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TMI Blog1978 (4) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... mmission had been disallowed. The total income assessed included the claimed expenses under these three heads. The ITO, while computing the chargeable profits, did not make any additions under r. 3(ii) of the First Schedule to the Act. The assessee felt aggrieved, and went up in appeal. It claimed relief of Rs. 8,505 on account of entertainment expenses, Rs. 3,288 on account of advertisement, and Rs. 12,000 on account of commission. It was urged on behalf of the assessee that since these amounts stand included in the computation of chargeable profits without previous approval of the IAC, they should be deducted. The AAC repelled the submission. He held that since the expenditure under these three heads was disallowed under the I.T. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of Rs. 8,505 and Rs. 12,000. There was another small amount of Rs. 3,288 which the assessee did not press before us as it was claimed that the necessary relief has already been granted in appeal at the income-tax stage." At the instance of the revenue, the Tribunal has solicited our opinion on the following question of law : " Whether, on the facts and in the circumstances of the case, and on a true interpretation of the Rules framed under the First Schedule of the Companies (Profits) Surtax Act, 1964, prior approval of the Inspecting Assistant Commissioner of Income-tax was necessary before the expenditure on entertainment and commission amounting to Rs. 8,505 and Rs. 12,000, respectively, could be treated as excessive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : " 3. The net amount of income calculated in accordance with rule 2 shall be increased by the aggregate of-- (i) the amount of any interest payable by the company in respect of the debentures referred to in clause (iv) or moneys referred in clause (v) of rule 1 of the Second Schedule for the previous year relevant to the assessment year allowed as a deduction in computing its total income ; (ii) any expenditure incurred on account of commission, entertainment and advertisement, to the extent such expenditure, in the opinion of the Income-tax Officer, is excessive having regard to the circumstances of the case : Provided that the previous authority of the Inspecting Assistant Commissioner is obtained for holding such expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commission, entertainment and advertisement, because the assessment order under the I.T. Act had disallowed the expenditure under these heads. Since the amount had been included in the total income, the assessee was entitled to relief to the extent to which the ITO did not consider the expenses to be excessive. The argument went on that it was incumbent upon the ITO to view the expenses from this point of view and record a finding. It was also stressed that he ought to have obtained prior sanction of the IAC before arriving at any conclusion. The arguments seek only to confuse the issue. Under r. 3 the ITO is not entitled to reconsider or vary the total income assessed under the I.T. Act. Even for purposes of computation of the charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se only if any expenditure incurred on account of commission, entertainment and advertisement had, in fact, been allowed as a deduction on the income-tax side. Then r. 3(ii) authorises the ITO to consider if any part of such allowed expenditure was excessive. If he prima facie comes to that conclusion, he has to obtain the previous sanction of the IAC, and then alone he can hold any part of the allowed expenditure to be excessive, with a view to add such amount to the net amount of income. The question as framed presupposes that any part of the expenditure was treated as excessive in arriving at chargeable profits. As we have shown, this was an erroneous view. No amount was sought to be added under r. 3(ii) of the First Schedule. We, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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