2002 (7) TMI 28 - HC - Income Tax

Court rules commission to agents not sales promotion expense under Income-tax Act.

Commissioner of Income-Tax Versus Gogte Textiles Ltd.

The High Court held that commission paid to agents on actual sales does not qualify as sales promotion expenses under section 37(3A) of the Income-tax ... Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the commission paid to the agents on actual sales cannot form sales promotion expenses? - we hold that the commission paid to the agents cannot be treated as sales promotion expenses within the meaning of section 37(3A) of the Act. The question referred is accordingly answered in the affirmative, i.e., in favour of the assessee and against the Revenue. Issues:1. Interpretation of whether commission paid to agents on actual sales can be considered as sales promotion expenses under section 37(3A) of the Income-tax Act, 1961.Detailed Analysis:The case involved a limited company where the Assessing Officer disallowed the commission paid to agents under section 37(3A) of the Income-tax Act, 1961, during the assessment for the year 1985-86. The Commissioner (Appeals) later ruled that the commission should not be disallowed under section 37(3A) and that depreciation should not be reduced by the amount of Central subsidy received. The Department then appealed to the Tribunal, which, following a judgment of the Calcutta High Court, held that commission paid on actual sales cannot be considered as sales promotion expenses. This decision was challenged in the High Court.The key issue revolved around the interpretation of section 37(3A) of the Act, which restricts the deduction of certain expenditures exceeding a specified limit. The section specifies items on which the expenditure is to be calculated, including advertisement, publicity, and sales promotion. The court referred to previous judgments, including CIT v. Srinivasa Textile Processing Ltd., where it was held that sales promotion should be understood as activities to popularize a product to enhance sales, and payments to commission agents do not fall under this category.The High Court, in its analysis, referred to the decision in CIT v. Klas Engineering (P.) Ltd., where it was reiterated that sales promotion involves providing incentives or taking steps to popularize a product for sale. The court concluded that commission paid to agents does not fall under the definition of sales promotion expenses as per section 37(3A) of the Act. Therefore, the court held that the commission paid to agents cannot be considered as sales promotion expenses under the Act, ruling in favor of the assessee and against the Revenue.In summary, the judgment clarified that commission paid to agents on actual sales does not qualify as sales promotion expenses under section 37(3A) of the Income-tax Act, 1961. The court relied on previous decisions to establish that sales promotion involves activities to popularize a product, and payments to commission agents do not align with this definition. As a result, the court ruled in favor of the assessee, holding that the commission paid to agents should not be disallowed under section 37(3A) and that the depreciation should be allowed without deducting the subsidy received.