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Commissioner Of Income-Tax v. Sutlej Cotton Mills Ltd.
Structured Summary of the Opinion Delivered by Ajit K. Sengupta, J.
Factual and Procedural Background
This is a reference under section 256(1) of the Income-tax Act, 1961, concerning the assessment year 1980-81. Two questions of law were referred to the court.
Question 1 arises from the assessee's claim of deduction of Rs. 17,37,497 as selling commission. The Income-tax Officer disallowed 15% of this amount under section 37(3A) by treating it as sales promotion expenditure. The Commissioner of Income-tax (Appeals) directed the Income-tax Officer not to include the selling commission for the purpose of computing the disallowance under section 37(3A), following his earlier order in the case of Tins Products Ltd. The Revenue appealed to the Appellate Tribunal, which upheld the Commissioner (Appeals). The Department referred the question to this Court.
Question 2 arises from the assessee's claim of deduction of Rs. 19,058, which the Income-tax Officer disallowed on the ground that it was paid by way of penalty under section 5C of the Rajasthan Sales Tax Act. The Commissioner of Income-tax (Appeals), relying on an earlier appellate order in the assessee's own case and on the Madhya Pradesh High Court decision in Simplex Structural Works v. Commissioner of Income-Tax (1983), held that the amount was allowable as a deduction (characterising it as withdrawal of a concession rather than a penalty) and directed the Income-tax Officer to allow the sum. The Tribunal affirmed that order without detailed reasons. The matter was before this Court on reference.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the expenditure of Rs. 17,37,497 incurred on payment of commission on sales cannot be treated as sales promotion expenses and, therefore, it cannot be taken into account while computing the disallowance under section 37(3A) of the Income-tax Act, 1961?
- Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in upholding the order of the Commissioner of Income-tax (Appeals) directing the Income-tax Officer to allow the expenditure of Rs. 19,058 paid as penalty under section 5C of the Rajasthan Sales Tax Act?
Arguments of the Parties
Revenue's (Appellant's) Arguments
- In respect of the first question: The Commissioner of Income-tax (Appeals) erred in following his decision in Tins Products Ltd. without analysing the facts of the present case; the Income-tax Officer had not examined all relevant facts to determine whether the expenditure was commission on actual sales; accordingly the amount was rightly considered by the Income-tax Officer for computing disallowance under section 37(3A).
- In respect of the second question: The Income-tax Officer treated the Rs. 19,058 as a penalty under section 5C of the Rajasthan Sales Tax Act (i.e., an amount paid for violation of statutory provisions), and on that basis disallowed the deduction claim. The Tribunal affirmed the Commissioner (Appeals) without detailed reasons; the Department challenged that conclusion by way of reference.
Assessee's Arguments
- For the first question: The payment of sales commission cannot be considered sales promotion expenditure for the purpose of section 37(3A). Reliance was placed on the Central Board of Direct Taxes circular dated May 17, 1978 ([1979] 117 ITR (St.) 17).
