DCIT, New Delhi V. M/s SBI Cards and Payment Services Pvt. Ltd., New Delhi

ITA 2808/DEL/2011

• Counselvise Citation: 280820114 RSA 2011
• Duration Of Justice: 2 year(s) 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 26-11-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 31-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RENUKA JAIN GUPTA; RAMESH CHANDRA
• Assessee Lawyers: RAHUL SATE
• Keywords: Capital asset; Gift; Depreciation; Transfer pricing; Business expenditure; International transaction; Cost of acquisition; Initiation of penalty proceedings; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 244A; 37(1); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G: NEW DELHI BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER ITA NO. 2808/DEL/2011 ASSESSMENT YEAR: 2006-07 DCIT, CIRCLE 7(1), ROOM NO. 312, 3 RD FLOOR, C.R. BLDG., I.P. ESTATE, NEW DELHI. VS. SBI CARDS & PAYMENT SERVICES PVT. LTD., STATE BANK OF INDIA, 11-LOCAL HEAD OFFICE, PARLIAMENT STREET, NEW DELHI. AAECS5981K (APPELLANT) (RESPONDENT) ITA NO. 1293/DEL/2012 ASSESSMENT YEAR: 2007-08 DCIT, CIRCLE 7(1), ROOM NO. 312, 3 RD FLOOR, C.R. BLDG., I.P. ESTATE, NEW DELHI. VS. SBI CARDS & PAYMENT SERVICES PVT. LTD., STATE BANK OF INDIA, 11-LOCAL HEAD OFFICE, PARLIAMENT STREET, NEW DELHI. AAECS5981K (APPELLANT) (RESPONDENT) ITA NO. 1047/DEL/2012 ASSESSMENT YEAR: 2007-08 SBI CARDS & PAYMENT SERVICES PVT. LTD., STATE BANK OF INDIA, 11-LOCAL HEAD OFFICE, PARLIAMENT STREET, NEW DELHI. AAECS5981K VS. ADDL. CIT, RANGE-7, NEW DELHI. (APPELLANT) (RESPONDENT) ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 2 ITA NO. 3977/DEL/2010 ASSESSMENT YEAR: 2005-06 SBI CARDS & PAYMENT SERVICES PVT. LTD., STATE BANK OF INDIA, 11-LOCAL HEAD OFFICE, PARLIAMENT STREET, NEW DELHI. AAECS5981K VS. ADDL. CIT, RANGE-7, NEW DELHI. (APPELLANT) (RESPONDENT) ITA NO. 2470/DEL/2011 ASSESSMENT YEAR: 2006-07 SBI CARDS & PAYMENT SERVICES PVT. LTD., STATE BANK OF INDIA, 11-LOCAL HEAD OFFICE, PARLIAMENT STREET, NEW DELHI. AAECS5981K VS. DCIT, CIRCLE 7(1), ROOM NO. 312, 3 RD FLOOR, C.R. BLDG., I.P. ESTATE, NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY: SH. RAMESHCHANDRA, CIT(DR) & SMT. REN UKA JAIN GUPTA, SR. DR RESPONDENT BY: S/SH. N. VENKAT RAMAN, SR. ADV., TUS HAR JARWAL & RAHUL SATEEJA, ADV. O R D E R PER S.V. MEHROTRA, A.M. FIRST WE TAKE UP ITA NO. 3977/D/2010 . 2. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE IS A J OINT VENTURE PROMOTED BY STATE BANK OF INDIA & GE CAPITAL (MAURITIUS) INV ESTMENT COMPANY LTD., MAURITIUS. THE ASSESSEE WAS INCORPORATED ON MAY 15 , 1998 AND IS ENGAGED IN THE BUSINESS OF ISSUANCE OF CREDIT CARDS AND PROVIDING CARD SERVICES TO CUSTOMERS IN INDIA. IT HAD FILED ITS R ETURN OF INCOME DECLARING INCOME OF RS. 87,84,00,090/-. THE ASSESSMENT WAS C OMPLETED AT A TOTAL ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 3 INCOME OF RS. 88,13,76,451/-, INTER-ALIA, MAKING A DISALLOWANCE IN RESPECT OF PROVISION FOR REWARD POINT REDEMPTION AMOUNTING TO RS. 2,90,73,000/- ON THE GROUND THAT THE SAID PROVISION WAS FOR UNASCERT AINED LIABILITY. 2. LD. CIT(A) CONFIRMED THE AOS ACTION. 2.1 BEING AGGRIEVED WITH THE ORDER OF LD. CIT(A), T HE ASSESSEE IS IN APPEAL BEFORE US AND HAS, INTER-ALIA, TAKEN FOLLOWI NG 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 ASSESSE E HAD OFFERED 2,90,73,000/- BEING PROVISION FOR REWARD POINT REDE MPTION IN THE COMPUTATION OF INCOME BY RESERVING THE RIGHT TO CLA IM THE AFORESAID LIABILITY AS AN ALLOWABLE DEDUCTION DURING THE COURSE OF ASSE SSMENT 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 ASSESSE E HAS DEBITED A SUM OF RS. 2,90,73,000/- TO ITS PROFIT & LOSS ACCOUNT F OR F.Y. 2004-05 TOWARDS LIABILITY IN RESPECT OF REWARD POINTS MET O F PAYMENTS MADE DURING THE YEAR AND BASED ON ACTUARIAL VALUATION GR ANTED TO CARD HOLDERS UNDER THE TRIPLE ADVANTAGE REWARD POINTS SC HEME. THE ABOVE AMOUNT OF RS. 2,90,73,000/-. 3. THE MOVEMENT CHART IN RESPECT OF LIABILITY FOR R EWARD POINT WAS AS UNDER: ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 4 PARTICULARS YEAR ENDED 31.3.04 YEAR ENDED 31.03.05 YEAR ENDED 31.03.06 OPENING PROVISION 33,24,000 1,69,90,000 4,60,63,000 ADDITIONS DURING THE YEAR 1,41,85,173 3,26,02,047 6,23,00,786 AMOUNTS USED DURING THE YEAR 5,19,173 35,29,047 72,22,786 CLOSING PROVISION 1,69,90,000 1,60,63,000 10,11,41,000 4. THE ASSESSEE FURTHER SUBMITTED AS UNDER: IN RESPECT OF THE SAME IT IS SUBMITTED THAT IN OR DER TO PROMOTE CREDIT CARDS AND THEIR USAGE AND LOYALTY AMONGST ITS CUSTO MERS THE COMPANY HAS INTRODUCED A TRIPLE ADVANTAGE REWARDS PROGRAM W HICH ALLOWS CARD MEMBERS TO EARN POINTS BASED ON SPENDS THROUGH THE CARDS THAT CAN BE REDEEMED FOR DISCOUNTS ON RENTAL MERCHANDISE AND OTHER GIFTS. THE COMPANY MAKES PAYMENTS TO ITS REWARD PARTNERS W HEN CARD MEMBERS REDEEM THEIR POINTS AND ESTABLISHES PROVISI ONS TO COVER THE COST OF FUTURE REWARD REDEMPTIONS. THUS, LIABILITY FOR REWARD POINTS OUTSTANDING AS AT THE YEAR END AND EXPECTED TO BE R EDEEMED IN THE FUTURE HAS BEEN ESTIMATED ON THE BASIS OF AN ACTUAR IAL VALUATION AND PROVIDED FOR IN THE BOOKS. THIS SCHEME IS OPEN FOR HOLDERS OF SBI GOLD CARD. SBI CARD FOR DOCTORS AND SBI INTERNATIONAL CARD FOR EVERY RS . 125 SPENT USING SBI CARD, THE CARDHOLDER EARNS ONE REWARD POINT. T HUS, ONCE THE CARDHOLDER MAKE SPENDS USING THE CARD. THE COMPANY S LIABILITY TOWARDS REWARD POINTS REDEMPTION ACCRUES. HENCE, T HIS LIABILITY TOWARDS REWARD POINT REDEMPTION IS AN ACTUAL LIABIL ITY IN PRESENT. IT IS A DEFINITE AND CERTAIN LIABILITY ONLY ITS QUANTIFIC ATION IS BASED ON ACTUARIAL VALUATION. ALSO AS PER THE OPINION OF EX PERT ADVISORY COMMITTEE OF INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, THE SAID AMOUNT IS CRYSTALLIZED LIABILITY AND, THEREFORE, TH E SAME HAS BEEN CLAIMED AS DEDUCTIBLE BY THE ASSESSEE IN ITS RETURN OF INCOME. THE OPINION EXPRESSED BY THE EXPERT ADVISORY COMMITTEE OF INSTITUTE OF ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 5 CHARTERED ACCOUNTANTS OF INDIA HAS ALSO BEEN REPROD UCED IN THIS REGARD. IT IS SUBMITTED THAT THE SPENDS MADE BY THE CREDIT CARD HOLDER USING THE CREDIT CARD AND LIABILITY TOWARDS REDEMPT ION OF REWARD POINTS ARE BOUND WITH EACH OTHER AND, THEREFORE, IF SPENDS MADE THROUGH CREDIT CARD ARE TAKEN NOTE IN A YEAR, FOLLO WING THE MATCHING PRINCIPLE OF ACCOUNTANCY THE LIABILITY IN RESPECT O F THE SAME SHOULD ALSO BE TAKEN NOTE OF IN THE SAME YEAR. THE INSTIT UTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) HAS ISSUED ACCOUNTING S TANDARDS WHICH ARE MANDATORILY REQUIRED TO BE FOLLOWED BY ALL THE COMPANIES. IN THIS REGARD, YOUR KIND ATTENTION IS DRAWN TOWARDS THE AC COUNTING 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 55 0) (MUM.); 9. MARUTI UDYOG LTD. VS. DY. CIT (92 ITD 119) (DEL.); 6. THE AO DID NOT ACCEPT THE ASSESSEES CONTENTION, INTER-ALIA, OBSERVING THAT PROVISION WAS CREATED IN THE BOOKS O F ACCOUNT TO MEET UNASCERTAINED LIABILITY AND HENCE IT WAS A PROVISIO N FOR CONTINGENT LIABILITY. ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 6 THE AO RELIED ON THE DECISION OF HONBLE SUPREME CO URT IN THE CASE OF M/S INDIAN MOLASSES COMPANY (P) LTD. VS. CIT, 37 ITR 66 , WHEREIN THE HONBLE SUPREME COURT HAD, INTER-ALIA, HELD THAT EXPENDITUR E WHICH IS DEDUCTIBLE FOR INCOME TAX PURPOSES IS ONE WHICH IS TOWARDS A LIABI LITY ACTUALLY EXISTING AT THE TIME, BUT THE PUTTING ASIDE OF MONEY WHICH MAY BECOME EXPENDITURE ON THE HAPPENING OF AN EVENT IS NOT EXPENDITURE. HE A LSO RELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SH REE SAJJAN MILLS LTD. VS. CIT, 156 ITR 0585, WHEREIN IT WAS HELD THAT ASS ESSEE WAS NOT ENTITLED TO DEDUCT ON ACCOUNT OF ITS LIABILITY FOR GRATUITY UNDER THE PAYMENT OF GRATUITY ACT, 1972 WITHOUT COMPLYING WITH THE PROVI SIONS OF SEC. 40A(7) OF THE ACT. HE ALSO REFERRED TO THE DECISION OF MUMBA I TRIBUNAL IN THE CASE OF M/S ALLIWED PHOTOGRAPHIC INDIA LTD. VS. ITO (2006) 8 SOT 318 (MUM. TRI.). BEFORE LD. CIT(A) THE ASSESSEE REITERATED THE SUBMI SSIONS MADE BEFORE LD. CIT(A). LD. CIT(A) CONFIRMED THE AOS ACTION. 7. LD. COUNSEL RELIED ON THE SUBMISSIONS MADE BEFOR E LOWER REVENUE AUTHORITY AND POINTED OUT THAT THE PROVISION HAD BE EN MADE ON THE BASIS OF GUIDELINES ISSUED BY INSTITUTE OF CHARTERED ACCOUNT ANTS OF INDIA. LD. COUNSEL SUBMITTED THAT THE ASSESSEE HAD DISCHARGED THE ENTIRE TAX LIABILITY AND HAD CLAIMED THE PROVISION AT ASSESSMENT STAGE O NLY. BEFORE LD. CIT(A) IT WAS SUBMITTED AS UNDER: 5.1 THE AR ALSO SUBMITTED THAT THE SCHEME IS OPEN FOR HOLDERS OF SBI GOLD CARD, SBI CARD FOR DOCTORS AND SBI INTERNA TIONAL CARD. FOR EVERY RS. 125 SPENT USING SBI CARD, THE CARDHOL DER EARNS ONE ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 7 REWARD POINT. THUS, ONCE THE CARDHOLDER MAKE SPEND S USING THE CARD, THE APPELLANTS LIABILITY TOWARDS REWARD POIN TS REDEMPTION ACCRUES. HENCE, THIS LIABILITY TOWARDS REWARD POIN T REDEMPTION IS AN ACTUAL LIABILITY IN PRASENTI. IT IS A DEFINITE AND CERTAIN LIABILITY, ALTHOUGH TO BE DISCHARGED AT SUBSEQUENT DATE. ALSO , AS PER THE OPINION OF EXPERT ADVISORY COMMITTEE OF INSTITUTE O F CHARTERED ACCOUNTANTS OF INDIA, THE SAID AMOUNT IS CRYSTALLIZ ED LIABILITY AND, THEREFORE, THE SAME HAS BEEN CLAIMED AS DEDUCTIBLE BY THE ASSESSEE IN ITS RETURN OF INCOME. THE OPINION EXPRESSED BY THE EXPERT ADVISORY COMMITTEE OF INSTITUTE OF CHARTERED ACCOUN TANTS 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 OUTSTA NDING REWARD POINTS ANY TIME IN FUTURE. THE LIABILITY FO R THE REWARD POINTS OUTSTANDING EXPECTED TO BE REDEEMED IN FUTUR E MAY BE ESTIMATED, AT THE YEAR-END, BY APPLYING THE ACTUARI AL METHOD. 5.2 IT WAS SUBMITTED THAT THE SPENDINGS MADE BY THE CREDIT CARDHOLDER USING THE CREDIT CARD AND LIABILITY TOWA RDS REDEMPTION OF REWARD POINTS ARE INEXTRICABLY LINKED WITH EACH OTH ER AND THEREFORE, IF INCOME ACCRUING TO THE APPELLANT ON ACCOUNT OF S PENDINGS MADE THROUGH CREDIT CARD ARE TAKEN INTO ACCOUNT IN A YEA R, 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 CHART ERED ACCOUNTANTS OF INDIA (ICAI) HAS ISSUED ACCOUNTING STANDARDS WHICH ARE MANDATORILY REQUIRED TO BE FOLLOWED BY AL L THE COMPANIES. IN THIS REGARD, ATTENTION HAS BEEN DRAWN TOWARDS TH E ACCOUNTING STANDARD (AS)-1, DISCLOSURE OF ACCOUNTING POLICIES , WHICH IN ITS ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 8 DEFINITION OF ACCRUAL STATES THAT THE COST ARE RECO GNIZED AS THEY ARE INCURRED AND RECORDED IN THE FINANCIAL STATEMENTS O F THE PERIOD TO WHICH THEY RELATE. 5.4 IT WAS PLEADED THAT IN THE CASE OF THE ASSESSEE , OBLIGATION TOWARDS REWARD POINTS ARISES AS SOON AS A CUSTOMER BECOMES ENTITLED TO THE REWARD POINTS ALTHOUGH PAYMENT IN T HIS REGARD IS MADE WHENEVER THE CUSTOMER CHOOSES TO REDEEM THE RE WARD POINTS ANY TIME IN FUTURE. THUS, LIABILITY HAS BEEN COMMI TTED BY THE ASSESSEE AS SOON AS SPENDS ARE MADE BY THE CREDIT C ARDHOLDER AND, THEREFORE, FOLLOWING THE ACCRUAL SYSTEM OF ACCOUNTI NG THE SAME HAS TO BE PROVIDED FOR IN THE BOOKS OF ACCOUNTS ON SCIE NTIFIC BASIS. 8. LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED T HAT THIS ISSUE IS COVERED BY THE DECISION OF BANGALORE TRIBUNAL IN TH E CASE OF SYNDICATE BANK VS. DCIT, VIDE ITA NO. 668/BANG./2010 FOR A.Y. 2006 -07, WHEREIN TRIBUNAL IN PARA 87 HAS OBSERVED AS UNDER: 87. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE ARE OF THE VIEW THAT THE CIT(A) HAS FALLEN INTO ERROR IN REJEC TING THE CLAIM OF THE ASSESSEE FOR DEDUCTION. AS LAID DOWN BY THE HO NBLE SUPREME COURT IN THE CASE OF BEML VS. CIT, 245 ITR 428 (SC) , THE CRITERIA FOR ALLOWING DEDUCTION ON ACCOUNT OF A PROVISION IS THAT THE LIABILITY TO INCUR THE EXPENDITURE WHICH IS CLAIMED BY WAY OF A PROVISION SHOULD BE CERTAIN AND SECONDLY THE QUANTIFICATION O F SUCH LIABILITY SHOULD BE SCIENTIFIC/REASONABLE. IN THE PRESENT CA SE, AS PER THE TERMS OF ISSUE OF CREDIT CARDS, ON ACCUMULATION OF MINIMU M POINTS, THEN CUSTOMERS WERE FREE TO ENCASH THOSE POINTS. THE AS SESSEE WAS LEGALLY BOUND TO PROVIDE EQUIVALENT OF REWARD POINT S IN CASH OR KIND. IN THE CASE OF THE ASSESSEE, THE REWARD POINTS ARE GIVEN IN THE FORM OF CASH REIMBURSEMENT. THE FACT THAT THE CUSTOMERS DID NOT MAKE ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 9 CLAIM FOR SUCH REIMBURSEMENT WILL NOT STOP THE ACCR UAL OF LIABILITY. IN OUR VIEW, THE LIABILITY OF THE ASSESSEE INSOFAR AS ACCUMULATED REWARD POINTS ARE CONCERNED IS CERTAIN AND THE REVE NUE HAS NOT DISPUTED THE BASIS OF QUANTIFICATION OF SUCH LIABIL ITY. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT IN THE LIGHT OF THE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF BEML (SUPRA), THE CLAIM FOR DEDUCTION SHOULD BE ALLOWED. WE, ACCORDINGLY, DIRECT THEN AO TO ALLOW THE CLAIM OF T HE ASSESSEE IN THIS REGARD. GROUND NO. 1 & 2 RAISED BY THE ASSESSEE AR E ACCORDINGLY ALLOWED. 