TMI Blog2015 (1) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... w applications were received from the prospective customer - It was an ongoing, continuous and perpetual exercise, directly connected with the line of business. The expenditure incurred to carry out verification was a part of the running cost incurred to earn profit - The business of the assessee was not to create and sell the database or provide the said information to third parties for consideration - It was not an expenditure incurred to create an asset or an asset of enduring nature - the principal and main object of the assessee was to appraise and ascertain financial position and creditworthiness of the person, so as to issue a credit card and earn money - no credit card would have been issued, due to a negative report - These were direct business expenses, revenue in nature - No one would issue a credit card or enter into a transaction on the basis of database and credit valuation 6 or 8 months old without ascertaining the true and correct position at the relevant time. Disallowance of 75% of expenses incurred on scanning or capturing the applications data into electronic form – Held that:- Criteria/test of once for all/lump-sum payment and periodical payments may not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral provisions in the Act like Section 43B which provide for different treatment than required under the provisions of the Companies Act or the accounting principles or standards – the right to claim deferred revenue expenditure is given to the assessee and not to the revenue - the expenditure as per the CIT(A) should be partly spread over two years, instead of the year in which it was incurred - the expenditure was revenue in nature - It had accrued and was paid - Nothing and no acts had to be performed and undertaken in future - It is not shown how and why, if the expenditure was allowed in the current year, it would not reflect true and correct financial position or income of the assessee in the current assessment year – the order of the Tribunal is upheld – Decided against revenue. - ITA 603/2014 &ITA No.604/2014 - - - Dated:- 29-9-2014 - MR. SANJIV KHANNA AND MR. V. KAMESWAR RAO, JJ. For The Appellant : Mr. Kamal Sawhney, Sr.Standing Counsel with Mr. Sanjay Kumar, Jr. Standing Counsel For The Respondent : Mr. Sanjeev Sabharwal, Sr. Advocate with Mr. Tushar Jarwal, Advocate SANJIV KHANNA, J (ORAL) These two appeals by the Revenue pertain to the same asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stomer, there is no need for further investigation and if okayed, such customers keeps on enjoying the services rendered by assessee company. 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 credit withness 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 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 credit worthiness of its prospective customers. In view of above discussion, the expenditure incurred o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. It was not permanent or even long lasting. Creation of database was an incidental by-product and not the primary reason and cause for carrying out investigation and verification. The expenditure incurred to carry out verification was a part of the running cost incurred to earn profit. The business of the assessee was not to create and sell the database or provide the said information to third parties for consideration. It was not an expenditure incurred to create an asset or an asset of enduring nature. It is not the case of the Revenue or the Assessing Officer that the database was ever sold to third parties. It certainly did not result in an advantage of enduring nature. Even, enduring benefit test as elucidated by the Supreme Court in Empire Jute Company versus CIT (1980) 124 ITR 1 (SC), is not applicable when the expenditure consists of merely facilitating trading or business operation or enables the management to conduct the business more efficiently as elucidated in detail in paragraphs below. The Commissioner of Income Tax (Appeals) rightly referred to and observed that the verification reports regarding creditworthiness of individual/ party, had a short useful life and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d/converted into e-format. E-formated data processing ensured objectivity and fairness. This reduced possibility of errors and of issuance of credit cards to undeserving candidates . We entirely agree with the Commissioner of Income Tax (Appeals) and the Tribunal that this expenditure incurred was revenue in nature. 8. The third and the last issue raised in the present appeal pertains to addition of ₹ 42,11,31,848/- on account of brand creation and advertisement expenditure. The assessee had advertised and incurred sale promotion expenditure to the tune of ₹ 56,15,09,131/-. The Assessing Officer held that this expenditure was in the nature of brand building as it had helped the assessee to increase their market share and enhance volumes/turnover and therefore, an asset was created. He however allowed depreciation on the amount disallowed. 9. Again, it is difficult to accept the reasoning as given by the Assessing Officer. The break-up of the expenditure incurred by the respondent assessee as noticed by the Commissioner of Income Tax (Appeals), is as under: Particulars Amount (Rs.) Advertising -Electroni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been incurring the aforesaid expenditure in preceding years and in the succeeding years without any major fluctuations. The Commissioner of Income Tax (Appeals) held that in the rapidly and constantly changing economic environment with cut-throat competition, advertisement and publicity expenditure has to be incurred on day to day basis. It was an expenditure for keeping the business a profitable proposition. It was directly associated with the running of the business. No intangible asset was created because of the said expenditure. 