2002 (11) TMI 22 - HC - Income Tax

Business Expenditure - Section 40A(2)(b) of the Act clearly provides for disallowance of amounts which the assessing authority considered to be in excess of the requirements of the business. The Assessing Officer in fact had limited the commission to 50 per cent. of the profit accruing to the company before the commission. The first appellate authority had considered the circumstances and limited the disallowance beyond 7 per cent. The Tribunal had also agreed with the view taken by the first appellate authority. On the face of the provisions of section 40A(2)(b) of the Act and the factual circumstances we are of the view that the two appellate authorities were perfectly justified in limiting the commission to 7 per cent. as against 7.5 per cent. provided in the agreement. According to us the conclusion reached by the Tribunal are based on findings of fact on which no substantial question of law much less any question of law arises.

Summary

Issues:
1. Disallowance of commission exceeding 7% of turnover
2. Disallowance of commission under section 40A(2)
3. Justification of disallowing commission based on agreement and services rendered

Analysis:
1. The appellant, a manufacturer of aluminium electrolytic capacitors, entered into an agreement with a company for selling its products, with a provision for 7.5% commission on turnover. The assessing authority disallowed a portion of the commission, limiting it to 50% of the profit before commission. The Commissioner of Income-tax partially allowed the appeals, restricting the commission to 7% of turnover. The Tribunal upheld this decision. The court found that the authorities were justified under section 40A(2)(b) in limiting the commission to 7%, as it was considered in excess of business requirements. The court held that altering the terms of the agreement was not warranted, and the Tribunal's decision was based on factual circumstances, dismissing the appeals.

2. The appellant argued that the commission provided in the agreement was just and reasonable, and reducing it would alter the terms of the agreement. The respondent contended that the 7.5% commission was high compared to sales turnover and services rendered. The court observed that section 40A(2)(b) allows disallowance of excessive amounts for business requirements. The Tribunal's decision to limit the commission to 7% was deemed justified based on the agreement terms and services provided, as excessive commission could be disallowed under the Act.

3. The court considered the submissions regarding the agreement terms and services rendered under it. The appellant's counsel argued for maintaining the original commission percentage, citing past acceptance by the assessing authority. The respondent's counsel supported the Tribunal's decision to restrict the commission to 7% of turnover, considering the high percentage compared to actual services rendered. The court upheld the Tribunal's decision as reasonable and in line with the provisions of section 40A(2)(b), dismissing the appeals based on factual findings and legal justifications provided in the judgment.