1991 (10) TMI 25 - HC - Income Tax

Summary

Issues Involved:
1. Whether the commission paid to sales agents and advertisement agents falls u/s 37(3A) read with section 37(3B) of the Income-tax Act, 1961.
2. Whether the order of the Commissioner of Income-tax u/s 263 was justified.

Summary:

Issue 1: Commission Paid to Sales Agents and Advertisement Agents
The Tribunal was tasked with determining if the assessee's expenditure on commission paid to sales agents (Rs. 1,57,65,878) and advertisement agents (Rs. 1,53,88,321) was covered by the provisions of section 37(3A) read with section 37(3B) of the Income-tax Act, 1961. The assessee argued that these commissions were for specific services rendered and did not fall under "advertisement, publicity or sales promotion" as per section 37(3A). The Tribunal agreed, noting that the commission paid to sales agents and advertisement agents was a basic selling cost necessary for the newspaper's distribution and advertisement space sales, respectively. The Tribunal concluded that these expenses did not have the nature of "sales promotion" and thus were not subject to disallowance under section 37(3A).

Issue 2: Order of the Commissioner of Income-tax u/s 263
The Commissioner of Income-tax had issued a show-cause notice and subsequently directed the Assessing Officer to disallow 20% of the expenditure on commissions, deeming the original assessment erroneous and prejudicial to the interests of the Revenue. The Tribunal, however, vacated the Commissioner's order, stating that the Assessing Officer's original acceptance of the deductions was justified. The Tribunal emphasized that the expenses were ordinary selling costs and not extravagant or socially wasteful expenditures targeted by section 37(3A) and (3B). The Tribunal's decision was based on the interpretation that "sales promotion" involves elements of advertisement and publicity, which were not applicable to the commissions in question.

Conclusion:
The High Court affirmed the Tribunal's decision, holding that the expenditure on commissions to sales agents and advertisement agents did not attract disallowance under section 37(3A) and (3B). The court emphasized that these were ordinary selling costs essential for the newspaper's business operations and not avoidable or ostentatious expenditures. The question was answered in the affirmative, in favor of the assessee, with no order as to costs.