11. When examining the question, whether expenditure is capital or revenue in nature, one has to be guided by commercial considerations and only when the advantage is in the capital field, the expenditure can be disallowed applying the enduring benefit test. If the advantage consists of merely facilitating trading operations or increasing profitability or enabling the management to conduct business more efficiently, while leaving the fixed capital untouched, the expenditure is still on revenue account. Thus the enduring benefit test, though the primary test, cannot be applied without reference to the practical business and commercial considerations. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t sure whether loom hours can be regarded as part of circulating capital like labour, raw material, power etc. but it is clear beyond doubt that they are not part of fixed capital and hence even the application of this test does not compel the conclusion that the payment for purchase of loom hours was in the nature of capital expenditure. xxx Now it is true that if disbursement is made for acquisition of a source of profit or income, it would ordinarily, in the absence of any other countervailing circumstances, be in the nature of capital expenditure. Undoubtedly, the profit-earning structure of the assessee was enabled to produce more goods, but that was not because of any addition or augmentation in the profit-making structure, but because the profit-making structure could be operated for longer working hours. The expenditure incurred for this purpose was primarily and essentially related to the operation or working of the looms which constituted the profit-making apparatus of the assessee. It was an expenditure for operating or working the looms for longer working hours with a view to producing a larger quantity of goods and earning more income and was therefore in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of revenue expenditure. 13. The Delhi High Court has repeatedly held that advertisement expenditures in the present day context should normally be treated as revenue expenditure, unless there are special circumstances and reasons to hold that the expenditure was capital in nature. The reason is that the advertisements do not have a lasting and long term effect and the memory of the customers or targeted audience is short lived. The advertisements fade away and do not have an enduring impact. If there is a lack of advertisement by one, the vacuum and space is taken over by others with benefit and advantage to the detriment of the first. Reference can be made to CIT vs. Salora International Ltd. (2009) 308 ITR 199 (Delhi) and the subsequent decision in ITA No.597/2014 titled CIT vs. M/s Spice Distribution Ltd. decided on 19th September, 2014. 14. This brings us to ITA No.604/2014. Addition of ₹ 17,93,59,566/- was made by the Commissioner of Income Tax (Appeals) after issuing notice of enhancement. The Assessing Officer had not made the said addition. The Commissioner of Income Tax (Appeals) held that the expenditure under the head, Card Acquisition Expenses had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change in accounting policy, profit before tax for the current year is higher by ₹ 19,64,39,035/-. 9.2 This accounting treatment is being explained by the under-noted illustration. If card-marking expense of ₹ 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 Loss Account for the Financial Year 2005-06 would be computed as under: = ₹ 1000*9/12 = ₹ 750 The balance amount to be deferred claimed in the next Financial Year i.e. 2006-07 would be calculated as under: = ₹ 1000*3/12 = ₹ 250 16. It is clear from the aforesaid reply and is an accepted position that till the assessment year in question, sales force composition, card acquisition costs etc. were recognised on upfront basis i.e. in the year in which they were incurred. In the current assessment year in question, i.e. 2006-07, the assessee consequent to change in policy had spread over or divided the expenditure over a period of one year in the books of accounts from the date they were incurred. It is meant that the expenditure could partly fall in the current year and partly in the next y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override Section 56 or any other provision of the Act. As was pointed out by Lord Russell in the case of B.S.C. Footwear Ltd. [(1970) 77 ITR 857, 860], the Income Tax law does not march step by step in the footprints of the accountancy profession. It was held by the Bombay High Court in Commissioner of Income-Tax versus Bhor Industries Limited (2003) 264 ITR 180, If (sic, It) is well settled that, ordinarily, revenue expenditure, which is incurred wholly and exclusively for the purposes of business, must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years even though the assessee has written it off in its books over a period of years. It is only in cases of special type of assets that the spread over is warranted. Judgment of the Supreme Court in Madras Industrial Investme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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