COMMISSIONER OF INCOME-TAX VS MACNEILL MAGORE LTD.
2000 P T D 618
[232 I T R 945]
[Calcutta High Court (India)]
Before Y. R. Meena and B. M. Mitra, JJ
COMMISSIONER OF INCOME-TAX
versus
MACNEILL MAGORE LTD.
Income-tax Reference No. 136 of 1992, decided on /01/.
11th March, 1998.
(a) Income-tax---
----Revision---Commissioner---Order prejudicial to interests of Revenue-- Export markets development allowance---Weighted deduction-7 Not necessary that assessee himself should maintain an office or agency outside India---Payment made to agent who sells goods of assessee outside India-- Assessee. entitled to weighted deduction---Order of Assessing Officer not prejudicial to interests of Revenue---Revision not valid---Indian Income Tax Act, 1961, Ss. 35B(1)(b)(iv) & 263.
(b) Income-tax---
----Revision---Commissioner---Order prejudicial to interests of Revenue-- Business expenditure--Company--Disallowance of expenditure--Retirement gratuity paid to employee---Not a periodical payment like salary---Cannot be included for disallowance under S.40A(5)---No error in order of. Assessing Officer---Revision not valid---Indian Income Tax Act, 1961, Ss. 40A(5) & 263.
On an examination of the assessment records of the assessee, the Commissioner of Income-tax found that the assessee had claimed weighted deduction under section 35B(1)(b)(iv) of the Income-tax Act, 1961 on payment of commission of Rs.12,94,776 paid to a foreign, agent and the Assessing Officer had allowed weighted deduction on that amount to the extent of Rs.4,31,592. Similarly, the Commissioner of Income-tax found while considering the provisions- of section 40A(5) that the amount paid by way of gratuity to a retired employee had not been included for the purpose of disallowance under section 40A(5) of the Act. The Commissioner of Income-tax in exercise of his powers of revision under section 263 set aside the assessment order with a direction to make assessment afresh for disallowance under section 40A(5) including the gratuity amount paid to the retired employee. Similar direction was given to re-mpute the income in accordance with the provisions of section 35B after disallowing weighted deduction on payment of commission. The assessee appealed to the Tribunal challenging the revision order of the Commissioner of Income-tax. The Tribunal held in favour of the assessee in respect of the allowance of weighted deduction on commission paid to the foreign agent. Similarly, the Tribunal held that no disallowance was warranted under section 40A(5) as the gratuity payment could not be included in the amount for purpose of disallowance under section 40A(5). On a reference:
Held, (i) that under section 35B of the Act, it is not the intention of the Legislature that weighted deduction should be allowed only to an assessee who maintained an office or agency outside India. Any payment made to any agent who sells the goods of the assessee outside India is entitled to weighted deduction. The commission had been paid to a foreign agent who sold the goods of the assessee outside India. Therefore, the order of the Assessing Officer was neither erroneous nor prejudicial to the interests of the Revenue. The order of revision under section 263 was not valid.
(ii) That under section 40A(5) of the Act, the payment of gratuity which is payable once on retirement of the employee is not a periodical payment like salary and should not be included for disallowance under the section. There was no error in the order of the Assessing Officer. The order of revision was not valid.
CIT v. Chloride India Ltd: (1992) 193 ITR 355 (Cal.); CIT v. Colgate Palmolive (India) (Pvt.) Ltd. (1994) 210 ITR 770 (Bom.); CIT v. Godrej and Boyce Mfg. Co. (P.) Ltd. (1984) 149 ITR 594 (Bom.) and CIT v. Usha Telehoist Ltd. (1995) 212 ITR 177 (Cal.) ref.
Standing Counsel for the Commissioner.
Dr. Debi Pal for the Assessee.
JUDGMENT
Y. R. MEENA, J.--In this reference application, the following questions are referred for our opinion:
"(1) Whether, on the facts and in the circumstances of the case, when the Assessing Officer in the assessment allowed relief under section 35B(1)(b)(iv) of the Income Tax Act, 1961, only on the ground that there have been changes in the said section from the assessment year 1982-83 without applying his mind to the conditionalities embedded in the section 35B(1)(b)(iv) of the said Act, the Tribunal was justified in law in holding that the order of the Assessing Officer was not erroneous and prejudicial to the interests of the Revenue and thereby cancelling the order under section 263 of the said Act passed by the Commissioner?
(2) Whether, on the facts and in the circumstances of the case, when the Assessing Officers while making the disallowance under section 40A(5) of the Income Tax Act, 1961, in the assessment did not examine whether payments of gratuity excluded in the above computation were, in fact, such gratuities which are exempt under section 10(10) of the said Act in the hands of the individual employees, the Tribunal was justified in law in holding that the order of the Commissioner of Income-tax on this issue cannot be supported and thereby cancelling the order of the Commissioner under section 263 of the said Act?"