- For the second question: Although described as a "penalty" under section 5C(2) of the Rajasthan Sales Tax Act, the amount was, in reality, a withdrawal of a concession (i.e., the dealer paying the tax at the full rate because the conditions for concessional rate were not met). The counsel explained that payment under section 5C(2) arises only if the dealer is unable to sell the finished products in Rajasthan for reasons beyond the dealer's control and relied on the Madhya Pradesh High Court decision in Simplex Structural Works [1983] 140 ITR 782.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Hindustan Motors Ltd., [1991] 192 ITR 619 (judgment delivered 23 Feb 1990) | Held that commission and brokerage payments could not be equated with sales promotion expenses and therefore such expenditure could not be disallowed under section 37(3A) of the Income-tax Act, 1961. | The Court followed this decision and, on that basis, answered the first question in the affirmative and in favour of the assessee (i.e., the commission is not sales promotion expense for s.37(3A) disallowance). |
| Simplex Structural Works v. Commissioner Of Income-Tax, M.P.-II, [1983] 140 ITR 782 | The Madhya Pradesh High Court observed that where a statutory provision results only in collection of the tax which otherwise would have been payable (i.e., the difference between full rate and concessional rate), such an amount cannot properly be termed a penalty; penalties that require payment in excess of what would otherwise be payable may be characterised as penalty. | The Court relied on and expressly agreed with this view in interpreting section 5C(2) of the Rajasthan Sales Tax Act and held that the difference (full rate minus concessional rate) is not a penalty and is allowable as a deduction to that extent. |
| Order of the Commissioner of Income-tax (Appeals) in Tins Products Ltd. (order dated 6 August 1982) | The Commissioner of Income-tax (Appeals) directed that selling commission not be included for computation of disallowance under section 37(3A). | The Commissioner (Appeals) in the present case followed this earlier order; the Tribunal and this Court accepted that approach in the present context (subject to the Court's reliance on Hindustan Motors judgment). |
Court's Reasoning and Analysis
The Court addressed each referred question by applying legal principles and earlier authorities strictly as they appear in the record.
Analysis — Question 1 (Commission paid as selling commission vs sales promotion expense)
The Court observed the factual and procedural history: the Income-tax Officer treated 15% of the selling commission as sales promotion expenditure under section 37(3A); the Commissioner (Appeals) declined to include the selling commission for computing disallowance, following his earlier order in Tins Products Ltd.; the Tribunal upheld that approach. The Court noted that this precise question had been considered by this Court in CIT v. Hindustan Motors Ltd., where it was held that commission and brokerage payments could not be equated with sales promotion expenses and accordingly could not be disallowed under section 37(3A). Relying on that authoritative decision, the Court concluded that the commission in issue is not a sales promotion expense for the purpose of section 37(3A), and therefore the Tribunal's conclusion was legally justified. The Court therefore answered the question in favour of the assessee, following the cited precedent.
Analysis — Question 2 (Payment under section 5C of the Rajasthan Sales Tax Act)
The Court examined the text of section 5C of the Rajasthan Sales Tax Act as set out in the opinion. It emphasized that section 5C(1) provides a concessional rate of tax (1%) on certain purchases of raw materials for manufacture, subject to conditions, and section 5C(2) prescribes liability where raw materials purchased under the concession are utilised for other purposes. Section 5C(2) makes the dealer liable to pay, as "penalty," an amount not less than the difference between tax at the full rate and the concessional rate, but not exceeding one and one-quarter times the amount at the full rate, as the assessing authority may determine.
The Court analyzed this provision as creating two contingencies: (a) recovery of the difference between the tax at full rate and the concessional rate (which, the Court held, is essentially recovery of tax that would otherwise have been payable and operates as withdrawal of concession rather than a penal imposition); and (b) an additional discretionary amount up to 1.25 times the full rate (which, if imposed, may properly be characterised as a penalty). The Court explained that many reasons may prevent a dealer from fulfilling the obligations, and the purpose of section 5C(2) is to protect the Revenue by withdrawing the concession when the conditions are not met. When only the difference (i.e., the full tax that would have been payable) is collected, that cannot be equated with a penalty; it is merely recovery of tax that otherwise would have been payable and hence is of a revenue nature.
The Court noted that this view is consistent with the Madhya Pradesh High Court's reasoning in Simplex Structural Works, and expressly agreed with that view. Because, on the facts of the present case, only the difference between the tax at full rate and the concessional rate had been paid (no excess or discretionary levy was made), the payment could not be treated as a penalty in the disallowable sense. Consequently, the Court concluded that the expenditure is allowable to the extent it represents that difference.
Holding and Implications
Holding:
- First question: The Court answered in the affirmative in favour of the assessee — the commission and brokerage payments (the Rs. 17,37,497 claimed as selling commission) are not sales promotion expenses for the purposes of section 37(3A) of the Income-tax Act, 1961, and therefore are not to be disallowed on that ground (the Court followed CIT v. Hindustan Motors Ltd.).
