The main legal point established in the judgment is that for an expenditure to qualify for weighted deduction under section 35B(1)(b)(iv) of the Income Tax Act, it must be entirely incurred for the promotion of sales outside India, and not for procuring specific sales.

K. Shivashankar Bhat, J.—Under section 256(2) of the Income Tax Act, 1961, the following question was called for to be answered by this court :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in upholding the order of the Commissioner (Appeals) directing the Income Tax Officer to consider the payment of commission to foreign agents as qualifying for weighted deduction as admissible under sub-clause (iv) of section 35B(1) without considering the fact that sub-clause (b) (iii) of section 35B of the Income Tax Act, 1961, has been omitted with effect from April 1, 1978 (sic) ?"

2. The assessee is an agent to effect sales of sandalwood oil and other goods manufactured by a public sector undertaking belonging to the State Government which is now known as Karnataka Soap and Detergents Limited.

3. For the purpose of effecting sales abroad, the assessee entered into certain agreements whereby sub-agents were appointed for different territories in foreign countries like the U. S. A. and Japan. The copies of the agreements produced before us show that the sub-agent is appointed for a particular period and, during the said period, the assessee had the right to terminate the sub-agency by giving appropriate notice. The sub-agent was to be paid commission at 1.5% of the C & F value of sales of sandalwood oil in the territory of the sub-agent against orders secured by the sub-agent. However, in the agreement entered into with the sub-agent for Japan, the assessee reserved the right to accept orders direct from the buyers in respect of which the sub-agent would be paid a commission equal to half the commission payable to the sub-agent on orders secured by it. The sub-agents are not to deal in or in any manner associate with the trade in sandalwood oil manufactured by anybody other than the principal of the assessee. There is also a term under which the sub-agent was required to guarantee sale of a minimum quantity of sandalwood oil per annum in the relevant territory. If there is a shortfall in the sale from this minimum, there is a separate clause to deal with the situation. The sub-agents were expected to create a continuous demand for the sandalwood oil by proper advertisement, travelling, etc., at the cost of the sub-agent. However, the sub-agent in the U. S. A. was to be reimbursed towards such expenses incurred for brand publicity not exceeding half a per cent, of the total sales turnover.

4. The present question referred to us pertains to the assessment years 1979-80 and 1980-81. The assessee claimed the deduction under section 35B(1)(b)(iv) of the Income Tax Act in respect of the commission paid to the sub-agents. The relevant provisions of section 35B read thus :

"(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, 1988, but before the 1st 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 assess) 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.

(1) (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." (rest omitted here).

5. The assessee's claim was accepted by the Appellate Tribunal which affirmed the relief granted to the assessee by the Commissioner (Appeals). The Appellate Tribunal held that the agency agreement shows that it was in substance an agreement to promote sales abroad and if such an agreement were not to fall within section 35B, it will be difficult to imagine any other agreement which was meant to be