8.1 THEREFORE, LD. COUNSEL SUBMITTED THAT THE PROVI SION MADE BY ASSESSEE IS LEGALLY ALLOWABLE. HOWEVER, HE SUBMITTED THAT H E HAS INSTRUCTIONS THAT SINCE LIABILITY ON ACTUAL PAYMENT BASIS HAS BEEN AL LOWED, THEREFORE, THIS ISSUE NEED NOT BE PRESSED ANY FURTHER. 8.2 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE RECORD OF THE CASE. THE ASSESSEE HAD MADE A PROVIS ION ON THE BASIS OF OPINION EXPRESSED BY THE EXPERT ADVISORY COMMITTEE OF INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA ON THE ISSUE OF REWA RD POINT PROVIDED BY BANKS IN ORDER TO PROMOTE THEIR CREDIT CARDS AS CON TAINED AT PAGES 159 TO 163 OF PAPER BOOK. AS CLEARLY DEMONSTRATED BY LD. COUNSEL FOR THE ASSESSEE, THE PROVISION MADE BY ASSESSEE WAS AN ALL OWABLE DEDUCTION. THEREFORE, THE SUBMISSION OF LD. COUNSEL FOR THE AS SESSEE 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 ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 10 AND THE TAXES WERE ALREADY PAID BY THE ASSESSEE, TH EREFORE, 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 DEPARTME NT . 10.1 IN THIS ASSESSMENT YEAR, THE ASSESSEES BUSINE SS REMAINED THE SAME. THE ASSESSEE HAD FILED RETURN OF INCOME DECLARING T OTAL INCOME OF RS. 72,01,85,256/-. THE ASSESSMENT WAS COMPLETED AT A TOTAL INCOME OF RS. 120,52,30,650/- AFTER MAKING FOLLOWING ADDITIONS: INCOME AS PER RETURN DECLARED 72,01,85,256 ADD: DISALLOWANCES OF CREDIT INVESTIGATION EXPENSES 5,65,63,127 DISALLOWANCE OF EXPENDITURE ON APPLICATION CAPTURE 73,50,418 CREATION OF BRAND AND ADVERTISEMENT EXPENSES 42,11,31,848 TOTAL ADDITIONS 48,50,45,393 48,50,45,393 TOTAL ASSESSED INCOME 1,20,52,30,649 R/O 1,20,52,30,650 11. LD. CIT(A) PARTLY ALLOWED AND PARTLY ENHANCED T HE ASSESSEES APPEAL AS UNDER: GROUND NO. DESCRIPTION AMOUNT INVOLVED (RS.) DECISION IN BRIEF 1. GENERAL - DOES NOT REQUIRE ADJUDICATION 2. PROVISION FOR REWARD POINT REDEMPTION 6,23,00,786 DISMISSED WITH DIRECTIONS TO ALLOW PART RELIEF 3. PROVISION FOR DOUBTFUL DEBTS AS PER RBI NORMS 8,74,93,050 DISMISSED 4. CREDIT INVESTIGATION EXPENSES 5,65,63,127 ALLOWED 5. APPLICATION CAPTURE EXPENSES 73,50,418 ALLOWED 6. ADVERTISEMENT AND SALES PROMOTION EXPENSES 42,11,31,848 ALLOWED 7. WITHDRAWAL OF INTEREST U/S 244A - CONSEQUENTIAL 8. LEVY OF INTEREST U/S 234D - CONSEQUENTIAL 9. INITIATION OF PENALTY PROCEEDINGS - DISMISSED CLAIM OF DEFERRED 17,93,59,566 DIRECTION FOR ENHANCEMENT GIVEN. ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 11 REVENUE EXPENSES (NET) 12. BEING AGGRIEVED WITH THE ORDER OF LD. CIT(A), B OTH ASSESSEE AND DEPARTMENT ARE IN APPEAL BEFORE US. FIRST WE TAKE UP THE ASSESSEES APPEAL, VIDE ITA NO. 2470/D/2011. THE ASSESSEE HAS TAKEN FOLLOWING GROUNDS OF APPEAL: 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE IMPUGNED ORDER DATED FEBRUARY 22, 2011 PASSED BY TH E LD. CIT(A) U/S 250(6) OF THE ACT FOR THE SUBJECT YEAR IS ERRONEOUS AND BA D IN LAW TO THE EXTENT THE SAME ENHANCES THE INCOME OF THE APPELLANT/CONFIRMS THE DISALLOWANCES MADE BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7( 1), NEW DELHI (AO); 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF PROV ISION FOR REWARD POINT REDEMPTION AMOUNTING TO RS. 5,50,78,000 CONSIDERING THE SAME AS UNASCERTAINED LIABILITY. THE LD. CIT(A) HAS FURTHE R ERRED IN HOLDING THAT THE ABOVE LIABILITY ACCRUES WHEN THE CLAIM FOR REDEMPTI ON OF REWARD POINTS IS LODGED BY THE CARDHOLDER AND NOT AT THE TIME OF PUR CHASE BY THE CARDHOLDER; 2.1 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DIRECTING THE AO TO ALLOW DEDUC TION OF RS. 72,22,786/- TOWARDS ACTUAL REWARD POINTS REDEEMED BY THE APPELL ANT, 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 A MOUNT ACTUALLY PAID/DISBURSED BY THE APPELLANT IS NOT DEPENDENT UP ON ANY SUBSEQUENT APPELLATE PROCEEDINGS INSTITUTED BY THE APPELLANT; 2.2 THAT THE LD. CIT(A) HAS ERRED IN NOT APPRECIATING T HAT THE ABOVE PROVISION FOR REWARD POINT WAS RECOGNIZED ON SCIENTIFIC BASIS, DU LY SUPPORTED BY THE ACTUARIAL VALUATION CERTIFICATE FURNISHED DURING TH E COURSE OF APPELLATE PROCEEDINGS. ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 12 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LD. CIT(A) HAS ERRED IN EXERCISING JURISDICTION TO ENHANCE THE INC OME OF THE APPELLANT BY MAKING A DISALLOWANCE OF RS. 17,93,59,566 TOWARDS C ARD ACQUISITION EXPENDITURE INCURRED BY THE APPELLANT AND CLAIMED U PFRONT IN THE RETURN OF INCOME THOUGH TREATED AS DEFERRED REVENUE EXPENDITU RE IN THE BOOKS OF ACCOUNTS. 3.1 THAT THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW I N NOT APPRECIATING THAT FOR PURPOSES OF THE ACT, REVENUE EXPENSES HAVE TO BE AL LOWED IN ENTIRELY IN THE YEAR OF ACCRUAL AND NO ADVERSE INFERENCE CAN BE DRA WN ON THE BASIS OF ENTRIES IN THE BOOKS OF ACCOUNTS. 3.2 THAT THE LD. CIT(A) HAS ERRED IN NOT APPLYING THE U NDER-NOTED BINDING JUDICIAL PRECEDENTS ON THE ALLOWABILITY OF CARD ACQUISITION EXPENSES: A) THAT THE HONBLE INCOME TAX APPELLATE TRIBUNAL, DEL HI BRANCH (ITAT) HAS DISMISSED THE DEPARTMENTAL APPEAL FOR AYS 2000- 01 TO 2002-03 ON THIS ISSUE FOR WANT OF APPROVAL OF COMMITTEE OF DISPUTES (COD); B) THAT THE COD HAS DECLINED PERMISSION TO CENTRAL BOA RD OF DIRECT TAXES TO APPEAL BEFORE THE HONBLE ITAT ON DEDUCTION OF CARD ACQUISITION EXPENDITURE FOR AYS 2000-01 AND 2001-02, BY HOLDING THAT ABOVE EXPENDITURE IS REVENUE EXPENDITURE ALLOWABLE UNDER THE ACT; C) THAT THE LD. CIT(A), NEW DELHI HAS ALSO DELETED THE DISALLOWANCE OF CARD ACQUISITION EXPENSES MADE IN ASSESSMENT ORDER FOR A YS 2000-01 TO 2002- 03 ON SIMILAR GROUNDS. 3.3 WITHOUT PREJUDICE TO ABOVE, THE LD. CIT(A) HAS ERRE D IN DIRECTING THE AO TO ALLOW DEDUCTION OF RS. 17,93,59,566 TOWARDS CARD AC QUISITION EXPENDITURE IN AY 2007-08 ONLY ON THE CONDITION THAT NO APPEAL IS FILED AGAINST THE ABOVE DISALLOWANCE. THE LD. CIT(A) HAS ERRED IN NOT APPR ECIATING THE FACT THAT IN THE EVENT THE ABOVE AMOUNT IS NOT ALLOWED IN SUBJECT YE AR, THE SAME OUGHT TO BE ALLOWED IN AY 2007-08. 13. GROUND NO. 1 IS GENERAL AND DOES NOT CALL FOR A NY ADJUDICATION. ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 13 14. APROPOS GROUND NO. 2 TO 2.2, THE FACTS ARE IDEN TICAL TO THE SOLITARY ISSUE IN A.Y. 2005-06 IN ASSESSEES APPEAL. IN THE PRESE NT ASSESSMENT YEAR THE ASSESSEE HAD MADE THE PROVISION ON THE BASIS OF ACT UARIAL VALUERS REPORT CONTAINED AT PAGE 315 OF PAPER BOOK WHICH FURTHER P ROVE THE ASSESSEES BONA FIDE IN MAKING THE PROVISION. IN VIEW OF THESE FACTS F OR THE REASONS GIVEN IN A.Y. 2005-06 IN ASSESSEES APPEAL THESE GR OUNDS ARE DISMISSED. 