- Second question: The Court held that the expenditure of Rs. 19,058 will be allowed to the extent it represents the difference between the tax payable at the full rate and the tax payable at the concessional rate under section 5C(1) of the Rajasthan Sales Tax Act (i.e., the withdrawal of the concession / recovery of tax that otherwise would have been payable). The Court qualified that if any sum in excess of that difference had been levied, such excess would fall within the scope of a penalty, but that did not arise on the facts before it.
Direct consequences: The assessee succeeds on both referred questions — the selling commission is not to be treated as sales-promotion expenditure for s.37(3A) disallowance; the Rs. 19,058 is allowable to the extent it equals the difference between full-rate tax and the concessional rate under s.5C(1). The Court recorded that there would be no order as to costs.
Broader implications: The Court expressly followed prior decisions (CIT v. Hindustan Motors Ltd. and the Madhya Pradesh High Court in Simplex Structural Works) and thereby applied existing precedent and statutory interpretation; the opinion does not purport to create new precedent beyond applying those authorities to the facts before it.
(Bhagabati Prasad Banerjee, J. agreed.)
The Judgment of the Court was delivered by
Ajit K. Sengupta, J.:— In this reference under section 256(1) of the Income-tax Act, 1961, the following questions of law have been referred to this court for the assessment year 1980-81:
“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the expenditure of Rs. 17,37,497 incurred on payment of commission on sales cannot be treated as sales promotion expenses and, therefore, it cannot be taken into account while computing the disallowance under section 37(3A) of the Income-tax Act, 1961?”
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in upholding the order of the Commissioner of Income-tax (Appeals) directing the Income-tax Officer to allow the expenditure of Rs. 19,058 paid as penalty under section 5C of the Rajasthan Sales Tax Act?”
2. Shortly stated, the facts relating to the first question are that the assessee claimed deduction of Rs. 17,37,497 as selling commission. The Income-tax Officer disallowed 15% of this amount under section 37(3A) treating it as sales promotion expenditure. The matter was carried in appeal before the Commissioner of Income-tax (Appeals) who, following his order dated August 6, 1982, in the appeal in the case of Tins Products Ltd., directed the Income-tax Officer not to include the selling commission for the purpose of computing the disallowance under section 37(3A).
3. Against the decision of the Commissioner of Income-tax (Appeals), the Revenue came up in appeal before the Tribunal. It was submitted that the Commissioner of Income-tax (Appeals) erred in following his decision in the case of Tins Products Ltd., without analysing the facts of the case before him. It was also pointed out that even the Income-tax Officer did not examine all the relevant facts in order to as certain if the expenditure was incurred on payment of commission on actual sales. It was contended that the amount was rightly considered by the Income-tax Officer for the purpose of computing the disallowance under section 37(3A).
4. On behalf of the assessee, it was contended that the payment of sales commission cannot be considered for the purpose of computation of disallowance under section 37(3A) as the commission paid on sales cannot be considered to be an expenditure incurred on sales promotion. In this connection, reliance was placed on the circular dated May 17, 1978 (see [1979] 117 ITR (St.) 17), issued by the Central Board of Direct Taxes.
5. The Tribunal, considering other similar orders, upheld the order of the Commissioner of Income-tax (Appeals). Hence, this reference on the first question by the Department.
6. It is not in dispute that this question came up for consideration before this court in Income-tax Reference No. 134 of 1985 —CIT v. Hindustan Motors Ltd., [1991] 192 ITR 619, where the judgment was delivered on February 23, 1990. In that case, it was held that the commission and brokerage payment could not be equated with sales promotion expenses and, accordingly, the expenditure could not be disallowed under section 37(3A) of the Income-tax Act, 1961. Following the said decision, we answer this question in the affirmative and in favour of the assesssee.
