C.I.T. JALANDHAR vs. M/S PRINCE RUBBER IND.

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ITR/54/1995HC Punjab & HaryanaPHHC01032531199531 October 2006Author: MR. JUSTICE RAJESH BINDAL,MR. JUSTICE ADARSH KUMAR GOEL2 pages
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What did the High Court hold?

The High Court answered both questions of law against the revenue and in favour of the assessee. Regarding the first issue, the Court noted the assessee's reliance on the High Court's own precedent in Commissioner of Income-Tax v. Indo Asian Switchgears (P) Limited, which held that sales promotion commission expenses are not subject to disallowance. The Court accepted this submission. For the second issue concerning section 40A(3), the Court acknowledged the assessee's reliance on Circular No.220, which provides an exception to the section's applicability when parties lack bank accounts at the transaction location. The Court observed that the ITAT had made a finding that the assessee's case was covered by these departmental instructions. The revenue's counsel was unable to rebut these submissions. Consequently, the reference was disposed of in favour of the assessee, with the operative direction being to answer the questions against the revenue.

What were the facts?

This case concerns a reference to the High Court of Punjab and Haryana at Chandigarh regarding an order of the Income Tax Appellate Tribunal (ITAT), Amritsar Bench, dated December 23, 1992, in ITA No.700(ASR)/1988. The assessment year in question is 1985-86. The Commissioner of Income Tax, Jalandhar (the petitioner/revenue) has challenged the ITAT's decision. The assessee, M/s. Prince Rubber Industries, Jalandhar (the respondent), had made claims under sections 37(3A) and 40A(3) of the Income Tax Act, 1961. These claims were initially disallowed by the Assessing Officer but subsequently allowed by the Commissioner of Income Tax (Appeals) and then by the ITAT. The dispute revolves around the disallowance of expenses on sales promotion commission and additions made for alleged violation of section 40A(3).

What were the issues?

The High Court was asked to decide two questions of law arising from the ITAT's order for assessment year 1985-86: 1. Whether the ITAT was correct in law in holding that expenses on account of commission paid for sales promotion, amounting to Rs.1,31,208/-, are not to be taken into account for the purpose of disallowance under section 37(3A) of the Income Tax Act? 2. Whether the ITAT was correct in law in deleting the addition of Rs.1,101,376/- made on account of violation of the provisions of section 40A(3) of the Income Tax Act? Assessee's Contentions: For issue 1, the assessee argued that the matter is covered by this Court's judgment in Commissioner of Income-Tax v. Indo Asian Switchgears (P) Limited, (2002) 257 ITR 645, which held that sales promotion commission expenses are not to be disallowed. For issue 2, the assessee relied on Circular No.220 (F.No.206/17/76-IT(A-II), dated 31.5.1977), stating that section 40A(3) does not apply if the purchaser or seller lacks a bank account at the transaction location. The assessee pointed out that the ITAT found this case to be covered by these instructions. Revenue's Contentions: The judgment records no specific contentions made by the revenue's counsel to rebut the submissions of the assessee.

Which sections of the Income-tax Act were involved?

Section 37(3A),Section 40A(3)

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
ITR No.54 of 1995 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITR No.54 of 1995 Date of decision:31.10.2006 The Commissioner of Income tax, Jalandhar ....Petitioner versus M/s. Prince Rubber Industries, Jalandhar. ....Respondents CORAM: HON'BLE MR. JUSTICE ADARSH KUMAR GOEL HON'BLE MR. JUSTICE RAJESH BINDAL Present: Dr. N.L.Sharda, Advocate, for the revenue. Mr. SK Mukhi, Advocate, for the respondent.

JUDGMENT: Following questions of law have been referred for the opinion of this Court by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar, arising out of its order dated 23.12.1992 in ITA No.700(ASR)/ 1988, for the assessment year 1985-86:- “1. Whether on the facts and in the circumstances of the case, the Ld. ITAT was right in law in holding the expenses on account of commission paid for sales promotion amounting to Rs.1,31,208/- are not to be taken into account for the purpose of disallowance under section 37 (3A) of the IT Act?

2.

Whether on the facts and in the circumstances of the case, the Ld. ITAT was right in law in deleting the addition of Rs.1,101,376/- made on account of violation of provisions of section 40A(3) of the IT Act?” The assessee filed its return wherein claims were made under sections 37(3A) and 40A(3) of the Income tax Act, 1961 (for short, 'the Act') which were disallowed by the Assessing Officer but were allowed by the Commissioner of Income Tax (Appeals) and the Tribunal. Learned counsel for the assessee points out that the matter is ITR No.54 of 1995 2 covered by judgment of this Court in Commissioner of Income-Tax v. Indo Asian Switchgears (P) Limited, (2002) 257 ITR 645, holding that expenses on account of commission paid for sales promotion is not to be disallowed. Learned counsel for the assessee also points out that as per Circular No.220(F.No.206/17/76-IT(A-II), dated 31.5.1977 issued by the department, the provisions of section 40A(3) of the Act did not apply if the purchaser or seller did not have a bank account at the place where transaction took place. The Tribunal has recorded a finding in para 6.2 of the impugned order, in the present case, that the case of the petitioner was covered by the instructions of the Board. Learned counsel for the revenue has not been able to rebut the submission made on behalf of the assessee. In the above circumstances, the question referred is answered against the revenue and in favour of the assessee. Reference is disposed of accordingly. (Adarsh Kumar Goel) Judge October 31, 2006 (Rajesh Bindal) 'gs' Judge

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