15. APROPOS GROUND NO. 3 TO 3.3, BRIEF FACTS ARE T HAT AO NOTICED THAT DURING THE YEAR 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 31 ST MARCH, 2005 SALES FORCE COMPENSATION, CARD ACQUISI TION COST (SALES SERVICE PROVIDER EXPENSES, INCENTIVES R ELATED 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 ST APRIL, 2005), THE COMPANY HAS CHANGED ITS POLICY TO RECOGNIZE PRODUCTIVE SALE S FORCE COMPENSATION, CARD ACQUISITION COST, CONSUMPTION OF PLASTIC CARDS AND DELIVERY CHARGES OVER A PERIOD OF ONE YEAR AS T HIS MORE CLOSELY REFLECTS THE PERIOD TO WHICH THE FEE RELATES TO. A S 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. ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 14 IF CARD-MAKING EXPENSE OF RS. 1000/- HAS BEEN INCU RRED 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 WOU LD 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 COMPUTATION OF INCO ME FOR INCOME TAX PURPOSES, HE FOUND THAT THE AFORESAID EXPENSES, WHI CH WERE DEFERRED IN THE BOOKS OF ACCOUNT TO THE EXTENT OF RS. 19.64 CRO RES, HAD BEEN CLAIMED AS A DEDUCTION. CONSEQUENTLY, THE BOOK RESULTS, WHICH SHOULD HAVE SHOWN A HIGHER PROFIT BY RS. 19.64 CRORES, HAD BEEN NEUTRAL IZED AND FOR INCOME TAX PURPOSES, PROFITS HAD BEEN DISCLOSED AT A LOWER FIG URE. 16. THE ASSESSEE FILED DETAILED SUBMISSIONS, IN WHI CH, INTER-ALIA, IT WAS SUBMITTED THAT THE EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE FOR RUNNING THE BUSINESS MORE EFFICIENTLY AND EFFECTIVE LY AND AS SUCH ALLOWABLE U/S 37(1) OF THE ACT. THE ASSESSEE HAD RELIED ON T HE DECISION IN THE CASE OF EMPIRE JUTE CO. LTD. VS. CIT, 124 ITR 1. IT WAS FU RTHER SUBMITTED THAT SINCE LEGISLATURE HAS NOT PROVIDED ANY DEFERMENT OF EXPEN SES OF THE NATURE PRESENT IN THE INSTANT CASE, IT WILL BE AGAINST THE INTENT OF THE LEGISLATURE TO DEFER SUCH EXPENSES. THE ASSESSEE RELIED ON THE DE CISION IN THE CASE OF HINDUSTAN COMMERCIAL BANK LIMITED VS. REVENUE 21 IT R 353 (ALL.) AND ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 15 KEDARNATH JUTE VS. CIT, 82 ITR 363 (SC). THE ASSES SEE ALSO POINTED OUT THAT IN ASSESSMENT YEARS 2000-01 & 2001-02, THE ASS ESSEE HAD AMORTIZED SUCH EXPENSES OVER THE PERIOD OF TWO YEARS WHICH WA S NOT ACCEPTED BY THE AO. 16.1 HOWEVER, LD. CIT(A) ALLOWED THE ASSESSEES APP EAL AND THE DEPARTMENT WAS DENIED GOING IN FURTHER APPEAL BY TH E COD. LD. CIT(A) HOWEVER, DID NOT ACCEPT THE ASSESSEES CONTENTIONS FOR THE FOLLOWING REASONS: 1. SECTION 211(2) OF THE COMPANIES ACT, 1956 PROVID ES THAT EVERY PROFIT & LOSS ACCOUNT OF A COMPANY SHALL GIVE A TRUE AND F AIR VIEW OF THE PROFIT & LOSS OF THE COMPANY FOR THE FINANCIAL YEAR . SUB-SECTIONS (3A) & (3C) OF SECTION 211 OF THE COMPANIES ACT PROVIDE THAT EVERY PROFIT & LOSS ACCOUNT OF THE COMPANY SHALL COMPLY WITH THE ACCOUNTING STANDARDS PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. 2. HE POINTED OUT THAT AS PER (AS-5) ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, THE SAME ACCOUNTING POLICIES 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 SECTI ON 211(3A) & (3C) OF THE COMPANIES ACT, AS-5 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA NEEDS TO BE MANDATORILY FOLLOW ED. THERE IS NO CHOICE LEFT WITH THE ASSESSEE IN THIS REGARD. LD. CIT(A) REFERRED TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CI T VS. WOODWARD GOVERNOR INDIA PVT. LTD. (2009) 312 ITR 254 (SC) AN D POINTED OUT THAT IN THIS CASE THE HONBLE SUPREME COURT WAS OF THE V IEW THAT THE ASSESSEE COMPANY, IN VIEW OF THE PROVISIONS IN THE COMPANIES ACT, HAD NO CHOICE BUT TO FOLLOW THE ACCOUNTING TREATMEN T SUGGESTED IN AS- ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 16 11 AND, THEREFORE, FOREIGN EXCHANGE LOSS WAS AN ALL OWABLE DEDUCTION. HE POINTED OUT THAT SINCE ASSESSEE COMPANY HAD FOLL OWED AS-5 WHILE PREPARING ITS ANNUAL FINANCIAL STATEMENTS, THEREFOR E, IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TH E COMPUTATION OF INCOME FOR INCOME TAX PURPOSES HAD TO BE MADE ON TH E SAME BASIS. 17. LD. CIT(A) ALSO REFERRED TO SECTION 145(2) OF T HE 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 AS SESSEE. 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 FO LLOWING MERCANTILE SYSTEM OF ACCOUNTING. HE REFERRED TO PARA 4 OF THE SAID NOTIFICATION WHICH READS AS UNDER: ACCOUNTING POLICY ADOPTED BY AN ASSESSEE SHOULD B E SUCH AS TO REPRESENT A TRUE AND FAIR VIEW OF THE STATE OF AFFAIRS OF THE BUSINESS, PROFESSION OR VACATION IN THE FINANCIAL STATEMENT P REPARED AND PRESENTED ON THE BASIS OF SUCH ACCOUNTING POLICY. 17.1 LD. CIT(A) FURTHER DISCUSSED IN DETAIL THE ASS ESSES SUBMISSIONS BUT DID NOT AGREE WITH THE EARLIER DECISION OF LD. CIT(A) O R WITH THE DECISIONS RELIED BY THE ASSESSEE AND HELD THAT THE CLAIM OF THE DEDUCTI ON OF THE DEFERRED REVENUE EXPENDITURE AMOUNTING TO RS. 19,64,39,035/- , HAD BEEN WRONGLY MADE IN THE COMPUTATION OF INCOME. HE, ACCORDINGLY , DISALLOWED THE ASSESSEES CLAIM FOR A SUM OF RS. 17,93,59,566/- (1 9,64,39,035/- - 1,70,79,469/-), SINCE IN THE COMPUTATION OF INCOME, THE INCOME FROM MEMBERSHIP FEE AMOUNTING TO RS. 1,70,79,469/- HAD B EEN OFFERED TO TAX. ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 17 THOUGH, IN VIEW OF THE CHANGED OF ACCOUNTING POLICY , THE SAME WAS NOT CREDITED TO THE PROFIT AND LOSS ACCOUNT. 18. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE RE IS NO DISPUTE THAT THE IMPUGNED AMOUNT WAS REVENUE EXPENDITURE AND INC URRED DURING THE YEAR UNDER CONSIDERATION. HOWEVER, SINCE THE IMPUGNED A MOUNT WAS OF DEFERRED REVENUE NATURE, BEING PARTLY RELATABLE TO CURRENT Y EAR AND PARTLY TO SUBSEQUENT YEAR, THEREFORE, FOR PREPARATION OF BALA NCE SHEET, IT WAS CLAIMED AS DEFERRED REVENUE EXPENDITURE IN THE BALANCE SHEE T BUT FOR INCOME TAX PURPOSES THE ENTIRE AMOUNT WAS CLAIMED AS DEDUCTION IN THE COMPUTATION OF INCOME U/S 37 OF THE INCOME TAX ACT. LD. COUNSEL S UBMITTED THAT BALANCE SHEET IN THE CASE OF A COMPANY WOULD BE PREPARED AS PER THE REQUIREMENTS OF THE COMPANIES ACT BUT FOR COMPUTATION OF INCOME UNDER THE INCOME TAX ACT, THE PROVISIONS OF THE INCOME TAX ACT HAVE TO B E APPLIED. 19. LD. DR RELIED ON THE ORDER OF LD. CIT(A). 