1980 (5) TMI 24 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Section 40(c) of the Income-tax Act, 1961, to the payment of commission by the assessee to the sole selling agency firm.
2. Validity of the Commissioner of Income-tax's order under Section 263 of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Applicability of Section 40(c) of the Income-tax Act, 1961
The court examined whether the provisions of Section 40(c) or Section 40A of the Income-tax Act, 1961, were applicable to the payment of commission made by the assessee-company to M/s. Hans Raj Pahwa and Brothers, a sole selling agency firm.

Key Findings:
- Nature of Payment: The court determined that the payment of commission to a firm for acting as the sole distributor of the company's products is a business activity and not remuneration or benefit to a director or a person with a substantial interest in the company.
- Firm's Status: The firm, M/s. Hans Raj Pahwa and Brothers, is a genuine partnership concern, and the commission paid to it cannot be considered a direct or indirect benefit to the directors or their relatives.
- Section 40(c) Interpretation: The court held that Section 40(c) applies to remuneration or benefits provided directly or indirectly to directors or persons with substantial interest in the company. Since the firm itself is not a director or a person with substantial interest, the payment of commission does not fall under the purview of Section 40(c).
- Remuneration Definition: The court clarified that "remuneration" typically means reward, recompense, pay, wages, or salary for services rendered. The commission paid to the firm is for business services and not for services rendered by any director or relative.
- Legislative Intent: The court referred to the Finance Minister's speech and the explanatory note on the Finance (No. 2) Bill, 1971, which indicated that the amendments aimed to curb high salaries and remunerations, not business commissions.

Conclusion: The court concluded that the payment of commission to the firm does not constitute remuneration or benefit under Section 40(c) and is therefore not governed by this section.

Issue 2: Validity of the Commissioner of Income-tax's Order under Section 263
The Commissioner of Income-tax had issued an order under Section 263, considering the assessment order by the Income-tax Officer (ITO) as erroneous and prejudicial to the interests of the revenue.

Key Findings:
- ITO's Assessment: The ITO had initially allowed the deduction of the commission paid to the firm, and no notice under Section 148 was issued, indicating satisfaction with the assessee's explanation.
- Commissioner's Action: The Commissioner believed that the ITO had not applied the amended provisions of Section 40(c) correctly and issued a notice under Section 263 to rectify the assessment.
- Tribunal's Decision: The Income-tax Appellate Tribunal (Tribunal) disagreed with the Commissioner, holding that the payment to the firm was not remuneration and thus not covered by Section 40(c). The Tribunal also noted that the firm's partners' shares belong to their respective HUFs, not to the directors individually.

Conclusion: The court upheld the Tribunal's decision, affirming that the provisions of Section 40(c) did not apply to the commission payments and that the Commissioner's order under Section 263 was not justified.

Summary:
The court determined that the payment of commission by the assessee-company to the sole selling agency firm, M/s. Hans Raj Pahwa and Brothers, does not fall under the purview of Section 40(c) of the Income-tax Act, 1961, as it is not remuneration or benefit to the directors or their relatives. The court also upheld the Tribunal's decision to cancel the Commissioner of Income-tax's order under Section 263, validating the original assessment by the ITO. The questions of law were answered in favor of the assessee and against the revenue, with costs.