2006 (8) TMI 103 - HC - Income Tax

Business Expenditure The amount paid by the assessee to various sales representatives or the dealers is sales commission could not be aggregated for the purpose of working of the disallowance u/s 37(3A) held by the CIT(A) and also upheld by tribunal and HC

Summary

Issues: Determination of whether the expenditure on payment of commission on sales can be treated as sales promotion expenses under Section-37(3A) of the Income Tax Act, 1961.

Analysis:
The judgment delivered by the Gujarat High Court involved a reference made by the Income-Tax Appellate Tribunal regarding the treatment of expenditure on sales commission for two assessment years. The assessee, a limited company engaged in the manufacture and sale of yarns, had a significant amount disallowed by the Assessing Officer under Section-37(3A) of the Income Tax Act. The primary contention of the assessee was that the sales commission should not be considered for computing the disallowance as it did not fall under the category of sales promotion expenses. The Commissioner of Income Tax (Appeals) supported this argument, and the Tribunal upheld the decision based on the interpretation of sales promotion as per Section-37(3B) of the Income Tax Act.

The High Court, after hearing the arguments, concluded that sales commission paid to sales representatives or dealers should not be equated with sales promotion expenses. The Court emphasized that sales promotion has a distinct meaning under the Income Tax Act and does not encompass regular sales commissions. Therefore, the Commissioner of Income Tax (Appeals) was justified in reversing the disallowance, and the Tribunal correctly dismissed the appeal. The judgment referenced a previous ruling by the Calcutta High Court to support the interpretation that sales commission is a common trade practice and not in line with the definition of sales promotion as per the Act.

In summary, the High Court answered the referred question against the interest of the Revenue, affirming that the sales commission expenditure could not be considered as sales promotion expenses under Section-37(3A) of the Income Tax Act. The judgment provided clarity on the distinction between sales commission and sales promotion, highlighting that the former does not fall within the scope of disallowance under the relevant provisions of the Act. The reference was disposed of with no costs awarded.