19.1 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND H AVE PERUSED THE RECORD OF THE CASE. WE FIND THAT THERE IS NO CONCE PT OF DEFERRED REVENUE EXPENDITURE UNDER THE INCOME TAX ACT EXCEPT UNDER C ERTAIN SPECIFIC PROVISIONS LIKE SECTION 35D. THEREFORE, UNLESS STA TUTORY PROVISION IS THERE TO DEFER THE REVENUE EXPENDITURE OVER A PERIOD, THE EN TIRE AMOUNT IS TO BE ALLOWED IN THE YEAR IN WHICH IT IS INCURRED FOR RUN NING THE BUSINESS AS PER SECTION 37 OF THE INCOME TAX ACT. LD. CIT(A) HAS R ELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVER NOR (SUPRA), WHEREIN ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 18 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 H ONBLE SUPREME COURT CONSIDERED THE APPLICABILITY OF ACCOUNTING STANDARD XI IN THAT CONTEXT ONLY. AS FAR AS THE PRESENT ISSUE IS CONCERNED, WE FIND T HAT THIS ISSUE IS NO MORE RESINTEGRA IN VIEW OF FOLLOWING DECISIONS: 1. 335 ITR 29 IN THE CASE OF CIT VS. CASIO INDIA LT D., WHEREIN THE HONBLE DELHI HIGH COURT HELD THAT DIRECT SELLING EXPENSES, STAMPING FEE AND COMMISSION PAID TO THE SELLING AGENTS IN THE CASE O F ASSESSEE WHO WAS FINANCING THE HIGHER PURCHASE OF VEHICLES AND H OMES AND THE PERIOD OF SUCH FINANCING WERE RANGING FROM LESS THA N 1 YEAR UPTO 5 YEARS WAS ALLOWABLE IN THE YEAR IN WHICH THE EXPEND ITURE WAS INCURRED AND NOT OVER 5 YEARS; 2. 308 ITR 199 IN THE CASE OF CIT VS. SALORA INTERN ATIONAL LTD., HEAD NOTE READS AS UNDER: FOR THE ASSESSMENT YEAR 2001-02, THE ASSESSEE HAD I NCURRED ADVERTISING EXPENDITURE OF ABOUT RS. 3.08 CRORES FO R LAUNCHING OF ITS PRODUCTS AND THE AO HELD THAT THE EXPENDITURE WAS O F AN ENDURING NATURE AND TREATED ONE-THIRD OF IT AS CAPITAL EXPEN DITURE. THE TRIBUNAL, CONFIRMING THE FINDINGS OF THE COMMISSION ER (APPEALS) THAT THE EXPENDITURE WAS REVENUE EXPENDITURE, HELD THAT THERE WAS A DIRECT NEXUS BETWEEN THE ADVERTISING EXPENDITURE AN D THE BUSINESS OF THE ASSESSEE AND THAT UNLESS THE ASSESSEE MADE ITS PRODUCTS KNOWN IN THE MARKET, ITS BUSINESS WOULD SUFFER. ON APPEAL B Y THE DEPARTMENT: HELD ALSO, THAT THE QUESTIONS WHETHER THE TRIBUNAL WAS CORRECT (I) IN DELETING THE ADDITION MADE BY THE AO BY AMORTISI NG THE EXPENDITURE TOWARDS THE PROFESSIONAL FEE PAID TOWAR DS THE PROJECT OF ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 19 SUPPLY CHAIN MANAGEMENT AND HUMAN RESOURCE REVENUE- ENGINEERING BY ALLOWING DEDUCTION OF ONE-FIFTH AS EXPENDITURE I N THE YEAR UNDER ASSESSMENT, AND (II) IN HOLDING THAT THE UNUTILIZED AMOUNT OF DEPB WOULD BE ALLOWED AS EXPENDITURE U/S 37(1) OF THE IN COME TAX ACT,1961, AND COULD BE ALLOWED AS LOSS, WERE SUBSTA NTIAL QUESTIONS OF LAW. 3. CIT VS. PANACEA BIOTECH LTD., VIDE ITA NO. 22 & 24/2012, WHEREIN THE HONBLE DELHI HIGH COURT OBSERVED AS UNDER: 4. THE QUESTION OF DEFERRED REVENUE EXPENDITURE A ND THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. CIT, MANU/SC/0493/1 997 : (1997)225 ITR 802 (SC) WAS EXAMINED AND DISTINGUISH ED IN CIT VS. INDUSTRIAL CORPORATION OF INDIA MANU/DE/2521/20 09 : (2009) 185 TAXMAN 296 (DELHI) AND IT WAS HELD: 22. THE LD. COUNSEL FOR THE REVENUE HAD STRONGLY ARGUED THAT MATCHING CONCEPT IS TO BE APPLIED, AS P ER WHICH PART OF THE EXPENDITURE HAD TO BE DEFERRED AN D CLAIMED IN THE SUBSEQUENT YEARS AND, THEREFORE, APP ROACH OF THE AO WAS CORRECT. HOWEVER, THIS ARGUMENT OVERLOOKS THAT EVEN IN MADRAS INDUSTRIAL INVESTMENT CORPORATION (SUPRA), ON WHICH THE RELIANCE WAS PLAC ED BY MS. BANSAL, THE GENERAL PRINCIPLE STATED WAS THA T ORDINARILY REVENUE EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS CAN BE ALLO WED IN THE YEAR IN WHICH IT IS INCURRED. SOME EXCEPTIONAL CASES CAN JUSTIFY SPREADING THE EXPENDITURE AND CLAIMING IT OVER A PERIOD OF ENSUING YEARS. IT IS IMPORTANT TO NOTE THAT IN THAT JUDGMENT, IT WAS THE ASSESSE WHO WANTE D SPREADING THE EXPENDITURE OVER A PERIOD OF TIME AS WAS ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 20 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 FOUN D THAT THE ASSESSEE COULD STILL BE ALLOWED TO SPREAD THE S AID EXPENDITURE OVER THE ENTIRE PERIOD OF FIVE YEARS, A T THE END OF WHICH THE DEBENTURES WERE TO BE REDEEMED. B Y RAISING THE MONEY COLLECTED UNDER THE SAID DEBENTUR ES, THE ASSESSEE COULD UTILIZE THE SAID AMOUNT AND SECU RE 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 DIV ISION BENCH REFERRED TO INDUSTRIAL FINANCE CORP. OF INDIA (SUPRA) AND THEN QUOTE A PASSAGE FROM THE DECISION OF THE SUPRE ME 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 DIS CUSS 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 NATU RE, IN A GREAT MEASURE. IN THAT CASE, THE SC NOTED THAT BY DECIDED CASES, THE COURTS EVOLVED VARIOUS TESTS FOR DISTING UISHING BETWEEN THE CAPITAL AND REVENUE EXPENDITURE BUT NO TEST IS PARAMOUNT OR CONCLUSIVE. EVERY CASE HAS TO BE DECI DED ON ITS FACTS KEEPING IN MIND THE BROAD PICTURE OF WHOL E OPERATION IN RESPECT OF WHICH THE EXPENDITURE HAS B EEN 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 OU R ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 21 PURPOSE WAS WHEN AN EXPENDITURE IS MADE NOT ONLY O NCE AND FOR ALL, BUT WITH A VIEW TO BRINGING INTO EXIST ENCE OF AN ADVANTAGE FOR WHICH ENDURING BENEFIT OF A TRADE, TH E EXPENDITURE CAN BE TREATED AS CAPITAL IN NATURE AND NOT ATTRIBUTABLE TO REVENUE. HOWEVER, CAUTIONED THE C OURT, IT WOULD BE MISLEADING TO SUPPOSE THAT IN ALL CASES SE CURING A BENEFIT FOR BUSINESS EXPENDITURE WOULD BE CAPITAL EXPENDITURE. THE COURT ADDED THE CAUTION IN THE FO LLOWING WORDS: .THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OBTAINING ADVANTAGE OF ENDURING BENEFI T, MAY, NONE THE LESS, BE ON REVENUE ACCOUNT AND THE TEST O F ENDURING BENEFIT MAY BREAK DOWN. IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN ASSESSE E THAT BRINGS THE CASE WITHIN THE PRINCIPLE LAID DOWN IN T HIS TEST. WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE A DVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHERE THE ADVA NTAGE IS IN THE CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLOWABLE ON AN APPLICATION OF THIS TEST. IF TH E ADVANTAGE CONSISTS MERELY IN FACILITATING THE ASSES SEES TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEES BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHITE LEAVING THE FI XED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVE NUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR A N INDEFINITE FUTURE. THE TEST OF ENDURING BENEFIT IS , THEREFORE, NOT A CERTAIN OR CONCLUSIVE TEST AND IT CANNOT BE A PPLIED BLINDLY AND MECHANICALLY WITHOUT REGARD TO THE PART ICULAR FACTS AND CIRCUMSTANCES OF A GIVEN CASE. ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 22 6. IT WAS HELD THAT THE CLAIM OF THE REVENUE THAT THE REVENUE EXPENSE SHOULD BE DEFERRED IN THE ABSENCE OF A STAT UTORY PROVISION OR SPREAD OVER SOME YEARS CANNOT BE ACCEP TED. IN THE CASE OF COMMISSIONER OF INCOME TAX VS. CASIO INDIA LTD. MANU/DE/2405/2011 : (2011) 335 ITR 196 (DEL.), REFE RENCE WAS MADE TO THE DECISION IN THE CASE OF CITI FINANC IAL CONSUMER FIN. LTD. (SUPRA). IT WAS HELD THAT THE EXPENDITUR E INCURRED ON INVESTMENT AND SALE PROMOTION WAS BUSINESS EXPENDIT URE U/S 37(1) OF THE ACT AND THE CONCEPT OF DEFERRED REVENU E EXPENDITURE SHOULD NOT BE ACCEPTED AT THE BEHEST OF THE REVENUE . 19.2 SIMILAR VIEW HAS BEEN TAKEN IN FOLLOWING DECIS IONS: 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 E XPENDITURE, EVEN IN THE YEAR IN WHICH IT IS INCURRED, AND THE E XPENDITURE FULFILS THE TEST LAID DOWN U/S 37 OF THE ACT, IT HA S TO BE ALLOWED. ONLY IN EXCEPTIONAL CASES, THE NATURE MENTIONED IN MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. [1997] 225 I TR 802 (SC), THE EXPENDITURE CAN BE ALLOWED TO BE SPREAD OVER, T HAT TOO, WHEN THE ASSESSEE CHOOSES TO DO SO. 2. 338 ITR 177, CYBER MEDIA (INDIA) LTD. IN THIS C ASE, 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 UND ER THE COMPANIES ACT THAT IT CHANGED BONA FIDE TO THE MERC ANTILE SYSTEM, IT ERRED IN CONCLUDING THAT THE ASSESSEES INCOME FOR THE ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 23 PURPOSES OF INCOME-TAX PROCEEDINGS COULD NOT HARK B ACK 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 W HETHER IT IS PERMISSIBLE FOR THE ASSESSEE TO CLAIM THE ENTIRE EX PENDITURE AS REVENUE EXPENDITURE WHILE FILING ITS RETURN OF INCO ME, WHILE ON THE OTHER, UNDER THE COMPANIES ACT, ADOPTED A METHO D OF ACCOUNTING WHEREIN ONLY PART OF THE EXPENDITURE IN QUESTION WAS DEBITED TO THE PROFIT AND LOSS ACCOUNT. THE ISSUE, IN OUR CONSIDERED OPINION, IS COVERED IN FAVOUR OF THE ASS ESSEE AND AGAINST THE REVENUE BY A NUMBER OF DECISIONS WHICH WERE CITED BEFORE US BY THE LEARNED COUNSEL FOR THE ASSESSEE. IN THE HYDERABAD BENCH IN THE CASE OF AMAR RAJA BATTERIES VS. ASSTT. CIT [2004] 91 ITD 280 WHICH IS SQUARELY APPLICABLE TO THE FACTS OF THIS CASE, IT WAS HELD THAT- THE UNDISPUTED FACT IS THAT THE EXPENDITURE IS IN THE REVENUE FILED. THE ONLY ISSUE TO BE CONSIDERED IS WHETHER THE ASSESSEE CAN CLAIM THE ENTIRE EXPENDITURE IN TH IS YEAR ITSELF, EVEN THOUGH IT HAD WRITTEN OFF THIS EXPENDI TURE IN THE BOOKS OVER A PERIOD OF FIVE YEARS. THOUGH THE ASSE SSEE HAS WRITTEN OFF THE EXPENDITURE IN ITS BOOKS OF ACCOUNT OVER A PERIOD OF FIVE YEARS, IT MUST BE ALLOWED IN ITS ENT IRETY IN THE YEAR IN WHICH IT WAS INCURRED, IF IT IS REVENUE EXP ENDITURE AND IF IT IS WHOLLY AND EXCLUSIVELY INCURRED FOR TH E PURPOSES OF BUSINESS. THE ASSESSEE HAD LAUNCHED A NEW PRODU CT AND INCURRED HEAVY ADVERTISEMENT EXPENDITURE. THE PERI OD FOR WHICH THE ASSESSEE CAN BE SAID TO HAVE SECURED BENE FIT BY INCURRING THIS EXPENDITURE CANNOT BE REASONABLY EST IMATED. ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 24 THE UNDISPUTED FACT IS THAT THE NEW PRODUCT LAUNCHE D MAY FAIL TO TAKE OFF IN THE YEAR OF LAUNCH ITSELF OR MA Y HAVE A LONG LIFE AS A PRODUCT. THERE IS NO WAY IN WHICH I T CAN DEFINITELY BE ESTIMATED THAT THE BENEFIT OF THE EXP ENDITURE WOULD LAST FOR A PARTICULAR PERIOD OF TIME. THE EN TRIES IN THE BOOKS OF ACCOUNT DO NOT CLINCH THE ISSUE EITHER WAY AND THEY DO NOT DETERMINE THE ALLOWABILITY OR OTHERWISE OF THE EXPENDITURE. THE ENTIRE ADVERTISEMENT EXPENDITURE FOR PRODUCT LAUNCHING IS TO BE ALLOWED IN THIS YEAR. T HE DISALLOWANCE OF RS. 1,03,63,401/- MADE BY THE ASSES SING OFFICER ON ACCOUNT OF ADVERTISEMENT EXPENDITURE IS DELETED. IT IS WELL SETTLED THAT 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 NO T. COURTS ARE COMPELLED TO GO BY THE TRUE NATURE OF RE CEIPTS AND NOT TO GO BY THE ENTRIES MADE IN THE BOOKS OF A CCOUNT. IF ANY AUTHORITIES ARE REQUIRED TO BE CITED ON THIS CASE ON THIS ISSUE WE DERIVE STRENGTH STRONGLY FROM THE FOL LOWING 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 ASSESSEES APPEAL IS PARTLY ALLOWED. 21. NOW WE COME TO THE DEPARTMENTAL APPEAL, VIDE IT A NO. 2808/D/2011. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APP EAL: ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 25 1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD . CIT(A) ERRED IN LAW AND MERIT OF THE CASE IS DELETING THE DISALLOWA NCE MADE BY THE AO ON ACCOUNT OF CREDIT INVESTIGATION EXPENSES TO T HE TUNE OF RS. 56563127/- BEING 75% OF THE TOTAL EXPENDITURE TREAT ING 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 DISALLOWA NCE MADE BY THE AO ON ACCOUNT OF EXPENDITURE ON APPLICATION CAPTURE TO THE TUNE OF RS. 7350418/- BEING 75% OF THE TOTAL EXPENDITURE TR EATING 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 DISALLOWA NCE MADE BY THE AO ON ACCOUNT OF CREATION OF BRAND AND ADVERTISEMEN T 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 ACCOUNT, THE AO NOTICED THAT ASSESSEE HAD DEBI TED RS. 7,54,17,503/- ON ACCOUNT OF CREDIT INVESTIGATION EXPENSES. THE A SSESSEE SUBMITTED AS UNDER: IN THIS REGARD, IT IS SUBMITTED THAT THE ASSESSEE RECEIVES APPLICATIONS FROM VARIOUS PROSPECTIVE CUSTOMERS FOR ISSUANCE OF CREDIT CARDS AND IT NEEDS TO VERIFY INFORMATION AND DATA PROVIDED BY TH ESE CUSTOMERS TO ESTABLISH THEIR BONAFIDE AND CREDIT WORTHINESS. FO R THIS PURPOSE, THE ASSESSEE ENGAGES THE SERVICES FOR CREDIT VERIFICATI ON AGENCIES/FIRMS OF CHARTERED ACCOUNTANTS, WHO CARRY OUT RESIDENCE VERI FICATION/BUSINESS VERIFICATION AND REPORT ON THE BONAFIDE OF THE DATA PROVIDED BY THE PROSPECTIVE CARDHOLDERS. THIS IS ESSENTIAL IN ORDE R TO REDUCE/CURTAIL THE HIGH LEVEL OF DELINQUENCIES AND RESULTANT CREDIT LO SSES WHICH ARE WIDELY ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 26 PREVALENT IN THE CREDIT CARD INDUSTRY. I HAVE GON E THROUGH THE SUBMISSION OF THE ASSESSEE AND OTHER DETAILS FILED BY THE ASSESSEE. ITS IS CLEAR THAT THE NEED OF THE CREDIT INVESTIGATION ARI SES FOR PROSPECTIVE CUSTOMERS FOR ISSUANCE OF CREDIT CARD. THIS INCLUD ES THE VERIFICATION OF INFORMATION AND DATA PROVIDED BY THESE CUSTOMERS AN D ALSO TO MINIMIZE THE RISK OF THE ASSESSEE COMPANY AGAINST INCURRING FUTURE BAD DEBTS. AS A MATTER OF FACT, THIS KIND OF INVESTIGATION IS A O NE TIME VERIFICATION OF CREDIT WORTHINESS AND CREDIT HISTORY OF THE PROSPEC TIVE CUSTOMERS WHICH LEADS TO CREATION OF DATA BASE WHICH IS NOT ONLY US ED BY ASSESSEE COMPANY BUT ALSO SHARED BY OTHER SUCH CREDIT CARD C OMPANIES AND BANKS. ONCE THE INVESTIGATION IS COMPLETED IN RESPECT OF A PROSPECTIVE CUSTOMER, THERE IS NO NEED FOR FURTHER INVESTIGATIO N AND IF OKAYED, SUCH CUSTOMERS KEEPS ON ENJOYING THE SERVICES RENDERED B Y ASSESSEE COMPANY. 