1974 (11) TMI 41 - AT - Income Tax

Issues Involved:
1. Justification for payment of commission to sole selling agents.
2. Relationship between partners of Nutan Distributors and shareholders/directors of the assessee company.
3. Genuineness of Nutan Distributors as a firm.
4. Business expediency of appointing sole selling agents.
5. Allowability of commission under Section 37(1) of the IT Act.
6. Disallowance of interest on deposits out of the said commission.

Issue-wise Detailed Analysis:

1. Justification for Payment of Commission to Sole Selling Agents:
During the assessment proceedings for the asst. yr. 1965-66, the ITO questioned the justification for the commission paid to Nutan Distributors, the sole selling agents. The assessee argued that Nutan Distributors undertook responsibilities for sales, timely payments, and bad debts. However, the ITO noted that there were no prior issues with bad debts and that the sales were already controlled by the government. The ITO concluded that the commission payments were unjustified and were a means to divert profits within the family. This disallowance was extended to the asst. yrs. 1966-67, 1967-68, and 1968-69. The AAC, however, found that the appointment of sole selling agents was commercially expedient and allowed the commission payments for these years.

2. Relationship Between Partners of Nutan Distributors and Shareholders/Directors of the Assessee Company:
The ITO highlighted that the partners of Nutan Distributors were related to the shareholders and directors of the assessee company, suggesting a family arrangement. The AAC countered this by stating that shareholders and their relatives are not barred from undertaking work connected with the company's sales. The AAC noted that three out of six partners were unrelated to the management of the assessee company, thus negating the claim of an unbusinesslike arrangement.

3. Genuineness of Nutan Distributors as a Firm:
The ITO questioned the genuineness of Nutan Distributors, implying it was a family arrangement for profit diversion. The AAC and the Tribunal found that Nutan Distributors was a genuine firm, duly registered, and had been considered genuine by the ITO, Sirsa. The Tribunal emphasized that the firm was in existence when the selling agency agreement was executed, and there was no evidence to suggest that the agreement was a sham.

4. Business Expediency of Appointing Sole Selling Agents:
The Tribunal agreed with the AAC that the appointment of Nutan Distributors was due to business expediency. The assessee's business required a separate sales organization to handle the magnitude of sales and ensure smooth operations. The Tribunal noted that the sales figures justified the need for a sole selling agent. Furthermore, the Tribunal dismissed the ITO's arguments regarding government controls and the necessity of selling agents, stating that the controls were not consistent and did not negate the need for selling agents.

5. Allowability of Commission Under Section 37(1) of the IT Act:
The Tribunal held that the payment of commission to Nutan Distributors was wholly and exclusively for the purpose of the assessee's business. The Tribunal referred to various judgments, including J.K. Woolen Manufacturers vs. CIT, which emphasized that business expenditure should be judged from the businessman's perspective. The evidence showed that Nutan Distributors rendered services, and the expenditure on commission was justified.

6. Disallowance of Interest on Deposits Out of the Said Commission:
The ITO disallowed the interest paid on deposits out of the commission for the asst. yrs. 1969-70 and 1970-71, as the commission itself was disallowed. Since the Tribunal allowed the commission payments for these years, it also allowed the interest payments, stating that they were incurred wholly and exclusively for business purposes.

Conclusion:
The Tribunal upheld the AAC's orders for the asst. yrs. 1965-66 to 1968-69, allowing the commission payments. It reversed the AAC's orders for the asst. yrs. 1969-70 and 1970-71, allowing the commission payments and the interest on deposits for these years. The appeals by the Revenue were dismissed, and the appeals by the assessee were allowed.

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