1. This is a departmental appeal in which two grounds are raised first being in respect of action of the Commissioner (Appeals) who reduced the disallowance made by the ITO under Section 37(3A) of the Income-tax Act, 1961 ('the Act') holding that commission paid by the assessee amounting to Rs. 89,050 was not to be treated as 'sale promotion expenses' ; and the second regarding weighted deduction under Section 35B of the Act.
2. In the course of assessment proceedings, the ITO observed that the commission paid in a sum of Rs. 53,075 was for procuring orders for the supply of engines and other material. On that basis, the ITO came to a conclusion that the commission was paid in order to procure orders which have promoted the sales of the assessee-firm. He, therefore, treated the commission as part of sale promotion expenses. He, therefore, treated the entire amount of commission as sale promotion expenses and dealt with it under the provisions of Section 37(3A).
3. When the issue came before the Commissioner (Appeals), he admitted the contention of the assessee that commission was not only paid for procuring orders but also for after sales service.
4. The learned senior departmental representative while disputing the action of the Commissioner (Appeals) in excluding commission of Rs. 73,808 + Rs. 15,000 + Rs. 242 from advertisement and publicity expenses, as worked out in paragraph No. 13 of the Commissioner (Appeals)'s order, mainly relied on the order of the ITO and submitted how could there be sale without this commission and, hence, it was nothing but sale promotion expenses.
The learned counsel for the assessee, on the other hand, beside relying on the order of the Commissioner (Appeals) submitted that there is a Circular No. 240, Chaturvedi & Pithisaria's Income-tax Law, Third edn., Vol. 2, p. 1450 to which the reply of the learned senior departmental representative was that it was only illustrative. The commission in this case was nothing but sale promotion, as per submissions of the learned senior departmental representative whereas submission of the learned counsel for the assessee was that such expenses even if extravagant expenses or sale promotion, would be incurred before effecting the sale. He placed on the assessee's compilation various terms of Kirloskar Oil Engines Ltd. and the assessee's letter dated 22-12-1981 to the ITO in which it is mentioned that the commission was paid for procuring the orders, getting payment, providing after sale service to the department for all the products during warranty period, etc. Then, in another letter to the ITO, it was mentioned that Section 37(3A) was introduced in order to curb lavish expenditure on advertisement and publicity in the garb of sale promotion. In the instant case, it was not sale promotion at all. He even drew our attention to an extract from the Finance Minister's Budget Speech for 1978-79.
5. After taking into consideration the rival submissions we are unable to interfere in the finding of the Commissioner (Appeals). Provisions of Section 37(3A) were introduced for the first time in the Finance Act, 1978, and were applicable for the assessment years 1979-80 and 1980-81. Sub-section (3A) in its amended form is as under: Notwithstanding anything contained in Sub-section (1) but without prejudice to the provisions of Sub-section (3), where the aggregate expenditure incurred by an assessee on advertisement, publicity and sales promotion in India exceeds forty thousand rupees, so much of such aggregate expenditure as is equal to an amount calculated as provided hereunder shall not be allowed as a deduction, namely:--(i) where such aggregate expenditure does not exceed 10 per cent of 1/4 per cent of the turnover or, as the case may the adjusted be, gross receipts of the business or profession expenditure ;(ii) where such aggregate expenditure exceeds 1/4 per 12 1/2 per centof cent but does not exceed 1/2 per cent of the turn- the adjusted over or, as the case may be, gross receipts of the expenditure ; business or profession where such aggregate expenditure exceeds 1/2 per 15 per cent of cent of the turnover or, as the case may be, gross the adjusted receipts of the business or profession expenditure.
Dictionary meanings of the words 'advertisement' and 'publicity', as per the Readers' Digest Great Encyclopaedia, are: Advertisement--Advertising ; public announcement (in newspaper, by placards, etc.).
Publicity--Being or making public ; esp. (business of) advertising or making things or persons publicly known ; agent, person employed for this purpose.
Thus, the dictionary meanings of the words 'advertisement' and 'publicity' are the same, i.e., advertising or making things or persons publicly known. The words 'sale promotion' are, however, not defined anywhere and as such one has to look into the intention of the Legislature when the provision was introduced. The Hon'ble Finance Minister while introducing the Budget, in his speech, remarked: Extravagant and socially wasteful expenditure is often incurred on advertisement, publicity and sale promotion. In order to put a curb on such expenditure at the cost of exchequer, I propose to provide for the disallowance of a part of such expenditure in the computation of taxable profits. . . .
Then, departmental Circular No. 240 dated 17-5-1978 was issued to explain the above provision, extract from which is: As the terms 'publicity' and 'sales 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. (p. 1452) From the above, it is very clear that the words 'sales promotion' were never intended to cover an expenditure of the nature of commission, as has been paid by the assessee.
6. The word 'commission' has also been defined by their Lordships of the Bombay High Court in the case of Harihar Cotton Pressing Factory v.CIT  39 ITR 594, as under: ...'Commission'' has no technical meaning but both in legal and commercial acceptation of the term, it has definite signification and is understood as an allowance for service or labour in discharging certain duties such for instance of an agent, factor, broker or any other person who manages the affairs or undertakes to do some work or render some service to another.... (p. 610) Commission has a direct nexus with the quantum of sales and it is not like other expenses such as advertisement and publicity which are of voluntary nature. Commission is paid under a business agreement and has a legal force behind it. The assessee is under law bound to pay the amount as per contractual agreement. The payment is made for commercial expediency. The payment of commission is an integral part of profit earning process because the business could not have proceeded without incurring that commission. In this case, the commission has been paid to agents for rendering specific services, i.e., for procuring orders for sales, ensuring payment from the customers and for rendering after sale service under the warranty period. The issue has been thoroughly dealt with by the Commissioner (Appeals) in paragraph Nos. 11 to 13 of his order wherein he has held that the commission would not form part of sale promotion while working out the disallowance. Even otherwise, for finding out true meaning of the words 'sale promotion' used in Section 37(3A), the principles of ejusdem generis would apply, which means, if a general word is added to specific word (advertisement and publicity), the general word wpuld take its colour from the specific word. Ejusdem generis as a rule of interpretation imply that where there are general words following a particular and specific word, the general words must be confined to things of the same kind as those specified. The words 'advertisement' and 'publicity' specifically deal with advertising or making things or persons publicly known. So, it is in this context that the words 'sale promotion' have also to be read, so that they take their colour from the specific words preceding them.
Commission cannot by any stretch of imagination be considered as 'sale promotion'. The provision was specifically meant to disallow extravagant and socially wasteful expenditure and commission can never be said to be an extravagant and socially wasteful expenditure.
Regarding services to be rendered by the agents, the Commissioner -(Appeals) has dealt with this issue thoroughly. The commission was paid on the basis of an oral contractual agreement and there was no agreement in writing with the agents. However, the correspondence entered into with the agents prove that the commission was paid for rendering specific services. Promotion of sale would ordinarily imply expenditure incurred prior to effecting sales. Commission is paid after sales had been effected and as such it cannot be covered by the definition of words 'promotion of sales'. It is a reward or a salary for effecting sales. There is a contractual relationship of master and agent. Agent takes the responsibility of supply of goods, ensuring payment and effecting after sale services under the warranty period.
Thus, there are certain duties attached to the payment of commission.
If there are no sales, there is no commission. As such, it cannot be said that the payment of commission is extravagant or socially wasteful expense. In the light of above discussion and for the reasons given by the Commissioner (Appeals) in his order his action is hereby confirmed.
7 to 9. [These paras are not reproduced here as they involve minor issues.]