23. THE AO HELD THE EXPENDITURE BEING IN CAPITAL FI ELD OBSERVING AS UNDER: THE ASSESSEE HAS MENTIONED THAT SUCH KIND OF EXPE NDITURE 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 EXPEN DITURE CANNOT BE JUSTIFIED AS RECURRING EXPENDITURE. EVEN IF, ASSES SEE COMPANY DENIES A CARD TO A PROSPECTIVE CUSTOMER AFTER INVESTIGATING HIS CREDITWORTHINESS EVEN THEN NO FURTHER EXPENDITURE IS REQUIRED ON SUC H PROSPECTIVE CUSTOMER. THEREFORE, IT CAN BE SAFELY HELD THAT TH E CREDIT INVESTIGATION EXPENSES ARE PREDOMINANTLY ONE TIME EXPENSE FOR BOT H KINDS OF DECISIONS VIZ. PROVIDING CARD TO A PROSPECTIVE CUST OMER OR DENYING THE SAME. THE INFORMATION SO GATHERED ABOUT RISK PROFILE/CRE DIT PROFILE OF A PROSPECTIVE CUSTOMER CAN BE USED FOR OTHER OCCASION AND BY THE OTHER ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 27 AGENCIES ALSO. THEREFORE, IT IS A DATA BASE/KNOW-H OW WHICH PROVIDES ENDURING BENEFIT TO THE ASSESSEE COMPANY REGARDING CREDITWORTHINESS OF ITS PROSPECTIVE CUSTOMERS. IN VIEW OF ABOVE DISCUSSION, THE EXPENDITURE INCUR RED ON CREDIT INVESTIGATION IS HELD AS CAPITAL AND DISALLOWED AS REVENUE EXPENDITURE. HOWEVER, THE ASSESSEE IS ALLOWED 25% OF SUCH EXPEND ITURE 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 ABOU T ITS INCOME, THEREFORE, PENALTY PROCEEDINGS U/S 271(1)(C) ARE IN ITIATED SEPARATELY. ADDITION OF RS. 5,65,63,127/- 24. LD. CIT(A) ALLOWED THE ASSESSEES APPEAL TREAT ING THE SAME AS REVENUE EXPENDITURE. 25. LD. DR REFERRED TO PARA 5.7 OF LD. CIT(A)S ORD ER AND POINTED OUT THAT HE HAS NOT CONSIDERED THE REASONING GIVEN BY AO THAT T HE BENEFIT OF THIS EXPENDITURE IS ENDURING IN NATURE. SHE SUBMITTED T HAT LD. CIT(A) ADOPTED HIS OWN REASONING AND, THEREFORE, THE MATTER SHOULD BE RESTORED BACK TO THE FILE OF CIT(A) FOR CONSIDERING THE AOS REASONING. 26. LD. COUNSEL SUBMITTED THAT REASONING GIVEN BY A O IS AKIN TO TREATING THE EXPENDITURE AS DEFERRED REVENUE EXPENDITURE. H E SUBMITTED THAT MERELY BECAUSE BENEFIT FROM A PARTICULAR EXPENDITURE ENDUR ES OVER A PERIOD DOES NOT NECESSARILY MAKE THE SAME AS CAPITAL EXPENDITUR E UNLESS THE EXPENDITURE RESULTS INTO PROFIT YIELDING APPARATUS. LD. COUNSEL SUBMITTED THAT THE EXPENDITURE WAS INCURRED EVEN FOR THOSE APPLICA NTS WHO DID NOT ACTUALLY BECOME ITS CUSTOMERS ON ACCOUNT OF HAVING POOR CRED IT HISTORY AND FROM WHOM THE ASSESSEE DOES NOT OBTAIN ANY BENEFIT FROM SUCH INVESTIGATION. ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 28 THEREFORE, IT IS NOT CORRECT TO SAY THAT BY INCURRI NG THIS EXPENDITURE, THE ASSESSEE HAD CREATED A PROFIT YIELDING APPARATUS FO R FUTURE. 27. LD. DRS SUBMISSION THAT THE MATTER SHOULD BE R ESTORED BACK TO THE FILE OF AO AS LD. CIT(A) HAS GIVEN HIS OWN REASONING CAN NOT BE ACCEPTED BECAUSE LD. CIT(A) HAS PRIMARILY CONSIDERED THE ISS UE IN THE LIGHT OF AOS FINDING THAT THE IMPUGNED AMOUNT WAS CAPITAL IN NAT URE. WE ARE IN AGREEMENT WITH THE SUBMISSIONS OF LD. COUNSEL FOR T HE ASSESSEE THAT THE REASONING GIVEN BY AO IN REGARD TO IMPUGNED AMOUNT IS AKIN TO TREATING THE AMOUNT AS DEFERRED REVENUE EXPENDITURE INASMUCH AS THE AO HIMSELF HAS OBSERVED THAT THERE WAS NECESSITY OF THIS EXPENDITU RE AND WHILE SO HOLDING, THE AO HIMSELF HAS ALLOWED 25% OF THIS EXPENDITURE IMPLIEDLY 1/4 TH OF THE IMPUGNED AMOUNT HAS BEEN CONSIDERED AS EXPENDITURE RELATING TO CURRENT ASSESSMENT YEAR AND THE BALANCE BEING ALLOWABLE IN SUBSEQUENT THREE YEARS. THEREFORE, THE FINDING OF AO THAT THE IMPUG NED AMOUNT WAS CAPITAL IN NATURE WAS NOT CORRECT BUT HE HAS PRIMARILY TREATED THE EXPENDITURE AS DEFERRED REVENUE EXPENDITURE. AS DISCUSSED IN REGA RD IN GROUND NO. 3 TO 3.3 OF ASSESSEES APPEAL FOR A.Y. 2006-07, THIS TREATME NT 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 PURPO SE 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 NO TICED THAT ASSESSEE COMPANY HAD DEBITED A SUM OF RS. 98,00,557/- UNDER THE HEAD APPLICATION ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 29 CAPTURE EXPENSES. THE ASSESSEE POINTED OUT THAT T HESE EXPENSES PERTAIN TO CAPTURING OF DATA ENTERED BY PROSPECTIVE CARDHOL DER INTO APPLICATION FORM. THE AO OBSERVED THAT SINCE THIS EXPENDITURE WAS INC URRED ONLY ONCE DURING THE ENTIRE PERIOD OF CUSTOMERS RELATION, THEREFORE , IT WAS CAPITAL EXPENDITURE. HE, HOWEVER, ALLOWED 25% OF THE CLAIM AND, THUS, MA DE A DISALLOWANCE OF RS. 73,50,418/-. LD. CIT(A) CONSIDERED THIS EXPEND ITURE ON THE SAME FOOTING ON WHICH CREDIT INVESTIGATION EXPENSES AND ALLOWED THE ASSESSEES CLAIM. 28.1 HAVING HEARD BOTH THE PARTIES, WE FIND THAT TH E NATURE OF THIS EXPENDITURE, REASONS FOR MAKING DISALLOWANCE BY AO AND THE REASONS FOR ALLOWING THIS EXPENDITURE BY LD. CIT(A) ARE IDENTIC AL TO THE ISSUE RELATING TO CREDIT INVESTIGATION EXPENSES AND, THEREFORE, FOR T HE 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 AN D 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 TR EATED AS CAPITAL EXPENDITURE AS THE SAME LEAD TO CREATION OF BRAND O F SBI CARD. THE ASSESSEE IN ITS REPLY SUBMITTED AS UNDER: ASSESSEE HAS SUBMITTED ITS REPLY VIDE LETTER DATE D 22.12.2009 WHEREIN IT HAS CONTENDED THAT ADVERTISEMENT AND SALES PROMOTIO N IS ESSENTIAL PART OF TODAYS BUSINESS IN TODAYS COMPETITIVE WORLD AND A LSO THAT SUCH EXPENSES DO NOT PROVIDE ANY ENDURING BENEFIT TO THE ASSESSEE BECAUSE OF FOLLOWING REASONS: ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 30 A) CUSTOMER CAN TERMINATE THE USE OF CREDIT CARD AT AN Y POINT OF TIME. B) NUMEROUS COMPETITORS TARGETING THE CUSTOMERS IN A C OMPETITIVE MARKET AND SHORT MEMORY OF PURCHASING MARKET ADVERT ISEMENT EXPENSES DOES NOT HAVE ANY ENDURING BENEFIT TO THE ASSESSEE. C) EXPENDITURE INCURRED BY THE ASSESSEE ARE ORDINARY A ND ROUTINE EXPENDITURE WHICH ARE REQUIRED TO BE INCURRED FROM YEAR TO YEAR. D) IN THIS ERA OF CUT THROAT COMPETITION, IT IS IMPORT ANT FOR THE COMPANIES IN BUSINESS OF CARD SERVICES TO LAUNCH NE W PRODUCTS WITH