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Interpretation of section 37(3A) and 37(3B) of the Income-tax Act, 1961 regarding disallowance of sales promotion expenditure. Analysis: The High Court of MADRAS was presented with a petition by the Commissioner of Income-tax, Tamil Nadu III, seeking a direction to the Tribunal to refer a question of law related to the disallowance of chit incentive expenses and chit expenses as sales promotion expenditure under section 37(3A) of the Income-tax Act, 1961. The Tribunal had previously rejected a similar question for a different assessment year on the grounds that it was a question of fact, not law. The assessee was engaged in the business of buying and selling gold and silver ware, and the assessment in question pertained to the year 1985-86. The court examined sub-sections (3A) and (3B) of section 37 of the Income-tax Act, which specify the conditions under which certain types of expenditures are not allowed as deductions in computing income. Sub-section (3A) mandates that if the expenditure on specified items exceeds a certain threshold, a portion of the excess shall not be allowed as a deduction. The relevant items include advertisement, publicity, sales promotion, among others. The court emphasized that the determination of what constitutes allowable deductions is a factual inquiry based on the accounts of the assessee. The court concluded that the decision of the Tribunal to reject the reference was justified as the matter at hand was not solely a question of law but involved factual considerations. Therefore, the reference application was dismissed. The judgment underscores the importance of factual analysis in determining the deductibility of expenses under the Income-tax Act, rather than a purely legal interpretation.
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