1982 (6) TMI 102 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of commission payments to M/s Swastika Traders.
2. Disallowance of car expenses and depreciation.
3. Charging of interest under Section 215 of the IT Act.

Detailed Analysis:

1. Disallowance of Commission Payments to M/s Swastika Traders:
The primary issue revolves around the disallowance of commission payments made by the assessee, M/s Sudarshan Engg. Works, to M/s Swastika Traders. The Income Tax Officer (ITO) disallowed portions of these payments for the assessment years 1976-77 and 1977-78, citing that the payments were excessive and unreasonable under Section 40A(2) of the IT Act. The ITO's decision was based on an evaluation of the expenses incurred by M/s Swastika Traders and an allowance for entrepreneurial skill and capital. The Commissioner of Income Tax (Appeals) [CIT(A)] partially upheld the ITO's disallowance but increased the allowance for entrepreneurial skill.

The tribunal analyzed the agreement between M/s Sudarshan Engg. Works and M/s Swastika Traders, which stipulated a 12.5% commission for the latter as sole selling agents. The tribunal found that the agreement was genuine and acted upon in good faith. The tribunal emphasized that the commission payments were made for commercial considerations and were neither excessive nor unreasonable. It was noted that the expenses incurred by M/s Swastika Traders, including salaries, rents, and other operational costs, were legitimate. The tribunal concluded that the entire commission should be allowed as a deduction, rejecting the ITO's and CIT(A)'s partial disallowance.

2. Disallowance of Car Expenses and Depreciation:
The assessee had initially disallowed one-third of the car expenses and depreciation in its returns. The ITO maintained this disallowance, which was upheld by the CIT(A). The tribunal noted that the assessee had conceded to this disallowance and did not address further arguments on this issue, thereby upholding the disallowance as reasonable and fair.

3. Charging of Interest Under Section 215:
The assessee contested the charging of interest under Section 215 of the IT Act. The CIT(A) held that Section 215 was applicable but directed the ITO to recalculate the interest based on the final total income determined after the appeal. The tribunal did not address further arguments on this issue, noting that the interest would be consequential to the final determination of the assessee's income.

Conclusion:
The tribunal allowed the appeals of the assessee regarding the disallowance of commission payments, directing that the entire amount be allowed as a deduction for both assessment years. The appeals of the Revenue, which contested the CIT(A)'s enhancement of the allowance for entrepreneurial skill, were dismissed. The disallowance of car expenses and depreciation was upheld, and the issue of interest under Section 215 was left to be recalculated based on the final income determination.