2013 (11) TMI 1247 - HC - Income Tax

Commission to sole selling agent - Reasonableness - Held that - The constitution of M/s. Laxmi & Co shows Sri L.C. Gupta (HUF) and others were ladies and house wives representing the interest of HUF, they were not in a position to offer any professional advise on matters relating to production, market survey or procurement of orders etc. Sri L.C. Gupta was engaged as Manager (Finance) with the assessee firm - Assessee has taken substantial amount as loan from the relatives including partners of Commission Agent M/s. Laxmi & Co, and had paid a high rate of interest - There was no service provided by the partners of M/s. Laxmi & Co. in respect of manufacture and sale of production to justify huge commission - Decided against assessee.

Summary

Issues:
Income Tax Appeal under Section 260-A of the Income Tax Act, 1961 challenging the order dated 15.11.2001 passed by the Income Tax Appellate Tribunal, Allahabad Bench, Allahabad for Assessment Years 1990-91 and 1991-92 regarding the disallowance of commission paid to a selling agent.

Analysis:

1. Disallowance of Commission:
The appeal raised the issue of whether the Tribunal was justified in confirming the part disallowance of commission without proving that the appellant had not rendered similar services as in previous years. The appellant, engaged in manufacturing and selling loudspeakers, entered into an agreement with a selling agent, M/s. Laxmi & Co., claiming allowances for the commission paid based on services rendered. The AO partially disallowed the expenses citing Section 40-A (2) (a) of the Act, as similar relief was granted in the previous year. The CIT (A) deleted the addition, but the Tribunal reinstated the AO's order. The Tribunal found that the partners of M/s. Laxmi & Co. were not in a position to provide professional advice on production or market matters, and the commission paid was excessive. The Tribunal upheld the AO's decision, emphasizing the decrease in sales and lack of justifiable services by the selling agent.

2. Reasonableness of Commission and Discretion of Authorities:
The appellant argued that there was an agreement for commission based on sales, increasing to 6% for higher sales, with additional incentive for exceeding a specified amount. However, the Tribunal upheld the disallowance, noting the decrease in sales and the incapacity of the selling agent's partners to provide professional advice. The Tribunal also highlighted the substantial loans taken by the appellant from relatives of the commission agent, indicating a high rate of interest paid. The Tribunal's findings on the excessive and unreasonable nature of the commission were considered factual and not subject to interference. The discretion of income tax authorities under Section 40 A (2) (a) to assess the reasonableness of commission based on the material presented was acknowledged.

3. Conclusion:
The High Court dismissed the Income Tax Appeal, stating that no substantial question of law was raised. The judgment emphasized the factual findings regarding the lack of justifiable services by the selling agent's partners, the decrease in sales, and the discretion of income tax authorities in assessing the reasonableness of commission payments under the relevant provisions of the Income Tax Act.

This detailed analysis encapsulates the key legal issues, arguments presented, factual findings, and the final decision rendered by the High Court in the referenced judgment.