ALLAHABAD BENCH KOTHARI CARPETS v. INCOME TAX OFFICER March 5, 1984 JUDGMENT Order PRAKASH NARAIN, A.M.: only contention that was pressed argued in this case relates to disallowance of weighted deduction under s. 35B of IT Act, 1961 on sum of Rs. 3,68,312 paid by assessee as commission. assessee is manufacturer and exporter of hand-knitted carpets. With view to maintain and increase its exports in Europe, it had entered into agency agreement with M/s Ingebore Unadeath of Hamburg. It will be necessary to quote relevant provisions of this agreement as under: "It been agreed between both parties as follows; first party KC are manufactures of Indian hand knitted carpets who have agreed to appoint second party as AGENTS Export Promotion Sole Settling Agents in whole of Europe including United Kingdom for period of five years. AGENTS will secure orders for export of hand-knitted carpets from first class customers. KC will manufacture and export and orders submitted and confirmed. It has been decided that commission of 5% will be paid to AGENTS at same time when documents are paid by customers. KC will give irrevocable instructions each time to their bankers to pay 5% commission to AGENTS from proceeds. AGENTS will not charge any other expenses such as telegram, post, travelling, etc., and they are only entitled as mentioned above to 5% commission. Commission will be paid on invoice value. AGENTS will guide KC about trend of European market from time to time and give new designs for developments. KC will ensure execution of orders, maintain standard of quality as per contract and/or as per samples approved by customers. This agreement will be extended automatically for further five years if not terminated by one year s notice earlier or latest to be given by 31st Dec. 1982." assessee paid commission of Rs. 3,68,312 based on 5% of FOB invoice value of orders actually procured by agent and shipment made by assessee on that basis. I claimed relied under s. 35B on this expenditure which was allowed by ITO. deduction allowed on this account worked out to Rs. 1,22,771. ITO had made some other disallowances also. Against this, assessee appealed to CIT (A). CIT (A) also noticed that ITO had allowed relief under s. 35B of Act as mentioned above. He required assessee to point out relevant provisions of Act under which it was entitle to required relief. It was submitted before him that relief had been claimed and allowed under s. 35B(1)(b)(iv) of Act. This section reads as under: "Sec. 35B. (1)(a) Where assessee, being domestic company of person (other than company) who is resident in India, ha incurred after 29th day of February, 1968, but before 1st March, 1983, whether directly or in association with any other person, any expenditure (not being in nature of capital expenditure or personal expenses of assessee) referred to in cl. (b) he shall, subject to provisions of this section, be allowed deduction of sum equal to one and one-third times amount of such expenditure incurred during previous year: Provided that in respect of expenditure incurred after 28th day, 1972 but before 1st April, 1981, by domestic company being company in which public are substantially interested, provisions of this clause shall have effect as if for words one and one-third times words one and one-half times had been substituted. (b) expenditure referred to in cl. (a) that incurred wholly and exclusively on xx xx xx (iv) maintenance outside India of branch, office or agency for promotion of sale outside India of such goods, services or facilities." It was contended before CIT (A) that assessee had maintained agency for promotion of its sale of carpets outside India and therefore, it was also entitled to relief on expenditure incurred in such maintenance. CIT (A) was of view that assessee had actually not maintained any agency outside India. According to him maintenance represented meeting entire expenditure. To support his view, he gave examples of maintenance of car or office or garden. According to him, assessee could not be said to have maintained any agency inasmuch as it was required to pay only fixed sum of F. O. B. invoice value of orders booked that agent and shipped by assessee and it was not obliged to make additional reimbursement of any loss likely to be sustained by agent or was also not entitled to refund of any amount, if not so spent. He, therefore, held that assessee had actually not maintained any agency and was, therefore, not entitled to deduction under s. 35B of Act. After giving assessee opportunity of being heard, he enhanced income by Rs. 1,22,771. assessee is now in appeal before us. ld. counsel for assessee, Shri Agarwal submitted before us that CIT (A) had completely misunderstood provisions of Act inasmuch as he had compared legal interpretation of words "maintenance" and "agency" with those under stood in common parlance. He submitted that none of authorities below had doubted genuineness of agency agreement or fact that assessee had, in fact, made payment of Rs. 3,68,312 to Agent. He also submitted that assessee was prudent enough to make payment only on invoice value of goods actually booked and shipped, which was also direction of Reserve Bank of India as per their letter dt. 6th April, 1978. Shri Agarwal next contended that cl. (iv) of s. 35B(1)(b) of Act suggested three modes to exporter in India, namely, maintenance outside India of branch maintenance outside India of office, and maintenance outside India of agency and if expenditure was incurred on any of these, then it was entitled to relief under s. 35B. Proceeding further, he submitted that choice of mode was left to exporter and it depended upon his capacity and extent of business of adopt either of them. He contended that in present case, assessee had adopted third mode, namely, maintenance of agency outside India for promotion of sale of its carpets. In this connection, he also invited out attention to following sections of Indian Contract Act: "Sec. 182: "agent" is person employed to do any