7. Shortly stated, the facts relating to the second question are that the Income-tax Officer disallowed the assessee's claim for deduction in respect of a sum of Rs. 19,058 on the ground that the amount was paid by way of penalty under section 5C of the Rajasthan Sales Tax Act, for violation of the provisions of that Act. Before the Commissioner of Income-tax (Appeals), it was submitted that the amount did not represent any penalty, but it was a concession withdrawn. Reliance was placed on the decision of the Madhya Pradesh High Court in the case of Simplex Structural Works v. Commissioner Of Income-Tax, M.P-Ii., [1983] 140 ITR 782. The Commissioner of Income-tax (Appeals), following the appellate order for the assessment year 1978-79 in the assessee's own case held that the amount was allowable as a deduction. He, accordingly, directed the Income-tax Officer to allow the sum of Rs. 19,058.
8. The Tribunal, without giving any detailed reasons and following the decision in another similar case, affirmed the order of the Commissioner of Income-tax (Appeals).
9. At the hearing before us, Mr. Bajoria, learned counsel for the assessee, contended that though the momenclature given was penalty in section 5C(2) of the Rajasthan Sales Tax Act, it was in reality not a penalty but a withdrawal of some concession given under the very same provision. It was further contended that this was a separate provision while there were regular provisions for levy of penalty which is, in reality, penalty. He has also explained that payment of amounts under section 5C(2) arose only in the event of the assessee not being able to sell the finished products in Rajasthan for reasons beyond the control of the assessee. He has also drawn our attention to the decision of the Madhya Pradesh High Court in Simplex Structural Works, [1983] 140 ITR 782.
10. To appreciate the contention, it is necessary for us to set out the relevant provisions of the Rajasthan Sales Tax Act. The relevant provisions are as follows:
“5C. Concessional rate of tax for raw materials.— (1) Notwithstanding anything contained in this Act, but subject to such restrictions and conditions as may be prescribed, the rate of tax payable on the sale to or purchase by a registered dealer of any raw material for the manufacture in the State of goods for sale within the State or in the course of inter-State trade or commerce shall be at a concessional rate of 1% of the sale or purchase price of such raw material.
(2) Where any raw material purchased by a registered dealer under sub-section (1) is utilised by him for any purpose other than a purpose specified therein, such dealer shall be liable to pay as penalty, such amount, not less than the difference between the amount of tax on the sale of such raw material at the full rate applicable thereto under section 5 and the amount of tax payable under sub-section (1) but not exceeding one and one-quarter times the amount of tax at such full rate, as the assessing authority may determine, having regard to the circumstances in which such use was made.”
11. It would appear that certain concessions are allowed to the assessee in respect of purchase of raw materials for the manufacture in the State of goods for sale within the State or in the course of inter-State trade or commerce. If a dealer purchased the raw materials at a concessional rate for the purpose of manufacturing the finished products, but if the obligations under section 5C are not fulfilled, in that event, certain consequences as provided in section 5C(2) will follow. A concessional rate of 1% of the sale or purchase price of such raw materials has been given to a dealer for the specific purpose of utilising such raw materials for manufacture in the State of goods for sale within the State of Rajasthan but, in case he fails to sell the goods so manufactured within the State or in the course of inter-State trade or commerce, the said concession will be withdrawn. It has also been provided that the dealer would be liable to pay over and above the difference in the rates of taxes which is given by way of concession. In our view, two separate contingencies have been provided in section 5C(2), the first contingency is that a dealer has to compensate the Government for the benefit which he has obtained in the course of purchase of the raw materials for the manufacturing of the goods and, in that event, the dealer shall be liable to pay as and by way of penalty an amount not less than the difference between the amount of tax on the sale of such raw material at the full rate applicable thereto under section 5 and the amount of tax payable under subsection (1). The second contingency is when a dealer may be asked to pay more than the amount of difference which, however, would not exceed one and one-quarter times the amount of tax at such full rate as the assessing authority may determine. The second limb where the discretion has been vested with the sales tax authorities to impose more than the difference between the amount of tax on the sale of such raw material and the amount of tax payable at