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Income Tax Appellate Tribunal, DELHI BENCH ‘G’ : NEW DELHI
Before: SHRI N.K. SAINI & SHRI A.T. VARKEY
PER A.T. VARKEY, JUDICIAL MEMBER :
This appeal, at the instance of the revenue, is filed against the order of CIT (Appeals)-X, New Delhi dated 22.08.2013 for the assessment year 2008- 09.
The grounds of appeal taken by the revenue read as under :-
“1. The Ld. CIT (A) has erred in law and on facts and circumstances of the case, in deleting the addition of Rs.4,90,73,276/- being 75% of Rs.6,54,31,035/- claimed by the assessee on account of credit investigation expenses. 2. The Ld. CIT (A) erred in law and on the facts and circumstances of the case, in deleting the addition of Rs.2,57,61,950/- being 75% of application capture expenses.
3. The Ld. CIT (A) erred in law and on the facts and circumstances of the case, in restricting the addition of Rs.100,00,000/- out of total addition of Rs.1,05,27,85,289/- of advertisement expenses.
4. The appellant craves to amend, modify, alter, add or forego any ground (s) of appeal at any time before or during the hearing of this appeal.”
Ground No.4 is general in nature and does not require any adjudication.
GROUND NO.1
At the outset of the hearing, the ld. AR for the assessee submitted that Ground No.1 is covered against the revenue by the decision of Hon’ble jurisdictional High Court in assessee’s own case for AY 2006-07 in ITA 603/2014 & ITA 604/2014 order dated 29.09.2014. Ld. DR could not controvert that there is factual difference in the ground for AY 2006-07 before the Hon’ble Delhi High Court and in the instant appeal before us.
We have heard the rival submissions and perused the material on record. We find that Ground No.1 is decided against the revenue by the Hon’ble jurisdictional High Court in assessee’s own case (supra) vide paras 4 & 5, which are reproduced below :-
“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 revenue expenditure incurred in the normal course of business. The aforesaid exercise had to be taken periodically and routinely as and when new applications were received from the prospective customer. It was an ongoing, continuous and perpetual exercise, directly connected with the line of business.
5. Observation of the Assessing Officer that a database was created on the basis of verification and thus could be used in future, is farfetched. Creditworthiness of applicants was dynamic and could tend to vary and change from time to time. 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 the information could lose usefulness within a short time. It would be unfit and superfluous given the transient and ephemeral nature of the said data. In any case, 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. In fact, in some cases, 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. On each occasion, fresh and new valuation had to be undertaken.”
Respectfully following the aforesaid decision of the Hon’ble jurisdictional High Court, we uphold the order of the CIT (A) on this issue and reject the ground no.1 of the revenue’s appeal.
GROUND NO.2
The ld. AR for the assessee, at the outset of the hearing, submitted that Ground No.2 is covered against the revenue by the decision of Hon’ble jurisdictional High Court in assessee’s own case vide order dated 29.09.2014 (supra). Ld. DR could not controvert that there is factual difference in the ground for AY 2006-07 before the Hon’ble Delhi High Court and in the instant appeal before us.
We have heard the rival submissions and perused the material on record. We find that Ground No.2 is decided against the revenue by the Hon’ble jurisdictional High Court in assessee’s own case (supra) vide para 6, which are reproduced below :-
“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 expenditure to acquire or bring into existence as asset or advantage of enduring benefit, would be of capital nature. [See, CIT versus J.K. Synthetics Ltd [2009] 309 ITR 371 (Del)]. Application capture and data entry facilitated and helped the assessee to conduct their day to day business operations. Profiles of applicants and their creditworthiness had to be assessed and evaluated on specific parameters. To make the process of evaluation faster, accurate and more systematic, the information/details were scanned or captured/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.”
Respectfully following the aforesaid decision of the Hon’ble jurisdictional High Court, we uphold the order of the CIT (A) on this issue and reject the ground no.2 of the revenue’s appeal.
GROUND NO.3
At the threshold, the ld. AR for the assessee submitted that Ground No.2 is covered against the revenue by the decision of Hon’ble jurisdictional High Court in assessee’s own case vide order dated 29.09.2014 (supra). Ld. DR could not controvert that there is factual difference in the ground for AY 2006-07 before the Hon’ble Delhi High Court and in the instant appeal before us.
We have heard the rival submissions and perused the material on record. We find that Ground No.3 is decided against the revenue by the Hon’ble jurisdictional High Court in assessee’s own case (supra) vide para 6, which are reproduced below :-
“8. The third and the last issue raised in the present appeal pertains to addition of Rs.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 Rs.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 - Electronic and Print Media 64,136,170 Advertising - Outdoor Publicity 9,879,435 Sales Commission 553,440,265 Branch Incentives and Dealer Incentives 14,300,908 Gifts 25,981,120 Insurance Incentive 16,184,963 Merchant Tile ups 4,150,131 Others 13,940,478 Total 702,014,470 Less: Deferment of The expenditure 140,505,339 Expenses as per the Profit and Loss account 561,509,131” Major expenditure of about Rs.55,34,40,265/- was on account of sales commission which had nothing to do with, what the Assessing Officer regarded as the brand building exercise. This expenditure was in the nature of direct selling expenses and relatable to and generated the turnover. The commission payment was for day to day operations and directly connected with the trading/business itself. No benefit of enduring nature or capital asset was created by incurring the said expenditure.
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 Turnover (% age of Expense (Rs. In (Rs. in crores) turnover Crores) 2004-05 25.44 307.90 8% 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 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.
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. The enduring benefit test falters if the main purpose of the expense is to facilitate business operations, increase profitability and conduct business in an efficient manner, while leaving the capital assets untouched. The second test of fixed or circulating capital test, would be debatable and may not be applied unless the expenditure necessarily falls within one of the two categories. Normally expenditure incurred by the assessee as working expenditure as a part of process of profit earning, would be treated as operational expenditure.
Certainly the expenditure under consideration were not for acquisition of a source of profit or income but to secure better financial results and ensure greater or increased profits from the assets already created. It was to increase business turnover and attract more and new customers. It was expenditure incurred for increasing profits/income. Appropriate reference can be made to the judgment of the Supreme Court in Empire Jute Co. Ltd. (supra),wherein it has been held:- “Now so long as the expenditure in question can be clearly referred to the acquisition of an asset which falls within one or the other of these two categories, such a test would be a critical one. But this test also sometimes breaks down because there are many forms of expenditure which do not fall easily within these two categories and not infrequently, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [(1965) 58 ITR 241 (PC) : 1964 AC 948] the line of demarcation 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. 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 nature of revenue expenditure. ... Similarly, if payment has to be made for securing additional power every week, such payment would also be part of the cost of operating the profit- making structure and hence in the nature of revenue expenditure, even though the effect of acquiring additional power would be to augment the productivity of the profit-making structure. xxx When dealing with cases of this kind where the question is whether expenditure incurred by an assessee is capital or revenue expenditure, it is necessary to bear in mind what Dixon, J., said in Hallstrom's Property Ltd. v. Federal Commissioner of Taxation [72 CLR 634] : “What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted is the process.” The question must be viewed in the larger context of business necessity or expediency. If the outgoing expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. See Bombay Steam Navigation Co.(1953) Pvt. Ltd. v. CIT [1965] 56 ITR 52 (SC). The same test was formulated by Lord Clyde in Robert Addie 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.”
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 titled CIT vs. M/s Spice Distribution Ltd. decided on 19th September, 2014.” Respectfully following the aforesaid decision of the Hon’ble jurisdictional High Court, we uphold the order of the CIT (A) on this issue and reject the ground no.3 of the revenue’s appeal.