1984 (6) TMI 77 - AT - Income Tax

Assessment Order, Business Connection, Commission Payment, Development Allowance, Weighted Deduction

Issues Involved:

1. Eligibility for relief under section 35B of the Income-tax Act, 1961.
2. Jurisdiction of the Commissioner under section 263 to interfere with the ITO's assessment order.
3. Correct sub-clause of section 35B(1)(b) under which the relief was granted.
4. The erroneous and prejudicial nature of the ITO's order to the interests of the revenue.

Detailed Analysis:

1. Eligibility for relief under section 35B of the Income-tax Act, 1961:

The assessee, a company engaged in the large-scale export of engineering goods, claimed relief under section 35B for expenses amounting to Rs. 3,45,69,974, including a commission to overseas agents of Rs. 1,78,83,301. The ITO allowed the claim for weighted deduction under section 35B, following the guidelines from the Tribunal Special Bench decision in the case of J.H. & Co. v. Second ITO. The Commissioner, however, observed that the ITO had allowed a weighted deduction of Rs. 59,61,100 on the commission paid to overseas agents, which he deemed erroneous since the expenditure was incurred after 1-4-1978 and thus not eligible under section 35B(1)(b)(iii).

2. Jurisdiction of the Commissioner under section 263 to interfere with the ITO's assessment order:

The assessee contended that the assessment made under section 143(3) read with section 144B was not amenable to interference by the Commissioner under section 263. It was argued that the ITO's order merged with the IAC's instructions under section 144B, and thus, the Commissioner could not interfere. However, it was clarified that the ITO himself had proposed to grant relief under section 35B without any instructions from the IAC regarding this item, allowing the Commissioner to interfere with the ITO's order under section 263.

3. Correct sub-clause of section 35B(1)(b) under which the relief was granted:

The Commissioner assumed that the ITO had granted relief under section 35B(1)(b)(iii), which was not permissible for expenses incurred after 1-4-1978. However, it was pointed out that the ITO had allowed the relief following the Tribunal's Special Bench decision in J.H. & Co., which granted relief under sub-clauses (i) and (ii) of section 35B(1)(b). The Commissioner was found to be in error in assuming the relief was granted under sub-clause (iii).

4. The erroneous and prejudicial nature of the ITO's order to the interests of the revenue:

The ITO's order was scrutinized to determine if it was erroneous and prejudicial to the interests of the revenue. The assessee had made payments to non-resident parties for services that included promoting and expanding foreign business, sales negotiations, after-sales services, and other related activities. It was established that these services fell under sub-clauses (i) and (ii) of section 35B(1)(b), making the assessee eligible for relief. The ITO's order did not suffer from any infirmity, and thus, it was not erroneous or prejudicial to the interests of the revenue.

Conclusion:

The Tribunal concluded that the ITO's order did not suffer from any infirmity and was not erroneous or prejudicial to the interests of the revenue. The Commissioner's action in assuming jurisdiction under section 263 was unwarranted. Consequently, the appeal filed by the assessee was allowed.

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