) has erred in not appreciating that deduction of above amount actually paid/disbursed by the Appellant is not dependent upon any subsequent appellate proceedings instituted by the Appellant; 2.2 That the ld. CIT(A) has erred in not appreciating that the above provision for reward point was recognized on scientific basis, duly supported by the Actuarial Valuation Certificate furnished during the course of appellate proceedings. 3. That on the facts and in the circumstances of the case, the ld. CIT(A) has erred in exercising jurisdiction to enhance the income of the Appellant by making a disallowance of Rs. 17,93,59,566 towards card acquisition expenditure incurred by the appellant and claimed upfront in the return of income though treated as Deferred Revenue expenditure in the books of accounts. 3.1 That the ld. CIT....
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....ard acquisition cost (sales service provider expenses, incentives related to card acquisition, credit investigation cost, application printing cost), consumption of plastic cards, and delivery charges were recognized on an upfront basis. During current year (with effect from 1st April, 2005), the Company has changed its policy to recognize productive sales force compensation, card acquisition cost, consumption of plastic cards and delivery charges over a period of one year as this more closely reflects the period to which the fee relates to. As a result of this change in accounting policy, profit before tax for the current year is higher by Rs. 19,64,39,035/-." 9.2 This accounting treatment is being explained by the undernoted illustration. "If Card-making expense of Rs. 1000/- has been incurred in the month of July 2005, then as per the above accounting policy, the amount to be charged to the profit and loss account for the financial year 2005-06 would be computed as under: = Rs. 1000*9/12= Rs. 750 The balance amount to be deferred & claimed in the next financial year i.e. 2006-07 would be calculated as under: =Rs. 1000*3/12=Rs. 250" 15.1 However, on perusal of the computat....
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.... Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. (2009) 312 ITR 254 (SC) and pointed out that in this case the Hon'ble Supreme Court was of the view that the assessee company, in view of the provisions in the Companies Act, had no choice but to follow the accounting treatment suggested in AS- 11 and, therefore, foreign exchange loss was an allowable deduction. He pointed out that since assessee company had followed AS-5 while preparing its annual financial statements, therefore, in view of the decision of Hon'ble Supreme Court in the case of the computation of income for Income tax purposes had to be made on the same basis. 17. Ld. CIT(A) also referred to section 145(2) of the Income Tax Act which mandates that the Central Government may notify the accounting standards to be followed from time to time by any class of assessee. He pointed out that CBDT has notified accounting standard vide SO-69(E) dt. 25/01/1996 which is mandated to be followed by all assesses following mercantile system of accounting. He referred to para 4 of the said notification which reads as under: "Accounting policy adopted by an assessee should be such as to represent a true and fair....
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.... is not applicable to the facts of the present case. The Hon'ble Supreme Court considered the applicability of accounting standard XI in that context only. As far as the present issue is concerned, we find that this issue is no more resintegra in view of following decisions: 1. 335 ITR 29 in the case of CIT vs. Casio India Ltd., wherein the Hon'ble Delhi High Court held that direct selling expenses, stamping fee and commission paid to the selling agents in the case of assessee who was financing the higher purchase of vehicles and homes and the period of such financing were ranging from less than 1 year upto 5 years was allowable in the year in which the expenditure was incurred and not over 5 years; 2. 308 ITR 199 in the case of CIT vs. Salora International Ltd., head note reads as under: "For the assessment year 2001-02, the assessee had incurred advertising expenditure of about Rs. 3.08 crores for launching of its products and the AO 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 ....
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....nder the said debentures, the assessee could utilize the said amount and secure the benefit over number of years. 5. In CIT vs. Citi Financial Consumer Fin. Ltd. MANU/DE/2208/2011 : (2011) 335 ITR 29 (Del.), a Division Bench referred to Industrial Finance Corp. of India (supra) and then quote a passage from the decision of the Supreme Court in CIT vs. Empire Jute Co. Ltd. vs. CIT MANU/SC/0279/1980 : (1980) 124 ITR 1 (SC): 13. At this stage, it would be of advantage to discuss the judgment of Supreme Court in Empire Jute MANU/SC/0279/1980 : (1980) 124 ITR 1 (SC) which repelled the theory of expenditure of enduring nature, in a great measure. In that case, the SC noted that by decided cases, the courts evolved various tests for distinguishing between the capital and revenue expenditure but no test is paramount or conclusive. Every case has to be decided on its facts keeping in mind the broad picture of whole operation in respect of which the expenditure has been incurred. At the same time, a few tests formulated by the courts were taken note of. One such test which was specifically spelled out and may be relevant for our purpose was "when an expenditure is made not only once and fo....
