Per Shri Prakash Narain, Accountant Member - The only contention that was pressed and argued in this case relates to the disallowance of weighted deduction under section 35B of the Income-tax Act, 1961 ('the Act) on a sum of Rs. 3,68,312 paid by the assessee as commission.

2. The assessee is a manufacturer and exporter of hand-knotted carpets. With a view to maintain and increase its exports in Europe, it had entered into an agency agreement with Ingeborg Unadcath of Hamburg. It will be necessary to quote the relevant provisions of this agreement as under:

"It has been agreed between both the parties as follows:

1. The first party 'KC' are the manufacturers of Indian hand-knotted car- pets who have agreed to appoint the second party as 'AGENTS', Export Promotion Sole Selling Agents in whole of Europe including the United Kingdom for a period of five years.

2. The 'AGENTS' will secure orders for export of hand-knotted carpets from first class customers.

3. 'KC' will manufacture and export the orders submitted and confirmed.

4. It has been decided that a commission of 5 per cent will be paid to 'AGENTS' at the same time when the documents are paid by the customers. 'KC' will give irrevocable instructions each time to their bankers to pay 5 per cent commission to the 'AGENTS' from the proceeds.

5. 'AGENTS' Will not charge any other expenses such as, telegram, post travelling, etc., and they are only entitled as mentioned above to the 5 per cent commission, commission will be paid on the invoice value.

6. 'AGENTS' will guide 'KC' about the trend of the European market, from time to time give new designs for developments.

7. 'KC' will ensure execution of the orders, maintain standard of the quality as per the contract and/or as per the samples approved by the customers.

8. This agreement will be extended automatically for further five years if not terminated by one year's notice earliest or latest to be given by 31st December, 1982.

The assessee paid a commission of Rs. 3,68,312 based on 5 per cent of the FOB invoice value of the orders actually procured by the agent and ship-ment made by the assessee on that basis. It claimed relief under section
35B on this expenditure, which was allowed by the ITO. The deduction allowed on this account worked out to Rs. 1,22,771.

3. The ITO had made some other disallowances also. Against this, the assessee appealed to the Commissioner (Appeals). The Commissioner (Appeals) also noticed that the ITO had allowed relief under section 35B as mentioned above. He required the assessee to point out the relevant provisions in the Act under which it was entitled to the required relief. It was submitted before him that the relief had been claimed and allowed under section 35B(1)(b)(iv). This section 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 com- pany, 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—

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(iv)maintenance outside India of a branch, office or agency for the pro-motion of the sale outside India of such goods, services or facilities;"

It was contended before the Commissio