The assessee-company filed its return on July 26, 1982, declaring a total income of Rs.29,08,030. Subsequently, the return was revised and the assessee-company declared its income at Rs.30,62,500. During the course of hearing, again, income was revised further and the assessee-company declared its income at Rs.31,23,300. On a perusal of the assessment order, the Commissioner of Income-tax found that the assessment order of the Assessing Officer was erroneous and prejudicial to the interests of the Revenue so far it relates to allowance of weighted deduction, on payment of commission, under section 35B of the Act and also not including the gratuity payment for disallowance under section 40A(5) of the Act.
On an examination of the assessment records, the Commissioner of Income-tax found that the assessee has claimed the weighted deduction on the payment of Commission of Rs.12,94,776, paid to a foreign agent and allowed the weighted deduction on that amount to the extent of Rs.4,31,592. Similarly, the Commissioner of Income-tax further found while considering the provisions of section 40A(5), the Inspecting Assistant Commissioner (Assessment), the gratuity payment amount which has been paid to a retired employee had not been included for the purpose of disallowance under section 40A(5) (sic). The assessment order dated March 10, 1986, was set aside with a direction to make fresh assessment for disallowance under section 40A(5) including the gratuity amount paid to the retired employee. Similarly, direction was given to re-compute the income as per the provisions of section 35B after disallowance of weighted deduction on payment of commission.
In appeal, the Tribunal has considered the decision of the Bombay High Court in CIT v. Godrej and Boyce Manufacturing Co. (P.) Ltd. (1984) 149 ITR 594, which is in favour of the assessee so far as it relates to the allowance of the weighted deduction on commission paid to a foreign agent. Similarly, following the decision of the Special Bench of the Tribunal, the Tribunal has taken the view that no disallowance was warranted under section 40A(5) of the Act as gratuity payment cannot be included in the amount for the purpose of disallowance under section 40A(5).
Heard learned counsel for the parties. Learned counsel for the. assessee, Dr. Pal placed reliance on the decisions of this Court in CIT v. Chloride India Ltd. (1992) 193 ITR 355 and CIT v. Usha Telehoist Ltd. (1995) 212 ITR 177 and submits that even after amendment in section 35B, on the commission paid to a foreign agent outside India weighted deduction should be allowed. He also submits that the Commissioner of Income-tax has not set aside the order of the Inspecting Assistant Commissioner (Assessment), on the ground that he has allowed weighted deduction on payment for warehousing charges.
The facts are not in dispute that Rs.11,42,611 has been paid by the assessee as commission to the foreign agent outside India. Sub-clause (iv) of clause (b) of subsection (1) of section 35B provides that if the expenditure referred to in clause (a) is incurred wholly and exclusively on maintenance outside India of a branch officers or agency for the promotion of the sale outside India of such goods, services and facilities, the assessee is entitled to weighted deduction.
The commission has been paid to a foreign agent, who sold the goods of the assessee, outside India. Any payment against such commission to that agent is entitled or eligible for weighted deduction. Under section 35B, there is no intention of the Legislature that weighted deduction should be allowed only to an assessee who maintains the agency or office outside India. Any payment made to any agent who sells the goods of the assessee outside India, is eligible for weighted deduction. Thus, the order of the Inspecting Assistant Commissioner (Assessment) is neither erroneous nor prejudicial to the interests of the Revenue.
The next reason for setting aside the assessment order given by the Commissioner of Income-tax is that the Assessing Officer has not included the gratuity amount for the purpose of disallowance under section 40A(5) of the Act. The issue has been considered elaborately by the Bombay High Court in CIT v. Colgate Palmolive (I.) (Pvt.) Ltd. (1994) 210 ITR 770. At page 782, the High Court observed as under:
"Since the payment of a sum of Rs.90,000 to the Chairman-cum -fulltime Director as retirement gratuity cannot be looked upon as periodic payment, it is not covered by the provisions of either section 40(c) or section 40A(5) of the Income Tax Act, 1961. The ceiling, therefore, which is prescribed under these two sections on allowable expenditure will not apply to this payment. The Tribunal has allowed this payment as a deduction from the income arising to the assessee on account of profits and gains of business. We do not see any reason to take a different view."
No contrary decision has been brought to our notice by learned counsel for the Revenue. Considering the reasoning given by the Bombay High Court on the issue that under section 40A(5) of the Act, the payment of gratuity which is payable once on retirement of the employee and not a periodical amount like salary should not be included for disallowance under section 40A(5) of the Act. Thus, on this issue also we do not find any error in the order of the Assessing Officer.
In the result, we answer Question No. 1 in the affirmative, in so far as it relates to whether the Tribunal was justified in law in holding that the order of the Assessing Officer was not erroneous and prejudicial to the interests of the Revenue, that is to say, in favour of the assessee and against the Revenue. Similarly, we answer question No. 2 in the affirmative in so far as it relates to whether the Tribunal was justified in law in holding that the amount of gratuity should not be included in the amount paid to the employee in the year of retirement, for disallowance under section 40A(5) of the Act, i.e., in favour of the assessee and against the Revenue.
The application is, thus, disposed of.
M.B.A./3289/FC Order accordingly