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....for the whole amount of such expenditure, even in the year in which it is incurred, and the expenditure fulfils the test laid down u/s 37 of the Act, it has to be allowed. Only in exceptional cases, the nature mentioned in Madras Industrial Investment Corporation Ltd. [1997] 225 ITR 802 (SC), the expenditure can be allowed to be spread over, that too, when the assessee chooses to do so." 2. 338 ITR 177, Cyber Media (India) Ltd. In this case, inter-alia, held as under: "Once the Tribunal accepted that the assessee had regularly employed the hybrid system of accounting for income-tax purposes and it was only to adhere to procedure under the Companies Act that it changed bona fide to the mercantile system, it erred in concluding that the assessee's income for the purposes of income-tax proceedings could not hark back to the hybrid system." 3. 19 SOT 13, Situ Electro Instruments (P) Ltd. vs. ITO has observed as under: 8.4 "This leads us with the only question as to whether it is permissible for the assessee to claim the entire expenditure as revenue expenditure while filing its return of income, while on the other, under the Companies Act, adopted a method of accounting wherein onl....
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....iew of above discussion, these grounds are allowed. 20. In the result, the assessee's appeal is partly allowed. 21. Now we come to the Departmental appeal, vide ITA No. 2808/D/2011. The revenue has raised the following grounds of appeal: 1) "On the facts and circumstances of the case the ld. CIT(A) erred in law and merit of the case is deleting the disallowance made by the AO on account of credit investigation expenses to the tune of Rs. 56563127/- being 75% of the total expenditure treating it as capital expenditure; 2) On the facts and circumstances of the case the ld. CIT(A) erred in law and merit of the case in deleting the disallowance made by the AO on account of expenditure on application capture to the tune of Rs. 7350418/- being 75% of the total expenditure treating it as capital expenditure. 3) On the facts and circumstances of the case the ld. CIT(A) erred in law and merit of the case in deleting the disallowance made by the AO on account of creation of brand and advertisement expenses to the tune of Rs. 421131848/- being 75% of the total expenditure treating it as capital expenditure." 22. Brief facts apropos ground no. 1 are that from perusal of profit and loss ....
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....igation expenses are predominantly one time expense for both kinds of decisions viz. providing card to a prospective customer or denying the same. The information so gathered about risk profile/credit profile of a prospective customer can be used for other occasion and by the other agencies also. Therefore, it is a data base/know-how which provides enduring benefit to the assessee company regarding creditworthiness of its prospective customers. In view of above discussion, the expenditure incurred on credit investigation is held as capital and disallowed as revenue expenditure. However, the assessee is allowed 25% of such expenditure for the A.Y. 2006-07 resulting in addition of Rs. 5,65,63,127/-. Since, I am satisfied that assessee has filed inaccurate particulars about its income, therefore, penalty proceedings u/s 271(1)(c) are initiated separately. Addition of Rs. 5,65,63,127/- 24. Ld. CIT(A) allowed the assessee's appeal treating the same as revenue expenditure. 25. Ld. DR referred to para 5.7 of ld. CIT(A)'s order and pointed out that he has not considered the reasoning give....
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....xpenses". The assessee pointed out that these expenses pertain to capturing of data entered by prospective cardholder into application form. The AO observed that since this expenditure was incurred only once during the entire period of customer's relation, therefore, it was capital expenditure. He, however, allowed 25% of the claim and, thus, made a disallowance of Rs. 73,50,418/-. Ld. CIT(A) considered this expenditure on the same footing on which credit investigation expenses and allowed the assessee's claim. 28.1 Having heard both the parties, we find 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. 29. Ground no. 3: Brief facts apropos ground no. 3 are that AO noticed that assessee had incurred expenditure on advertising and sales promotion to the tune of Rs. 56,15,09,131/-. The AO issued show cause notice to assessee to explain as to why this amount be not treated as capital expenditure as the same lead to creation of brand of S....
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....ital assets as mentioned in section 32(1)(ii) of the I.T. Act. Therefore, amount claimed as advertisement & sales promotion expense of Rs. 56,15,09,131/- is disallowed as revenue expenditure, however, assessee is allowed to claim depreciation @ 25% on such amount. Total disallowance on this account of this comes to Rs. 42,11,31,848(56,15,09,131 - 14,03,77,282). Since, I am satisfied that assessee has filed inaccurate particulars about its income, therefore, penalty proceedings u/s 271(1)(c) are initiated separately." 31. Ld. CIT(A) allowed the assessee's appeal, inter-alia, observing as under: 6.14 "Accordingly, after considering the relevant facts of the case and the case laws on the subject. I agree with the contention of the Appellant that in today's rapidly changing economic scenario and cut throat competition, for running the business of the appellant as a profitable proposition, it is necessary to incur advertisement expenditure on an year-on-year basis to ensure higher turnover & profits for the appellant. In any case, as mentioned earlier, nearly 79% of the expenses are in the nature of "commission" paid to marketing agents for procuring new cardholders. Accordingly, I ho....