act for another or to represent another in dealings with third persons. person for whom such act is done or who is so represented, is called "principal." Sec. 184: As between principal and third persons any person may become agent, but no person who is not of age of majority and of sound mind can become agent, so as to be responsible to his principal according to provisions in that behalf herein contained. Sec.: 185 No consideration is necessary to create agency." Shri Agarwal contended that agent was not servant and that his status emanated from contract entered into with principal. He argued that German party admittedly was assessee s agent and not servant of latter. His next contention was that in terms of s. 185 of Contract Act, no consideration was necessary to create agency and that it was enough if there was contract to that effect between principal and agent, which by itself, created agency between them. On basis of these legal submissions, his argument was that there was contract of agency between assessee and German firm. Shri Agarwal then referred to dictionary meanings of words "maintain" and "maintenance".. Some of these are given in order of CIT (A). It is, therefore, not necessary to reproduce them in our this order. Suffice it to say that by maintenance, among others, means to keep in working order or to keep in existence. Although dictionaries give different meanings, but only meaning, which can be relevant in context of matter dealt with by us is one given by us above. submission of ld. counsel, therefore, was that by referring to maintenance of agency in cl. (iv) of s. 35B(1)(b) of Act, Parliament mean that principal carried on or kept in working order relationship of agency with agent. To support his submissions, he also referred to following decisions: (1) CIT vs. K. S. Ratnaswamy (1980) 14 CTR (SC) 377: (1980) 122 ITR 217 (SC) (2) S. M. Zackariah Sahib vs. CIT (1952) 22 ITR 359 (Mad) (3) J. M. Abdul Aziz vs. CIT (1963) 48 ITR 602 (Mad). He argued that this was exactly what was done in present case. agency between assessee and German firm which come into effect on 1st Jan., 1978 was to continue for period of five years subject to its further renewal. During assessment year under appeal, therefore, it was maintained by assessee. He contended that question of maintaining agency and expenditure incurred for such maintenance were two different things and, therefore, it could not be said that unless some expenditure was incurred, agency could not be said to have been maintained. He finally submitted that assessee had incurred expenditure of Rs. 3,68,312 in maintenance of above agency, which expenditure was entitled to relief under s. 35B. According to him, therefore, ITO was justified in allowing above relief and CIT (A) had committed legal error in withdrawing it. On behalf of Department, it was submitted that question of payment was linked with element of agency and two could not be separated. ld. Departmental Representative, in this connection also referred to certain observations appearing at p. 187 to law and Practice of Income- tax (Seventh Edition) by Palkhivalas (Vol. I). He has also referred to decision of Supreme Court in case of CIT vs. K. S. Ratnaswamy (supra). We have carefully considered submissions placed before us. We are incline to agree with stand of assessee. There is not doubt that word "agency" occurring in cl (iv) of section referred to above can only mean agency as defined in Contract Act. It is relationship between principal and agent. agent is person employed to do any act for principal or to represent latter in dealings with third persons. As per s. 185 of Contract Act, no consideration is necessary to create agency. In light of this interpretation, it cannot be denied that German firm was agent of assessee. second question which arises is what is meaning of word "maintenance". As shown above, words "maintain" and "maintenance" have different connotations. However, in connection with agency that only means keeping latter in working order or to carry it on. expression "maintenance of agency", therefore, means act of continuing relationship of principal and agent for which as stated above, no consideration is necessary. We find that as per agreement dt. 11th Nov., 1977, this relationship had been maintained by assessee with German concern in year under appeal also. As contended before us, option was with assessee either to maintain branch outside India or to maintain office outside India or to maintain agency outside India. Obviously in case of maintaining branch or office, burden of meeting entire expenditure would have been upon assessee. assessee, however, chose to maintain any agency. In order to maintain agency, his responsibility was not to meet its expenses, but to keep relationship with German firm in contract or to carry it on. This is what assessee has done. assessee, therefore, has maintained agency outside Indian in terms of cl. (iv) of section. This view also finds support from various decisions cited at Bar. We do not agree with view of CIT (A) that legal meaning of maintenance of agency can be compared with use of word "maintenance" in common parlance as in connection with garden or car etc. That concept is wholly outside scope of cl. (iv) of s. 35B. Under s. 35B, assessee would be entitled to relief on expenditure which, among others, is incurred wholly and exclusively on maintenance of agency. There is not doubt that assessee has spent sum of Rs. 3,68,312 on maintenance of agency. How that amount has been worked out is not relevant for purpose. As stated above, it was worked out at 5% on F. B. invoice value of orders booked by agent and shipped by assessee. assessee is, therefore, clearly entitled to relief under s. 35B on above amount as was allowed by ITO. other contention relating to relief under s. 35B of Rs. 958 being value of samples was neither pressed nor argued before us and is, therefore, rejected. In result, appeal is partly allowed. *** KOTHARI CARPETS v. INCOME TAX OFFICER