1981 (7) TMI 85 - AT - Income Tax

Summary

Issues:
1. Excessive sales incentive payment to a sister concern under section 40A(2).
2. Allowance of weighted deduction under section 35B for various expenses.

Issue 1: Excessive sales incentive payment to a sister concern under section 40A(2):
The case involved appeals by both the assessee and the Department for the assessment year 1977-78. The Department appealed against the deletion of Rs. 37,387 by the IAC(Asst.) under section 40A(2) due to excessive sales incentive payment to a sister concern, M/s. Nirankari Auto Engg. Works, at 8% instead of the general rate of 6%. The CIT (Appeals) later deleted the addition, stating that the assessing officer did not consider the cash discount allowed to other customers and that the sales incentive to the sister concern was not excessive considering their purchases and sales margins.

Issue 2: Allowance of weighted deduction under section 35B for various expenses:
The Departmental appeal also contested the allowance of weighted deduction under section 35B for expenses totaling Rs. 36,583. The CIT (Appeals) allowed the deduction for subscription expenses related to obtaining foreign market information. However, the Department raised objections regarding the allocation of other miscellaneous expenses for weighted deduction. The CIT (Appeals) related 50% of the expenses to manufacturing and 50% to sales, allowing a proportion of 9/400 for weighted deduction. The Department argued that the CIT (Appeals) did not sufficiently analyze the nature of expenses for weighted deduction, especially for advertisements and agents' commission.

The ITAT Amritsar upheld the CIT (Appeals)'s decision on the sales incentive issue, stating that the payment to the sister concern was not excessive based on the circumstances and relationship between the parties. Regarding the weighted deduction for expenses, the ITAT directed the CIT (Appeals) to reevaluate the nature of expenses like advertisements and agents' commission before allowing weighted deduction and suggested a proportion of 9/300 for other miscellaneous expenses. Ultimately, the ITAT partially allowed both appeals, providing detailed guidance for the reexamination of expenses for weighted deduction under section 35B.