ENHANCED UTILITY AND FEATURES ON REGULAR INTER VALS. SUCH PRODUCTS ARE MADE KNOWN TO THE PUBLIC AT LARGE BY U NDERTAKING EXTENSIVE ADVERTISING AND PUBLICITY TO PROMOTE SALE S. IN THE ABSENCE OF SUCH PUBLICITY, THE NEW AND ENHANCED FEA TURES OF PRODUCTS WOULD REMAIN UNKNOWN TO THE PUBLIC, WHICH WOULD HAVE AN ADVERSE IMPACT ON THE TRADING OPERATIONS OF THE COMPANY. E) THE PUBLICITY MADE FOR A PRODUCT IN ONE YEAR DOES N OT GUARANTEE THE SALE OF PRODUCTS IN THE FUTURE SINCE NEW PRODUC TS WITH ENHANCED FEATURES MAY BE INTRODUCED BY THE COMPETITORS, THUS MAKING THE PRODUCT UNPOPULAR. F) ASSESSEE INTRODUCES VARIOUS SCHEMES, WHICH HAVE A V ERY SHORT SHELF LIFE I.E. NOT MORE THAN 2 TO 3 MONTHS. SINCE THE P RODUCT ITSELF HAS SUCH A SHORT LIFE, THE EXPENSES INCURRED TO ADVERTI SE OR PUBLICIZE THE PRODUCT CANNOT BE TREATED AS PROVIDING ANY ENDU RING BENEFIT TO THE ASSESSEE. THESE EXPENSES ARE INCURRED ON THE B USINESS CAPTURED DURING THE YEAR. ASSESSEE HAS ALSO RELIED UPON FOLLOWING DECISIONS O F VARIOUS CODES IN SUPPORT 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). ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 31 4. EMPIRE JUTE CO. LTD. VS. CIT (124 ITR 1). 30. THE AO AFTER DETAILED DISCUSSION, HELD AS UND ER: IN VIEW OF ABOVE DISCUSSION AND FACTS & CIRCUMSTA NCES OF THE CASE, THE AMOUNT SPENT ON ADVERTISEMENT AND SALE PROMOTIO N 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 MEN TIONED IN SECTION 32(1)(II) OF THE I.T. ACT. THEREFORE, AMOUNT CLAIM ED AS ADVERTISEMENT & SALES PROMOTION EXPENSE OF RS. 56,1 5,09,131/- IS DISALLOWED AS REVENUE EXPENDITURE, HOWEVER, ASSESSE E IS ALLOWED TO CLAIM DEPRECIATION @ 25% ON SUCH AMOUNT. TOTAL DIS ALLOWANCE ON THIS ACCOUNT OF THIS COMES TO RS. 42,11,31,848(56,1 5,09,131 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 ASSESSEES 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 TODAYS RAPIDLY CHANGING E CONOMIC SCENARIO AND CUT THROAT COMPETITION, FOR RUNNING TH E 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 EXPEN SES ARE IN THE NATURE OF COMMISSION PAID TO MARKETING AGENTS FOR PROCURING NEW CARDHOLDERS. ACCORDINGLY, I HOLD THA T NO INTANGIBLE ASSET HAS BEEN CREATED BY THE APPELLANT BY INCURRING OF SAID EXPENDITURE AND THE WHOLE EXPENSE OF RS. ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 32 56,15,09,131/- CHARGED TO THE PROFIT & LOSS ACCOUNT IS ON REVENUE ACCOUNT AND, THEREFORE, ALLOWABLE AS SUCH. HENCE, THE GROUND NO. 6 STANDS ALLOWED. 32. LD. DR RELIED ON THE ASSESSMENT ORDER AND SUBMI TTED THAT SINCE THE EXPENDITURE HAD BEEN INCURRED FOR BRAND BUILDING OF SBI CARD, THEREFORE, IT WAS IN CAPITAL FIELD. 33. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DISALLOWANCE MADE BY AO HAS TO BE CONSIDERED IN THE LIGHT OF ITS ALLOWAB ILITY/ DISALLOWABILITY U/S 37 OF THE I.T. ACT AND THE DECISION OF SPL. BENCH OF D ELHI TRIBUNAL IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. VS. ASSTT. CIT, VIDE ITA NO. 5140/DEL/2011DATED 23/01/2013 IS NOT APPLICABLE TO THE PRESENT FACTS. IN THIS REGARD LD. COUNSEL REFERRED TO PAGE 90 OF LGS DECI SION (SUPRA) PARA 16.8, WHEREIN TRIBUNAL HAS, INTER-ALIA, OBSERVED AS UNDER : THE EXERCISE OF SEPARATING THE AMOUNT SPENT BY TH E ASSESSEE IN RELATION TO INTERNATIONAL TRANSACTION OF BUILDING B RAND FOR ITS FOREIGN AE FOR SEPARATELY PROCESSING AS PER SECTION 92 OF T HE ACT CANNOT BE CONSIDERED AS A CASE OF DISALLOWANCE OF AMP EXPENSE S U/S 37(1). IN FACT, BOTH THE SECTIONS I.E. 37(1) AND SEC. 92 OPER ATE IN DIFFERENT FIELDS. 33.1 LD. COUNSEL FURTHER REFERRED TO FOLLOWING DECI SIONS IN SUPPORT OF HIS CONTENTION THAT ADVERTISEMENT EXPENSES ARE TO BE AL LOWED IN FULL IN THE YEAR IN WHICH THEY ARE INCURRED FOR THE PURPOSES OF BUSI NESS. FOR THE ASSESSMENT YEAR 2001-02, THE ASSESSEE HAD INCURRED ADVERTISING EXPENDITURE OF ABOUT RS. 3.08 CRORES FO R LAUNCHING OF ITS PRODUCTS AND THE ASSESSING OFFICER HELD THAT THE EX PENDITURE WAS OF AN ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 33 ENDURING NATURE AND TREATED ONE-THIRD OF IT AS CAPI TAL EXPENDITURE. THE TRIBUNAL, CONFIRMING THE FINDINGS OF THE COMMIS SIONER (APPEALS) THAT THE EXPENDITURE WAS REVENUE EXPENDITURE, HELD THAT THERE WAS A DIRECT NEXUS BETWEEN THE ADVERTISING EXPENDITURE AN D THE BUSINESS OF THE ASSESSEE AND THAT UNLESS THE ASSESSEE MADE ITS PRODUCTS KNOWN IN THE MARKET, ITS BUSINESS WOULD SUFFER. ON APPEAL B Y THE DEPARTMENT: HELD, THAT NO INTERFERENCE WAS NECESSARY IN THE IS SUE IN REGARD TO ADVERTISING EXPENDITURE. HELD ALSO, THAT THE QUESTIONS WHETHER THE TRIBUNAL WAS CORRECT (I) IN DELETING THE ADDITION MADE BY THE AO BY AMOR TISING THE EXPENDITURE TOWARDS THE PROFESSIONAL FEE PAID TOWAR DS THE PROJECT OF SUPPLY CHAIN MANAGEMENT AND HUMAN RESOURCE REVENUE- ENGINEERING BY ALLOWING DEDUCTION OF ONE-FIFTH AS EXPENDITURE I N THE YEAR UNDER ASSESSMENT, AND (II) IN HOLDING THAT THE UNUTILIZED AMOUNT OF DEPB WOULD BE ALLOWED AS EXPENDITURE U/S 37(1) OF THE IN COME TAX ACT, 1961, AND COULD BE ALLOWED AS LOSS, WERE SUBSTANTIA L QUESTIONS OF LAW. 33.2 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND H AVE PERUSED THE RECORD OF THE CASE. AS IS EVIDENT FROM THE FINDING S OF AO, HE HAS ALLOWED 25% OF THE EXPENSES TREATING THE SAME BEING RELATIN G TO CURRENT YEAR UNDER CONSIDERATION AND BALANCE HAS BEEN DISALLOWED. THI S IMPLIES THAT HE HAS PRIMARILY TREATED THIS AMOUNT AS DEFERRED REVENUE E XPENDITURE AND, THEREFORE, FOR THE REASONING GIVEN IN REGARD TO GRO UND NO. 3 OF THE ASSESSEES APPEAL FOR A.Y. 2006-07 AND ALSO AFTER TAKING INTO CONSIDERATION THE VARIOUS DECISIONS RELIED UPON BY LD. COUNSEL FOR THE ASSESS EE, THE ENTIRE AMOUNT WAS RIGHTLY ALLOWED BY LD. CIT(A) PARTICULARLY BECAUSE 79% OF THE EXPENDITURE WAS ITA NOS. 2808/D/11, 1293/D/12, 1047/D/12, 3977/D/10 & 2470/D/11 34 IN THE NATURE OF COMMISSION PAID TO MARKETING AGENT FOR PROCURING NEW CARDHOLDERS. IT CANNOT BE DENIED THAT THIS EXPENDI TURE THOUGH CLASSIFIED UNDER THE HEAD ADVERTISING EXPENDITURE WAS ESSENT IAL FOR RUNNING OF ASSESSEES BUSINESS. 34. IN THE RESULT, THIS GROUND IS DISMISSED. 35. IN THE RESULT, THE DEPARTMENTS APPEAL IS DISMI SSED AND ASSESSEES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31/01/2014 SD/- SD/- (R.P. TOLANI) JUDICIAL MEMBER (S.V. MEHROTRA) ACCOUNTANT MEMBER DATED: 31/01/2014 *KAVITA COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. TRUE COPY BY ORDER ASSISTANT REGISTRAR