1984 (3) TMI 32 - HC - Income Tax

Summary

Issues Involved:
1. Justification of commission payment to M/s. Kay Engineering Sales Corporation.
2. Applicability of Section 37(1) and Section 40(c) of the Income-tax Act, 1961.
3. Rendering of specific services by the sole selling agents.
4. Determination of questions of law and fact.

Summary:

1. Justification of Commission Payment:
The assessee, M/s. Ess Ess Kay Engineering Company (P.) Ltd., claimed Rs. 1,52,130 and Rs. 1,69,162 as commission payments for the assessment years 1967-68 and 1968-69, respectively, to M/s. Kay Engineering Sales Corporation. The ITO disallowed these payments, concluding that there was no evidence of specific services rendered by the agency firm to justify the commission. The Tribunal upheld this decision, noting the close relationship between the shareholders of the assessee-company and the partners of the agency firm, and the lack of evidence for any substantial services provided by the agency firm.

2. Applicability of Section 37(1) and Section 40(c):
The Tribunal found that the ITO disallowed the commission under Section 37(1) of the Income-tax Act, 1961, which states that any expenditure not laid out wholly and exclusively for business purposes is not deductible. The assessee argued that the case should be judged under Section 40(c), which deals with excessive or unreasonable expenditure benefiting directors or persons with substantial interest. The Tribunal concluded that Section 37(1) was applicable, and the mere mention of Section 40(c) by the ITO did not change the basis of the disallowance.

3. Rendering of Specific Services:
The Tribunal concluded that there was no evidence to show that the agency firm rendered any specific services to justify the commission. It noted that the firm did not book any orders, perform any propaganda work, or provide any funds to the assessee-company. The Tribunal also observed that the sales of the company continued to rise even after the termination of the agency agreement, indicating that the increase in sales was not due to the agency firm's efforts.

4. Determination of Questions of Law and Fact:
The Tribunal addressed eight questions raised by the assessee, but only referred one question to the High Court: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure of Rs. 1,52,130 and Rs. 1,69,162 for the assessment years 1967-68 and 1968-69, respectively, by way of payment of commission to M/s. Kay Engineering Sales Corporation, was not laid out wholly and exclusively for the purposes of assessee's business?" The High Court affirmed the Tribunal's decision, holding that the expenditure was not justified under Section 37(1) and that the Tribunal's findings were based on a thorough evaluation of the evidence.

Conclusion:
The High Court upheld the Tribunal's decision that the commission payments were not laid out wholly and exclusively for the purposes of the assessee's business and were therefore not deductible under Section 37(1) of the Income-tax Act, 1961. The court rejected the assessee's argument regarding the applicability of Section 40(c) and concluded that the Tribunal's findings were based on substantial evidence.