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Interpretation of sections 40A(5) and 40(c) of the Income-tax Act, 1961 regarding the treatment of commission paid to a selling agent in relation to the salary and allowances of a working director. Analysis: The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the treatment of commission paid by an assessee to a selling agent, Parekh and Co., in relation to the salary and allowances of the managing director, Shri Pradeep H. Shah. The primary question referred to the court was whether the commission paid would fall under section 40A(5) or section 40(c) of the Income-tax Act. The controversy arose for the assessment year 1978-79, where the assessee, a private limited company manufacturing various industrial products, had paid a salary to the managing director and a commission to the selling agent. The Income-tax Officer applied section 40A(5) to determine the allowable salary, leading to an appeal and subsequent reference to the High Court. The Commissioner of Income-tax (Appeals) initially held that the amount paid to the selling agent was not covered by section 40A(5). The Income-tax Appellate Tribunal, upon further appeal, concluded that the commission paid to the selling agent could not be included in the salary and allowances of the working director for the purpose of disallowance under section 40A(5). The Tribunal considered whether the commission could reasonably be brought under section 40(c) but found that it was not necessary to remit the matter for processing under that section. The Tribunal determined that the commission paid was not excessive or unreasonable concerning the business of the assessee, leading to the dismissal of the appeal by the Department. The High Court, in its judgment, referred to previous decisions and observations of the Supreme Court regarding the interpretation of section 40(c) of the Income-tax Act. Citing the Prakash Beedies case, the High Court clarified that payments made in consideration of a valuable right by the directors of the assessee-company do not fall within the scope of section 40(c). As there was no dispute regarding the genuineness or reasonableness of the commission payment in the present case, the High Court relied on the Supreme Court's precedent to conclude that the commission paid to the selling agent would neither be covered under section 40A(5) nor under section 40(c). Ultimately, the High Court disposed of the reference accordingly, providing a clear answer to the controversy raised and emphasizing that payments made for valuable rights by directors do not fall within the scope of section 40(c) as per established legal precedents.
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