ORDER
V.P. Elhence, Judicial Member
1. These two appeals, filed by the department, arise out of the consolidated order dated 31-12-1986 of the learned Commissioner of Income-tax (Appeals)-II, New Delhi for the assessment years 1984-85 and 1985-86.
2. The assessee is a private limited company which carries on the business of chit fund and finance. The common point involved for these years relates to the disallowance under Section 37(3A) and Section 37(3B). These sub-sections were added to Section 37 by the Finance Act, 1978 with effect from 1-4-1979 and were omitted by the Finance Act, 1985 with effect from 1-4-1986. However, for the assessment years in question, they were operative. The assessee paid agent’s commission amounting to Rs. 2,55,700 for the A.Y. 1984-85 and an amount of Rs. 2,16,000 for the A.Y. 1985-86. The Income-tax Officer made disallowances of Rs. 51,133 and Rs. 43,200 in the assessment years in question by treating the said commission as expenditure or. “Sales promotion” as referred to in Section 37(3B)(i).
3. In appeal, the learned Commissioner of Income-tax (Appeals) referring to the Board’s Circular No. 240 dated 17-5-1978, relied upon on behalf of the assessee, held that payments made to the agents for bringing subscribers for the chits did not constitute payment for sales promotion. He held that the expenditure envisaged in Section 37(3 A) and Section 37(3B) is that incurred in contemplation of and for the purpose of promotion of sales in future, whereas the payment to the agents is made with reference to the sales already effected. He also observed that in the present case, commission was paid to the agents specifically in terms of the quantum of business procured by them and that such expenditure was not intended to be covered for disallowance under Sub-sections (3A) and (3B) of Section 37.
4. On behalf of the department, reliance was placed on the wordings of Sub-sections (3 A) and (3B) of Section 37 and it was submitted by Shri Rajendra Kumar, the learned Departmental Representative that the disallowance was justified and was entitled to be restored. He submitted that the reasons given by the learned Commissioner of Income-tax (Appeals) in his order were not germane. Lastly he submitted that payment of commission in the case of the assessee was not necessary for the conduct of its business but was only for its promotion and therefore, constituted expenditure on sales promotion. On the other hand, Shri Kanwal Krishan, the learned counsel for the assessee strongly relied upon the order of the learned CIT(A). He submitted that the character of commission was different from the character of sales promotion. According to him commission was reward for effecting sales and was given for securing subscribers and for ensuring payments by them. In this connection, he referred to the expression “advertisement, publicity and sales promotion”. Reliance was also placed by him on the decision dated 25-6-1985 of Chandigarh Bench of the Tribunal in the case of/TO v. Meera & Co. [1986] 24 TTJ 44 and on the Board’s Circular referred to above. Lastly he submitted that for the preceding two assessment years 1982-83 and 1983-84 when the agents’ commission amounted to Rs. 4,86,200 and Rs. 3,67,500 respectively @ 2% of the chit value for each subscriber introduced by the agent, no disallowance had been made by the Income-tax Officer.
5. We have considered the rival submissions as also the decision referred to above. Section 37 deals with expenditures which are laid out or expanded wholly and exclusively for the purposes of the business or profession of an assessee. Subsections (3A) &(3B) had been inserted in order to place a curb on extravagant and socially wasteful expenditure on advertisement, publicity and sales promotion. Para 12.4 of the Board’s Circular No. 240 dated 17-5-1978 shows that the terms “publicity” and “sales promotion” have a wide amplitude and that expenditure incurred on fashion shows, beauty contests, consumer contests, consumer gift offers and free samples or gifts fall within the ambit of Sub-section (3 A) of Section 37. This gives an indication about the general nature of the expenditures which the legislature had in mind and the lavishness of which was desired to be curbed. The expression “Sales promotion” has not been defined in the Act. The context in which this expression has been used has, therefore, to be seen. Commission is paid by the assessee in the present case not in a general way to attract sales in future or in contemplation of promotion of sales but for the conduct of the business of chit fund and financing. It is an integral part of profit-earning process of the assessee because the business could not proceed without incurring that commission. The commission is paid after the sales have been effected. In fact it is a reward or salary for effecting sales. It is a payment made for services rendered in regard to specific subscribers to chits secured by the assessee, who not only secure the subscribers but also ensure due payments connected therewith. Thus the payment is for rendition of specific services. If there are no sales, there is no commission. Such being the nature of commission, the question of lavishness of expenditure with reference thereto would, therefore, not arise. Taking all these factors into consideration, therefore, it cannot be said that the payment of commission was to form part of sales promotion under Sub-sections (3A) and (3B). We, therefore, respectfully agree with the view expressed by Chandigarh Bench in the case of Meera & Co. (supra). We, therefore, uphold the order of the learned Commissioner of Income-tax (Appeals) in this regard.
6. The appeals, therefore, fail and are dismissed.
