Recently High Court of Delhi in Commissioner of Income-tax-III v SBI Cards & Payment Services (P.) Ltd held that:

• In credit card business, credit investigation expenses; would be revenue expenditure.
• Expenses incurred on scanning or capturing application data received from prospective customers of credit cards into electronic form would be revenue expenditure.
• Advertisement and sales promotion expenses are allowable as revenue expenditure.
• Revenue expenditure couldn’t be spread over two years instead of year in which it was incurred.  

 

Facts of the case:

The assessee is a company carrying on business of marketing and distributing SBI credit cards. The company offers various credit cards, such as premium, travel and shopping, classic, exclusive, and corporate cards. It also provides utility bill and card payment services. The assessee incurred certain expenditure on account of credit investigation to verify information and data provided by prospective customers for issue of credit cards. The assessee incurred certain expenditure on scanning or capturing application data from applications received from prospective customers into electronic form and also incurred certain sales promotion expenditure. It claimed said expenditures as revenue expenditure.

The Assessing Officer held that the credit investigation expenses were predominantly one time expense. It 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. Assessing Officer held that sales promotion expenditure was in the nature of brand building as it had helped the assessee to increase its market share and enhance volumes/turnover and, therefore, an ‘asset’ was created.

The assessee- company had divided card acquisition expenses into two years in the books of account and accounts prepared under the Companies Act, 1956. But for the purpose of Income-tax the entire amount was treated as revenue expenditure in one assessment year. The Commissioner (Appeals) held that the said expenditure should be treated as deferred revenue expenditure and certain part should be allowed in the relevant assessment year and the balance should be allowed in next assessment year.

On appeal, the Commissioner (Appeals) as well as the Tribunal treated the said expenditures as revenue in nature and set aside the Assessing Officer’s order against which the Revenue went for an appeal.

 

It was held that :

The major issue of considering expenditure incurred on account of credit investigation for issue of credit cards got settled in favour of the assessee. The High Court said that the main business of the assessee was receiving applications from prospective clients for issue of credit cards. This requires verification of information and details furnished. The aforesaid exercise to verify and check the truthfulness and correctness of the details /data and creditworthiness was a part of the day to day conduct of business and had to be taken periodically and routinely. 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 old database and credit without ascertaining the true and correct position at the relevant time.

Application capture and data entry facilitated and helped the assessee to conduct their day to day business operations. To make the process of evaluation faster, accurate and more systematic, the information/details were scanned or captured. This reduced possibility of errors and issuance of credit cards to ‘undeserving candidates’. Therefore, this expenditure incurred was revenue in nature.

In the present competitive world, the advertisement expenditures should normally be treated as revenue expenditure, until there are special circumstances to hold that the expenditure was capital in nature. As advertisements do not have a long term effect and the advertisements fade away and do not have an enduring impact, it shall be considered as revenue in nature.

Section 145 postulates that accounts should give true and fair picture of the financial position or the income of the assessee. It is further noticeable that the Act, i.e., the Income-tax act, 1961 only refers to capital or revenue expenditure. There is no provision in the Act which postulates or refers to deferred revenue expenditure. Accounting principles or standards have to be applied and adopted and they must disclose fair and true financial position and the income, but they cannot be contrary to the provisions or the mandate of the Act. The Act would then override the accountancy principles. Hence, the entire expenditure was allowable in relevant assessment year.

 

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