TaxTMI 
TaxTMI 
2015 (1) TMI 607
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....,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 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 car....
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....en 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 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....
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....ert 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 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....
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....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 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 app....
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....ircumstances of the case and in law, the ld. CIT(A) erred in confirming the disallowance of provision for reward point redemption amounting to Rs. 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 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 ....
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....ear 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 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 Jul....
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....icies 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 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 f....
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....er 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 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 un....
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....s 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 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 revenu....
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.... 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 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 ....
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.... 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. 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/....
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....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. 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....
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.... 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 Rs. 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 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 t....
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....t 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 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 ca....