2004 (10) TMI 73 - HC - Income Tax

Commission paid to selling agents Section 37 - 1. Whether Tribunal was legally justified in its opinion that the firms, M/s. Techno Sales Corporation and M/s. Kumar Wire and Conductors were not sole selling agents of the company and, therefore, the provisions of section 294(2) were not attracted? 2. Whether, Tribunal was legally correct in holding that the provisions of section 314(1)(b) of the Companies Act, 1956, were not applicable? - As there is no dispute that some of the partners of the two firms are related to the directors of the company, the appointment of even selling agents amounts to holding an office of profit and is hit by section 314 of the Companies Act, 1956. - We answer the first question referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue, and the second question in the negative, i.e., in favour of the Revenue and against the assessee.

Issues Involved:
1. Applicability of Section 294(2) of the Companies Act, 1956.
2. Applicability of Section 314(1)(b) of the Companies Act, 1956.
3. Deductibility of selling agency commission under Section 37 of the Income-tax Act, 1961.

Detailed Analysis:

1. Applicability of Section 294(2) of the Companies Act, 1956:
The court examined whether the firms M/s. Techno Sales Corporation and M/s. Kumar Wire and Conductors were sole selling agents of the company, which would attract the provisions of Section 294(2) of the Companies Act, 1956. The agreements with these firms did not explicitly appoint them as sole selling agents but as selling agents for specific products in the State of Uttar Pradesh. The court noted that the term "sole selling agent" implies an exclusive right to sell all products of the principal to the exclusion of others. The agreements did not grant such exclusive rights, and there was no declaration from the Central Government designating these firms as sole selling agents. Thus, the court concluded that the provisions of Section 294(2) were not applicable.

2. Applicability of Section 314(1)(b) of the Companies Act, 1956:
The court considered whether the appointments of the selling agents were in violation of Section 314(1)(b) of the Companies Act, 1956, which requires a special resolution for a director or their relative to hold any office or place of profit. The selling agents included partners related to the directors of the company, making it necessary for the company to pass a special resolution. The court observed that the selling agency agreements did not receive such approval, thereby violating Section 314(1)(b). Consequently, the appointments were invalid under this provision.

3. Deductibility of Selling Agency Commission under Section 37 of the Income-tax Act, 1961:
The Income-tax Officer (ITO) had disallowed the commission payments, arguing that the selling agency firms did not render any services justifying the payments and that the agreements were void under Sections 294(2) and 314(1)(b) of the Companies Act, 1956. The Appellate Assistant Commissioner (AAC) found that the firms did render services but upheld the disallowance based on the agreements' invalidity. The Tribunal, however, concluded that the agreements were not sole selling agency agreements and were not violative of Section 314, thus allowing the deductions. The court, agreeing with the Tribunal's findings, held that the agreements were not sole selling agency agreements and the provisions of Section 294(2) were not violated. However, it upheld the Revenue's stance on Section 314, thereby disallowing the deductions.

Conclusion:
The court answered the first question in the affirmative, holding that the Income-tax Appellate Tribunal was justified in its opinion that the firms were not sole selling agents, thus Section 294(2) was not attracted. The second question was answered in the negative, holding that the provisions of Section 314(1)(b) were applicable, and the appointments were invalid without a special resolution. Consequently, the commission payments were not allowable as business expenditure under Section 37 of the Income-tax Act, 1961. There was no order as to costs.

← Previous Next →