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Issues involved: Disallowance of commission payments for assessment years 1966-67 and 1967-68.
Summary: The appeals were against the CIT (a) order regarding the disallowance of commission payments. The assessee, engaged in the business of art silk cloth, had entered into agency agreements with firms owned by sons of partners of the assessee, providing for a 5% commission. The ITO raised queries during assessment, questioning the allowance of these commissions. The assessee defended the payments, emphasizing the commercial expediency and business purpose, highlighting the agents' experience and sales figures. The ITO, however, disallowed the commissions, stating that in that line of trading, commission payments normally do not exceed 2.5%. The CIT (A) upheld the disallowance based on the assessee's conduct and relationships involved. In appeal, the assessee argued that the commercial aspect was not appreciated, and the transactions were bona fide, citing a Gujarat High Court judgment. It was pointed out that the sales improved substantially when the agents were involved, and the commission was reduced to 2.5% when sales declined, demonstrating business motivations. The Departmental Representative highlighted the blood relationship between the parties and suggested that the payments were motivated by personal interests rather than commercial considerations. Upon examination, the Tribunal found that the agents executed substantial orders, earned profits for the assessee, and were experienced and trustworthy. The Tribunal concluded that the payments were made entirely from a business perspective, with no extraneous motives, and that the disallowance was unwarranted. The appeals were allowed in favor of the assessee. This judgment emphasizes the importance of considering the business purpose and commercial expediency behind expenditure decisions, rather than focusing solely on personal relationships or subjective opinions.
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