9911796707
TMI Blog2015 (1) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... by prospective customers. The amount claimed was treated as expenditure in the Profit & Loss Accounts by the respondent assessee, but in the assessment order the expenditure was held to be substantially capital in nature. The exact reasoning given by the Assessing Officer reads:- "Assessee has submitted its reply vide letter dated 18.12.2009 stating that-"in this regard, it is submitted that the assessee receives applications from various prospective customers for issuance of credit 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. It is clear that the need of the credit investigation arise for prospective cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years to follow or could be capitalized for depreciation. The intention, it appears was that the aforesaid expenditure would be treated as capital and not allow the same as revenue expenditure in future or even capitalize the same. 4. We are entirely in agreement with the findings of the Commissioner of Income Tax (Appeals) and the Tribunal treating the said expenditure as revenue in nature. In fact, the reasoning given by the Assessing Officer is erroneous and contrary to law. The main business of the assessee, as noted in the assessment order, was receiving applications from prospective clients for issue of credit cards, consequent verification and issuance of credit cards. Information and details furnished by the prospective clients had to be verified, details checked and creditworthiness ascertained. Credit card business involved risks as the person to whom credit card was issued was entitled to make purchases and subsequently make payment. The aforesaid exercise to verify and check the truthfulness and correctness of the details/data and creditworthiness was a part and parcel of the day to day conduct of business. The expenditure, in fact, was similar to and like other reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the relevant time. On each occasion, fresh and new valuation had to be undertaken. 6. The second addition of Rs. 73,50,418/- made by the Assessing Officer was by disallowing 75% of the expenditure of Rs. 98,00,557/-, incurred on scanning or capturing the applications data into electronic form. The disallowance was on the ground that 75% of the said expenditure was capital in nature. The balance, Rs. 24,50,139/- was allowed as revenue expenditure. Applications from the prospective clients, upon receipt were scanned/captured for scrutiny and evaluation. Computer data entry or scan was undertaken. The Assessing Officer held that the expenditure was incurred once and for all and thus the transcription, capture or e-format conversion expenditure would be capital in nature. This reasoning is unacceptable and untenable. Criteria/test of once for all/lump-sum payment and periodical payments may not and in several cases would not be the true and correct test to determine, revenue or capital nature of an expense. The aim and object of the expenditure would be decisive. Expenditure for running of business or working with a view to produce profits, would be revenue expenditure, whereas expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and directly connected with the trading/business itself. No benefit of enduring nature or capital asset was created by incurring the said expenditure. 10. The Commissioner of Income Tax (Appeals) in his order has referred to data for earlier years relating to advertisement and sales promotion expenditure. For the sake of convenience we reproduce the details: "The year-wise details of gross sales vis-a-vis advertisement and sales promotion expenses along with the ratio of expenses to sales are reproduced hereunder: Assessment Year Advertisement Expense (Rs. in Crores) Turnover (Rs. in crores) (% age of turnover 2004-05 25.44 307.90 8.00% 2005-06 42.69 357.01 11% 2006-07 56.15 498.65 11% 2007-08 125.11 878.58 14% 2008-09 140.37 918.77 14%" The Commissioner of Income Tax (Appeals) rightly observed that the assessee had 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 basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arcation is difficult to draw and leads to subtle distinctions between profit that is made "out of" assets and profit that is made "upon" assets or "with" assets. Moreover, there may be cases where expenditure, though referable to or in connection with fixed capital, is nevertheless allowable as revenue expenditure. An illustrative example would be of expenditure incurred in preserving or maintaining capital assets. This test is therefore clearly not one of universal application. But even if we were to apply this test, it would not be possible to characterise the amount paid for purchase of loom hours as capital expenditure, because acquisition of additional loom hours does not add at all to the fixed capital of the assessee. The permanent structure of which the income is to be the produce or fruit remains the same; it is not enlarged. We are not 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. x ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and Son's Collieries Ltd. v. IRC [1924] 8 TC 671, 676 (C Sess) in these words: "Is it part of the company's working expenses, is it expenditure laid out as part of the process of profit-earning? - or, on the other hand, is it a capital outlay, is it expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all?" It is clear from the above discussion that the payment made by the assessee for purchase of loom hours was expenditure laid out as part of the process of profit-earning. It was, to use Lord Soumnar's words, an outlay of a business "in order to carry it on and to earn a profit out of this expense as an expense of carrying it on". It was part of the cost of operating the profit-earning apparatus and was clearly in the nature 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal and we are in agreement with their findings. Before, we elucidate, it will be relevant and important to reproduce the reply of the assessee, which for the sake of convenience is reproduced below: "Till 31 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 1 April, 2005), the Company has 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 o 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 under-noted illustration. "If card-marking 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 & Loss Account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although under the law, a deduction must be allowed by the Income Tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. ..." In Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, (1997) 227 ITR 172 at page 184, it was observed, "It is true that this Court has very often referred to accounting practice for ascertainment of profit made 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
