Commissioner of Income Tax vs Digvijay Textiles

This is an application u/s 256(2) of the Income Tax Act, 1961, preferred by the Commissioner of Income Tax, Jodhpur.

The Assessing Officer allowed the following expenses which were shown in the return of income of the assessee-Digvijay Textiles, Jodhpur :

Rs.

"(1) Advertisement expenses 12,454

(2) Commission paid to selling agent 5,17,107

(3) Sales incentive 96,060

(4) Cash discount 8,99,490

Total 15,25,111."

Later on, on a perusal of the records, the Commissioner of Income Tax noticed that the above expenditure was in the nature of advertisement, publicity or sales promotion and the same having exceeded Rs. 1 lakh, 20 per cent, of the excess was required to be disallowed as per the provisions of Section 37(3A) of the Income Tax Act, 1961. Since the Assessing Officer did not do so, the assessment framed by him was considered erroneous and prejudicial to the interests of the Revenue and accordingly, the said assessment was revised u/s 263 of the Income Tax Act. The assessee being aggrieved by this assessment order filed an appeal before the Income Tax Appellate Tribunal. The Tribunal however accepted the totality of the claim of the assessee and held that the expenditure on commission by way of payment to selling agent does not come within the purview of Section 37(3A) of the Income Tax Act, in view of the decision of the Calcutta High Court in Commissioner of Income Tax Vs. Hindusthan Motors Ltd., . As regards the sales incentive, it has been held that it is neither an extravaganza nor a wasteful expenditure and hence cannot be subjected to partial disallowance u/s 37(3A) of the Income Tax Act. Similarly, the cash discount has been held to be wholly out of the purview of Section 37(3A) of the Income Tax Act.

The Revenue thereafter moved the Tribunal for making a reference u/s 256(1) of the Income Tax Act, but the Tribunal rejected the reference application holding it, inter alia, to be basically a question of fact. The Commissioner of Income Tax hereafter makes a reference application on the following amongst other questions :

"(1) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in holding that expenditure incurred on commission payment to selling agent, sales incentive and cash discount do not come within the purview of Section 37(3A) of the Income Tax Act, 1961 ?

(2) Whether in order to apply the provisions of Section 37(3A) the Income Tax Appellate Tribunal''s observation that the expenditure is neither an extravaganza nor a wasteful expenditure is relevant ?

(3) Whether the Income Tax Appellate Tribunal is justified in not upholding the Commissioner of Income Tax action u/s 263 on all the points in spite of the fact that the nature of all the expenses was only to boost the sales, so these were clearly covered u/s 37(3A) of the Income Tax Act, 1961?"

We think that this case is covered by the decision of the Calcutta High Court in Commissioner of Income Tax Vs. Hindusthan Motors Ltd., It was held, inter alia, in the said case that the brokerage and commission paid on selling the goods would not come within the meaning of the phrase "advertisement, publicity and sales promotion" u/s 37(3A) of the Income Tax Act. No part of the amount could be disallowed u/s 37(3A) of the Income Tax Act.

We think these are basically all questions of fact and no reference application could be entertained on these grounds.

Accordingly, the present reference application stands rejected.