the full rate if no such concession was allowed, may be treated as penalty. But, when only the actual tax Which otherwise would have been payable is collected, it cannot be held to be in the nature of penalty. There are many reasons why a dealer may not be able to fulfil the obligations of manufacture in the State of goods for sale within the State or in the course of inter-State trade or commerce. The object of section 5C(2) is to protect the interests of the Revenue. If the purpose for which the concession was given was not fulfilled for any reasons by the dealer, then the concession is withdrawn and the full amount of tax is realised. In such a case, the withdrawal of concession cannot be held to be in the nature of penalty. Had the concessional rate not been made available or obtained, the entire sales tax liability would have been allowed as deduction as revenue expenditure in income-tax proceedings. It is only when the obligations attached to the grant of concessional rate of tax are not fulfilled, that the question of making payment of the entire tax which, otherwise, would have been payable had the concession not been allowed to the dealer would arise. In our view, therefore, the charging of the difference which amounts to the full rate of tax cannot be equated with penalty. It is no doubt true that the sales tax authorities are empowered to charge at their discretion in excess of the difference in rates. If, in a case, anything more is levied than the difference in rates, in that event that excess will come within the purview of a penalty as not only the full rate of tax is recouped but also a further sum by way of penalty for contravention of the obligations imposed under section 5 C. However, that question does not arise on the facts of this case as, admittedly in this case, the assessee paid the difference between the amount of tax on the sale of raw material at the full rate applicable thereto under section 5 and the amount of tax payable under section 5C(1) and no excess amount had been charged or realised. The Madhya Pradesh High Court also considered a similar provision under the Madhya Pradesh General Sales Tax Act, 1958. The Madhya Pradesh High Court has observed as follows (at page 784 of 140 ITR):
“Section 8(1) of the Madhya Pradesh General Sales Tax Act provides for concessional rate of tax on the sale or purchase by a registered dealer of any raw material for the manufacture of other goods for sale in the State of Madhya Pradesh or in the course of inter-State trade or commerce or in the course of export out of the territory of India. But if any raw material purchased by a registered dealer under section 8(1) is utilised for a different purpose, section 8(2) makes him liable for penalty. The minimum amount of penalty under section 8(2) is the difference between the amount of tax payable at the full rate and the amount of tax payable at the concessional rate. The maximum penalty is one and one-quarter times the amount of tax payable at the full rate. Similarly, section 8(1)(b) of the Central Sales Tax Act read with section 8(3) provides for concessional rate of tax when a sale in the course of inter-State trade or commerce is made to a registered dealer of goods specified in his certificate of registration as being intended for re-sale by him or for use by him in the manufacture or processing of goods for sale. If a person, after purchasing any goods at a concessional rate of tax under section 8(1), fails without reasonable cause to make use of the goods for any of the aforesaid purposes, he becomes liable to punishment under section 10(d). Instead of prosecution, however, penalty may be imposed on such a person under section 10A. Minimum penalty is not prescribed by this section. Maximum penalty is one and a half times of the tax at the full rate…. If the amount of penalty is such an expenditure which the assessee would have been required to incur, even if he had not broken the law, such ah expenditure cannot in the true sense be termed as penalty for infraction of the law. As pointed out by us, the assessees here would have been required to pay the tax at the full rate as part of the sale price and they, at the time of making the purchases, disclosed the purpose for which the goods were used. The amount of tax so paid would have been allowed as business expenditure under section 37. The penalties imposed under section 8(2) of the State Act and under sec tion 10A of the Central Act in the cases before us do not require the assessees to pay more than what they should have paid as tax in obedience to the law.”
12. We, respectfully, agree with the view expressed by the Madhya Pradesh High Court.
13. For the reasons aforesaid, we answer the second question by saying that the expenditure claimed will be allowed to the extent it represents the difference between the tax payable at the full rate and the tax payable at the concessional rate in terms of section 5C(1) of the Rajasthan Sales Tax Act. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.:— I agree.
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