Commissioner of Income Tax vs Zippers India

D.A. Mehta, J.

1.The following question has been referred by the Income Tax Appellate Tribunal, Ahmedabad Bench, ''B'' u/s 256(1) of the Income Tax

Act,1961 (the Act) at the instance of the Commissioner of Income Tax.

Whether, the Appellate Tribunal is right in law and on facts in deleting the addition of Rs. 1,41,276/- made u/s 37(3A) observing that commission

was not included in the provisions of Sec.37(3B)?�

The Assessment Year is 1985-86 and the relevant accounting period is the financial year ended on 31/3/1985. The assessee, a registered

partnership firm, claimed certain expenses which included local commission as well as export commission. The Assessing Officer invoked

provisions of Section 37(3A) read with Section 37(3B) of the Act and disallowed a sum of Rs. 1,41,276/- vide his order dated 25/3/1998.

The assessee carried the matter in appeal before Commissioner (Appeals) who accepted the claim of the assessee by relying upon the Circular

issued by Central Board of Direct Taxes on 17/5/1978.

The revenue carried the matter in appeal before the Tribunal. The Tribunal after referring to the findings recorded by Commissioner (Appeals)

and the Board''s circular, followed the ratio of judgment of Calcutta High Court in the case of Commissioner of Income Tax Vs. Bata India Ltd.,

and dismissed the appeal of the department vide order dated 27/8/1993.

Mr. M.R. Bhatt, learned Senior Standing Counsel appearing on behalf of the applicant reiterated the reasons which weighed with the Assessing

Officer and submitted that the Tribunal had committed an error in law in deleting the disallowance. The Board shows that the notice issued to the

respondent assessee has not been received back. However, in light of the fact that the Court does not propose to disturb the order of the Tribunal

the matter is taken up and disposed of finally.

Section 37(3A) of the Act was introduced initially by Finance Act,1978 with effect from 01/04/1979 and came to be deleted with effect from

01/04/1981. Thereafter, once again the provisions were inserted by Finance Act, 1983 with effect from 01/04/1984 and were omitted with effect

from 01/04/1986 by Finance Act,1985. Therefore, the provisions were operative for Assessment Years 1979-80 and 1980-81 and thereafter for

Assessment years 1984-85 and 1985-86.

Section 37(3A) of the Act provides that where the expenditure or, as the case may be, the aggregate expenditure incurred by an assessee on

any one or more of the items specified in Sub-section (3B) exceeds the stipulated limit, twenty percent of such excess shall not be allowed as

deduction while computing the income chargeable under the head SProfits and gains of business or profession�.

Thus, the provision requires that any expenditure incurred on advertisement, or publicity, or sales promotion, exceeds individually, or in the

aggregate, the specified limit, twenty percent of such excess shall be disallowed. In other words, all the three items of expenditure are allowable u/s

37(1) of Section 37 of the Act but because of the use of the term S Notwithstanding anything contained in Sub-section (1)� occurring in the

opening part of Sub-section (3A) of Section 37 of the Act the specified percentage is disallowed.

Section 37(3B) of the Act specifies expenditure vide clauses (i), (ii) & (iii). However, for the present, the material clause is clause (i) which

states :�[(3B) The expenditure referred to in Sub-section (3A) is that incurred on ​ (i) advertisement, publicity and sales promotion; or S

When one considers the meaning and concept of the terms Sadvertisement� and Spublicity� it is apparent that the term which follows viz.

Ssales promotion� would be required to be assigned the same meaning and concept as is understood in the commercial sense. The basic

distinction underlying the term Ssales� and Ssales promotion� has to be kept in mind while applying the provision. Any expenditure incurred

for effecting sales cannot be termed to be expenditure for sales promotion. In other words, the test would be whether the expenditure is incurred

for effecting sales or is it incurred for promoting/enhancing sales by reaching out to potential customers. The expenditure incurred for making sales

is a part and parcel of the expenditure for selling the products or the goods in which the assessee trades, while expenditure incurred on sales

promotion would be general in nature and relate to creating awareness about the product of the assessee.

The decision of Calcutta High Court in the case of CIT v. Bata India Ltd. (supra) on which the Tribunal has placed reliance lays down that the

expression Ssales promotion� though of wide amplitude and undefined, is to be understood in its meaning in the setting in which it occurs, viz. it

necessarily involves an element of advertisement and publicity.

In the case of Karnataka High Court has followed the decisions rendered by Calcutta and Kerala High Courts as well as its own decision to

lay down that the concept of advertisement, publicity and sales promotion would be by way of providing certain incentive or taking certain other

steps by which the product could be popularised to promote sales, however, would not take within its sweep commission paid on sales.

In the case of Commissioner of Income Tax Vs. Print System Products, Madras High Court has stated that the difference between sales and

sales promotion is self-evident. Sales promotion expenses are expenses which are not directly related to any single sale, but are expenses aimed at

generating interest among potential customers for the purchase of the product. Commission, on the other hand, is paid on the actual sales effected

to the person through whose assistance the sale was concluded. Therefore, payment of commission to an agent or a person effecting actual sale

and salary paid to the sales personnel for the services rendered would not fall within the meaning of the expression sales promotion.

The Commissioner (Appeals) has rightly relied upon departmental circular No.240 dated 17/5/1978. In paragraph No.12.4 of the said circular

it is stated :

12.4 As the terms Spublicity� and Ssales promotion� have a wide amplitude expenditure incurred by taxpayers on fashion shows, beauty

contests, consumer contests, consumer gift offers, and free samples or gifts will fall within the ambit of new Sub-section (3A) of Section 37 of the

Income Tax Act�

Applying the aforesaid principles to the facts concurrently found by Commissioner (Appeals) and Tribunal, it is apparent that the commission

paid for local sales as well as for export sales cannot be considered to be sales promotion expenditure for the purpose of disallowance considering

the fact that the commission was paid for the services rendered.

In the circumstances, the Tribunal was right in law in deleting the addition of Rs. 1,41,276/- made u/s 37(3A) of the Act by treating the

commission paid as not falling within the provisions of Section 37(3B) of the Act.

The question is accordingly answered in the affirmative i.e. in favour of the assessee and against revenue.

The Reference stands disposed of accordingly with no order as to costs.