THE C.I.T. JALANDHAR vs. M/S J.M.P. MFG.CO.PREET NAGAR JALANDHAR

JUDGMENT: Following question of law has been referred for opinion of this court by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar, in respect of assessment year 1985-86:- “Whether on the facts and in the circumstances of the case, the Ld. ITAT is right in law in holding that expenses on account of commission and rebate to the dealers amounting to Rs.6,69,045 and Rs.3,48,724/- respectively are not to be taken into account for the purpose of calculating the disallowance under section 37 (3A) of the Income Tax Act, 1961?” The assessee is a firm carrying on business of manufacture and sale of motor auto parts. During the assessment year under consideration, the assessee claimed that the commission paid to dealers amounting to Rs.6,69,045/- and Rs.3,48,724/- is business expenditure. However, the Assessing Officer disallowed the same under section 37(3A) of the Income Tax Act, 1961 (for short, 'the Act') while completing the assessment under section 143(3) of the Act.

The CIT(A) reversed the said view and the Tribunal affirmed the order of CIT(A). It was also held that commission and rebate could not be treated as sales promotion within the meaning of Section 37(3A) of the Act and could not be disallowed on that account. We have perused the finding recorded by the CIT(A) and the Tribunal. Concurrent finding of fact has been recorded that commission was paid by the assessee to the commission agents genuinely. The agents, to whom commission was paid, confirmed the receipt thereof before the IAC (Assessment). There is nothing to show that the said finding is, in any way, vitiated by non-consideration of relevant material or taking into account irrelevant material. We find that in The Commissioner of Income Tax, Jalandhar v. M/s Knit Foulds (P) Limited, Kapurthala, ITR No.191 of 1995, decided on 9.8.2004, this court held that amounts paid as commission are permissible deductions. It was observed by this court in Commissioner of Income-tax v. Indo Asian Switchgears (P) Ltd. (2002) 257 ITR 645:- “Admittedly, the provisions of section 37(3A) of the Act place an embargo on the expenses incurred on the advertisement, publicity and sales promotion. This would mean that the expenses claimed by an assessee in connection with the advertisement, etc., have to be scrutinised and reduced in accordance with the slab prescribed in section 37(3A) of the Act. However, a discount allowed by an assesseed to an agent is not an expense in connection with the publicity or advertisement, etc. It is an amount forgone by the assessee in favour of the dealer for effecting the actual sale. It is not like the fashion show conducted by a garment manufacturer, but a commission allowed to a dealer. Trade discount cannot be treated as a wasteful expenditure incurred by an assessee in connection with the sales' promotion. It is not a gift as given on a festival or a free sample as distributed by a pharmaceutical company to the doctors but an actual commission allowed or paid to a dealer. It does not fall within the mischief of section 37(3A) of the Act.”

In view of above, answer to the question referred is to be against the revenue and in favour of the assessee. (Adarsh Kumar Goel) Judge September 5, 2006 (Rajesh Bindal) 'gs' Judge