1998 (8) TMI 34 - HC - Income Tax

Summary

Issues:
1. Entitlement to weighted deduction for commission paid to local agent of foreign buyers under section 35B of the Income Tax Act.

Analysis:
The High Court of MADRAS deliberated on the issue of whether the assessee, a dealer in leather, was entitled to a weighted deduction for commission paid to the local agent of foreign buyers. The assessee claimed this deduction for the assessment year 1978-79, which was initially disallowed by the Assessing Officer but later allowed by the Commissioner of Income Tax (Appeals). The Tribunal upheld the CIT(A)'s decision, leading to the current dispute before the High Court.

The assessee's contention was that the commission paid to the local agent qualified for weighted deduction based on the services rendered by the agent in facilitating the sale of goods to foreign buyers. However, the Revenue argued against this claim, relying on a Supreme Court decision in CIT vs. Stepwell Industries Ltd., where a similar claim for weighted deduction was dismissed. The Supreme Court held that merely paying commission to a middleman for securing an order did not constitute obtaining information about markets outside India, as required under the relevant provision.

Furthermore, the High Court highlighted the distinction between a commission agent's role as an intermediary facilitating a sale and a provider of market information. It emphasized that information provided by a commission agent typically pertains to specific transactions and does not encompass broader market insights necessary for weighted deduction eligibility.

In contrast, the assessee cited a Kerala High Court decision in CIT vs. Kerala Nut Food Co., where the court allowed weighted deduction based on the agents' activities in obtaining market information and promoting goods abroad. However, the High Court noted the absence of similar evidence in the present case, concluding that the commission paid to the local agent was primarily for facilitating a sale rather than acquiring market-related information.

Ultimately, the High Court ruled in favor of the Revenue, holding that the commission paid to the local agent did not meet the criteria for weighted deduction under section 35B of the Income Tax Act. The judgment underscored the importance of distinguishing between commission for sales facilitation and commission for market information acquisition in determining eligibility for tax deductions.