1981 (9) TMI 54 - HC - Income Tax

Summary

Issues:
1. Whether payments made by the assessee-company to its directors as commission were solely for services rendered by them?
2. Whether disallowing payment of commission to the directors of the assessee-company under section 40(c)(i) of the Income Tax Act, 1961 was justified?

Analysis:

The case involved a dispute regarding the allowance of expenditure through commission payments to the directors of the assessee-company for the assessment years 1962-63, 1963-64, and 1964-65. The directors, all from the same family, were entitled to a salary and commission based on profits under separate agreements. The Income Tax Officer (ITO) disallowed the commission payments under section 40(c)(i) of the Income Tax Act, 1961, alleging that it was a means to divert profits to the directors. This decision was based on the family relationship among the directors, their past partnership, and lower salaries drawn previously.

In earlier assessment years, the Tribunal had reversed the ITO's decision and allowed the commission payments, emphasizing the directors' experience, qualifications, and responsibilities. The Tribunal found the payments reasonable considering the directors' roles and the company's business growth. The Tribunal's decision was challenged by the Revenue, arguing that the payments were excessive and unreasonable under section 40(c)(i) of the Income Tax Act, 1961.

The High Court noted that the determination of whether the payments were excessive or unreasonable was a factual matter for the Tribunal. Referring to a previous case, the Court emphasized that such issues fall within the Tribunal's jurisdiction as the fact-finding authority. The Court found the Tribunal's reasoning in both sets of orders convincing and upheld the finding that the commission payments were not excessive or unreasonable. The Court concluded that the questions raised were not legal but factual, and if answered, they would favor the assessee.

Therefore, the High Court decided in favor of the assessee on both questions, stating that the commission payments to the directors were not excessive or unreasonable. The Court directed the Revenue to pay the costs of the reference.