1981 (4) TMI 129 - AT - Income Tax

Summary

Issues Involved:
1. Justification of additions under Section 40(b) of the IT Act, 1961.
2. Validity and genuineness of the agreement between the assessee firm and M/s Desai & Company.
3. Applicability of Section 40(b) to payments made to M/s Desai & Company.

Detailed Analysis:

1. Justification of additions under Section 40(b) of the IT Act, 1961:

The primary issue in these appeals pertains to whether the authorities were justified in making additions of Rs. 75,410 for the assessment year 1975-76 and Rs. 55,227 for the assessment year 1976-77 under Section 40(b) of the IT Act, 1961. The ITO's examination revealed that the partnership deed of the assessee firm stipulated that each of the three partners from the Desai Group was to be paid a commission at the rate of 1.33% of the net collections from the exhibited films. However, instead of paying the partners directly, the payments were made to M/s Desai & Company, a firm where these three partners were the only members. The ITO concluded that this arrangement effectively resulted in the firm's profits not being distributed according to the partnership deed and that the payments were essentially made to the partners, thus invoking Section 40(b).

2. Validity and genuineness of the agreement between the assessee firm and M/s Desai & Company:

The assessee firm argued that M/s Desai & Company was a separate and distinct entity with extensive experience in the business of film distribution and exhibition. The firm had an existing setup and infrastructure, making it prudent and convenient for the assessee firm to utilize their services. The agreement dated 31st October 1973, between the two firms, was claimed to be a commercial arrangement made in good faith. However, the CIT (A) viewed this agreement as a collusive arrangement intended to reduce the true income of the assessee firm. The CIT (A) noted that the agreement was signed only by members of the Desai Group, excluding the Kuckreja Group, and upheld the addition on this basis.

3. Applicability of Section 40(b) to payments made to M/s Desai & Company:

The Tribunal analyzed whether the exploitation commission paid to M/s Desai & Company was rightly included in the assessment of the assessee firm. It was acknowledged that both firms were genuine entities with their own business activities. The Tribunal found that the three partners from the Desai Group were authorized by the partnership deed to manage the business and could utilize M/s Desai & Company's services. The agreement between the two firms was considered commercially sound and in line with trade practices. The Tribunal disagreed with the authorities' view that the arrangement was collusive or an afterthought. It was concluded that the payment to M/s Desai & Company was a genuine business expense and not a payment to the partners of the assessee firm. Consequently, Section 40(b) was deemed inapplicable.

Conclusion:

The Tribunal held that the additions made under Section 40(b) were not justified. The agreement between the assessee firm and M/s Desai & Company was genuine and commercially sound. The payments made to M/s Desai & Company were for legitimate business services and not to the partners of the assessee firm. Therefore, the appeals were allowed, and the additions were directed to be deleted.