Rajasthan H.C : Expenditure incurred on commission payment to selling agent, sales incentive and cash discount do not come within the purview of s. 37(3A)

High Court Of Rajasthan

CIT vs. Digvijay Textiles

Sections 256(2)

M.G. Mukherji, C.J. & J.C. Verma, J.

D.B. IT Ref. Appln. No. 41 of 1996

26th May, 1997

Counsel Appeared : Sandeep Bhandawat, for the Applicant

JUDGMENT

BY THE COURT :

This is an application under s. 256(2) of the IT Act, 1961, preferred by the CIT, Jodhpur.

2. The AO allowed the following expenses which were shown in the return of income of the assessee, M/s Digvijay Textiles, Jodhpur : Rs. Later on, on a perusal of the records, the CIT noticed that the above expenditure was in the nature of advertisement, publicity or sales promotion and the same having exceeded Rs. one lac, 20 per cent of excess was required to be disallowed as per the provisions of s. 37(3A) of the IT Act. Since the AO did not do so, the assessment framed by him was considered erroneous and prejudicial to the interest of the Revenue and accordingly, the said assessment was revised under s. 263 of the IT Act. The assessee being aggrieved by this assessment order filed an appeal before the Tribunal. The Tribunal, however, accepted the totality of the claim of the assessee and held that the expenditure on commission by way of payment to selling agent does not come within the purview of s. 37(3A) of the IT Act, in view of the decision of the Calcutta High Court in CIT vs. Hindustan Motors Ltd. (1991) 192 ITR 619 (Cal) : TC 16R.1195. As regards the sales incentive, it has been held that it is neither an extravaganza nor a wasteful expenditure and hence, cannot be subjected to partial disallowance under s. 37(3A) of the IT Act. Similarly, the cash discount has been held to be wholly out of the purview of s. 37(3A) of the IT Act.

3. The Revenue, thereafter moved the Tribunal for making a reference under s. 256(1) of the IT Act, but the Tribunal rejected the reference application holding it inter alia, to be basically a question of fact. The CIT hereafter makes a reference application on the following amongst other questions :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that expenditure incurred on commission payment to selling agent, sales incentive and cash discount do not come within the purview of s. 37(3A) of the IT Act ?

(2) Whether in order to apply the provisions of s. 37(3A) the Hon’ble Tribunal’s observation that the expenditure is neither an extravaganza nor a wasteful expenditure is relevant ?

(3) Whether the Tribunal is justified in not upholding the CIT’s action under s. 263 on all the points in spite of the fact that the nature of all the expenses was only to boost the sales, so these were clearly covered under s. 37 (3A) of the IT Act, 1961?”

4. We think that this case is covered by the decision of the Calcutta High Court in CIT vs. Hindustan Motors Ltd. (supra). It was held inter alia, in the said case, that the brokerage and commission paid on selling the goods would not come within the meaning of the phrase “advertisement, publicity and sales promotion” under s. 37(3A) of the IT Act. No part of the amount could be disallowed under s. 37(3A) of the IT Act. We think these are basically all questions of fact and no reference application could be entertained on these grounds. Accordingly, the present reference application stands rejected.

[Citation : 256 ITR 781]

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