Case: Velvet Carpet and Co. Ltd Vs. Commissioner of Income Tax

1. The question that needs to be decided in the present case is as to whether the Appellant/Assessee herein was entitled to weighted deduction in terms of the provision of Section 35B(1)(b)(iv) of the Income-tax Act, 1961, which was the provision in force during the relevant period, i.e., the assessment year 1983-84. In the return filed by the Assessee for that year, it had stated that a sum of Rs. 4,60,433 was paid by the Assessee to one Mr. Jack Barouk of Brussels who was appointed by the Assessee as its commercial agent in the said country for the sale of the Assessees goods. The aforesaid provision, i.e., Section 35B(1)(b)(iv), provides for weighted deduction that is in addition to the actual amount spent, one-third thereof as an additional expenditure, which provision was introduced to give the benefit to the Assessee. This provision reads as under:35B(1)(a) : Where an Assessee, being a domestic company or a person (other than a company) who is resident in India, has incurred, after the 29th day of February, 1968, but before the 1st day of March, 1983, whether directly or in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the Assessee) referred to in Clause (b), he shall, subject to the provisions of this section, be allowed a deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year:Provided that in respect of the expenditure incurred after the 28th day of February, 1973, but before the 1st day of April, 1978, by a domestic company, being a company in which the public are substantially interested, the provisions of this clause shall have effect as if for the words one and one-third times, the words one and one-half times had been substituted.(b) The expenditure referred to in Clause (a) is that incurred wholly and exclusively on-- ...(iv) maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities.As per Clause (b)(iv) the expenditure incurred shall qualify for weighted deduction in case the expenditure is incurred wholly and exclusively on maintenance outside India of a branch, office or agent for the promotion of the sale outside India of such goods, services or facilities.What is not in dispute is that the expenditure was in fact incurred. It was also incurred wholly and exclusively outside India as the payment was made to Mr. Jack Barouk a resident of Brussels. It is also not in dispute that this payment was made against some sales of carpets belonging to the Assessee, made by the said Mr. Jack Barouk. The only dispute is as to whether he could be treated as "agent" of the Assessee. The Appellant had filed appeal against the order of the Assessing Officer refusing to give benefit of the aforesaid provision, with the Commissioner of Income-tax (Appeals) ("CIT (Appeals)"), which was dismissed. However, in further appeal preferred before the Income-tax Appellate Tribunal (ITAT), the Appellant succeeded. A perusal of the judgment of the Income-tax Appellate Tribunal reveals that the Income-tax Appellate Tribunal had looked into the agreement that was entered into between the Assessee and the aforesaid Mr. Jack Barouk and found that this agreement is an agency agreement. The Income-tax Appellate Tribunal also took into consideration another supporting fact that as per the legal requirement the said agreement was approved by the Reserve Bank of India and the Reserve Bank of India in its approval had treated this agreement to be an agency agreement.2. We find that the High Court while allowing the appeal of the Department and rejecting the claim of the Assessee, observed that at no stage, the Assessee had put up a case that it had maintained branch or agency outside the country. This is clearly an erroneous finding and against the record. No doubt, the Assessee was not maintaining any branch office. However, the case of the Assessee was that Mr. Jack Barouk was appointed as his agent. It was the specific case made out by the Assessee right from the stage of the assessment proceedings and was specifically argued before the Income-tax Appellate Tribunal, as mentioned above, which was accepted by the Income-tax Appellate Tribunal.3. We were taken through the agreement that was entered into between the Assessee and Mr. Jack Barouk by the learned Counsel for the Appellant. It is in the form of communication dated October 24, 1977 addressed by Mr. Jack Barouk to the Assessee stating therein the terms and conditions on which two parties agreed to work together. In this communication, Mr. Jack Barouk agreed to keep the goods of the Assessee in his godown, show the said products to the visiting customers personally and secure orders from the territories mentioned therein namely, Benelux and France. This communication further states that he will be given 5 per cent, commission on all goods shipped by the Assessee to the aforesaid territories on the orders procured by the said Mr. Jack Barouk. The Assessee had accepted and agreed on the aforesaid terms contained in the said communication and there is a specific endorsement to this effect by the Assessee that the said communication, on acceptance by the Assessee, became a valid and enforceable agreement between the parties. The aforesaid terms clearly state that Mr. Jack Barouk had agreed to work as an agent of the Assessee and on the orders procured he was to get 5 per cent, commission. This aspect that the agreement was in fact an agency agreement stands conclusively established by the registration given by the Reserve Bank of India vide its letter dated October 29, 1977. Captioned communication of the Reserve Bank of India reads as "Registration of Selling Agency Arrangement". Thus, while giving its accord to the arrangement established between the parties it was termed as an agency arrangement.

Decision:
1[ds]2. We find that the High Court while allowing the appeal of the Department and rejecting the claim of the Assessee, observed that at no stage, the Assessee had put up a case that it had maintained branch or agency outside the country. This is clearly an erroneous finding and against the record. No doubt, the Assessee was not maintaining any branch office. However, the case of the Assessee was that Mr. Jack Barouk was appointed as his agent. It was the specific case made out by the Assessee right from the stage of the assessment proceedings and was specifically argued before the Income-tax Appellate Tribunal, as mentioned above, which was accepted by the Income-tax Appellate Tribunal3. We were taken through the agreement that was entered into between the Assessee and Mr. Jack Barouk by the learned Counsel for the Appellant. It is in the form of communication dated October 24, 1977 addressed by Mr. Jack Barouk to the Assessee stating therein the terms and conditions on which two parties agreed to work together. In this communication, Mr. Jack Barouk agreed to keep the goods of the Assessee in his godown, show the said products to the visiting customers personally and secure orders from the territories mentioned therein namely, Benelux and France. This communication further states that he will be given 5 per cent, commission on all goods shipped by the Assessee to the aforesaid territories on the orders procured by the said Mr. Jack Barouk. The Assessee had accepted and agreed on the aforesaid terms contained in the said communication and there is a specific endorsement to this effect by the Assessee that the said communication, on acceptance by the Assessee, became a valid and enforceable agreement between the parties. The aforesaid terms clearly state that Mr. Jack Barouk had agreed to work as an agent of the Assessee and on the orders procured he was to get 5 per cent, commission. This aspect that the agreement was in fact an agency agreement stands conclusively established by the registration given by the Reserve Bank of India vide its letter dated October 29, 1977. Captioned communication of the Reserve Bank of India reads as "Registration of Selling Agency Arrangement". Thus, while giving its accord to the arrangement established between the parties it was termed as an agency arrangement.