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Issues involved: Appeal regarding reduction of disallowance u/s 37(3A) and weighted deduction u/s 35B of the Income-tax Act, 1961.
Reduction of Disallowance u/s 37(3A): The ITO treated commission as sale promotion expenses under section 37(3A) for procuring orders. The Commissioner (Appeals) acknowledged that commission was also for after sales service. The departmental representative argued that commission was essential for sales promotion, while the assessee's counsel cited Circular No. 240 and contractual agreements to support that the commission was not extravagant or for sale promotion. The Tribunal upheld the Commissioner (Appeals)'s decision, emphasizing that the provision aimed to curb lavish expenses on advertisement and publicity, not commissions for specific services post-sales. Weighted Deduction u/s 35B: The judgment primarily focused on the reduction of disallowance u/s 37(3A) and did not delve into the weighted deduction u/s 35B issue. The Tribunal analyzed the legislative intent behind section 37(3A) introduced in the Finance Act, 1978, to restrict excessive expenditure on advertisement and publicity. The definition of 'advertisement' and 'publicity' was examined, emphasizing that 'sales promotion' was not intended to cover expenses like commissions. The term 'commission' was defined as an allowance for specific services, distinct from voluntary expenses like advertisement. The Tribunal applied the principle of ejusdem generis to interpret 'sale promotion' in conjunction with 'advertisement' and 'publicity,' concluding that commissions for post-sales services did not fall under the disallowance provision. The contractual obligations and nature of commission payments were crucial in determining that commissions were not extravagant or socially wasteful expenses, aligning with the Commissioner (Appeals)'s decision. This judgment underscores the distinction between commissions for specific services and general promotion expenses, clarifying that commissions for post-sales services do not qualify as 'sale promotion' under section 37(3A) of the Income-tax Act, 1961.
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